Solocal: Owner-Operated Turnaround with Early Signs of Success

David Autin presented his investment thesis on Solocal Group (France: LOCAL) at European Investing Summit 2024.

Thesis summary:

Is Solocal an exception to Warren Buffett’s observation that “when a brilliant management team tackles a business with poor economics, it’s the business’s reputation that remains intact”? Over the past decade, Solocal has transformed from a leading paper directory to a 100% digital company, offering services to about 250,000 French SMEs on a subscription basis (€120 per month). It provides tools for visibility on major internet platforms, website creation, and digital advertising. The company targets a market of 4.4 million SMEs in France, spending an average of €415 per month on advertising, more than half of which is digital.

The company has undergone its fourth capital increase in seven years, but this time, Maurice Lévy, former CEO of Publicis, is leading the charge through his family holding, YCOR. Lévy’s family, who now holds 64% of Solocal’s share capital, has already achieved significant milestones, including renegotiating the company’s headquarters rent (saving €14 million) and reducing financial debt by over 80%. By the end of 2024, net financial debt should be around €40 million, with a normalized free cash flow (FCF) capacity of €20 million, making debt (at 0.8x EBITDA) a non-issue.

In recent years, two factors have negatively impacted FCF: high interest expenses (€35-40 million annually) and a negative working capital change due to the declining business. However, with a projected stabilization of revenue by 2025 and interest costs expected to drop to €5 million, these pressures should ease, improving cash generation.

The board and executive team have seen new additions, including Lévy and his son, bringing credibility and strategic vision previously lacking. Lévy’s perseverance is evident, as YCOR took over REGICOM (formerly Proximedia Webformance from Publicis) in 2019 and attempted to acquire a competing site local.fr in 2022, though it was ultimately bought by Xavier Niel. REGICOM, albeit smaller, has seen its revenues grow from €30 million in 2019 to €44 million in 2023, with EBITDA improving from -€7 million to €2 million over the same period. This business was integrated into Solocal during the restructuring.

While a sales recovery is not expected overnight, the new management team anticipates stabilization by 2026, with new products and services to be launched. However, there are no guarantees, given the company’s track record. Additional risks include a thinly traded small-cap stock (€100 million market cap, 13% free float) and a business that is entirely French-based.

In terms of valuation, Solocal has a market capitalization of €100 million, €40 million in net financial debt, and €88 million in provisions (mostly pensions). With sales expected to stabilize at €340 million, the company offers a 20% FCF yield and trades at 2x EV/EBITDA, significantly lower than peers, whose multiples range from 6x to 8x EBITDA. This suggests a potential for the stock to triple in value if Lévy succeeds in driving top-line growth and increasing EBITDA margins to 25% within five years (compared to 15% in 2024), given the company’s operating leverage. Financial leverage is no longer an issue, and the company is now led by credible and experienced people.

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About the instructor:

David Autin, CFA, is a private investor based in Paris, France. He brings over 15 years of experience in the financial industry, having most recently served as an Equity Fund Manager at Richelieu Gestion until mid-2024. Prior to joining Richelieu in 2019, David held fund management roles at Pléiade Asset Management and Auris Investment Managers. He holds a specialized Master’s in International Finance from NEOMA Business School and a Bachelor of Arts in International Business from the University of Brighton. David is a CFA charterholder.