We initiate coverage of SFPI Group with a Buy recommendation and a c.70% upside.

The core of SFPI Group’s business model is to target niche markets among the rather moderately-growing building and industrial sectors.

SFPI Group has a c.€230m market cap.

Following the success of the merger-absorption of DOM Security, we believe that the company now has greater firepower and could rapidly announce new bolt-on acquisitions.

Business model and market cap

The core of the business model is to target niche markets among the rather slow-growing building and industrial sectors. SFPI Group is a compelling leader in several of its fragmented niche markets. Management has real knowledge in identifying target companies, potential synergies, need for restructuring and operational leverage of acquired companies. It has executed more than 80 (bolt-on) acquisitions since the founding of the company in 1985. Through acquisitions, the current management’s goal is to diversify outside France.

Moreover, the strength of the business model is to provide more and more services and product categories in order to become a solution partner instead of a mere building/ industrial products provider.

Despite the fact that the group consolidates more than 80 companies, with very different brand names, there is a clear willingness to consolidate the number of brands.

Digitalisation is also at the heart of SFPI Group’s investments in future growth.

The business model differs by division:

  • There are three important points to be noted about the business model of DOM Security (which represents c.45% of our NAV): what it designs has high security features, are easy to use and people should feel by using its products to be in control.
  • One of the strengths of MAC has been the constant development of its distribution network. The company has built up a significant network of loyal craftsmen. This is a process that takes decades and explains why MAC is rather slow at growing organically outside France.
  • On its side, the Industrial division is striving to become a one-stop-shop.

Overall, SFPI Group, based on the fact that the construction industry is a local industry, believes that it is not necessary to be of extremely large size to be efficient.

SFPI Group has a c.€230m market cap.

Recommendation, upside and main earnings drivers

We initiate coverage of SFPI Group with a Buy recommendation and a c.70% upside.

Main earnings drivers:

  • MAC could be slightly impacted by the end of tax credits in the renovation market.
  • MAC’s performance is mainly driven by energy efficiency gains.
  • DOM Security is a late-cyclical business in the buildings industry.
  • NEU-JKF should benefit from the momentum in industrial turnover and more stringent air regulations.
  • MMD (Cipriani/Barriquand) will benefit from global warming.
  • MMD (Steriflow) will benefit from the growing agrofood sector.
Need to know

There are three essential points of note:

  • The group was founded in 1985 by a group of entrepreneurs who still owns the company and assumes management.
  • There are two branches, four operating divisions and more than 80 companies specialised in safety for people, goods and the environment.
  • The group has become more and more a European group (40% of sales in Europe) with strong international ambitions.
Next trigger

SFPI Group sought to simplify its structure in mid-2018 by submitting a simplified tender offer (OPAS) on 10% of DOM Security (oversubscribed) and then merging with DOM Security through a stock exchange with a parity of 20 SFPI Group shares for one DOM Security share. The main goal beyond the simplification of the structure was to offer a higher liquidity on SFPI Group stock, whose free float will increase from 18.9% to 26.5%.

The other goal was to simplify the operations of the group, with lower operational costs as the two listings were not justified. The deal will naturally increase the net income attributable to SFPI Group’s shareholders as well as the equity of the group, which should give additional firepower to the company. We, hence, expect new acquisitions to follow the merger of SFPI Group with DOM Security. We especially see bolt-on acquisitions in the locking solutions sector as likely in the foreseeable future.

The merger with DOM Security makes such acquisitions easier, with no longer any conflict of interest, as difficulties in acquiring companies in the past may have arisen due to the double listing (the listing of DOM Security and the listing of SFPI Group, which controlled around 70% of DOM Security pre-merger).

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