2018 delivery beats expectations coming from a high 2017 base. 2019 may be subject to more hesitant growth. The young CEO confirms his drive for long-term profitable growth including garnering control of the holding company (Columbus Holdings). Long-term investors can only be pleased by this development.

FY 2018 earnings beat expectations up to the recurrent operating line (€49m), while the 2017 top line and operating earnings were high benchmarks. The bottom line is marred by higher financing and acquisition-related costs, a mechanical consequence of deploying ample resources in acquired growth.

The company-provided following table offers a commendably clear review of the P&L. There is nothing more to add.

Cash flow and FCF generation are the only clear-cut indications of a tougher going in 2018 as clients, notably on the Protective Film side, run down their own inventories while those of Chargeurs rose. This is presumably transitional but wiped out €22m from working capital so the CF from operations retreated to €14.4m from €30.7m.

With a sharp rise in capex (as widely announced) and the first significant acquisitions (€65m spent on two transactions), the net cash position (€9m by the close of 2017) has become a net debt of €92m. This is well within what the balance sheet can stand. This is confirmed by the dividend strategy with a 12% rise to €0.67 for 2018 (€.30 already paid out).

Before addressing the divisional performances, it must be stressed that our confidence in Chargeurs and Chargeurs’ management has been rising on and on, with 2018 being the third year in which the new team has delivered on its plans. Plans here do not mean one of those so many cost control exercises which are in lieu of genuine strategic thought.

At Chargeurs, plans to tackle “profitable growth” are a holistic combination of hiring and training talent for the next 10 years, reinventing brands to create long-term stickiness, making sure that capital is properly remunerated, using the leverage of cheap debt where suitable, keeping a cool head when making (necessary) acquisitions, addressing world markets with niche products, etc.

In many respects the “mayonnaise” that provides an ambitious firm with the proper growth legs appears to be holding. Short-term holders of Chargeurs will inevitably pinpoint to slowing margins ex acquisitions and a duller macro context. We would hold the view that the new management team has made it clear that well thought out acquisitions were part and parcel of the group’s growth strategy.

On that account, Chargeurs has been impressive in adding spark to what would otherwise be construed as growth-less businesses working on a shoe-string.

Protective Films

Protective Films is where the bears will have a case: flattening margins and a surge in working capital requirement are the 2018 story. This can easily be explained through a combination of unfavourable comps, slower demand and shy customers digging into their own inventories of plastic films.

The longer term view is that Chargeurs’ prime cash cow has continued investing in new top-notch capacity (on stream by H2 19) and in new products including greener ones where clients are willing to pay for premium goods. The buzzword of “premiumisation” appears to have substance here as more sophisticated films tend to come with a higher level of servicing.

2019 will most likely be dependent on how much Germany slows down, so that top-line growth is expected to be modest on an pro forma basis, capacity wise. However with new top notch capacity coming on stream by H2-2019 sales may just post decent growth after all (5-9%).

Protective Film’s 2018 performance: very resilient actually

Fashion Technologies: the 2018 success story

Fashion Technologies’ quantum margin jump is largely due to the positive impact of the PCC acquisition (August 2018) but more legacy-type businesses have been pulling up strongly as well. The ex growthless interlining businesses have been turned into a service-intensive proposition aimed at the textile industry and massively so towards the fast-fashion one. To great success as operating margins have gained 300bp to 9.2%. The “iconic” branding strategy that Chargeurs is promoting across the board would seem to have considerable leverage in this business which will benefit from continuing top-line gains this year.

Fashion Technologies’ essentials

Technical Substrates: the surprise

Although it remains a tiny business with a fair degree of volatility in its reported profits (see table below), it is clear that Chargeurs’ management is enthusiastic about the potential offered by the ability to print display-perfect stills on sometimes huge surfaces. Sales up 19% are dominated by the Leach acquisition which has been confirmed as a game-changing one. An unexpected growth area seems to be museums…using those giant top-quality displays. Such surprise markets are indicative of the potential offered by what seemed initially to be a simple cottage industry. Management is keen to stress a €100m top-line target by 2021 from the current €31m. Acquisitions must be in the pipeline.

Technical Substrates’ essentials

Luxury Materials:

Sales up 6.4% lfl are good to have but the point has always been that the business is managed to deliver a proper ROE while attempts to create value in the wool industry take hold. This seems to be happening with tools in place that help track the origins of wool and its processing into a given garment. This is an intriguing experience in creating a need that had a first go with an online luxury brand (Amédée 1851). This initiative shows a genuine open-mindedness to project as fostered by the management team of Chargeurs across the four businesses.

Luxury Materials essentials

Targets and balance sheet: proper tensions

Chargeurs was overfunded for a while as it was gearing up for focused acquisitions. The good news is that such funds are now at work and successfully so. ROEs will benefit from a reasonable gearing (1.5x EBITDA in 2018). Chargeurs’ ROCE took a hit in 2018 as capital employed went up but should be heading back to 15% or more, rapidly enough, as it is confirmed that Chargeurs does not overpay its targets and has deployed the tools and teams to integrate small operations successfully.

Spending is easy, integration is another matter; Chargeurs appears to have endowed itself with the right human resources at the operational level. This should help magnify its acquired growth.

The stated target to reach sales of €1bn by 2021 is a bold challenge as it can only happen through acquisitions. On the simplistic view that extra sales may be acquired at 1.5x (enterprise value), the group may need to buy €300m extra sales over three years at a total cost of €450m. This assumes that organic growth of 5% a year from now would bring total revenues to €720m by 2021.

Obviously €450m for the purpose of acquisitions looks a pretty tall order if we assume that the hands-on management is a feature that can only be deployed on 100%-owned businesses, i.e. no minorities to share the bill. This would be set in the perspective of current shareholders’ equity at €237m and a market cap at €500m. The group is targeting a 10% EBITDA return on sales for the expanded group, or €100m, by 2021. Setting this against a target debt/EBITDA of 3x would mean that the group’s extra borrowing capability is capped at c.€200m.

In other words the €1bn 2021 sales target presumably implies a call on shareholders, possibly through convertibles. We simulated a scenario where acquisitions would cost €70m a year between 2019-2021 and allowed for a €100m capital raising. Under such a scenario, net debt/ebitda would remain below 2x.

Updating models will amount to trimming 2018 earnings to reflect higher financing and acquisition costs … and no stop of this kind of costs for near-term financial years. They certainly bite into FCF and amount to a higher net debt than we had expected (partly due to negative working capital developments that may not last).

It is possible that the status of Chargeurs may move on to become more “growth” with the corresponding risks attached to external growth strategies. Sentiment swings about the stock are bound to be deeper as part of its fast-forward drive.

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