H1 behind with limited scars; H2 partial reversion to normal
Tight, reactive management and a strong balance sheet policy saved the day in locked-down times. Management is cautious but the small industrial conglomerate holds the cards for a return to dividend payments in 2021.
SFPI has released a solid set of results when set against the extreme difficulties met by small-sized industrial operations when navigating the COVID-19 crisis.
Sales retreated by 21%, earnings dropped to a €4.4m loss vs. a €4.7m gain last year but the net cash position has actually improved by c.€7m to €36m and FCF generation is a positive c. €10m.
On the sales front, we were expecting much worse realisations with a back of the envelope 37% drop in revenues where SFPI eventually managed -21%. For the full year, the small industrial conglomerate suggests -15% (presumably remaining on the cautious side of the very low visibility). This -15% is way above our own -23% computed in May for FY 2020.
The building side of the business (locks and security with DOM, closings with MAC) did suffer from locked-down clients and locked-down staff. The worse is behind, obviously, but did last about six weeks. The talk is of a recovery but with a caveat: both businesses are rather aimed at new buildings while the bulk of the recovery-type demand is in renovation/updating. So it is not clear that the firm will be an overnight beneficiary of government-sponsored plans to cut on emissions from the housing stock. It may happen though through a domino effect where new demand that cannot be met is addressed to smaller players such as SFPI.
One impressive feature of the H1 20 resilience is that these B2B businesses have seen a jump in online ordering to c. 20% of revenues.
The industrial side (air cleaning and heat exchangers) suffered comparatively less as the non-French units hardly stopped. Developers found the time to devise new products meeting medical requirements in air cleaning. The next step is how to open the doors of the health sector but this certainly demonstrates a fighting mood from the shop floor.
Looking into H2, the turnover implied by a full-year 2020 drop of 15% is €250m vs. €274m by H2 19. It is easy to take a more optimistic view than management on the principle that business not executed in H1 may be executed by H2, but this would be risky.
Indeed, one should not forget that an industrial operation can easily suffer disruptions and may not be in a position to expand its manufacturing capacity as quickly as volatile demand would justify. It is not unreasonable to consider that some of the recovery demand will be a 2021 business.
SFPI’s strength is its financial conservatism. This is consistent with a family-driven business aware that excess cash is the only insurance policy. The COVID-19 test confirmed this point. SFPI opened H1 with c. €29m in net cash and closes it at €36m. Fast cost adjustments, dropping the dividend, cutting on capex and good working capital control did the trick. The working capital cash generation over H1 (€5m) will presumably not survive a pick-up in business in H2, but was good to have.
As a reminder, SFPI which made ample use of furlough schemes in France had residual costs in two respects: French-type furlough leaves 16% of the wages in the P&L of the corporate and COVID-19 prevention measures have genuine costs estimated at €1m over 2020.
Clearly, the better H1 sales and the first positive tones for H2 justify taking a less cautious stance on FY 2020. Our 2020 earnings expectations have been upgraded to c. €7m earnings from nil, with no domino impact on 2021 as a degree of normalisation was already built-in. The risks to 2020 are those of H2 business being executed by early 2021 due to so many operational disruptions.
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