Description

A cheap stock (5.6x EV/EBITDA on my 2022e) with a catalyst because the Street's view into company was opaque for months and now 2022E consensus likely needs to increase.

85% of revenues are boat manufacturing (54/46 motorboat/sailboat) where their world class brands support a #1 global market share of 40% in mono-hull sailboats, #1 global market share of 50% for multi-hull sailboats, and #1 European market share of c. 10% for European motorboats. Key boat brands: Beneteau, Jeanneau, Wellcraft, Four Winns, and Lagoon.  Beneteau sells-in to a network of third party dealers and directly to Charter fleet operators.  15% of revenues from the sale of trailers with nice furnishings to campsites within their Housing segment.  New management will evaluate whether these two activities belong together over the medium-term, but current focus is on the optimization of the group as it currently exists. 

I estimate the efficiency plan under new management will expand Beneteau’s post-tax ROCE to mid-to-high teens, or well above WACC on a sustainable basis – so this thesis is based on a quality inflection from one quartile to another.  This had become a bloated French family-run company (rev/employee 50-67% lower than listed peers). With that sort of employee productivity shortfall, perhaps it is unsurprising that Beneteau also trails the peer group in OPM and ROCE. The efficiency opportunity set is large.  

New management’s actions are material: headcount reduction, SKU reduction, capacity streamlining, shared services, outsourcing, and divestments are significant improvements that boost ROCE via both OPM and Capital Turns. This sets up a scenario of multiple expansion vs history.  Finally, the time horizon on this investment thesis is relatively short, which boosts expected IRR.  

Management Change

The boating industry declined between 2000-2010 and has stabilized over the last 5 years.  Rather than right-size the capacity and costs, the old management did the opposite and tried to find new sources of growth by expanding the list of brands and doing M&A.  So Beneteau’s excess capacity situation actually deteriorated during a time when it should have been a focus.  So, when old management’s SKU expansion and acquisitions underwhelmed, margin progression and ROCE also disappointed.  

Enter Jerome de Metz, who founded and ran French PE firm MBO Partneries between 2002-2015.  The family brought him on as a commercially focused-outsider.  The original intent was to serve as a board member and become Chairman successor to family representative Yves Lyon-Caen.  However, as he assessed the business, he noticed lots of low hanging fruit.  These realizations were happening at the same time that the old management was missing their medium term goals, so the family agreed that Jerome should become CEO.  Jerome is both Chairman and CEO now, so he firmly has the reins.  He replaced the CFO and brought in Bruno Thivoyon from Valeo, a company I respect for operational and financial sophistication. He then devised a medium term plan to become more efficient, but those plans became more aggressive as a result of COVID.  I spoke with Jerome and he is good.  

The plan calls for capacity reductions, headcount reductions, SKU reductions to jettison unprofitable models, and breaking down the internal brand fiefdoms to enable economies of scale. The last point is important because the old management structure had silo’d brands – each brand had its own cost center.  This meant that Beneteau Groupe functioned more as a holding company of brands, with limited internal synergies in areas like IT, Design, Marketing, or Manufacturing.   So, the transformation plan was fairly obvious and it was worthwhile to make the tough changes to unwind this outdate setup.       

They will also de-consolidating brands that are fledgling (removes a set of businesses that lost -12m in EBIT in 2019). The most important remaining brands will be: Beneteau (predominately monohull sailboats; also motorboats), Jeanneau (predominately monohull sailboats; also motorboats), Four Winns (motorboats), Wellcraft (motorboats), and Lagoon (global leader in multi-hull catamarans).  

A Note on Consensus

With the usual caveats about the difficulty of predicting such things, I believe the Street’s forecasts are uniquely stale here because new management changed the financial calendar year and has not yet given 2021 guidance.  During this period of the Street being in limbo, management has been undertaking significant headcount and capacity actions, but doing this has influenced their communication style.  Out of respect for the process, I won’t spell it out here in public, so you'll have to ask yourself:  is it commercially rational for a new management of a family-owned company in labor-friendly France to publicly tout the equity story during negotiations of headcount reductions and capacity closures?  

Many of the tough actions have been completed in Jan/Feb, so I would not be surprised if management’s communication style were more upbeat on March 17 and thereafter.  I don’t want to get into predicting what the 2021 guidance will be because I don’t know.  However, some directionality may help.  Street consensus for 2021E is EUR 10m EBIT (or 27m ex-Berenberg’s large negative outlier that is driven by definitional difference).  In 2020, they reported EUR 30m in EBIT (12 month period end Aug 2020) and their factories were closed for 6-6.5 weeks. Absent such a prolonged factory closure during their most important production quarter, the 2021 revenue arithmetic is favorable.  I am currently assuming the recent cyberattack has a much more moderate impact on their revenues than COVID did in 2020 (getting more info on this March 17).  Regardless, they get a significant yoy EBIT tailwind because have taken out a bunch of costs already that management can now discuss more openly.  I would be pounding the table harder on the 2021 consensus, but the cyberattack creates an unknown. Nevertheless, the consensus for 2022E OPM of 6.2% looks quite low vs new management’s MT target of >10% OPM (i.e. 2022E EBIT 15% below 2019 seems draconian given large cost actions).  Cost actions are EUR 45-65m, of which 25-35m are fixed costs.  So, my base case assumes upward consensus revisions for 22E EBIT over the next 0-12 months will provide a catayst to close the discount to my appraisal of fair value.

Fair Value Appraisal: 

My base case fair value (EUR 16/sh) includes: 

• 2024E revenue similar to 2019 and apply 9.7% group EBIT margin (vs >10% target)

• Capitalize the terminal EBITDA at 8x to reflect a structural improvement in returns under new management (vs LT historical avg trading multiple of 6.8x), but not too high because this is still a cyclical business with moderate competitive advantages and a fully mature growth profile. 

Catalyst

Street consensus for 2022E EBIT increases

Turnaround structurally increases ROCE