Description
Picanol (PIC BB) is a Belgium based producer of textile weaving machines, engineered casting solutions and custom-made controllers. The stock is controlled by Luc Tack, a Belgium owner-operator who through his various entities owns ~90% of the common stock. The company does not do conference calls nor speak with investors. It has been written up previously on VIC and I suggest reading that article as well.
Picanol is currently trading at ~€70 and has 17.7m shares outstanding for a market cap of €1,240m. There is €180m of cash and no debt. In addition to the core business, Picanol owns ~40% of Tessenderlo (TESB BB), another Belgium industrial/chemical company run by Luc Tack and his associate Stefan Haspeslagh which is worth €530m at current market prices. Given the long-term track record of the business, terrific balance sheet and substantial hidden asset in the form of their interest in Tessenderlo (TESB BB) I think the stock is compelling. I believe the stock has 25-40% upside to a target price of €90-100/share.
Picanol’s two major business segments are weaving machines and industries. Weaving machines represent ~85% of revenues and profitability while industries represent the rest.
Weaving Machines:
The weaving machine division supplies airjet and rapier machines for the general textile (denim, shirts, terry cloth) and niche (technical textiles such as airbags, medical textiles, parachutes) markets. Picanol supplies the weaving machines to mills worldwide as well as providing the customer support, spare parts and service contracts. There are ~2,600+ machines installed globally, primarily outside of Europe and the go to market strategy is through its own branch network (very important for large industrial customers who require real time service) and through agents.
The company has a strong share in the apparel market (estimate ~25% globally though in Bangladesh I was able to find a presentation where they show 85% market share – see link below) and within the household segment Picanol is well known with its Optimax-I and GTMax-I weaving machines. Recently the company has emphasized growth in the technical textiles segment through the customization of machines for customers.
Industries:
Industries is primarily an OEM component business which operates under 3 divisions – Proferro, Psicontrols Mechatronics and Melotte.
Proferro is the foundry and machining division that produces engineered casting solution for compressors, pumps and agricultural machinery. It also supplies parts for the weaving machine business. It operates in the Benelux, France, Germany and the UK and caters to the more technically complex, core-intensive parts of machinery.
Psicontrols designs, develops and produces custom made controllers for industrial customers. They are a supplier to Picanol as well as to HVAC and fleet management customers. Production is done in Belgium and Romania.
Melotte produces specializes high precision, complex parts in special materials and in small numbers (batch process). They use 3D printing and high end finishing and focus primarily on prototypes.
Management:
Luc Tack took over this company through a rights offering in 2009 at ~3/share. The company was on the verge of bankruptcy with revenues in 2008 of €282m, Opinc of (€22m) and CFO – CapX of (€15)mm. It had €13m of cash and €50m of debt. Luc turned it around by cutting costs, investing in R&D which in turn enabled the company to move from 1st to 4th generation technology in 5 years. In 2018 the company reported ~€670m in revenues and €102m in Opinc. Simply put, Luc is a phenomenal owner-operator. Please see the interview below for more on Luc and his background.
Financials:
The weaving machine business has averaged €82m of opinc the last 5 years with a high of €113m in 2017 and a low of €77m in 2015. In 2018 weaving machines earned €92m of opinc. The industries business has averaged €11m with a high of €15m in 2016 and low of €9m in 2015. In 2018 industries earned €14m of opinc. Together, the company has averaged €107m of opinc the last 5 years and reported €102m last year.
For the 1H 2019 the company guided revenues to be -25% given global uncertainty, particularly in Asia. Assuming this persists for 2019 and assumes no cost savings I think opinc could be €70-80m similar to 2015. Looking historically at the data one would see (given the replacement nature of the business and customer loyalty) that a trough year is followed by a rebound. Therefore, looking at a 5 year average (€107m) or 10 year average (€85mm) is more representative of normalized earnings. Therefore, using €95mm of opinc less €10m of sustaining capx less 30% taxes = €65m of normalized earnings for Picanol. Pretax returns on invested capital are 20-25% and Pretax returns on tangible capital are ~50%.
In addition, the company owns 40% or 17m shares of Tessenderlo which is currently trading at €31.50/share. TESB has a current market cap of €1,375mm, cash of €165m and debt of €512m for an enterprise value of €1,722m. Tessenderlo has 4 business units - the 2 which matter are the Agro business which produces specialty fertilizers in the US and Europe and T-Power, a combined cycle generator in Belgium. The Agro business is improving and 2019 should be better than 2018 as startup costs burdened the business last year. Additionally, their specialty fertilizers are nitrogen based which should see improving demand given the switch away from soy and to more corn planting. T-Power is the most modern CCGT in Belgium and has a 6 year tolling contract that generates ~30-40m in FCF/year. The tolling agreement ends in 2026 at roughly the same time as Belgium mandates the closure of their nuclear power generators and which should lead to improved pricing. Consensus for TESB is at €230-250m of EBITDA in CY19, implying a 6.8x – 7.3x valuation. At 9x the midpoint of €240m that would imply a share price of €42 which I believe is reasonable. At €42/share of TESB the implied value per share of Picanol is €40.33. I would also note that Luc Tack is in the open market every day buying shares of Tessenderlo.
Valuation:
Picanol presentation - http://www.eias.org/wp-content/uploads/2016/03/EIAS_Presentation_Picanol_20.04.2018.pdf
Luc Tack Article - http://trends.knack.be/economie/mensen/luc-tack-gokken-is-onze-stijl-niet/article-normal-642507.html Note it is in Dutch so use Google translator.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Continued deployment of cash on the balance sheet.
Realization of value at Tessenderlo.