Description

Robertet

Thesis

I recommend the purchase of shares of Robertet, a French, family controlled company, that supplies flavors and fragrances to cosmetics and consumer staples companies.

It is a well-run secular grower that is trading cheaply both on an absolute and relative basis.  Over the last decade, it has posted organic revenue growth in excess of six percent per annum and operating margins have widened.  Returns on marginal capital are around 20% post-tax.  It is selling at approximately 21.7x my estimate of forward earnings.    I think it is a very low price given the quality of the business, growth characteristics, very low debt levels and general levels of interest rates.

Description of the business and recent performance

As I already mentioned, the company is a supplier of flavors and fragrances to the cosmetics and consumer staples markets.  Competitors include International Flavors and Fragrances, Symrise, Givaudan, Firmenich and Treatt. 

The company has been growing revenues at high single digit rate over the past decade, faster than competitors, and reported 7.71% revenue growth in 2017.   Operating income rose by 12.8% and reached E 67.21MM in 2017, and net debt declined to E 22.63MM on 12/31/2017.  So debt / EBIT is less than 0.5x.

In the first quarter of 2018, the company reported 7.9% organic revenue growth, and forecast 5% organic revenue growth for 2018 as a whole; due to the strength in the euro, the company is forecasting flat revenues in 2018.  Historically the company has been conservative in its guidance.

In my conversations with competitors, they all seemed to be bullish on the industry prospects and thought highly of Robertet.

Capital allocation

Historically the company retained most of the profits to reinvest in the business, however it has been increasing dividends at a double digit rate over the last several years, with dividends rising by 80% since 2013.  Dividend has quadrupled since 2001.  As long as returns on marginal capital are around 20% on an after-tax basis, reinvesting in the business should be a good use of capital.

Family control, share ownership and voting rights

The Maubert family owns 46.9% of shares outstanding and 67.3% of voting rights.  First Eagle and International Value advisors own 22.87% and 6.98% of shares outstanding and 12.93% and 4.85% of voting rights respectively.  While I am not a fan of family controlled companies (I prefer 15-30% ownership and voting rights), given the history of First Eagle, I am comfortable that they will fight to protect minority rights if need be.

Executive compensation is not excessive; I believe the CEO’s compensation was E 400,000 in 2017.

Capital structure

a)      Debt, net of cash & investments = E 22.63MM as of 12/31/2017.

b)     Non-voting common = 143,616 on 12/31/2017.  (Technically participation certificates.)

c)      Voting common = 2,158,929.  (Double voting rights are granted to shares held for 5 more than years.)

Valuation and target price

The company is trading at 21.7x forward earnings based on my estimates (assumes stock price = E 500). 

What should it be worth?  I don’t know but hell of a lot more than E 500 per share.  

Using a rudimentary DCF assuming: a) 20 years of 8% annual EBIT growth (which is what the company did since 2001), and then 3% in perpetuity, 6% discount rate (Buffett said many years ago that for a highly stable business he would use a 10-year Treasury rate as a discount rate), a return on marginal capital of 20% gives a value = E 1437 per share.   If you want to assume 20 years of 6% annual growth and then a 3% growth in perpetuity, value = 1033 E per share.

As a sanity check, IFF trades at a similar valuation to Robertet, but grows much slower: three to four percent per annum versus 6-7% for Robertet.   Symrise grows roughly at the same rate as Robertet and trades at a 50% premium.

Catalyst

None