Securidev SCDV
November 19, 2013 - 3:27pm EST by
WeighingMachine
2013 2014
Price: 33.33 EPS $3.47 $0.00
Shares Out. (in M): 2 P/E 9.6x 0.0x
Market Cap (in $M): 82 P/FCF 9.5x 0.0x
Net Debt (in $M): 0 EBIT 12 0
TEV ($): 82 TEV/EBIT 6.7x 0.0x

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  • Industry Consolidation
  • Potential Acquisition Target
  • Insider Ownership

Description

While bargains abound following sell-offs, four years into a bull market, I find myself scouring the globe to find out of the way, off the grid bargains.  With a market cap of $110 million (and free float of just $34 million) and headquartered in France, Securidev (SCDV.FP) is one such bargain.  Securidev is a leading provider of commercial (65%) and residential (35%) locks in France, Germany, Switzerland, and Poland.  Securidev is an attractive opportunity for several reasons: 1) commercial locks are a very good business (explained below) (2) Securidev sells at just 57% of revenue and 7.1x operating profit (10x P/E) (3) the locks business is in a constant mode of consolidation – takeout multiples have averaged 120% of revenue over the past decade (4) the spin-off of Ingersoll-Rand’s lock business (to be named Allegion) before the end of this year could serve as a catalyst for an acquisition of Securidev (companies typically become more acquisitive after being spun-off – I’ll discuss below).  In a take-out I think Securidev is worth 100-130% more than its current price.  Even if a takeover doesn’t materialize in the near-term, further cost cutting should drive 40% upside in the shares (and shareholders will receive a 4% dividend yield as they wait).  Downside is limited given the company’s strong balance sheet and low valuation with shares selling at only a slight premium to book value and just 10x P/E. 

Securidev is a leading European lock-maker.  65% of revenues are derived from commercial locks, with the remainder coming from residential locks.  Locks are a very good business with high barriers to entry and significant customer switching costs (discussed in detail in Porter Analysis at the end of this write-up) which gives lock makers strong pricing power and the ability to earn high operating margins. 

Securidev was created through a series of acquisitions over the past 15 years.  Securidev has done a good job of cutting costs/integrating the acquired businesses.  Since acquiring DOM in 2005 (last major acquisition) it has consolidated several factories and reduced headcount by 20% (we’ll explore how lock makers are able to cut costs following acquisitions below).  In order to grow market share in the locks business, it is necessary to make acquisitions.  The reason for this is because about 70% of industry revenue is derived from the after-market: including renovation projects, additions to existing structures, and changes in tenancy (replacement of lock cylinder).  Master key systems mean that that once a lock maker is selected to provide locks in a commercial building, that lock maker will have a monopoly on that building’s after-market locks for the next 40+ years (or however long the building exists).  As such, market share in the commercial locks business moves at a glacial pace – hence the industry’s acquisitive history.  This is best illustrated by the behavior of the largest lock maker in the world, Sweden’s Assa Abloy which has made over 160 acquisitions in the past 20 years.  The company explicitly targets adding at least 5% per year to it’s revenue base through acquisitions (so acquire $350-400 million in revenue per year). 

Industry leader Assa has grown from virtually nothing to having $7.5 billion in sales by buying smaller lock companies for an average of 120% of revenue.  At the time of acquisition, the small lock makers it buys are typically earning 7-10% operating margins which implies that Assa (which itself trades at 275% of sales and 21x P/E) is paying 11-15x  operating profit (or 15-20x P/E).  However, as you can see, Assa earns a 16% operating margin (varies by region – Europe actually has a 17+% operating margin).  In consolidating smaller players, Assa is able to more than double the operating margins of the acquired business in a period of 3-5 years.   Thus, on a post synergy basis, Assa is paying less than a 10x P/E multiple for these deals, making them highly value accretive (still earns a 20% ROE including all of the acquisition goodwill).  Steps in consolidation include:

a)      Consolidating most production into Assa’s factories which lowers headcount and allows rationalization of factory overhead.

b)      Outsources low value added component to China.  It can purchase these more cheaply in China than it can make them in Europe.

c)       Consolidation of back-office functions including accounting, IT, etc. 

Thus far, Assa has been relatively uncontested in its quest to dominate the locks business.  The second largest global player, Ingersol-Rand has been more focused on using it’s capital to expand it’s HVAC business (took on significant debt to acquire Trane in late 2007) and has neglected opportunities in the locks business.  At the behest of activist shareholder Nelson Peltz, Ingersoll has decided to spin-off it’s locks business (will be named Allegion) before the end of 2013.   In total, Allergion does $1.6 billion in revenue and has had an operating margin ranging from 20.2-20.6% in the past 3 years.  Allegion management has seen the tremendous success enjoyed by Assa and, as we typically see following spin-offs, will now pursue a growth strategy unencumbered by the bureaucracy of a mini-conglomerate.  As such, I expect Allegion to become an active acquirer of locks businesses.  While this is bad for Assa, this should be very good for shareholders of Securidev as there will now be multiple potential buyers of the company. 

What is Securidev worth in a take-out?

Revenue

147

Shares outstanding

2.44

   

Revenue/ share

60.25

   

Multiple of Revenue

Securidev Value Per Share (Euro)

100%

60.25

110%

66.27

120%

72.30

130%

78.32

140%

84.34

While I project Securidev will have a net cash balance of nearly 30 million Euros by the end of 2013, I assume that this is needed to satisfy it’s pension obligation (E39 million deficit at the end of 2012 though an increase in the discount rate, driven by 2013’s uptick in interest rates, should bring this back to E28-32 million).  As such, the market cap is essentially the enterprise value.  Assuming that Securidev sells itself for 120% of revenue (average takeout multiple), shares are worth E72/share.  This is my base case valuation though I wouldn’t be surprised to see a deal at E80/share given that we now have two credible bidders in the market. 

What if we don’t see a takeout –what would Securidev be worth then?

While I believe the company will be approached for a takeout, ultimately the Chairman/CEO Henri Morel (late 50s) will be the decision-maker.  Morel (through SFFP holding company) owns 70% of Securidev shares and it is possible he may wish to continue working for another 4-5 years (early 60s retirement is customary in France).  Thus far we have seen pretty good corporate behavior – he has cut costs to maintain profitability during the storm and has continued to return capital toward shareholders (modest buybacks to reduce sharecount & E1.25/share dividend).  Here is a look at historical and expected results of Securidev:  

Securidev - Historical results - Euro millions

     
 

2007

2008

    2009

2010

2011

2012

Revenue

160.9

163.4

    139.8

144.3

150.2

147.5

 Revenue growth

 

1.6%

   -14.4%

 3.2%

4.1%

-1.8%

Operating Profit*

16.3

16.1

      8.9

14.6

13.2

11.4

 Operating Margin

10.1%

9.9%

     6.4%

10.1%

8.8%

7.7%

             

Personnel

 

 1,804

    1,661

 1,643

1,626

 1,556

Shares o/s ('000)

 

2604

     2604

2444

2444

2444

             

*Excludes restructuring charge of 2.6 million in 2009

   

Securidev - Forecast results - Euro Millions

 

           

 

 

2013e

2014e

2015e

   

 

Revenue

147

149.9

154.4

   

 

 Revenue growth

 

2.0%

3.0%

   

 

Operating Profit

12.1

13.0

14.2

   

 

 Operating Margin

8.2%

8.7%

9.2%

   

 

           

 

           

 

                         

While results have suffered over the past couple of years due to economic weakness in Europe, the company has initiated a restructuring program at the beginning of 2013 (took a E0.7 million charge).  We have already seen positive results from this program as 2013 first half operating margins are up 0.9% versus 2012.  I expect we will see continued benefits during the second half of 2013 and into 2014.  I expect operating margins to return to 9% or so.  Taxing at 30% produces net income of E9.1 million, or E3.72/share. 

P/E Multiple

Value/Share

11

40.92

12

44.64

13

48.36

14

52.08

15

55.80

Even without a takeover, it is still reasonable to expect significant price appreciation (+40%).  At today’s price, shares are selling for only a slight premium to book value. 

Porter Analysis of Securidev/Lock industry

Securidev/the locks business is attractive when evaluated using a Porter analysis:

Barriers to Entry - high – installed base of master key systems is the key barrier to entry for commercial locks.  This is supplemented by local build codes, and brands (to which locksmiths/architects are very loyal).  The fragmented nature of distribution also serves as a barrier to entry – for instance, the only in-roads Asian players have made over past decade have been in the US residential business (only requires them to build relationships with two customers – Lowe’s & Home Depot).  They have been considerably less successful at moving into European retailers because 1) European DIY retail is much more fragmented than in the US – thus requiring a much larger sales force and (2) Europeans tend not to have home security systems like ADT (estimated 5-7% penetration in Europe vs. nearly 30% in US) but instead opt for higher-end locks (average price of a lock in Europe is 3x that of the US).  Most Chinese locks do not meet these quality standards. 

Buyer power – low – wholesaler / distributor industry structure is highly fragmented (and very local). 

Threat of substitutes – low.  There are no substitutes for locks/doors. Securidev is well positioned to benefit from the increase in electronic content as electronic solutions require a physical locking structure (it is an add-on sale and should drive above GDP growth for the sector).

Rivalry amongst existing competitors – low – each local market is an oligopoly. Given master key system, incumbency is insurmountable for replacement market.  Consequently, pricing has trended upward every year (including during the ugly 2008-09 period). 

Bargaining power of suppliers – low – no components where supplier has a significant market share or proprietary technology.  

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Acquistion by Allegion, Assa, or Kaba
- Dividend hike
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