Monday, January 13, 2014

ADLPartner, a Euro crisis recovery candidate with a 10% dividend

I wish every stock I purchased were like PD-Rx Pharmaceuticals.  They traded slightly below NCAV when I purchased them, and with cash backed out they were a profitable business trading at a few times earnings.  Not only that, the company's earnings have been growing, and continue to grow.  The investment has done well, when I see a stock like that I buy a larger than normal position.  The stock was both safe and cheap.

ADLPartner (ALP.France) shares some of the same characteristics of PD-Rx; there are a number of differences as well.  The company could be attractive to a very wide variety of investors: great company investors,  dividend investors, and even to investors with a preference for tangible assets like myself.

ADLPartner is a French marketing company that creates and manages advertising campaigns and loyalty programs for clients.  They also run a series of marketing campaigns themselves both through the mail, and through their website hello deal.  Their hellodeal website is a French daily deal website similar to Zulily or Groupon.

The Vigneron family owns 71% of the company, their voting control extends to 82% of the voting rights.  The family is slowly taking the company private through the use of share buybacks, most recently canceling 1.53% of their shares outstanding, or 8.5% of the float.

The company has a sizable cash position, €22.7m as of their midterm financials.  This represents slightly less than half of their market cap, giving them an enterprise value of €26.47.  The company earned €5.6m in 2012, making their P/E ex-cash 4.72.  They have similarly low EV/EBIT and EV/FCF values as well.  It should be noted that their cash isn't completely unrestricted, a large portion of it is required for the operation of their business.

Many investors might consider the company an asset-lite business, they have almost no fixed assets to speak of.  I think it's a misnomer to say they're asset-lite, the company still has significant assets, it's just they take the elevator and drive home nightly instead of sitting on a factory floor.

The company's balance sheet is straight forward.  Their largest assets are accounts receivable and cash.  Their largest liabilities are accounts payable, and personnel expenses.  Their stated book value is €13.6m, which is clearly understated.

If we used their book value to calculate a metric such as return on equity (ROE) we'd end up with 36% which is unusually high.  The problem is the company's equity isn't what's generating their returns, but rather their people, the asset that doesn't appear on the balance sheet.  Book value isn’t as stable for ADLPartner as it is for other companies, this is a result of their simple balance sheet.  If the company signs a number of contracts where receivables increase and payables don’t then book value increases.  Conversely in a quarter where timing mandates a decrease in receivables and an increase in payables book value might record a decrease.  Fortunately book value is a poor way to measure the company’s asset value.

Management seems attune to the problem of measuring asset value and has created their own NCAV calculation.  They take the value of equity from the balance sheet and add the value of their open ended client contracts.  The way management calculates the value of the contracts is through a discounted cash flow calculation.  As far as I can understand their open ended client contracts are contractual commitments from clients for services from the company.  When using this number the company has a NCAV of €113.5m or €28.73 per share, more than double their €11.75 share price.  I rarely if ever run a DCF calculation for any company, but when management provides one as their estimate of value I’m inclined to use it.  In theory if the company were to stop selling their services and simply fulfill their current contracts and liquidate they would end up with book value, plus the cash from their open ended contracts.

Management might be slightly generous with their NCAV calculation because if I understand correctly they are doing a DCF of their contracted revenues.  They company still incurs expenses related to these contracts such as employee expenses and other expenses.  The annual report notes show that management calculates the DCF of the contracts net of tax.  Unfortunately we don’t know what else is netted out to know what the true value of these contracts are to investors.

The good news for investors is that almost all of the income the company earns is passed right back to investors in the form of a dividend.  In 2012 the company paid out 79% of their earnings as a dividend.  At the current payout schedule the company yields a generous 10%.  The beauty of a business who’s assets are people rather than machines is that ongoing reinvestment is minimal meaning most of their income is available for ongoing distribution.  As a controlled company they are at the mercy of the Vigneron family as to whether the dividends will continue.  It appears the Vigneron family pays themselves via dividends distributed from the company, rather than through large salaries, which means it’s unlikely the dividend will be cut in the future.

With a 10% dividend yield the company doesn’t need to appreciate much to hit my target of 15% a year.  The company has steadily increased the value of their open ended subscription portfolio over the duration of the European crisis.  If Europe's economies ever recover ADLPartner could benefit from increase advertising and marketing spending.  If Europe remains depressed forever and the company's results remain steady I would still be happy to hold this company.

Disclosure: Long ADLPartner

18 comments:

  1. Any idea about the minority shareholder rights in France ? Can they squeeze you out at a bad price ? Thanks for the idea. I am piqued. Reading there financial documents now.

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  2. hi nate,

    I looked at them as well a few weeks ago but didn't buy them. Some remarks:

    - the bread and butter business of Adlpartner is selling magazine and newspaper subscriptions plus some cds and dvds. The "Marketing and loyalty program" part seems to be more an "aspiration"

    - the subscriptions are either cancelable after 12 months or on a monthly basis. I guess the "NAV" assumes some optimistic assumptions with regard to renewal rates. They are definitely NOT contractually fixed


    - the underlying business is clearly shrinking in parallel to traditional print, this is a structural issue, not a "euro crisis" issue


    - your explanation for the moving book value doesn't make sense to me. Either their profit generation is very lumpy (extra fees for new sunscriptions ?) or their accounting stinks

    mmi

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    1. MMI,

      Thanks for your comments, they're very helpful. First off did you read the French or English versions of their reports? I'm wondering if something was lost in translation.

      The impression I had from reading their site and reports was that they were in marketing, not newspaper sales. You're right that there is a structural problem with newspapers, although look at their NI over the years. It jumped in 2008 and has coasted down, it's still higher than in 2006/2007.

      As for book value I guess a better way to explain it would be timing differences. It seems that their payables shrink and grow depending on the time of the year. This changes book value because it's their largest liability.

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  3. Nate (and MMI),

    I haven't looked at the numbers yet but are they carrying a lot of debt or fixed liabilities?

    If not, doesn't that give them a certain flexibility to change their business if necessary?

    Could it be possible that they'd be an attractive acquisition target for someone or even actively try to sell themselves? Is there nothing they could do to "digitize" their business and be relevant?

    Finally, MMI, if you wouldn't purchase them at this price, is there SOME price you'd pay? It seems extreme to conclude their trend of decline is terminal and say you'd offer $0 for a currently profitable business (w/ assumption of no fixed liabilities)?

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    1. Taylor,

      They are carrying a very small amount of debt and almost no fixed liabilities. You're right, they can change their business model entirely, it's a matter of training their employees. Or firing and re-hiring, it wouldn't be much of an issue.

      I don't think they're an acquisition target with the large family ownership stake. They consolidated their stake a number of years ago by buying out Publishers Clearinghouse.

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  4. So for a stock like this, would it be worth holding in taxable for the foreign credit or an IRA? I understand the dividends have a tax rate, but what about any special one time payments or being bought out/going private?

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    1. I can't purchase it easily in an IRA, but can purchase it easily in my taxable so that's where it sits.

      In the US there's a foreign tax credit for foreign taxes paid, French dividends qualify. If you pay €200 in French taxes you will receive a $260 credit on your taxes in the US. I believe there's some phase-out number if you have foreign income, but if all of your foreign taxes are from dividends there is an exemption and no limit.

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  5. Great writeup Nate! I enjoyed reading this.

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  6. Hi Nate. I write from Spain. I studied this company last July and i didnt buy any share. There is a big reason you should check. When you subscribe for a 12 months magazine or newspaper, after the expiration date is almost impossible to cancel your account. The company uses all sorts of bad practices to keep your account, and is also impossible to get a phone number to make a call and cancel your account. this company bad practices are quite clear. you should take a look before any investment. And i know this because i live in Spain and i know there are a lot of costumers complaints about this . Beware!

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    1. White Knight,

      Interesting perspective, thanks for that. You and a few other commenters have posted about the newspaper and magazine subscriptions, do you know how much of their business is selling magazines?

      I ask because as I read through their reports the impression I had was they were a marketing company, not a magazine sales company. They talked a lot about the loyalty campaigns they run for companies like BNParibas. I wonder if this is a marketing strategy, or if they have sold newspapers to BNParibas, Air France etc and are just showing the logos?

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    2. They make 85+% of their revenue with fixed and open-ended subscriptions. Based on their documents, those are newspaper and magazine subscriptions. So, they seem to be in reality a newspaper subscription marketing company.

      The customer list is quite confusing. Whatever they do for the banks, airlines etc is very likely a minor part of their business.

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    3. Hi again Nate, I´ve read your question and I will try to answer you as best as i can. In theory this is a marketing, not a delivering maganizes company. But most part of their revenues come from activities involved in delivering magazines and newspaper. I would like to explain why is this and what is the usual activity this company does. Let´s guess we want to make a loan in a bank which has an agreement with ADL partner, for instance, BNP paribas, as you said. We make the deposit, and like a gift we are going to receive in our home a free annual subscription for a magazines we want (for example, about finance). After the year is over, the subscription is not going to be cancelled by the company, they keep delivering your magazine, but they start to charge some fees in your bank account for the service that used to be free. If your lucky you are going to realize after a one or two months. But assume that you are an old woman who dont pay any attention on her bank account and who is a receiving a funny gossip magazine; the company can keep charging for fees for months, they can rise fees and if then you want to cancell your account they will start to do all king of bad practices as i exposed yesterday. Thats how this company makes the money

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  7. Thanks for the write-up, Nate.

    The dividend yield is certainly nice. But I don't see the point in calculating an ex cash PE when, as you mention, a large portion of the cash is needed for the operation. Let's assume for a second that all of it is: the company would be selling for a PE of almost 10, so not ridiculously cheap based on earnings.

    As you also mention, we don't know what goes into managements "net asset" calculation. On the discount rate they use, there's this: "the present value of this contribution, calculated by applying a rate based on the money market rate", so it might be a very low discount rate. So by their "net asset" calculation we also can't really tell if the company is cheap.

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    1. I somewhat agree with you regarding the cash. A lot of it is used in the operations of the business, but not all of it. The cash pile is growing as well.

      I did more research on the net asset calculation, they provided more information in the 2007 annual report. It seems they do net out a lot, COGS for sure, taxes and potentially a few other items. They said in the 2007 report that their revenue figure is closer to an operating income figure as opposed to a raw revenue number.

      If this really is operating income, and they've taken out taxes, I'm not sure how much it really differs from net income.

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    2. Nate, I just read the 2007 report and agree with you there doesn't seem to be much room for differences between net income and the number the company uses for the net asset calculation. Let's suppose their discount rate is also appropriate.

      In that case, you're investing on the basis of the future earnings stream, and calling that stream an asset doesn't make this an asset based investment. It could partially be one if a large percentage of the cash is excess cash, but that doesn't seem to be what you believe. People don't count as assets either because you get nothing for liquidating them (well, maybe life imprisonment).

      I'm not against investing based on earnings, but to do that one has to know a lot about the nature of the business and the likelihood of it's future survival. I don't know the first thing about subscriptions which, according to page 3 of the 2012 English annual report, makes up 88% of sales.

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    3. Nate, I just read the 2007 report and agree with you there doesn't seem to be much room for differences between net income and the number the company uses for the net asset calculation. Let's suppose their discount rate is also appropriate.

      In that case, you're investing on the basis of the future earnings stream, and calling that stream an asset doesn't make this an asset based investment. It could partially be one if a large percentage of the cash is excess cash, but that doesn't seem to be what you believe. People don't count as assets either because you get nothing for liquidating them (well, maybe life imprisonment).

      I'm not against investing based on earnings, but to do that one has to know a lot about the nature of the business and the likelihood of it's future survival. I don't know the first thing about subscriptions which, according to page 3 of the 2012 English annual report, makes up 88% of sales.

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  8. Nate,
    For a breakdown of their revenue take a look at: http://www.adlpartner.com/fichierUploader/adlpartnerfinancial-annual-report2012-ven-def.20130426235923.pdf
    Scroll down to page 2. On the bottom, the company indicates that 89% of revenues come from subscriptions.

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  9. Nate, it looks as though the buybacks are more modest than you intimate ... around 0.6% of outstanding shares per year. The last cancellation represented 2 1/2 years worth of buybacks. A pittance compared to the magnificent dividend. I don't think you should count the discounted cash flow as an asset so to me this is a 1 1/2-pillar stock. For that reason I am OUT ... it is too stressful worrying about the floor dropping out if earnings suddenly evaporate.

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