The Ideas Report For Serious Investors

Investment Idea: Vicat (Paris: VCT)

Company Overview

• Leader in South East France (~50% of sales) and strong regional positions in mature markets (Western Switzerland, California, South East USA) and in emerging countries (Western Africa, Egypt & Turkey)
• Vertically integrated: 2/3 cement, 1/3 aggregates / RMC
• 60% family controlled.  Free float increased from 5% to 40% in 2007
• Management strategy is to use group cash-flow to improve vertical integration, diversify from home base and increase exposure to faster growing markets

• Uses - housing, commercial construction, infrastructure, RMI
• High weight to value
• Limited substitutes
• Barriers to entry: ownership of quarries / environmental constraints; capital intensity; geographic/transport costs; control over import terminals; and vertical integration

Valuation

1. Earnings-based:
   • trades on 9x 2009E EPS and 5x 2009E EV/EBITDA --> Don thinks 2009 should represent trough in earnings cycle
   • FCF-yield on maintenance capex ~15%
   • trades at ~20% discount to peer group despite better pricing power, stronger balance sheet (net debt ~1.6x EBITDA), superior track record and higher medium term growth prospects
   • industry-average transaction multiple of 8-9x EBITDA over last 17 years --> Don thinks given family control and cyclical trough a transaction is unlikely but implied equity value ~€75 per share vs current market price of ~€40
2.  Asset-based:
   • Don estimates current replacement cost of 1M tonne cement plant at €200M in developed markets and €100M in emerging markets
   • This implies €61 per share of equity value for Vicat (assuming €1.8B of EV for Vicat's cement assets in developed markets, €1.2B in emerging markets and €0.5B EV for aggregates and ready-mix concrete)

Key Risks

• Prolonged deeper recession
• Price deflation – Don thinks this is mitigated by: industry consolidation; focus of geared players on cash generation, not market share; capacity additions delayed / cancelled; and limited risk of falling prices for Vicat due to market mix
• Antitrust enquiries
• Co2 compliance costs

How Don Differs from the Consensus View

• Consensus concern is industry-wide price deflation –> Vicat protected due to pricing power in key markets
• Consensus focus on cyclical downturn, not trough in the earnings cycle
• Don thinks next cycle’s earnings power for Vicat should be higher due to: increased earnings from capacity additions; efficiencies from industrial upgrades; and possible acquisitions at bottom of cycle

About Don Fitzgerald

Mr. Fitzgerald joined Tocqueville Finance in February 2007 as a Financial Analyst and has co-managed the Tocqueville Value Europe Fund since February 2008. He previously worked 7 years for Citigroup in Dublin, London, Frankfurt and Paris in different corporate finance roles. Subsequently, he worked as an investor in distressed debt for WestLB in Paris from 2003 to 2006. He is a CFA charterholder and graduated from Trinity College Dublin in 1996 with a degree in Business Studies and German.