Doubled down on CAFOM: Quick H1/18 update

Recently, CAFOM, a French electronic, furniture and decoration retail conglomerate that I have position and that I have written investment thesis earlier this year, published its fiscal first half results for 2018, which showed that earnings for continuous operations have improved significantly.

The main source of earnings growth for continuous operations was Habitat, a loss making decoration retailer:

This is good news because historically Habitat has lost more than the other parts (Outre-mer and Vente-Unique) have earned, as seen from the full year figures:

If the H1/18 trends for all segments would be extrapolated to H2/18, the CAFOM’s continuous operations could earn about 8 MEUR in FY18 :

With current 84 MEUR market cap the extrapolated earnings would imply about 10x forward P/E for continuous earnings:

And if you are not in to forecasts, the earnings multiple would be even somewhat lower if you calculate rolling 12 month continuous earnings (8,7 MEUR) from the table earlier.

Just for perspective, the Vente-Unique segment, a fast growing online furniture retailer, is also listed entity by itself and valued 24x forward P/E and 35x trailing P/E multiples, so the CAFOM’s valuation seems cheap based already on the current situation.

Real icing on the cake would how ever be if the Habitat losses will end totally, as the management’s goal probably is and the recent trend would indicate, which would double CAFOM’s earnings from current levels.

Then, with the current forward and trailing 10x P/E multiple, the stock price could double too. But if the other segments continue to grow, as the stated plan is, I would say some multiple expansion on top of that would be warranted.

So, I have increased my CAFOM position from the original 2,5 % to 9,6 %, second largest position, and with my current thinking I could see myself increasing it further.

Current portfolio allocation:

Ps. As can be found from the original CAFOM writeup linked earlier, the Outre-Mer segment runs electronics and furniture retail stores in French overseas regions i.e. in small islands in Atlantic Ocean, Pacific Ocean, Indian Ocean etc..

Recently, the segment made small purchase of competing stores to re-brand them to their own stores in Guadalope, one of the overseas islands, which competitive authority investigated for potential market dominance (sign of good business).

Quite interestingly, the competitive authority commented that Amazon etc. internet operators are not considered as competitors due to logistics difficulties to the isolated location and customs taxation.

I assume this is applicable to all islands where CAFOM operates and which probably explains, in addition to the first mover advantage mentioned in the original writeup, the high margins in the business.

So, with these valuation levels and potentially high quality businesses, CAFOM starts to see pretty interesting situation.

Appendix 1: Outre-mer segment figures and assumptions

Appendix 2: Habitat segment figures and assumptions

Appendix 3: Vente-Unique segment figures and assumptions

7 thoughts on “Doubled down on CAFOM: Quick H1/18 update

  1. Since you are dealing in low liquidity stocks I would be curious to hear your view on such investments. How much do you increase the discount rate on your cash-flows or adjust valuations given the poor liquidity?

    Also more practically how do you go about investing with such low liquidity, do you cross the spread or do you sit patiently waiting on the bid ? Also if something goes wrong in the company and you realize you need to sell asap, how do you do handle that?

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    • Well thankfully in this case (otherwise unfortunatelly), my portfolio and thus positions are so small that even in illiquid secutities there is typically enough liquidity for my purposes (biggest positions would be 10 keur max).

      I don’t do any adjustment for my valuations due to lack of liquidity, I just buy when I think the price is good enough for me.

      Same thing goes for the buying strategy, I watch how much there is in the offer and what price, and then buy if it makes sense.

      There is for example one stock currently which last traded month ago with very attractive price but the current and only one sell offer is double that amount.

      I could leave a buy offer with the old price, yes, but how long I should be willing to wait? So I just haven’t gone to that, just tell me the price you are willing to sell and the I will take it or leave it.

      I haven’t bothered with trying fish best prices by leaving low buy offer prices to hang indefinitelly.

      The selling thing is pretty same, either someone is willing to buy at the price I’m ok to sell or I wont just sell.

      I don’t see big difference in lot of liquidity and too low price for my taste or no liquidity.

      Keeping it simple and low maintenance….

      Edit 19.7.2018 22:03: Big writing errors and few clarifying words to make sentences sensible…

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      • Thanks for you comments. I do think you need to take the liquidity into account in your investment case somehow as long as you don’t invest “forever”

        Going to state some obvious things below, just to set the stage.

        Everything is relative right, so for example you invest in this because its cheaper than that. Long long long term, a company is worth the discounted value of all future cash flows. So if you invest forever, liquidity shouldn’t matter? Well yes and no, let’s look at another case with poor liquidity, Private Equity. Here its hard to get out of your investment as well, but it’s slightly different. Because like Spotify liquidity is temporarily poor, later when they IPO, liquidity is great. The whole structure of these investments is more like buying call options. Many go to zero and some become worth a lot. You are not concerned with liquidity when you are buying lottery tickets.

        In your case, I see only one way out of poor liquidity, that the company grows to such a degree that MCAP increases until illiquid becomes liquid. For this you need obviously high growth. So if the company has poor liquidity and very unlikely to grow quickly, there will “always” be poor liquidity. This is OK for you (and for me) because we invest small amount. The problem is, for a large part of the market, this is not OK. Meaning that a lot of potential buyers of the stock, they just pass on the idea due to poor liquidity. What this in the end translate to is a lower multiple. To what degree this is true or not, depends on the investment cycle, country, portion of retail/inst investors, etc. But I believe to some degree it is true in all markets. So what you see as a cheap stock, might not be that cheap relative to other companies, if you adjust for the illiquidity. It could be that fair value for a illiquid company is just in line on P/E 8 with a comparable company which is liquid trading at P/E 11.

        If you don’t account for illiquidity you will always go for the P/E company. This is probably a successful strategy in the long long term, given that value is the discounted cash-flows. But what you might miss is that if the other company is trading at P/E 9, the relative difference is smaller than what a normal illiquidity premium requires, meaning there is short/medium term more upside in buying the P/E 9 company over the P/E 8 company.

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      • Yeah, I fully agree what you are saying in principle, all else equal I would rather take stock which has more liquidity. Thus it’s rational to pay some premium of more liquid stock.

        But few notes of which I don’t have good ending conclusion.

        First, what is liquidity? Liquidity is that someone is willing to buy your stock when you are selling, and wise versa.

        Therefore when we are speaking of liquidity we are really speaking of kindness of strangers. Current liquidity might or might not be indicative of future liquidity i.e. that you find kind stranger to be your counterparty.

        Liquidity is also function of price. There is always liquidity if you lower your sell offer price or increase buy offer price. In logical extreme you can give your stock free or offer infinet price, when, or lot earlier before approaching the limits, you will have liquidity.

        I work in smaller M&A firm where we sell SME companies which would seem illiquid. But we have yet to have a sell mandate which wouldn’t get buy offers, we just have problem with finding offers where buyer is willing buy and seller is willing to sell.

        So liquidity seems to be always related to perceived value. If the buy offer price is too low it’s not different of having no buy offer (=no liquidity) and if the sell offer is too high it’s no different of having no sell offer (=no liquidity).

        Assume you buy a stock for x and think it’s worth 2x i.e. the seller was Idiot and providing you “positive liquidity”.

        Now market notices that the last price was wrong and the buyers are willing to buy it for 2x, again giving you positive liquidity.

        If the buy offer is 1,9x, you have negative liquidity which is not different from having no liquidity because by definition only in 2x you are indifferent between having cash or owning the stock, everything below 2x you prefer the stock.

        Now something changes that you think it’s worth 0,5x. Now if the buy offer is anything higher than 0,5x you have positive liquidity and you can sell. But if the buy offer is 0,4x, again you cannot not sell because only at 0,5x you are indifferent of owning the stock or holding cash, everything below you prefer the stock and everything above you prefer the cash.

        As value investors you are looking for positive liquidity i.e. willing sellers at too low price when you are buying or willing buyers at fair or too high price.

        It follows from this that value investors are bit selfish because in essence they want idiots providing irrationally low priced liquidity when it suits best for them i.e. when they are buying and then they switch and want rationally priced liquidity when they are selling.

        So in a way, if in buying you are willing to pay premium for liquidity you are in essence paying for future rational buyers to show up but not before you have had you change to exploit the irrational sellers.

        But how rational is it you to pay pay premium for future rational counterparties to show up when your whole buying operation was predicated on irrational counterparties? How rational is to base your strategy on rational counterparties when it’s based on irrational counterparties?

        So maybe my conclusion is that if as value investors you want irrational counterparties when you are buying then you really don’t have rational basis to expect that they become rational counterparties, at last you don’t have “right” to demand it (because in effect that would destroy the basis for your own strategy, unless you demand that counterparties are irrational only when it suits you which is kind of irrational expectation in itself).

        So to conclude, if your strategy is based on finding irrational sellers I think you should accept that there might not be rational buyers around when it suits you best and thus you should be doing your purchases based on assumption that you might not maybe able to sell it ever at rational price.

        Thus all purchases should be based on assumption that you will hold it forever i.e. buy only if the future cash flows from here to eternity are worth more than the purchase price.

        I for sure try to arrange my life and portfolio that I’m not too dependent of kindness of strangers.

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  2. I really like your unique investment ideas, so happy when I find a great fellow blogger, there is actually not that many around..

    Liked by 1 person

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