CAFOM: Corporate restructuring special situation

CAFOM is the largest electronics and furniture retailer in France’s overseas islands in Caribbean (“Outre-Mer”). It’s operator of BUT furniture and DARTY electronics brands under franchise agreements.

It also has 59% ownership in growing and profitable online only furniture retailer operating across Europe (“Vente-Unique”).

Main owners are long time entrepreneurs. They have excellent track in the Outre-Mer market, where they started CAFOM in the 70s.

They started importing directly from furniture manufacturer from South-America and Asia. It was a revolutionizing concept at the time as competitors were importing from mainland France from expensive middlemen.

CAFOM became franchisee of the BUT brand to build awareness among consumers, and kept buying directly from manufacturer in low cost countries, cut the competitors out and became the “undisputed leader” in the furniture retail market. That happened in the 90s-00s, before 2005 IPO, and has remained so ever since (with bumbs in the way though).

So much of the excellent track record in the Outre-Mer market, now the management has made a decision to dispose a miss-venture approaching ten years in the mainland Europe market, Habitat, in the coming months.

They bought Habitat, a loss making furniture retail business, from the king of furniture business, Ikea’s founder, Ingwar Kamprad in 2012 or so. Not a good move, the business has stayed unprofitable ever since.

Habitat’s planed turnaround never materialized and has been drag on earnings ever since. The losses has more than offset Outre-Mer’s and Vente-Unique’s earnings. Management has finally decided to cut the losses and the press release said that the disposal will be done in few months.

With the Habitat’s track record, the question is will they find a taker. The negotiations will likely be about getting rid of the leases and how much debt they can dumb to the buyer. I’m not expecting much.

The deal is that CAFOM’s market cap is 46 MEUR. Book value is 120 MEUR and tangible book 90 50 MEUR (error noticed by a reader, see comments).

Outre-Mer segment’s reported segment earnings were 12 MEUR 09/18 fiscal year and 14 MEUR in 08/17 fiscal year. 15 year average earnings are 6,7 MEUR. Outre-mer has never made losses and the business is now bigger than in the early years included in the average. CAFOM’s share of Vente-Uniques earnings were 2 MEUR in last fiscal year.

That’s cheap to me.

Ex. Habit, the Outre-Mer segment figures might come down a bit though, assuming debt interest cost will be reallocated from Habitat segment to the Outre-Mer segment, and if there will be net taxes allocated to the Outre-Mer segment in the future (Habitat tax losses/assets might have offset the Outre-Mer segment’s tax liabilities).

Adjusted for these, Outre-Mer earnings would have been about 9 MEUR in both of the last two years and 5,6 MEUR on average for last 15 years. Still cheap.

There’s multiple company factors that imply growing earnings in the in coming years

• Outre-Mer is scheduled to open four new stores on top of old 23 and discussion to open one more this and next fiscal year
• Longer term opening plan implies about 30 % increase in revenues from fiscal 17-18 revenue levels
• Outre-Mer has consumer credit JV with good consistent growth track record in last years (16% annual customer / net profit CAGR)
• Vente-Unique is ramping up new markets in Italy and Poland, doubled warehouse capacity to absorb growth and to expand from furniture to decoration products

There’s several industry factors that point that the historical earnings power might be indicative of future earnings power

• Strong position in the Outre-mer market (“undisputed leader” as per mentioned in the 2005 IPO documents)
• Largest furniture player in the market in 2007 (per competitive authority investigation)
  • Guadaloupe: Market share 20-30%, number two at the time with 10-20 % share was bought out / ended operations, rest fragmented with 0-10 % shares
  • • Similar situation with electronics
  • Gyane: Furniture market share 40-50%, number two at the time with 0-10% share was bought out / ended operations, rest fragmented with 0-10 % shares
    • Similar situation in electronics
  • Martinque: Furniture market share 10-20%, number one at the time with 20-30% share was bought out / ended operations, rest fragmented with 0-10 % shares
    • Little better relative position in electronics
  • I have no specific information of the other islands but perceive that the situation would be similar
• I don’t have updated information of the market share but would assume situation is more or less the same (or better as big competitor Conforama exited the market)
  • Competitive authority still investigates every deal CAFOM makes in the Outre-Mer market
• Diffcult market entry as the small islands have limited retail space / mature market
• No online threat due to logistics cost in the islands

There are several macro factors that must be considered

• Electronics and furniture retail is cyclical: Outr-Mer’s profits do fluctuate but historically they have always come back and there has never been losses
• Caribbean is hurricane area: Last 15 years there’s been one or more every autumn but never made permanent damage to the business as the society is well adapted, and there’s some kind of insurance for operating losses. I guess there could be big hit if you are unlucky?
• The Outre-Mer is old French colony and mainlanders still have all the assets and the locals have high umemployment, there could be some unrest

Technically, CAFOM has traded around 10-25 eur / share before CAFOM owned Habitat (2005-2008, 2010-2012) when Habitat showed any indication improving (2014-2015, 2018). I’m expecting similar levels when things clear (vs. current <5 eur storck price).

Summary

• High potential returns
• Market cap 46 MEUR
• Book value 120 MEUR, tangible book 90 50 MEUR (note no goodwill from Habitat – – > existing gw “fair”)
• P/E09/21E 3,9x (own forecast for the first clean year without the loss making Habitat)
• Own model IRR 34,3% @ 2023 exit @10PE
• High leverage assuming bad case in Habitat exit → “private equity” style investment where returns driven by reduced leverage and multiple expansion
• Potential returns driven mainly by restructuring of the concern structure – – > uncorrelated with market returns
• I’m not going to sell at these prices if there’s not-a-remote-change that the company will be earning 13 MEUR+ in few years with significantly reduced debt levels (despite obvious cycle worries).
• This is all bit hazy as all documents are in French and I don’t speak French

Disclosure: Long CAFOM with 7,5 % position

Edit 25.10.2019 21.17: Corrected current market cap from 49 and 50 MEUR to 46 MEUR. Also corrected few writing errors.

Edit 2 27.10.2019 Corrected the errournes tangible equity numbers in the original version

Older posts:

Doubled down on CAFOM: Quick H1/18 update

Vente-Unique.Com: Rusty Growth Stock?

CAFOM: Growing Electronics and Furniture retailer @ 6x P/E (excluding problems)