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Akwel: Classic Cigar Butt, But Market More Efficient Than It Seems

Formerly known as MGI Coutier, Akwel is an equipment and system manufacturer for the automotive industry that trades below book value and for five times earnings.

Controlled by the Coutier family (70% of equity capital), the company focuses on fluid management (fuel, coolant, oil vapors, air regulation, etc.) for ~80% of revenue, and mechanisms (handles, latches, pedal boxes, etc.) for 15% of revenue. The remaining 5% derive from aftermarket sales.

A challenger among its larger peers (with “only” €1bn in revenue), Akwel employs 11,000 staff at 42 production sites and 8 offices across 22 countries. In 2015, Mathieu Coutier replaced his father André and became President with a mandate to pursue and ramp up international expansion.

The first major step towards this strategy was the highly opportunist and successful acquisition of Michigan-based Avon Automotive in 2011, then on the brink of collapse — its large customer General Motors was still licking its wounds after emerging from bankruptcy.

More recently, new plants were opened in China, Mexico and Thailand. Roughly half of sales are now realized abroad, for management’s focus is to set up factories near automakers’ assembly lines.

The Coutier family, by the way, seemingly has a bent for acquiring companies in distress, as evidenced by the joint acquisition of Franck & Pignard and Precialp — two small French companies, then under court-supervised reorganization — last year.

The growth record is excellent (CAGR of 9.7% over the 2008-2018 period) and average returns on equity over the cycle firmly anchored in the high teens (~17%). Financial standing is equally sound, with a peak of indebtedness in 2011 to fund the acquisitions of Avon and Deplanche Fabrication that was quickly extinguished.

Remarkably, operating margins (10.8% in average over the past three years) are higher than large-scale peers’ such as Faurecia or Valeo.

The chief issue revolves around cash-flows, for growth requires to increase capex (€408mil cumulated over the 2008-2017 period) and working capital (€81mil), in effect consuming the majority of cash generated from operations (€558mil); free cash-flow left in excess (€32mil) was largely used to fund the dividend (€21mil).

The founding family is clearly not milking the business, but keeps reinvesting in it. These investments have delivered good results so far, with book value per share consistently growing at an average clip of 21% per year, along with profits. The difficult, cyclical and capital-intensive business notwithstanding, management did an admirable job in building shareholder value.

However, investors’ defiance for the auto industry is well reflected in the current valuation, for Akwel’s stock is now trading at a price-to-earnings ratio of 5x and price-to-book of 0.8x — a far cry from eighteen months ago, when it traded at a PE of 12x and a PB of 3x. On an enterprise value basis, Akwel is valued at 4-5x EBIT.

On top of a critical customer concentration, five risks stand out:

1. By management’s admission, and despite a cost and organizational advantage — production facilities at the customers’ doorsteps — the company’s products are highly commoditized.

2. Customers have been surprisingly undemanding on price so far. This could change as they seek to cut costs and squeeze every penny from their suppliers.

3. Though management sports a flawless history in terms of financial prudence and efficiency, ambitions to grow worldwide will require heavy investments, which returns shall naturally be uncertain.

4. The zero-inflation golden years will eventually end, which would negatively impact cost of labor — and thus margins.

5. The vilification of diesel engines in Europe is here to last.

Interestingly, in a conversation with the author, CFO Jean-Louis Thomasset estimated estimated that an abrupt end of diesel would cause a €200mil loss in revenue. Should operating margin also weaken to 5% as inflation kicks in, operating earnings would come at ~€40mil.

At €15 per share, Akwel’s enterprise value of €400mil amounts to x10 such anticipated EBIT. By Mr. Thomasset’s own admission, the market is often more efficient than it seems…

The stock is nevertheless a classic Graham & Dodd bet in a though, capital-intensive industry prone to cyclical busts — typically a good fit in a diversified portfolio if valuation falls below x0.5 book value.

(No position.)

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