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Guillin: Had A Plan Until It Got Punched In The Mouth

Groupe Guillin is the European leader in the design and manufacturing of thermoformed plastic packaging for food products.

Launched in 1972, this hidden champion has diligently expanded its footprint across the continent and now operates an integrated network of 22 subsidiaries. France accounts for 35% of revenue, the United Kingdom for 17%, Italy for 11%, and the rest of Europe (Poland, Germany, Portugal, etc.) for the remaining 37%.

The group reports through two segments: packaging (94% of revenue) supplies the distribution, catering, agriculture and food processing industries with over ten billion units produced per year and a portfolio of 3,000 references; hardware (6% of revenue) sells machines to pack, store and serve food in various institutions with collective catering responsibilities, such as hospitals or retirement houses.

Founder François Guillin passed the chief executive baton to his daughter Sophie several years ago, but still remains chairman. The family own 64% of equity capital and has increased its stake over the recent years. Despite limited float, other shareholders include — or have included — reputable investment firms Amiral Gestion, Moneta Asset Management and HMG Gestion.

Beyond what may look as a mundane business at first sight, Guillin actually sports an enviable competitive advantage, as its extensive distribution network allows for a reactive, flawless supply of packagings on demand. Since customers need a reliable partner for their mission-critical task of storing and marketing perishable food, quality is paramount, compliance with stringent safety standards mandatory, and the ability to deliver on a timely manner the ultimate game changer.

Built through acquisitions and greenfield developments, this complex supply chain enables the group to respond and adjust efficiently to an ever-changing demand. A new entrant could hardly duplicate such asset, if not at all — making Guillin the incumbent player in the market.

For the anecdote, the French group bears some resemblance with Envirodyne, a name discussed by Peter Lynch in One Up On Wall Street, and incidentally one of its famous 10x-baggers:

Envirodyne passes the odd name test. It sounds like something you could bounce off the ozone layer, but it make plastic forks and straws — it is the number two in plastic cutlery and number three in plastic straws nationwide.

Being the lowest-cost producer gives it a big advantage. Through acquisitions — they got Viskase from Union Carbide at a bargain price — they took over the family picnic.

In addition of its regional moat, Guillin’s business has proved extremely resilient. It went through the crisis unscathed and maintained comfortable margins despite fluctuating commodity prices. Management has been opportunistic and made a shrewd acquisition in the midst of chaos when they bought British group Sharp Interpack in 2010. Integration went troubleless and this new platform fueled continuous expansion in Europe.

Revenue and cash-flows have grown steadily since 2006. Financial standing is excellent, with leverage always kept well under control — but it should rise in 2018, for new acquisitions were made in France (Groupe Thiolat, 31 million euros in revenue) and England (Etimex, 6 million euros in revenue). Average return on equity over the 2006-2017 period stands north of 12% and capital allocation is evenly balanced between investments, acquisitions and distributions.

Because Guillin produces on demand and gets paid on a short notice, it requires little additional working capital when business picks up; but capital expenditures are high — IFRS earnings slightly overstate true cash earnings — and may increase in the future.

At €18, shares currently trade at 7x earnings, 9x normalized free cash-flow and 0.8x book value despite an adequate history of returns, low leverage, outstanding management and the sizable moat discussed above. The sell-off was triggered by a new legislation in France — the law EGALIM — that seeks to dramatically reduce the use of plastic.

Guillin has the know-how and capacity to update its offering to the new standards — whatever they may be — with new machinery and some acquisitions. In that respect, the recently completed integration of Thiolat added a new catalogue of paper and cardboard packagings.

The unknown lies in what kind of investments the move away from plastic will require, and what kind of competitive landscape Guillin will have to deal with. A scenario in which cash-flows come under pressure while capital expenditures escalate to build up a new offering cannot be ruled out, although investors’ fears of a catastrophe look overblown.

Guillin has just entered the opportunity territory — it isn’t a screaming buy yet, but it does deserves special attention.

(No position.)

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