INVESTMENT ANALYSIS: SECURIDEV

October 16th 2012 Ticker: SCDV Share Price: €23 (October 12th 2012) Number of shares : 2,443,952 Market Cap: €56M EPS: €3.34 / Div: €1.50 Trailing P/E: 6.88 EV/ EBITDA: 1.79 P/Book: 0.70 P/Tangible Book: 1.18 Debt/Equity: 10% Current ratio: 2.21 ROE: 10.2% Valuation: DCF Method: € 40.60 Comparables: € 71 Net-Net: € 4.32

Reco: Buy

PRESENTATION OF THE ACTIVITIES:
Securidev is a French micro cap company, specialist in locking systems and equipments in Europe. Securidev designs, manufactures and markets conventional and electronic locks as well as security systems for households (32%) and industry (68%). Most of its sales are concentrated in France (36%) and Western Europe (49%). Securidev employs 1638 people, 574 of them being in France. Brands:   Mechanical and electronic access control systems for large organizations and risky sites: “Dény-Fontaine” and “Dom” Locking devices for materials and equipment for industrial groups providing turnkey solutions developed in coordination with their engineering departments: “Ronis” and “Dom”. Building locking systems: “Picard-Serrures” and “Métalux”.

2011 Key Figures (€M):
Sales: 150 EBITDA: 21 CFO: 12.3 FCFF: 10 Net Income: 8.2 Equity: 80 Assets: 153 Financial debt: 8.1 Cash: 27

Mehdi MEZIANE, Asset Management & Equity Research.

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STRATEGIC ANALYSIS:
Securidev is the alternative to the market leader ASSA Abloy. It operates in a mature industry where the brand name, the norms and the products’ quality outweigh the price. In each market segment, the competition is composed by two to three major players such as ASSA Abloy (around 40% market share in France concerning building locks) and a lot of small competitors. Securidev is much smaller than ASSA Abloy but remains a very strong competitor in France (around 15% market share) and Europe. The current strategy is to increase sales turnover through both internal and external growth (recent acquisition of UCEM) and to improve production efficiency.

5 PORTER’S FORCES:
Bargaining power of suppliers: Bargaining power of buyers: Threat of new entrants: Threat of substitutes: Competitive rivalry: Low (raw commodities). High because of the difficulty to differentiate one’s products. Low because of the small margins and important capital requirement. It is a mature industry. Very low. Very high.

No major change is expected for the next few years in the locking systems industry which is expected to concentrate further through acquisitions of smaller competitors by the top 3 market players. However, no major acquisition is expected because of antitrust rules. The sharp decline in constructions in Europe should impact Securidev sales for the next two years.

Mehdi MEZIANE, Asset Management & Equity Research.

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FINANCIAL ANALYSIS:
Evolution of Sales, Net Income, ROE and Debt ratio:

We can notice the continuous financial deleveraging (debt has been reduced from 26% of equity in 2007 to 10% in 2011). The average ROE for the past 5 years is 11.2% with a 4.7% standard deviation. Because of the deleveraging, these figures can be considered as overestimates of both the future ROE and its standard deviation.

DUPONT ANALYSIS (ROE ANALYSIS):
ROE = (NI/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity) ROE = 0,66 ROE = ROE = 10,22 % x 0.94 0.055 x 0.088 x x 0.98 0.98 x x 1,91 1,91 NI = 8,168 (€k) EBT =12,440 EBIT = 13,200 Sales = 150,180 Assets = 152,926 Equity = 79,947

The ROE breakdown shows an effective 34% tax rate, a 5.5% net margin and confirms the low equity multiplier (almost no financial leverage).

Mehdi MEZIANE, Asset Management & Equity Research.

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CASH FLOWS ANALYSIS:
On average, and for the last 3 years, cash flow from operations has been around €14M and shows great stability. Each year, an average of €6M goes to investments and approximately €5M has been used to reduce the debt on an annual basis. Now that the debt has been almost paid off, we can expect even stronger cash flows. Cash Flows (€k) CFO CFI CFF Total 2009 2010 2011 13 174 17 279 12 264 -5 142 -5 284 -7 443 -5 045 -2 389 -7 067 2 987 9 606 -2 246

BALANCE SHEET ANALYSIS:
Securidev has a very strong balance sheet with a current ratio of 2.2 and a quick ratio of 1.44. Long term and short term financial debt amount for €8.15M only or 10.2% of Equity to be compared with the impressive €27M cash position.

Assets
Intangible Assets: LT Tangible Assets: Total LT Assets: Inventory: Accounts & Receivables: Cash: Total Current Assets Total Assets

2009 31 568 26 544 68 689 25 174 25 186 19 643 73 932 142 621

2010 31 566 26 649 68 088 26 298 25 191 29 709 83 959 152 047

2011 32 306 27 111 69 388 29 037 24 816 27 083 83 538 152 926

Liabilities
LT Financial Debt Total LT Liabilities ST Financial Debt Payables Total Current Liabilities Equity Total Liabilities

2009 6 758 36 659 3 928 10 738 36 499 69 463 142 621

2010 5 537 36 243 4 178 11 291 37 875 77 929 152 047

2011 3 685 35 118 4 463 11 460 37 861 79 947 152 926

The inventory turnover remained around 5.4 (68 days) for the past 3 years. We can notice the same stability concerning the receivables turnover which is a good sign of operational efficiency.

QUALITATIVE FACTORS:
CORPORATE GOVERNANCE:
Mr Morel is both CEO and chairman of the board which is a not a good point in terms of corporate governance. However, interests of the management converge with shareholders’ ones (Mr Morel being a major shareholder through SFPI).

Mehdi MEZIANE, Asset Management & Equity Research.

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OWNERSHIP:
   SFPI (Société Financière de Participation industrielle): 69% (81.4% of voting rights) IVA (International Value Advisers): 15% (9.7% of voting rights) Treasury stock: 2.3%

INSIDER TRADING AND MISCELLANEOUS:
Securidev repurchased for €1.4M of its shares at an average price of €28 in 2011 (2% of outstanding shares). Securidev may issue new shares for €1M in order to create an incentive scheme for its employees.

SHARE PRICE:

As it often occurs, the price range of Securidev’s shares appears to be irrationally wide compared to the economic reality of the company.

FAIR VALUE ESTIMATION:
Using a single stage Gordon growth model with a 8.5% discount rate (cost of equity estimated using the CAPM model) and considering a sustainable growth rate of 4.63%, we can estimate the fair value to be around €40 per share.

Price per share
Cost of Equity
14,00% 12,00% 10,00% 8,00% 6,00%

Growth
0,00% 10,71 € 12,50 € 15,00 € 18,75 € 25,00 € 2,00% 12,50 € 15,00 € 18,75 € 25,00 € 37,50 € 4,00% 15,00 € 18,75 € 25,00 € 6,00% 18,75 € 25,00 € 37,50 € 75,00 €

37,50 €
75,00 €

Mehdi MEZIANE, Asset Management & Equity Research.

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Using the method of comparables shows a huge gap between Securidev and its competitors: P/E (trailing) ASSA Abloy (Stockholm) Gunnebo (Stockholm) Kaba (Switzerland) 22.8 10.8 17 16.8 € 56 Price/Book 3.57 1.1 2.64 2.4 € 78 Price/Sales 1.92 0.35 1.64 1.3 € 80

Mean Securidev’s equivalent price

Applying such multiples would result in a €71 average price per Securidev’s share. Applying a 20% discount for the lack of liquidity still yields a €57 price per share. However, being both conservatives and absolute value investors, we retain the €40 per share estimated by the discounted cash flow method.

CONCLUSION:
Securidev’s current market price does not reflect its strong balance sheet and cash flows. We consider Securidev to be a well managed company operating in a mature and profitable industry. Its size and the lack of liquidity for its shares may explain the current gap between its share price and what we estimate to be its fair value. The current €23 market price per share presents a margin of safety which is sufficient to recommend a strong buy.

Author: Mehdi MEZIANE, Independent Financial Analyst and Portfolio Manager. Contact: mehdi.meziane8@gmail.com

Information related to AMF: The author of this analysis personally owns shares of Securidev.
This report is for information only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities.

Mehdi MEZIANE, Asset Management & Equity Research.

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