Summary
- Esprinet (MI) operates in the B2B distribution of IT and consumer electronic in Italy and Spain, with about 40.000 customer dealers and a portfolio with over 600 brands.
- While operating in a highly competitive and “commodities like” market, Esprinet has a proven revenue growth history (also through acquisitions), an undisputed leadership in the market.
- Its remarkable operational efficiency provides a competitive advantage against its peers.
- We will provide in this post an overview of Esprinet business, discussing risks and opportunities in order to support our investment thesis
The company and its business
Founded in the seventies, the Company took over the current arrangement due to the merger of three computer vendors in September 2000: Comprel, Celo and Micromax. Since July 2001, Esprinet is listed on the Milan Stock Exchange, with a current capitalization of just over € 300 million
The 2016 sales, over € 3 billion, placed the Group in first place in Italy (with a market share close to 30%, ranked first in Spain (with a market share of over 20%) and among the top four in Europe.
Esprinet S.p.A. (and Esprinet Iberica) customers are the resellers of technological products (hardware and software) as well as office product retailers.
Resellers are divided according to their end-customers: if they are a company, they are defined as ‘business dealers’ (with whom the Group has developed about 70% of its turnover), in case they are a private they are called ’resellers Consumer’ (30% of Group sales). Some of the most well-known retailers, specialists or generalists are among the consumer retailers.
Below is a view of the customer mix served by the Group:
Source: investor.esprinet.com
Financials
Over the last three years, with a slight increase in revenues (with 15% CAGR, also affected by acquisitions), margins showed a sharp decline as a result of the intensification of competition in the B2B sector of IT and electronics consumption. In order to reverse this trend, in the last three years Esprinet has heavily invested in external growth, with some important acquisitions, mainly in Spain, with the aim to strengthen its leadership position seeking for operational synergies, economies of scale and efficiency that will allow cost reduction and margins increase.
Operational profitability, as mentioned, is characterized by the fact that the company operates in a very competitive business with thin margins. The ROS stands at 1% (over the three years considered) while in the same period the ROE presents as near or slightly above 10%
Operational cash generation is satisfactory and provides the resources needed to fund the Capex, as well as a yield dividend of just over 2% (compared to current prices).
Worth to be mentioned, the Free Cash Flow per Share, in relation to the current action prices (P/FCF around 9).
Source: BullsandBears.it elaboration on data available on www.morningstar.com
Stock performance
Over the last three years, Esprinet has largely underperformed the FTSE Italia Mid Cap (ITMC.MI) benchmark index. A first step in raising quotations lasted until the second half of 2015 and brought Esprinet to perform in line with the benchmark. Since there, a gradual retraction has begun and the title has progressively expanded the gap with the FTSE Italia Mid Cap (3-year performance is 20% negative, against an index performance of over 40%).
Source: BullsandBears.it elaboration on data available on www.morningstar.com
DCF Valuation
In our Discounted Cash Flow valuation we considered:
- Revenues growth: over 3% in the long run,
- Ebitda Margin: over 1.5% in the long run (in line with the average of the last three years and slightly above the 2016 value)
- Tax Rate: 34%
- Cash Flow Rate Discount: 10%
Although some of these assumptions are particularly conservative, our model converges to a price range between € 6.8 and € 7.5 per share. The stock therefore seems to express a slightly discounted stock price compared to its intrinsic value. The potential upside based on current price ranges from a minimum of 10% to a maximum of 20%, a margin of safety we believe is not enough to open a position in the stock. We would consider to start a cautious accumulation if price falls below € 5.5.
In calculating the price range, we have performed a sensitivity analysis by increasing the cash flow discount rate up to 2 pp and reducing the EBITDA margin by up to 0.2 pp
Esprinet Valuation: Sensitivity Analysis based on Ebitda and Cost of Capital
Relative valuation
In a small market such the Italian Stock Exchange, it is hard to identify competitors perfectly comparable with Esprinet, in terms of business segment and business model. For the purposes of our assessment we have therefore decided to consider a broader panel, including companies which, although operating in slightly different segments, have several analogies with Esprinet.
The table below shows the comparison between Esprinet and other 3 companies listed on the Italian stock market.
Source: Bulls and Bears elaboration on data available on www.morningstar.com
Esprinet has the best P/E of the considered sample; together with Sesa (SES.MI) is the only one reporting a positive economic result in the last fiscal year. However, compared to Sesa, Esprinet shows a lower profitability that partially justifies a higher P/BV ratio. The debt level is among the lowest of the sample, despite the 2016 rise due to acquisition finance. Finally, the (gross) dividend yield is the highest among the panel (2.2%).
Conclusion
Esprinet has demonstrated in the past years its ability to integrate acquisitions and to implement post-merger synergies.
The consolidation of its leadership in Italy and Spain and the increase in market share could allow Esprinet to make significant economies of scale and costs efficiency.
On the other side, the probable consolidation of the retail market could put pressure on margins and limit the dimensional growth.
Moreover, consumer behavior may be subject to sudden changes, virtually facing price pressure and/or shifting preferences to other brands, or to economic recession, causing the slowdown and/or shortage of purchases.
We would consider to start a cautious accumulation if price falls below 5.5 €.
Article by Luca Chiapparini Bulls And Bears
