High Co SA: cheap French marketing services company with good management
High Co SA provides marketing services to supermarkets, mainly in France but also in Belgium and a little bit in Spain. The company provides SMS marketing services and services related to coupons: giving them out and processing paper and digital coupons. More than 80% of the revenue is from France.
The stock trades on the EuroNext in Paris with ticker HCO. Current share price: €2.97. The market cap is €60.7 million with less than €10 million enterprise value. Dividend yield is 6.7%. I had a look into the annual report over 2023.
A headwind for the company is the restructuring of the Casino group, which is a big French supermarket chain. The effect of this restructuring will appear in the results from the second quarter of 2024.
Key audit matters: revenue recognition, goodwill impairment.
Apparently two audit firms have worked together to approve the financial statements. Red flag: The company uses the same two audit firms already since it went public 28 years ago.
Substantial shareholders (31 March 2024, page 17 annual report): long term investor WPP France Holdings (37.4%), Eximium (11.3%, controlled by the Baulé family), Gérard de Bartillat Participations (5.1%). Management and employees owns 3.2%, including the chairman who owns 1.85%.
Registered shareholders get double voting rights after two years. Of the major shareholders (above 5%) only Gérard de Bartillat Participations has double voting rights.
WPP France Holdings is owned by a British company WPP Group. This shareholder has two seats in the supervisory board.
It seems the business of WPP Group is similar to the business of High Co. From the annual report (page 154): “The WPP group is the communications group that offers one of the most comprehensive service offerings in the world, including advertising, media planning and media buying, operational and digital marketing, public relations, brand creation and institutional identity, communication in different specialized sectors, etc.”.
The WPP Group is much bigger however since it employs more than 115,000 people, at least according to the annual report of High Co SA. WPP Group is listed in London and as ADR at the NYSE. On both exchanges the ticker symbol is WPP. I do not find the statistical properties of WPP shares interesting.
Red flag: two of the three other members of the supervisory board are already a director of the company since 2013, so for more than 10 years. One of them is formally an independent board member.
The chairman of the management board, Mr. Didier Chabassieu started with the company in 1990, became CFO in 1996 and CEO in 2002. In 2013 he got appointed as chairman of the management board. In 2023 he earned 591k EUR in salary and bonus. A lot of money for managing a small company but on the other hand I think he has done an excellent job for so many years and has also shown maximum commitment.
I do not think this is a one-man show for two reasons. First he has a secondant, Cécile Collina-Hue, being the CEO and member of the management board and also management director of a subsidiary. By the way, she owns more than 300k EUR in shares and like Didier Chabassieu, her compensation package is also fantastic. Secondly, because I assume the two directors of WPP Group would prevent such a one-man show.
Leverage is very high because of 73 million EUR of goodwill with 90 million EUR of book value and 204 million EUR of total assets. So Tangible Assets/Tangible Book is more than 5. Also the current ratio does not look strong with a value of just above 1.
However the company has a source of free money related to the coupons it administers, a float. Because of this the company has a lot of cash. The company has small debts of 13 million EUR but this represents leases of real estate and vehicles (page 249 of the annual report). Only a small part of this debt is short-term. So, I do not think the company is financially distressed, at least not short-term and also because the company is very profitable. That the company still pays dividends is also reassuring.
During the last 10 fully reported years the company paid monotonically increasing dividends, with one exception. It skipped the dividend in 2020, maybe because of the uncertainty caused by the coronavirus. In addition the company is doing repurchases, already for at least 10 years. Again, the amounts involved are increasing. It temporarily suspended repurchases in 2020, probably also because of the coronavirus.
My take: cheap company based on EV/EBIT probably with future proof earnings. Outlook is negative because of the loss of a large customer. We do not know how revenue and income will decrease except that the decrease will be “significant”. I like the large long-term shareholder with knowledge of the business (WPP Group) and the long-term commitment of the chairman of the management board.
The company is very shareholder friendly. A long-term risk is the highly leveraged balance sheet but I do not think this is currently a big risk. I think this is a good stock for a small position.
Disclosure: long High CO SA.