Capelli is compelling

Capelli SA is a French company that is active in the real estate sector, primarily in France.

At the current price of €1.53 the market capitalization of the company is €20.3 million. Book value on March 31, 2013 was €32.8 million. The company is also a net-net: taking current assets of €100.6m and subtracting all liabilities and minority interests, gives Capelli a NCAV of €30.2 million.

What does Capelli do?

I am by no means an expert in real estate, let alone French real estate. The French real estate market works in its own particular way and I have no special insight there. In the annual report Capelli describes their role in the market. The company is active in two particular professions within the real estate market:

  • ‘L’Aménagement’ / ‘Lotissement’
  • ‘Promotion’

‘L’Aménagement’ / ‘Lotissement’: this consists of finding and acquiring land and developing it so an individual can begin to build a house there. I think the English term for this activity is subdivision. This process is described on the company website.

‘Promotion’: the development of property. Capelli is involved in specific phases in the development process, like selecting the sites and the ‘pré-commercialisation’ of the properties. Only when enough people have committed to a particular property, will Capelli buy the land and will construction activities start. Capelli is not active in the actual construction of properties. It uses third parties to do this. Advertising campaigns and the Capelli website play an important role in marketing the properties to potential customers. An example of a concept developed by Capelli is Villa Duplex.

At least this is my understanding of Capelli’s role in the development process. My French language skills are limited, so it is possible I have misunderstood Capelli’s position in the market.

Capelli’s customers are mainly individuals. The company focuses on first-time buyers. The French real estate market is depressed and existing owners have a hard time disposing of their current properties and buying something else. The French government has taken some measures to support first-time buyers. Capelli also mentions in the annual report that just 59% of French households owned their primary residence in 2009, which is much lower than countries like Italy (72%) or Belgium (74%). I don’t really invest based on macro factors that might prove favorable, but I think it does show that there is potential for improvement in the long run if the French government is determined to promote home ownership, something they have expressed in the past.

A shift from subdivision to development

In the past Capelli focussed on ‘Lotissement’ (subdivision). This table is from the 2008-2009 annual report:

Capelli revenue 2008-2009

After the financial crisis broke loose and dragged French real estate sales down, Capelli decided to focus on the development side of the business. In the year ended March 31, 2013 the majority of the total revenue of €50.1 million came from the ‘Promotion’ segment:

Capelli revenue 2012-2013

The company thinks the development segment is the most attractive currently. The subdivision side suffered from the depressed sales levels and increased red tape. This shift from subdivision to development also explains the weak results in the years ended March 31, 2010 and March 31, 2011. Capelli decided to get rid of a significant part of the older subdivision inventory and sold it at depressed rates. Profitability suffered and Capelli only earned €0.3 million and €1.2 million in these years respectively.

The shift seems to be paying of though, because for the year ended March 31, 2013 the company earned €2.9 million up 22% from the €2.4 million Capelli earned in the year ended March 31, 2012.

The company is continuing down this path. In the quarter ended 30 June, 2013 Capelli reported that ‘Promotion’ is now 70% of total revenue. Also, in November 2012 Capelli had a bond offering and collected €11.7 million from investors. These funds will be used for new projects. Capelli has established new subsidiaries in Switzerland and Luxemburg and will be starting projects there. The company will continue developing new Villa Duplex projects. It has also new concepts under development, I believe one is tailored for seniors.

The company expects revenues to grow more than 10% for the year ended March 31, 2014.

Valuation

I don’t think I can accurately value Capelli. Perhaps if I had extensive knowledge of the local real estate markets in which Capelli is active, the answer could be different.

Still, at this price I think the company is cheap. After reading the annual report I just thought to myself that this company is at least worth book value. It is probably worth some premium above book, but the premium depends on how the real estate market in France will develop and how successful Capelli’s future projects will prove to be.

Nate from Oddball Stocks often reminds his readers to ask themselves why a stock is cheap. For Capelli I believe the stock price has collapsed in tandem with the real estate market in France. You can see this when you look at a long term stock chart for Capelli. In early 2007 shares still traded above €8. The shares have recovered somewhat from the depths of 2009, but not that much. Profits also collapsed, but have recovered to almost €3 million, giving the company a P/E ratio of around 7.

I have not found a company specific reason for the large discount to book value that exists currently. It is very possible I have overlooked important facts. On my last post about a French stock called Audika, I received some good comments from French investors that gave me very useful background information. Perhaps this post will also give me and the other readers some good information from local investors.

Management ownership

One important fact about Capelli is that the Capelli family owns 74.6% of the outstanding shares. The company was founded in 1976 by Jean-Claude Capelli. In 2006 his son Christophe Capelli took over as CEO. A younger brother, Jean-Charles, is also active in the company. By investing in Capelli you are essentially betting on the ability of the managing family. Do they know the local markets? Do they know which type of house / apartment their customers are looking for? Can they pick local partners (builders) who can perform well and on time?

I don’t see how I can know the answer to these questions. The best I can do is look at the past results and also take into account the significant ownership of the Capelli family. The company has a long history and has been a leading player in the ‘Lotissement’ sector. Management has every incentive to act responsibly and that is why I am not too worried about the extra debt they took on in November last year. Management clearly believes there is potential to expand operations profitably. If they are wrong, they will suffer too, being the largest shareholders by far.

A French value firm called Moneta Asset Management reported a 5% position in January in a small cap fund they run.

Conclusion

All in all I think Capelli looks cheap at this price. I have bought a position and think the company is at least worth book value, but I will probably continue to hold my shares if they do reach book value and the company keeps performing well.

I will finish this post with a link to an interview with Christophe Capelli from April 2013: Smallcap Event 2013: Interview Christophe Capelli.

Disclosure: long Capelli SA

Posted in European Stocks and tagged .

NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

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