ADLPartner, a Euro crisis recovery candidate with a 10% dividend

I wish every stock I purchased were like PD-Rx Pharmaceuticals.  They traded slightly below NCAV when I purchased them, and with cash backed out they were a profitable business trading at a few times earnings.  Not only that, the company's earnings have been growing, and continue to grow.  The investment has done well, when I see a stock like that I buy a larger than normal position.  The stock was both safe and cheap.

ADLPartner (ALP.France) shares some of the same characteristics of PD-Rx; there are a number of differences as well.  The company could be attractive to a very wide variety of investors: great company investors,  dividend investors, and even to investors with a preference for tangible assets like myself.

ADLPartner is a French marketing company that creates and manages advertising campaigns and loyalty programs for clients.  They also run a series of marketing campaigns themselves both through the mail, and through their website hello deal.  Their hellodeal website is a French daily deal website similar to Zulily or Groupon.

The Vigneron family owns 71% of the company, their voting control extends to 82% of the voting rights.  The family is slowly taking the company private through the use of share buybacks, most recently canceling 1.53% of their shares outstanding, or 8.5% of the float.

The company has a sizable cash position, €22.7m as of their midterm financials.  This represents slightly less than half of their market cap, giving them an enterprise value of €26.47.  The company earned €5.6m in 2012, making their P/E ex-cash 4.72.  They have similarly low EV/EBIT and EV/FCF values as well.  It should be noted that their cash isn't completely unrestricted, a large portion of it is required for the operation of their business.

Many investors might consider the company an asset-lite business, they have almost no fixed assets to speak of.  I think it's a misnomer to say they're asset-lite, the company still has significant assets, it's just they take the elevator and drive home nightly instead of sitting on a factory floor.

The company's balance sheet is straight forward.  Their largest assets are accounts receivable and cash.  Their largest liabilities are accounts payable, and personnel expenses.  Their stated book value is €13.6m, which is clearly understated.

If we used their book value to calculate a metric such as return on equity (ROE) we'd end up with 36% which is unusually high.  The problem is the company's equity isn't what's generating their returns, but rather their people, the asset that doesn't appear on the balance sheet.  Book value isn’t as stable for ADLPartner as it is for other companies, this is a result of their simple balance sheet.  If the company signs a number of contracts where receivables increase and payables don’t then book value increases.  Conversely in a quarter where timing mandates a decrease in receivables and an increase in payables book value might record a decrease.  Fortunately book value is a poor way to measure the company’s asset value.

Management seems attune to the problem of measuring asset value and has created their own NCAV calculation.  They take the value of equity from the balance sheet and add the value of their open ended client contracts.  The way management calculates the value of the contracts is through a discounted cash flow calculation.  As far as I can understand their open ended client contracts are contractual commitments from clients for services from the company.  When using this number the company has a NCAV of €113.5m or €28.73 per share, more than double their €11.75 share price.  I rarely if ever run a DCF calculation for any company, but when management provides one as their estimate of value I’m inclined to use it.  In theory if the company were to stop selling their services and simply fulfill their current contracts and liquidate they would end up with book value, plus the cash from their open ended contracts.

Management might be slightly generous with their NCAV calculation because if I understand correctly they are doing a DCF of their contracted revenues.  They company still incurs expenses related to these contracts such as employee expenses and other expenses.  The annual report notes show that management calculates the DCF of the contracts net of tax.  Unfortunately we don’t know what else is netted out to know what the true value of these contracts are to investors.

The good news for investors is that almost all of the income the company earns is passed right back to investors in the form of a dividend.  In 2012 the company paid out 79% of their earnings as a dividend.  At the current payout schedule the company yields a generous 10%.  The beauty of a business who’s assets are people rather than machines is that ongoing reinvestment is minimal meaning most of their income is available for ongoing distribution.  As a controlled company they are at the mercy of the Vigneron family as to whether the dividends will continue.  It appears the Vigneron family pays themselves via dividends distributed from the company, rather than through large salaries, which means it’s unlikely the dividend will be cut in the future.

With a 10% dividend yield the company doesn’t need to appreciate much to hit my target of 15% a year.  The company has steadily increased the value of their open ended subscription portfolio over the duration of the European crisis.  If Europe's economies ever recover ADLPartner could benefit from increase advertising and marketing spending.  If Europe remains depressed forever and the company's results remain steady I would still be happy to hold this company.

Disclosure: Long ADLPartner