Van Elle

Van Elle Holdings – A Somero Replacement?

I loves a bargain.  Running my screen recently led me to Van Elle Holdings PLC, a company definitely meeting that criteria.  Van Elle currently trades at a shade over seven times earnings, and only 0.67 times sales.  It yields approximately 3.6% as well.  But does it warrant a purchase?  I’m going to enlist the help of one of my current holdings to try and find out.

Van Elle Holdings PLC

Before I do that, a little about the company.  Van Elle Holdings PLC is a UK based engineering firm, focusing on ground-based piling and engineering solutions.  The company was listed on the AIM market in 2016 and have a current market cap of around £69m.  The company consider themselves the “largest and most successful geotechnical contractor in the UK“.

They operate across four main service sectors – General Piling, Specialist Piling, Ground Engineering Services and Ground Engineering Products.  A breakdown of revenues can be found below (click to expand):

Van Elle
Source: Van Elle Holdings PLC Half-Year 2018 Report

As you can see, the biggest drivers of profit are the general and specialist piling parts of the business.  Piling refers to the use of piling rigs (they have 118 of them as per their latest RNS issuance) in the engineering of foundations for various types of buildings.  These rigs are able to drill precise diameter holes into the ground to enable the accurate laying of concrete foundations.  Van Elle also produce their own precast modular foundations through their branded product, Smartfoot®.  Sales of this product have been growing at quite a pace, particularly to the housebuilding sector, and margins have been improving.

 Carillion

Van Elle were listed as a specialist lead sub-contractor for Carillion, and a significant part of their revenues were dependent upon existing and future contracts with the now-defunct company.  Van Elle noted in January that they had approximately £1.6m in outstanding debt and exposure, which they were looking to write-off, as well as £2.5m of revenues relating to future contracts.  However the trading update in May notes that the £1.6m has been written down to £1m, and some future contracts will still be picked up in H2 2018/H1 2019.  No doubt this will impact future profitability of the company for the forthcoming year, but the board remain optimistic regarding growth elsewhere in the business, stating that “the current order book as at January 2018 remains substantial”.  Whilst the Carillion contracts were material, they aren’t life-threatening to Van Elle.

Financials

Van Elle appear to be a sensibly-run company.  Revenue has grown in each of the past four years, however margins have been a little bumpy, leading to somewhat nonlinear net income growth.  There are reasons outlined in their reports explaining the margin variations, although it appears to be a bit of a rather unpleasant pattern.  That being said, VANL generate consistently generous levels of free cash flow, with about half of cash generated from operations spent on capital expenditure.  Most of this CAPEX appears to be spent on increasing their rig count, which, as long as the demand exists, will continue to allow the company to grow.  Balancing investment with contract demand appears to be a task management are navigating well.

VANL have little long-term debt, but the bulk of their non-current liabilities come from capital leases on the rigs they use.  They have £21m in current liabilities (accounts payable and short-term capital leases) but this is more than covered by the £30m in cash and receivables.

Based on a discounted cash flow, the levels of free cash generated and the overall growth in revenues and income highlight a company that looks rather cheap.  Based on average free cash flow of £5m, 10% growth annually for ten years, 3% growth thereafter and a 10% discount rate, a DCF suggests an intrinsic value for VANL of £1.55, compared to the current price of £0.875.  A material discount.

The problem is, I’m already invested in Somero Enterprises, and comparing the two does not fare well for Van Elle Holdings.

Somero Enterprises

No, the two companies aren’t involved in exactly the same business, but they are very similar.  Both are construction and engineering companies.  Both are involved in the development of building foundations and both market proprietary technologies or skills to other companies.  So how do they compare?

Somero Valuation:

Market Cap: £221.78m

P/E – 15.83

P/S – 3.45

P/B – 6.14

Yield – 2.83%

Van Elle Valuation:

Market Cap: £69.60m

P/E – 7.11

P/S – 0.67

P/B – 1.78

Yield – 3.62%

By these basic quantitative metrics, Van Elle is clearly the cheaper of the two.  But what other criteria can we look at?

Van Elle

Adjusted for Somero’s dollar earnings, Van Elle generate meaningfully more revenues, and yet Somero have a market cap more than three times the size of Van Elle.  One point to VANL.

Van Elle

Whilst both companies have enjoyed relatively steady gross margins, Somero’s are far higher. +1 for SOM.

Van Elle

As a result, operating income is correspondingly better, and growing.  Another point for SOM.

Van Elle

Unsurprisingly Somero are also growing operating margins, which are significantly higher than VANL.  SOM running away with this now.

Van Elle

Correspondingly, Somero generate higher levels of net income, which has reverted to an uptrend.

Van Elle

Whilst Van Elle’s free cash flow conversion is good, Somero’s is better.  And all this from a lower starting revenue base.  Finally, we can see the comparative return on invested capital that both companies are able to achieve:

Van Elle

Both respectable, no doubt, but Somero have a higher average ROIC during the period studied.

Conclusion

Van Elle is attractively valued, no doubt.  I like the look of the business, and it’s cash flow generating abilities are definitely appealing.  That being said, I can’t bring myself to invest right now.  Firstly, margins are likely to be wobbly for a while.  I don’t personally have a problem with that.  Were I to invest, it would be with a long time horizon in mind.  It’s definitely one to watch.  The Carillion episode has definitely been a setback, but the company looks well placed to weather this particular storm.  Secondly, Somero just looks the better business operationally.  Management is well thought of, and with good reason.  The company also has a far broader, internationally diversified operation.  So for the minute I’m sticking with Somero.

Happy investing!

Leave a comment below, or find me on Twitter @BritishInvestor.

 

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