Explosifs et produits chimiques : lots of shareholder friendly moves
Explosifs et Produits Chimiques (EPC) is an old French company which produces and distributes explosives for mines, quarries, infrastructure products, demolition. They also have ancilliary BU’s (oil and circular economy, i.e recycling). Many things have been going on in the past years. After lots of activism, a fund (Argos) bought the family stake (whom weren’t very implicated) in December 2020. Since then the annual report has much more interesting information.
Barriers to entry: strict regulation, need to have infrastructure next to clients, long term relationships with clients
There are strict regulations linked to explosives, production sites need to be close to the clients, joint ventures are set up outside of Europe in order to have access to the markets.
70% of the global market is controlled by 9 actors. 2 of them have a worldwide presence while the other 7 are either present in a region or in different regions (EPC is among this category). Market is defined by lots of concentration which gives us an oligopolistic market.
Raw material increases were transferred to clients (price adjustement clause, activation of unpredictability clauses, price increases negotiated with clients).
They have solid positions in western Africa.
Shareholder friendly moves
Shareholder friendly moves have been numerous:
-clearer and more complete annual report,
-stock split,
- more communication, and
- the stock is now quoted on a continuous bases (before there was a fixing at 2 different hours),
-simplification of the share structure (founder’s shares have been taking out with a 13,3 shares for 1 founder’s share) and there are now only simple shares.
Communication has improved which more press releases and a much clearer annual report which goes in depth on many issues.
The demolition entity has been put up for sale but didn’t find a buyer at a correct price. They closed they joint company Kemek US as the contract with the main client could not be renewed at a satisfactory price. In my opinion, ancillary activities could be sold gradually. And finally EPC UK entered into a scheme of arrangement (agreement with its shareholders or creditors). In this case, it appears to be more a discussion with the minority shareholders which hold 7,4%. Interestingly, EPC UK is among the biggest subsidiaries of EPC where are there are still minority shareholders…
Growth capex and investing in new countries
2022 has lots of capex growth initiatives with the acquisition of new emulsion tracks, factory capacity increase in Canada, building of a new factory in the Ivory Coast and building with a partner a production site in Singapour and Malaysia.
Between 2019 and 2021, there were lots of growth capex (works on the new factory in Morocco, new emulsion line, investment in new factory in Quebec, new crushing lines…).
They acquired Normat servies in Bénin, setting up of a service company in Chili.
Profitable joint ventures
In 2021, EBIT was 17,5 M€. 5,7 M€ came from the 7 joint ventures/co- companies (Kemek, Kemek US, EPC-B SCRL, Modern Chemical Services, Nitrokemine Guinée, Société de Minage en Guinée and Arabian Explosives.
An incentivized CEO and management team
CEO owns 0,07% of the company (owns 0,14% of the 4th December entity which owns 59,62% of EPC. 4th of December is the entity through which Argos bought back the shares of the founding family memebrs). His variable remuneration gives us interesting insights and 4 items (EBITDA, reduction in the average customer to turnover ratio, carbon footprint reduction plan and strategic options).
44 EPC managers are shareholders of 4 décembre.
A recent private transaction which gives us an idea of how the market values the business
Titanoble was sold in 2022 to Incitec Pivot Limited. Titanoble had sales of 59,9 M€ and a 6,4 M€ EBITDA. When taking into account the debt of the holding, EBITDA multiple was 7,8 and sales multiple was 0,8.
Multiple gives us an idea but should be higher for a company such as EPC. Titanoble seller was the owner since 2011, which appears to be a much too long holding period, and could explain a lower multiple (which is more or less the average multiple of transactions in Europe).
With 2021 numbers we get the following valuation with a 95 € share price.
Valuation stands at 123 € with Titanobel private market price. But this doesn’t take into account, the potential sell of Demolition BU (which could be valued at 0,4 sales and for which the business plan was significantly increased) which adds 40 M€ to the valuation. Value per share would be 141,8€.
This valuation doesn’t take into account the following items:
Hidden assets (real estate) as EXPL is an old company which was set up in 1893,
Much bigger then Titanobel (290,1M€ in sales versus 59,9 M€), larger geographical reach for EPC (Africa, Canada…)
Other non core assets could be sold if the price is right (demolition, recycling, diesel additives
which has low margins)
Growth in the coming years ( growth is 26,8% after 9 months in 2022. This number excludes the demolition BU which was put up for sale and whose growth is 8,5%)
Margin increase with an incentivized management team and new shareholder, focus on the most profitable markets.
Disclaimer: liquidity is very low.
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Disclaimer: The above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – I hold a position in Explosifs et Produits Chimiques at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).