Thermador groupe : a unique culture but fairly priced and a declining ROCE

Thermador is a constellation of companies. They are a specialized distributor, which offer a large choice of accessories and equipment for fluid circulation for the construction and industry market. Their clients are either professionals and/or large DIY specialized entities.

A capex light distributor which acts as an all in one offer for foreign industrials

Thermador group acts as a representative in France for suppliers which can’t or don’t want to manage the commercial, marketing and distribution of their products in France. Thermador is a facilitator for its suppliers. With one fourth of their suppliers the business relationship goes back to 40 years. Initially Thermador begun with Italian suppliers who are still their top 2 suppliers. Since 2019, China and Taïwan are the main suppliers with Italy holding the second position after having been the number 1 supplier.

The business is capex light as most of their capex is building bigger warehouses on the site which they own so as to have the inventories which enables them to quickly answer to the client needs and to never have a sold out product.

Skin in the game for both the top 20 managers and the employees

The top 20 management (CEO of the different entities plus the group CEO and the CFO) and the employees hold respectively 9,2% and 9% of the company.

To get to the 9% employee holding one has to add  shares held directly by employees (1,2%), shares held by the employees mutual fund (3,5%) and retired or former employees (4,3%). A 1% capital increase (91 097 shares) took place in April 2020 whose subscription was reserved for its employees. Timing was perfect as we were at the height of the Covid 19 crisis and the share price was evolving between 39 and 46 euros. Moreover, employees had a 30% discount on the acquisition price.  A 10% threshold is aimed for the employee ownership.

Concerning the management, two shareholder’s agreement have been set up. The first one was in 2010 after 87 000 free shares were given to 9 managers. This agreement has lapsed since the 1st of January 2021 and the concerned managers are free to sell their shares. The second agreement was set up in 2016  for ten years after two managers retired. Their shares were acquired by 19 managers and the employees mutual fund. This second agreement doesn’t bind the shareholders into reinvesting  their dividends.

Great management team which has the ability to adapt its approach in commiunicaiton

For a long time, I thought that Thermador was over communicating on the idea that investing in their company was better than investing in a “Livret A” as its dividend yield was higher. This approach has since then been rescinded and they are more focused on operational key indicators. Top management are long time employees of the company and have gained their stripes internally. I was able to meet them often and can say that they have the right skill set and answer to all the questions even the difficult ones (ROCE which they know they have to work on).

A change of strategy since 2015: the use of external growth

Historically, Thermador didn’t use external growth as they had enough to do with their historic entities and the growth of the international entity. Since 2015, this approach has changed as the following table illustrates.

These acquisitions were made to either reinforce an entity which needed a bigger size to keep its bargaining power with its distributor clients (Dipra), others enabled it to reinforce its competitive positioning (PB tub acquired its main competitor) or to extend the product range.

Some entities were created from scratch as Thermador groupe saw opportunities such in the equipment of swimming pools (Aello) and ventilation (Axelair).

Thermador announced a standstill for acquisitions for 2020 and 2021 above 5 MEUR in order to focus on integrating the different companies.

Their moat: important inventories, owners of their site and a unique culture

Inventories represent 120 MEUR in assets (more or less 1/3 of total assets). It is high but contributes to their moat as they always have product availability and satisfy in that way their clients.

They own the site where most of their entities are based and they still have some real estate reserve to keep building bigger warehouses. Their main site is owned by SCI Thely which Thermador groupe owns at 99,9%. The net book value is 46,2 MEUR but the fair value is estimated at 56,9 MEUR. So we have 10,7 MEUR in hidden assets even though Thermador will never sell this asset as it contributes to their moat.

Once a year the wages of each employee is published so as to avoid any gossiping. The future CEO has been elected through a conclave. The different entities act as independent BU’s which helps them keep an entrepreneurial mindset.

ROCE is decreasing and D&A is benefiting from the growth acquisitions

ROCE is still above the 20% threshold but it has been going down regularly. Simply put the acquired companies are less profitable then the historical business. This is a point worth following going forward.

A last point, the acquisitions also help the D&A item as customer relationships are amortized on a 10 year span.

Valuation

The EV/EBITDA multiple stands at 17 with a 100 euros share price. The FCF yield stands at 2,9%. To get to the 10% threshold we need quite an amount of growth to kick in. And we know that the company enjoyed an exceptional 2020 year.

The integration of the acquired companies as well as the contribution of the international activity (Europe and Africa) should improve with the opportunity to physically visit clients. Syveco is the entity which manages the international business and is managed by the future Thermador groupe CEO. It is one of the most profitable entities with the historical entities (Thermador, Jetly and Sferaco) but it can clearly benefit from a long runway. Sales should be helped by MaPrimeRenov  which is a French mechanism which allows the financing of insulation, heating, ventilation or energy audit work. This leaves interesting options for Thermador to grow.

Dividend payments consumed 57% of the 2020 FCF. This number would be higher in a normal year. This is to put back into perspective that yes their balance sheet is solid and yes they can easily pay back the financial debt (which they can get at a very low rate) but the high level of dividend constrains a little their FCF deployment. Thermador has historically never bought back shares. Finally, the ongoing ROCE decrease must be followed closely as it could indicate that for the time being the acquisitions appear to be dilutive and more defensive. Sure synergies can kick in but it is a point to follow.

To sum up, Thermador is a great company with a unique culture but at the current price a decent IRR seems difficult to get.

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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 – we do not hold a position in Thermador Group at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).

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