Gévelot S.A.
An under the radar pumps business.
Overview
Gévelot S.A. is a French holding company that has been in operation since 1820. The company originally began as a manufacturer of ammunitions for the Royal Gendarmerie at the beginning of the 19th century, providing ammunition for the likes of King Louis-Philippe and Louis-Napoléon Bonaparte.
However, in Gevelot’s bicentenary of operations, the company has extended its competence into several fields. For example, since 1932, Gevelot has been a leading supplier of positive displacement pumps for petroleum, food and industry via its subsidiary PCM. Moreover, Gevelot also previously operated in the mechanics (Gurtner) and textile (SLF) industries, but both businesses have since been sold. Today, Gevelot is a streamlined company solely focused on supplying fluid handling equipment for the Oil & Gas, Food and Industry markets, via its subsidiary PCM.
PCM was founded in 1932 by René Moineau, the inventor of the progressing cavity pump, which the company continues to use 89 years later. PCM is operational in 90 countries and has 6 industrial manufacturing sites across the globe. Importantly, the company is known for the famous progressing cavity pump, which is a highly cost-effective pump that is perfect for transferring abrasive, corrosive, hot and heavy products. Hence, progressing cavity pumps are often used in the fluid transfer of crude oils with high viscosity (thickness). In fact, these pumps are an essential technology for offshore utilities because they are designed to be versatile, meaning they can handle sand particles, gas and oily water. Moreover, due to the simple design of the pumps, they have low maintenance costs and can easily be adapted for several conditions, which reduces life-cycle costs versus alternative pump technologies. Now, it’d be a lie to say I understand the intricacies of their pumps (I haven’t a clue), but essentially, PCM has carved out a niche by providing highly efficient and cost-effective pumps used for pumping things such as heavy oils in sandy and viscous environments.
PCM also offers fluid handling expertise for the food industry. In fact, PCM’s pumping, dosing, mixing, and filling systems are used across a wide range of food applications due to the versatility of their pumps. For example, their pumps can transfer anything from thin liquids to highly thick pastes and sauces, at cold and hot temperature, without damaging the ingredients.
Furthermore, PCM also provides an array of pumps for industrial applications such as water treatment, chemical transferring and mining activities. Essentially, the value proposition is the same throughout: PCM provides cost-effective and efficient pumps that can be used in highly versatile applications.
Business Quality
As mentioned, Gevelot has recently been refocusing the company within the fluid handling business. Thus, in recent years the company has made several divestures. For example, in 2017, Gevelot sold their extrusion business for €24 million. Interestingly, the extrusion business accounted for approximately half the company’s revenue but it was a cyclical business that was capital expenditure heavy and generated slim margins. Therefore, CEO Mario Martignoni decided Gevelot should sell the business and re-focus the company on their high-quality pumps business.
Moreover, in 2014 Gevelot sold a PCM subsidiary - KUDU Industries - to Schlumberger in a deal valued at €168 million; despite KUDU having sales of €102 million and only €1 million in net income! It is speculated the very favourable price was due to Schlumberger misunderstanding of exactly what assets they were acquiring, which was a small cost for Schlumberger but a big gain for Gevelot.
I mention these divestures because they have had a significantly positive impact on the financial position of Gevelot. In fact, the company has a net debt position of -€146.0 million. So, essentially Gevelot is sitting on a massive pile of cash, with a mere debt/equity ratio of 4.3% and a current ratio of 3.3x.
Gevelot is a profitable company with fair returns; especially when considering the huge cash pile. For instance, in 2019, the business generated a return on equity of 4.5% and EBIT margins of 8.2%. Of course, this is not a fair representation though because the business has €154 million in cash and equivalents. Thus, if we conservatively account for excess cash, the business could reasonably be generating closer to 12% returns.
In addition, the company has been growing revenue at approximately 3% on average in recent years and despite the collapse of oil prices in 2020, Gevelot only saw a -13.7% decline in revenue and remained profitable. Importantly, the majority of the company’s revenue is related to the oil industry. Thus, the company has a significant dependence on the price of oil, which makes it harder to forecast the performance of the business. Nonetheless, it is a fairly stable company, not least because of its rock-solid balance sheet, but also because it sells an important product that’s been around for a long time and will likely remain in demand for a long time to come.
Lastly, it’s always a welcome sight to see family-ownership within a small business such as Gevelot. In this instance, Mario Martignoni owns just greater than 50% of the company and other family members own 9%. Tick!
Valuation
Currently, Gevelot has a market capitalisation of €140 million, a negative enterprise value, and a book value of €197 million, meaning the business currently trades at approximately 0.7x book value, which is extremely cheap; especially considering most of the assets on the balance sheet are cash and equivalents. Thus, at the current discount I find the investment opportunity very compelling because the pumps business is actually a reasonable business. It is a proven business, with an operating history in the pumps industry that spans almost a century and it has a track record of profitability. Moreover, the company is family-run with significant insider ownership, so the chance of misalignment seems unlikely.
Recently, Gevelot paid out €1.54 million in dividends at a 1.1% dividend yield and the company has a history of re-purchasing shares. In fact, in their last buyback disclosure in 2018, management paid an average price of €200 per share, which is basically a 10% discount to today’s share price. So, if it was cheap at €200 per share, management won’t be hesitating to repurchase at €182 per share. In fact, I believe the only reason there hasn’t been more buybacks is because Mario Martignoni inherited shares that caused him to go beyond the 50% threshold. Hence, he had to waive the obligation to file a mandatory takeover bid.
Evidently, with so much cash on hand, there’s the opportunity for strategic acquisitions to grow the pumps business, whilst also doing buybacks and special dividends. So, at a 30% discount to book value, Gevelot provides a significant margin of safety and makes for a very compelling investment opportunity.
Conclusion
Essentially, Gevelot is a small, family-owned business, operating in a niche industry that has a long history of operations and profitability. However, it’s also those first two observations that make the company so cheap. I believe Gevelot is under-the-radar because it’s a small company that barely communicates with shareholders and has zero analyst coverage.
So, Gevelot is a perfect example of the inherent advantages offered to individual investors willing to find under-appreciated businesses within more inefficient markets. However, I won’t take the credit for this particular idea. In fact, I borrow ideas all the time, just not conviction; hence why I had to research and write-up the name myself.
I’ll continue to track Gevelot and learn more about the company over-time, and I look forward to seeing how this one unfolds!