A lot has happened since I last talked about Saint-Gobain (OTCPK:CODGF) (OTCPK:CODYY), a French conglomerate with a history of almost four centuries. In the past 4.5 years we have experienced COVID lockdowns, the brief economic upturn has only been hit by high inflation numbers for a decade right now. Despite these headwinds, Saint-Gobain performed quite well in the first half and free cash flow remained very strong. trading around 10% less than in 2018.
Saint-Gobain being a French company, its listing on Euronext Paris is the best way to trade in the company as it is certainly much more liquid. The stock symbol in France is SGO and the average daily volume is 1.1 million shares. The current market capitalization is around 20 billion euros. As the company reports and trades in Euros, I will be using the Euro as my base currency throughout this article. Saint-Gobain has published an excellent 54-page presentation which you can consult here to better understand the company and its divisions.
Surprisingly strong results in the first half of the year bode well for the rest of the year
Although the fate of Saint-Gobain is closely linked to the situation of the world economy since the company is one of the most important producers and distributors of building materials and applications for the automotive industry (such as windows ), the performance of the first half of this year was actually stronger than I had expected. Although I dared not buy the stock once the war in Ukraine started, I decided to monitor the financial performance more closely as the stock price is currently trading 40% below its 52-week high at EUR 67.12 per share.
Total first-half revenue was up about 15%, and all of the increase in revenue was driven by organic growth, which is pretty impressive. And while COGS increased by more than 15% (which explains the increase in turnover because Saint-Gobain was passing on the increase in operating expenses to its customers), the other “overheads” did not only increased by 7%, which helped to push operating profit up by around 20%, to just under 2.8 billion euros.
Other expenses increased somewhat (from EUR 232m to EUR 298m) and these expenses include impairment losses, amortization charges and acquisition-related costs. On top of that, there are also restructuring expenses and claims-related expenses.
Net interest charges also fell and despite recording a total tax burden of 530 million euros, declared net income amounted to 1.77 billion euros. Approximately €50 million of this amount was attributable to non-controlling interests, meaning that net income attributable to Saint-Gobain shareholders was €1.72 billion. This resulted in EPS of EUR 3.34 based on the average share count of just under 517 million shares. The net number of shares at the end of June was 520 million shares, which means that EPS based on the current number of shares was EUR 3.31 per share. Quite strong given that the stock is trading below EUR 40 per share.
I have already noticed that in 2018, Saint-Gobain tends to be very strong cash flow performers and H1 2022 was no different. Reported operating cash flow was €1.64 billion, but this included a working capital investment of approximately €1.3 billion (mainly related to a seasonal build-up in inventory levels). This means that operating cash flow before changes in working capital was around 2.9 billion euros.
From this result, we still have to deduct the 355 million euros in rents. This means that adjusted operating cash flow in the first half of the current financial year was around 2.55 billion euros. This is an increase of more than 20% compared to the 2.08 billion euros in the first half of 2021.
As you can see from the cash flow statement above, the company spent approximately €832 million on capital expenditures. This would indicate that the free cash flow result was around 1.7 billion euros (which would be pretty good, but keep in mind that the majority of the 832 million euros in capital expenditure was in been devoted to growth, with growth investments doubling compared to the first half of 2021.
The image below shows sustaining capital expenditures in the first half of the year
This means that the underlying free cash flow in the first half was EUR 2.2 billion and spread over 520 million shares, or approximately EUR 4.13 per share after also deducting the cash flow attributable to participations not giving control. The free cash flow result is higher than the reported net result due to the fact that the maintenance investments and lease payments of 704 million euros are lower than the 1.04 billion euros of depreciation charges. Over the full year, I expect a free cash flow result of around 3.5 billion euros.
At the end of June, net debt amounted to 8.3 billion euros, or only 1.3 times underlying EBITDA.
And although Saint-Gobain has sold many assets in recent years, the company is still considering additional acquisitions. The company closed the acquisition of Kaycan for which it paid approximately $820 million, or approximately 8 times EBITDA, after considering expected synergy benefits of $30 million. And SGO also closed the acquisition of GCP in the third quarter of this year. This deal was originally announced in December 2021 when Saint-Gobain announced an all-cash offer of $32/share for a total value of $2.3 billion. The deal was originally worth €2 billion, but as the USD has strengthened against the euro over the past year, the final price will be around 15% higher in euro .
GCP was expected to generate $170 million in EBITDA this year, but Saint-Gobain also expects to generate $85 million in annual synergy benefits later, meaning it pays around 8.8 times EBITDA, including synergy benefits.
Both of these acquisitions were finalized in the third quarter and, as they were all-cash acquisitions, we should expect the net debt on Saint-Gobain’s balance sheet to increase by the end of this year. This should not be a problem as strong cash flow generation will immediately help reduce net debt from next year while EBITDA attributable to acquisitions will also help keep the debt ratio at an acceptable level. .
The company’s first half was much stronger than expected, as sustaining free cash flow exceeded 2.2 billion euros. While that’s great, I would still like to see how Saint-Gobain fared in the third quarter of the year and what their expectations are for the fourth quarter because I imagine the visibility isn’t great.
Despite spending over 3 billion euros on acquisitions over the last few months, I think the balance sheet is and will be good and the bond market seems to agree with me. The 2032 bond with a coupon of 2.625% is currently trading at 85.6% of face value, implying a yield of 4.45%. This represents an increase of less than 150 basis points over the yield on French government bonds for the same period.
I do not currently hold any position at Saint-Gobain but I monitor this one very closely.