Overview:
DLSI Groupe is an European employment and staffing agency serving a diversified set of industries headquartered in France and with operations in France (approximately 60% of revenue), Luxembourg, Switzerland and Germany.
In investment terms I would describe it as a fair business at a wonderful price. The company suffered heavily from the government lockdowns and in my opinion its price has suffered more punishment that it is warranted even if the company continues to be pressured by both lingering health restrictions and economic pressure on some of its traditional customers due to rising costs of energy and raw materials.
To better understand this company we should divide out attention between two time periods: before 2020 and after 2020. Before 2020 the company was growing revenue at an average pace of 3.5% per year, nothing to write home about but due to its asset light nature it was also able to generate strong rates of return on capital consistently in the 15%-20% range. Unfortunately opportunities for reinvestment in the business are limited (the expansion into Poland did not go as expected) but the other side of that is that the company was willing to return capital to shareholders via a dividend (52.6% payout ration in 2019).
In 2020 revenues plummeted 29% although due to the nature of the business the company was able to control its costs as well. Gross margins declined from 10% to 8% on top of the revenue decline and even if the company ended the year with a net loss its operating income was still positive. Since then the company's revenues have rebounded but are still significantly below 2019 due to current macroeconomic headwinds in Europe. Margins have also rebounded but also still below the historic average (currently 9%) and ROIC now sits in the single digits.
Overall, owning DLSI means believing that the current situation is temporary and resultant from the extraordinary macro environment that we have been in since 2020 and that the market will eventually reprice it accordingly.
Risks:
Liquidity is very low, even for a micro cap. Less than 10k shares traded in a week is common.
The Doudot family holds close to 65% of the company leaving minority shareholders subject to their influence. That said the company issues a moderate dividend that was growing until 2019 before the government lockdowns. The dividend has been reinstated in 2021 and I would expect it to grow from here.
The company obviously thrives when there is a dynamic job market in the geographies it serves. Near term headwinds are expected by most macro analysts in this regard.
Valuation:
Current price: €11.40
Market cap: €28.96M
Enterprise Value: €23.03M (close to €6 million net cash in the balance sheet)
As mentioned before owning DLSI is to believe that once the situation normalizes (and that it doesn't take decades to do so) the company will return to its previous revenues and continue its growth from there.
In this specific case I have decided to forego a formal DCF and instead present the following metrics (not adjusted for inflation):
Average operating income for the last 10 years: €7.5M
Average net income for the last 10 years: €4.6M (this results in a P/E of 6.2)
Average free cash flow for the last 10 years: €5.4M (this results in FCF/EV yield of 23.7%)
Conclusion:
DLSI is a business suffering from the macro headwinds present in the economy since 2020 but I can see no signs that its current issues are structural and that it should not recover when the tide changes.
The company is trading at a cheap valuation and in the future it should benefit from both higher revenue and multiple expansion.
The balance sheet is strong with close to €6M in net cash and should provide ample resilience in an unfavorable macro environment.