Capral target valuation1/ As Capral has a cyclical business, it...

Capral target valuation

1/ As Capral has a cyclical business, it makes more sense to value it based on its average earnings during a cycle, rather just on one year.
Looking at the past 4 years (including company's estimate for FY 20), Capral had an average trading EBITDA of 15.7 m per year (interesting element as it is a good proxy for cash flow from operation).
If we estimate that they have a normalised Capex of 5 m (based mainly on a maintenance Capex of 3 m per year), we can estimate that Capral has an average free cash flow of 10.7 m per year, which corresponds to a free cash flow yield of 14 %.

2/ So the question is mainly to wonder if the period 2017-2020 corresponds to a cycle for Capral.
Interesting to remember that Capral has 3 main businesses : residential construction (41 % of their sales), commercial construction (13 % of their sales) and industrial (46 % of their sales). Looking at the period 2017-2020, their industrial business has been very steady, while their residential construction business has been quite volatile. The residential construction business is mainly related to the annual dwelling commencements, which have been strong in 2017 and 2018 (over 200 k per year), but has been declining in 2019 and 2020 (to reach 150 k estimated in 2020).
As a result, I feel that 2017-2020 reflects quite well a normal cycle for Capral.
Obviously, this is a subjective call.

3/ Coming back to the question of the target price
Given the uncertainties on the sector, it makes sense to require a significant risk premium on Capral.
We can probably take 2 scenarios :
- very defensive one, where we require a free cash flow yield of 10 %, which corresponds to a target price of around 8 $,
- another more realistic, where we require a free cash flow yield of 7 to 8 %, which corresponds to a target price of 9.60 $ to 12 $.