ELIS: Boring but profitable

November 2, 2023

Stack of folded cloths in an industrial laundry.

Investment opportunities can be found in every industry, though some may be easier to get excited about than others. However, as many astute investors, including Warren Buffett, have noted, “boring” companies and business models can be just as profitable as those flavour-of-the-month stocks. This week, we profile ELIS SA (ELIS FP), a boring company that Global Alpha got excited for.

Based in Europe, Elis specializes in renting and maintaining flat linen, workwear and hygiene appliances. Founded in 1883 in France, Elis operated as a family business for three generations before going through several leveraged buyouts and ultimately going public in 2015. The company has 440 production and distribution centres across 30 countries and a workforce of over 50,000 employees. With 75% of its revenues derived from markets where it leads, Elis is a dominant force.

Elis caters to a broad spectrum of customers, from hospitals needing linen to industrial companies needing uniforms exposed to dirt or chemicals, to small kitchens preferring not to manage towel cleaning in-house. Elis’s full-service solution relieves customers of managing inventory, ordering replacements or cleaning – handling all of the buying, renting and logistics. Customers have the option of variable pricing based on usage and service frequency or a fixed rate, typically under four-year contracts. Revenue is split almost equally between corporate and smaller businesses.

The textile rental market has seen growth, gradually replacing customer-owned textiles in the last decade, driven by cost savings, efficiency, improved hygiene standards and ESG commitments. Elis’s competitive advantage is its scale; its model is most efficient in densely populated areas, optimizing logistics and maintain margins. Elis strategically expands through acquisitions, improving its geographical presence to best utilize its distribution centres. This strategy has been paying off. In 2009, Elis derived 80% of its revenue from France, compared to less than a third today. More recently, it also started operating in Mexico through an acquisition that immediately made it the country’s largest player.

It’s worth taking a moment to explore the sustainability benefits of Elis’s solutions. As companies become increasingly mindful of their energy and resource use, they are also paying more attention to the companies they outsource to. Elis holds up very well under this scrutiny. The company has implemented various initiatives and made commitments to reduce its environmental footprint. For example, it pledged to cut water consumption per kilogram of linen processed by 50% by 2025, using 2010 as a baseline, and it has already achieved a 43% reduction by 2022. The company has also vowed to lower energy consumption by 35%, transitioning its fleet to alternative vehicles and reusing 80% of its end-of-life textiles. None of its clients have the capacity nor the inclination to manage their linen and workwear-related environmental impact as effectively. Furthermore, Elis offers ancillary services that directly help clients in reducing their own footprint, such as reusable scrubs in healthcare facilities that reduce CO2 emissions between 31% and 62% compared to disposable scrubs, or cloth roller hand towels that reduce emissions by 30% compared to disposable paper towels.

What makes Elis an appealing investment for us? It stands out with significant market share, a strong brand and a sustainable competitive advantage. It operates a resilient, non-cyclical industrial service with a business model adaptable to external disruptions. From COVID-19 and energy price shocks to wage inflation, the company has adeptly navigated recent macroeconomic events, maintaining its pricing power and protecting profits. With its strong free cashflow and flexible cost structure, we believe Elis is well-equipped to manage debt, and engage in strategic M&A and share buybacks, positioning it to excel in both bear and bull markets.

While a linen rental business may not intrigue everyone, our focus remains on identifying quality companies at reasonable valuations, no matter the industry.

Global Alpha Capital Management Ltd.
November 2nd, 2023