Wednesday, October 3, 2012

Cybergun -- Replica Firearms

Cybergun, listed on the French exchanges, is an interesting situation.

It makes replica air guns, under licence to brands such as Beretta, Smith & Wesson, Colt etc., for the benefit of the collector, toy, and paint-ball game markets. These are not large markets, and Cybergun dominates them. Naturally, its sales are concentrated in the United States.

Up until the year ending March 2010, things were going as one would expect: growth (22.5% CAGR), healthy RONIC (44.5%), and all the rest of it.

And then, for some reason known only to the CEO, whose family owns 44% of the business, Cybergun decided that it might as well branch out into shoot-‘em-up video games, too. Of course, any link between physical guns and video games is extremely tenuous – the markets, distribution channels, manufacturing processes, supply chains, are all different. Inevitably, therefore, the capital invested in this drive into software was wasted – heavy capex in 2010 and heavy goodwill write-downs in 2012.

The company has now rethought the rush of blood to the head and is, contra Hornby, washing its hands of its noncore activities. Unpleasant for longstanding shareholders  (the equity raise that financed the foray into video games came at their expense), but, now that the lesson has been learned the hard way, perhaps an attractive opportunity for new shareholders.

At a 10% discount rate, the underlying earning power value of the replica gun business is about EUR 11 per share, four times the current share price. Growth should add substantial additional value. The leverage is worth thinking about, however.

Dsclosure: No position


  1. great find...

    their web site is showing €23 million owner loss in 2012, guess you eliminate the write off?

    it's going to take some time to reduce debt.... too early to buy?


  2. Indeed, I mentioned the goodwill write-down in the text above but left it off the spreadsheet for the sake of cleanliness.

    The interest coverage is not quite what I like to see, but it does usually like to carry quite a bit of debt. I think EBITDA/Interest of 4x is probably the target that management aims for.


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