Value Ideas Blog
Update – Vitec Software Q3 and Adjustments

1) Recent Developments


You can read our last post here. Since the publishing of the Q3 results, the stock managed a 13.3% increase to 340 SEK. We are excited about an overall 150% increase since we discovered it. Main results JAN-SEP 2015 (as reported) were:


  • Net sales SEK 448.3 m (350.4)
  • Profit before tax SEK 67.8 m (42.4)
  • Operating margin 16% (13)
  • Earnings per share before dilution SEK 9.02 (5.47)
  • Cash flow from operations SEK 106.4 m (91.1)




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Disclaimer: This is not an investment advice, please do your own research and don’t follow anyone blindly. Furthermore, it has to be mentioned that the author and related parties are long-term shareholders of S&T AG for many years and thus participate if the share price increases. Additionally, the author and related parties may sell their shares without further notice. As this post is already extremely long, I will write another one for the Smart-Energy business.


1. Executive Summary

1.1. Business

  S&T AG (‘SnT’) is an Austrian company active in three different markets.

  1. IT Consulting and System House
  2. Niche market Security Appliances
  3. Hardware & software products for Smart Energy

Today, the System house activity stands for over 80% of revenue and is used to cross sell S&Ts smart energy & security Appliances. In the system house division S&T offers IT and ERP implementation services but also outsources the whole IT-Infrastructure of customers. The regional scope of S&T is focused on Eastern Europe and Russia. Major clients are governments and big companies like Skoda and Mikros.

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Back in 2013 we were invited to attend the Pabrai annual fund meeting to speak to Mr. Pabrai in person. Unfortunately it was not possible to meet him until six days ago. Thanks too my employer Fronteris, I was able to attended his annual meeting and a bike ride with him. In addition to this experience, I was able to meet with other great minds like Guy Spier, Rishi Gosalia (from Google), Haricharan Ramachandra (from Linkedin, who also run the great blog BitsBusiness), Adrian Warner (a fund manager from Australia) and many others.




  1. Score keeping is Mr. Pabrai’s most important lesson to achieve success in life and investing. Especially, the track-record is important in investing and gaming. It can help you to track your mistakes and improve your knowledge.
  2. Has read the Poor Charlies Almanac 7 times and still finds new insights.
  3. Self-improvement is the most important thing, he would bet on the guy with less knowledge and less skills if he has a drive to self-improvement, over a lifetime he will bet the guy with more skills.
  4. Pabrai thinks that Fiat is highly undervalued. Minimum margin of safety is 50% and it has the potential to become a +4x. The spinoff of Ferrari will come in less than a month and it is still not considered in the share price.
  5. Pabrai currently holds: Fiat 42% of the fund , GM B Warrents >10% , POSCO ~10% , ~15% Horsehead Holding , ~10% Google
  6. Dhando Holding IPO will be delayed by 2-3 years, they are currently developing a Smart-Beta value ETF and an own direct small businesses Insurance company (GEICO for businesses)
  7. Stone Trust made an underwriting loss of 4 million this year (when the Equity was just 61 million)

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Today we would like to provide further insides into our hidden Asset valuation of Hargreaves Services plc, where a friend of us, Daniel Gilcher helped us.   According to the annual report of 2014 the book value of land assets are carried at cost: 8,418m GBP. The problem is, that we don’t have a lot available information on the different land patches across the country nor the status and information of the plan projects.     Her is what we know: Where the old mines are and that 300 acres (1% of overall land) is developed towards a residential area. A minimum of 1600 housing units will be erected. The cost for development remains unknown. Please see below the landbank of Hargreaves around Edinburgh.   land portfolio around Edinburgh And in the next picture the landbank around Westfield. read more



vitec logo


Today, we want to introduce a company we found trough a stock screening process and which we found very interesting: The Vitec Software Group AB (STO:VIT-B) is a Swedish software designer specialized in comprehensive property and energy management systems for buildings, forecasting for energy companies (electricity, district heating and wind power), management systems for realtors and media distribution. Merely a warning in advance: historical annual reports are published exclusively in Swedish language, but the company has started to publish reports in English as well. That might also be the reason international investors start paying attention. We were already able to realize modest gains (we invested at about 135 SEK) but think there is still an upside. Some of you might remember that we pitched the idea in February at the EBS talk. Here is the full story.

 26.7 6.9 2.7  13.6 x  3.45 x  1.12%

Data: Bloomberg and own calculations, Website:


Live Stock Chart:

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Today I would like to present you a company which pops up in nearly every value screener which we use and is already well known by some value investors (the result below is from the quant investing screener):




I’m talking about Hargreaves Services Plc. (OTCMKTS: HGRVF), which was founded in 1994 with the acquisition of a haulage business from RJB Mining plc which consisted out of 20 trucks and simply hauled coal around. But we will come to the history of Hargreaves later in the text. Recently the share price has tanked to just below 3 GBP which is far away from its old high of 2012.  So the question is what happened? First in 2011 and 2012 some company specific news hit the share price when Hargreaves discovered in the year of 2011 that its Maltby coal mine had geo-structural issues and had to be mothballed. Later Hargreaves discovered a fraud in their Belgian operations, and took a GBP 17.7m write-down. You can see this development quite nicely in the share price development of that time. Than in 2013  many value investors found the company, it was pitched 2 times in Omaha, and called for an entry which ends in a share price stabilisation in the year of 2013 to 2014.




In the same time the coal price collapsed from its high in the year of 2011, when one tonne of coal was traded at around 130 Dollar to  now 58 Dollar. As coal mining companies are normally dependent on the coal price this is the explanation for the collapse of the stockrpice of Hargreaves.


Coal Price


But Hargreaves is not a simple coal mine. The key to Hargreaves business model lies in its history.  Especially the 1990’s  where from importans for Hargreaves, when it continued to grow organically and bought further haulage operations. At the start of the millennium, Hargreaves Waste Services was founded and haulage diversified to hauling waste. Gordon Banham, the current CEO joined the group in 2001 and began a strategy of diversifying into higher value services.

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logoThis weeks post is an introduction of a (well known) Swedish company. After several guidance adjustments, the company has disappointed some investors and the share has dropped significantly; potentially by too far? We will try to give an overview of the business itself.



The Business

Sweden-based Elekta develops, manufactures, and distributes treatment planning systems for neurosurgery and radiotherapy, including stereotactic radiosurgery and brachytherapy. The company’s platforms and software are used in more than 6,000 hospitals globally. Its headquarters are located in Stockholm.

Elekta operates in 4 business areas and the operational segments listed beneath:

 unitsareas regions

It is easily visible that Elekta operates in the Americas, Eurasia and Asia Pacific in about the same dimension. North and South America are the world’s largest market for radiation therapy: Elekta is the #1 in software and brachytherapy and #2 in the markets for linear accelerators (following Varian, controlling e.g. 70% of the US market). It is the market leader in the EMEA area with potential in the Middle East and some weakness in Russia. Asia Pacific offers the strongest opportunities for the company. Not only is Elekta the market leader, its growth potential in China is still remarkable.



Elekta’s customers for its oncology and neurosurgery solutions are over 6000 hospitals worldwide, primarily public care providers, but also a growing portion of private care providers specializing in radio therapy. Elekta also trains its customers in using their products and includes their feedback in their R&D process. The company has recently invested in which is known for its customer relationship management program, providing detailed analysis of the sales force and accomplished deals, thereby curbing up efficiency in the sales process. Elekta sells mainly through its own sales organization which constitutes 17% of overall employees. The sources of revenue are: hardware, software and system sales (hardware + software). Sales often stem from ongoing service contracts. A large and very important part of Elekta’s business model is its services sector (35% of employees). Its primary purpose is to maintain and develop equipment and software installed in clinics. This includes the prevention of downtime and the increase of customer efficiency. The former makes Elekta’s running service especially crucial to customers. Elekta uses these relationships to sell accessories, upgrades, more services and new systems. Services are organized globally (about 700 employees).


Competition and Moat

The nature of competition differs in the various operating areas. The most important competitor globally is Varian Medical Systems (NYSE:VAR). It also manufactures medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy. As mentioned, it is very well established in the US market and takes up 70% of the radio therapy market share (50% of global RT market). For radiosurgery, Accuray (NASDAQ:ARAY) is another notable competitor, that develops, manufactures, sells and supports treatment solutions (radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy) and can therefore be considered a niche peer. For brachytherapy, competitors are Phillips (Pinnacle treatment planning tools, integrated photon, electron, stereotactic, brachytherapy, simulation, image fusion, IMRT options and most recently VMAT planning) and Raysearch (STO:RAY-B) (RayStation treatment planning platform). There is a greater variety of Hospital Information System (HIS) companies in the IT business, whereby cancer care is only one of many specialities. The business of radio therapy is highly protected by barriers of entry through intellectual property and technological know-how. As we have shown before, through services area that includes maintenance, switching costs are also massive. As a consequence, we have seen very strong consolidation in the sector. In the US market, Varian and Elekta have formed a stronghold protected by these barriers. When doing further research to compare the individual products (on the basis of personal experience reports given by MDs) it cannot be denied that the portfolios are very similar in nature.


Key Industry Drivers

Radiation therapy (RT) still lags behind the attractiveness of cancer drugs. Even though RT offers a cost-efficient way of fighting certain kinds of cancer, its side effects seem rare but consistent. This does not mean that improvements cannot be made in the future. Morningstar estimates that 95% of the world’s RT equipment installations will be provided by Varian and Elekta over the next decade, partly enabled by Siemens’ exit from the industry in 2012.

The company itself lists four levels on which its success will ultimately depend. The first is the research and development level with regard to all products, software and services. Especially on the IT level, solutions such as MOSAIQ have to be developed quickly. The second level is the sales and marketing level which can be argued is not as sophisticated as the R&D and less reliant on special individuals. The third level is the lifecycle management which plays into the services strategy. 45% of sales are made up by software and services and synergies are very valuable to the costumer on an efficiency bases and to Elekta on a recurring sales and growth basis. The fourth level of intrinsic growth is based on the success of the former three but also strategies like evidence-based medicine and training.



The emerging markets, particularly China could be a welcome customer. The Asia/Pacific marketplace could support up to 5’000 new linac (linear accelerator) installations, according to Morningstar.

In the USA, the Centers for Medicare/Medicaid Services (CMS), a federal US agency, control government funds spent on medical equipment. It is their decision which products will be paid for, but as long as Varian and Elekta offer the most suitable options, the situation should not be problematic. The increasing power of large hospital networks will have an impact on the choice of supplier. This could either turn out positively or negatively. Western Europe will depend on government’s decisions to increase RT support.


Cyclicality, Exposure to Recession

Obviously, the cancer treatment (and medical overall) appears as a sector that is almost immune to broad economic trends due to its importance to the patients. Cyclicality could merely stem from government decisions on health care spending resulting in periods where more new devices are employed or systems are updated. A change in recognized services on the side of the health insurer seems highly unlikely.


Potential Treats

While the US market seems to be a rather safe, and Europe (ex UK) at least stable, a visible threat is the aggressive competition in emerging markets. Customers have been declared to be more cost-conscious and therefore pushing competition and lowering margins. Forex depreciation in these markets is possible due to a strong US Dollar.


Management & Governance

Mr. Laurent Leksell is a SSE graduate. He is the founder of Elekta and the board chairman, owning 14,250,000 A-shares, 8,856,624 B-shares, 3,562,500 A-convertibles and 2,500,681 B-convertibles. He is the company’s largest shareholder. It is remarkable how much effort is put into explaining the corporate governance structures in the annual report. It shows a scheme of how the board and the auditor interact and lists the boards most important members with days of attendance in board meetings as well as their total compensation. Overall, the corporate governance report seems to be very transparent, but I do not have any opinions on the management yet.




Conventional Valuations

  • P/S lies at 1.82 compared to 2.88 for Varian and 1.52 for Accuray.
  • P/B is at 3.11 compared to 5.50 for Varian and 5.58 for Accuray.
  • Elekta trades at a P/E of 37.40 against P/E of 46.26 for RaySearch and 21.93 for Varian.

Earnings multiples are high due to the earnings decline while when focussing on other fundamentals, the company looks rather undervalued. However, this is of course just a quick glance.



One risk for Elekta is the change of the competitive landscape. Technical shifts occur as well as continuous improvements of industrial know-how. Constant development is crucial in this industry. In its risk report, it states: “The Company’s continued success is dependent on the ability to establish and maintain successful relationships with customers.” Elekta’s delivery of treatment equipment relies on customers’ readiness to receive the delivery at site. Depending on contractual payment terms a delay can result in postponed invoicing and also affect timing of revenue recognition. The Group’s credit risks are normally limited since customer operations are, to a large extent, financed either directly or indirectly by public funds.



Besides recognizing a potential opportunity after the recent downturn, we will restrain from a buying decision and further research because of: 1. The size of the company and strong analyst coverage 2. The complexity of the sector, especially R&D ambitions and needs 3. A competitive disadvantage towards more specialized agents in the market


We will have to learn much more about the sector and the industry in general to make better judgements. Also, this is not as easy to comprehend as Coca Cola, to be fair. The next two posts are going to make more precise conclusions; we have full valuations coming up, stay tuned.


Questions to the audience: What are your future expectations for Elekta? What is your guess for development of demand in China?


Enjoy your week!

Hello readers, we are sorry for the recent slowdown in blogging activities which are mainly due to time constraints and restrictions on what we can and would like to publish, but the good news is that we will publish two new company analyses in the near future. As I’m recently working on quantitative value portfolios, their backtesting and possible improvements I would like to share two helpful ideas with you.   First: The use of the Piotroski-F score seems to increase the returns of nearly all quant portfolios.   Second: So called dual momentum seems to work as a protection against high absolute drawdowns Both strategies are nicely described by Tim of the quant-investing blog.   Third: magicdiligence has written about the potential to increase the returns of Earning yield stocks by adding a FCF-Yield, which is on the first view quite similar but seems to effect the overall return positive.  According to the author, the earnings yield screening led to a better outcome (most of the times), as it accounts for minority interest effects, and “smooths out” lump sum businesses for a better idea of ongoing earnings power. Therefore the FCF-Yield is a good verification that the earnings are real earnings to the owner. If the Earnings Yield and FCF-Yield are widely divergent, perhaps the business isn’t as attractive as it initially appeared in the screener.   The fundooprofessor has written in interesting article the Coal CAPEX in India and who will benefit from it. As the next stock which will be presented will be a coal stock this was a good read, but it also helps to think about other input costs and their influence on the outcome of a company. The key takeaways are, that the Effects of low/high commodity prices are temporary and lead to big cycles in the producers earnings. But the real money is mad somewhere else: In the businesses which will benefit from this huge capex – businesses which facilitate the capex or benefit from that capex. There are two different levels of companies:
  1. upstream (businesses that benefit from supplying goods and services to facilitate the capex that is coming) For example SMT Scharf (Where the CEO stepped down today)
  2. downstream (businesses that benefit from cheap energy – a cost benefit they will be able to retain because they have a moat).
What we are looking for are businesses which have very high energy costs, but when those costs go down they can retain a significant part of that benefit for themselves without suffering any loss of business volume or market share. Those two things — protection of business volume and market share — are terribly important. Examples for this are Coca-Cola, Starbucks, Apple etc.   Last but not least I would highlight the latest news from Banque Privée Edmond de Rothschild or from now on only Edmond de Rothschild S.A.. Recently they appointed a new Chief Risk Officer, Manuel Leuthold in the same time will step down from his position. Interestingly after the announcement the share price started to rise at, for BPE astonishingly high volumes. Today Rothschild is trading at 17.500 CHF and we are happily waiting for everything what comes next.   Have a good week!  
Dear followers, the time has come again for our weekly link collection. This time featuring an enlightening article on management compensation, how Charlie Munger picks stocks, seven patterns of inefficiency when pricing a business, some thoughts from the Brooklyn Investor and an ‘Economist’ comment on John Nash’s nobel price 1994, in remembrance of his great life that ended three days ago. nash We will be back shortly with our latest investment story. Stay tuned and enjoy your week!

Welcome to a further piece of our ‘Value Essentials’ series. ‘Financial Shenanigans’ is written by Howard M. Schilit, PhD, CPA and Jeremy Perler, CFA, CPA. It presents an empirical journey through many accounting tricks in an entertaining way while teaching its readers what to look for when analyzing balance sheets. This blog post is by no means a summary of all the facts given in the book. It is merely meant to give you an idea and remind you of the key lessons. I would highly recommend reading it as soon as possible, as it is also part of our recommended reading list that you find on our website. After all, there are passages that show the recklessness of managers and the absurdity of huge frauds (that have stayed unnoticed for decades) which makes the reading experience quite joyful.

  financial shenanigans  

NOTE: In this post we directly quote the book. If you find this interesting, please consider buying it (e.g. via this link).

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