Frenzel & Herzing Value Investment  Blog
S&T AG – Comments on results & more growth ahead

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 now. Thus they participate if the share price increases. Additionally, the author and related parties may sell their shares without further notice.

 

On March 30th 2016, S&T published their annual report 2015. You can find our old write-up here. Since than the share price is up nearly 50%. Back than we wrote:

If we put those two values together, we end up with a fair value of 7,68 Euro per share which doesn’t account for the potential of further revenue growth of the Security Appliances Segment which could get a really big project from Boeing (S&T already received money for a feasibility study and currently they are negotiating the contract with Boeing). If we factor in the growth of the appliances segment the fair value could easily reach 10 Euros per share, due to favorable economics.

 

Thus, I would like to present an update on my valuation and thoughts today. But lets start with the annual report. The revenue figures where already published before but now we also have the underlying Cash-Flow etc. the key highlights for me are:

  1. Operating Cashflow exceeds EBITA and Net Income by a wide margin and is up +29%
  2. EBITA increased by 23%
  3. EPS increased to 36 Cents (+12,5%), EPS before PPA rose to 42 Cents (+13,5%) vs. an increase of + 25,7% in Net Profit – This is not really nice as we had some dilution
  4. Order Backlog up to 181 Mio. (+ 16%) / Project Pipeline (Mainly Smart energy) up to 701 Mio. (+8,7%)
  5. Plan for 2016: Over 500 Mio. in revenues (Q4 2015: 165 Mio. / 468 Mio. FY 2015)
  6. Sold three pilots for an “End-to-End Smart-Metering Solution” to Electrica, Romania, which shows the good potential in Romania and Poland. According to my Knowledge, S&T is currently the only provider which is able to supply a one-stop solution like this in eastern Europe. Furthermore, if we look in the new tender documents, we can see, that they are on OSGP now. Which means that the Pilots where so good, that S&T now has nearly won the big tender as they are the only major player with OSGP and own the license!
  7. S&T invested 5,2% or 24,6 Mio. of their revenues into R&D. Of this 4 Mio. are for a big new Internet of Things security project which can be used in both, Secruity Appliances & Smart Energy but is fully charged on the Secruity Appliances segment. Which confirms, in my opinion, the margin potential of up to 20% in this segment.
  8. EBIT-Margins in the different segments:
    1. Service DACH: 0,25% vs. -0,7% in 2014
    2. Services EE: 2,4% vs. 3,3% in 2014
    3. Security Appliances: 11,74% vs. 11,84% in 2014
    4. Smart Energy -0,5% vs 0,4% in 2014
  9. Free Cash Flow of 17 Mio. in line with Net income

 

Another really interesting thing in my opinion was the option scheme, which you can find below. What astonished me was that every top-manager was rewarded with more options than the year before, despite one, Hannes Niederhasuer the CEO himself. When I have asked him about this fact, he told me, that he only has a certain amount of options which he can contribute among his employees and as he already owns enough shares and is incentivized enough he believes that it is better to give the options to his managers. This again underlines what a great CEO he is, remember he is paying himself only 450 Euro a month. He still holds more than 10% of all outstanding shares (5% directly and 5% via his family).

 

Options

 

 

A further point of interest was the disposal of the international assets of NES (Smart Energy). Basically, S&T has sold the non strategical parts of NES which will reduce the revenues in the Smart Energy segment by 10 Mio. The new guidance is a revenue of 70 Mio. in 2016 ( +70% without NES US). Furthermore, the Smart Energy segment should be profitable for the first time as they can focus on the eastern European and  DACH-area. This refocus has already brought the Smart Energy segment to a breakeven in Q4 2015 and should yield in profits from 2016 onwards. Additionally,  an earn-out of 3 Mio. over the next 3 years exists. The Earn-out is based on the EBITDA-margin of the Smart Energy Segment of S&T. If they come over 5-6% EBIDTA Margins, S&T has to pay nothing. If they approach 15% they have to pay 3 Mio. over 4 years. Thus the disposal of the non-strategic NES segments make sense.

 

if we now look on my old valuation and update the numbers, the SOTP looks like this:

  1. Services is basically an IT-System house which generates 350 Mio. Euro revenue in 2016:
    1. 4% sustainable EBIT-Margin
    2. = ~14 Mio. EBIT
    3. * (1-tc(25%))
    4. = 10,5 Mio. OE
    5. Discount rate of 10%
    6. = ~105 Mio. Euro OE

 

  1. Security Appliances for niche markets generate 90 Mio. Euro revenue in 2016:
    1. 20% sustainable EBIT-Margin
    2. = ~18 Mio. EBIT
    3. * (1-tc(25%))
    4. = 13,5 Mio. OE
    5. Discount rate of 10%
    6. = 135 Mio. Euro OE

 

If we put those two segments together, we end up with a value, without any further growth, of 240 Mio. Euro + 9,4 Mio. Net Debt – 11 Mio. Minority interest = 238 Mio. Euro / 43,8 Mio. Shares outstanding = 5,44 Euro per share

  1. Smart-Energy Real Option:
    1. Detail period of 9 years where revenue grows from 65 to 235 and falls back to 90 Mio.
    2. 9% WACC in detail period
    3. 10% WACC afterwards
    4. 3% Perpetual growth rate after 2024
    5. Marginal Tax rate of 25%
      1. Sum of DFCFs = 60,7 Mio.
      2. PV of TV= 94,6 Mio.
    6. Firm Value = 155,4
    7. FV/43,8 Mio. Shares = 3,59 Euro per share

Thus the fair share price for S&T in 2016, according to my STOP valuation, is 9,03 EUR.

 

A further catalyst to realize the value should be the fact that they could enter into the TechDAX by September 2016. This is really important for S&T as Deutsche Bank and ETF will and can invest into S&T.  Furthermore, S&T had two roadshow in UK and it seems like S&T now gets a lot of attention from the investors there. Additionally, Warburg started to cover the stock as well which brings the number of analysts up to 3 now.  Another driver could be, that Berenberg could start to cover them soon, as they have a big conference  in Lisbon, where S&T will be presented as one of the best 25 European companies.

 

What I didn’t like was that S&T paid interest of 2,9 Mio. which is added to the Operating CashFlow which I typically don’t like as it inflates the Operating Cash-Flow! Furthermore, the Received Interest of 300k EUR is booked into Investment activities, which I find really strange. Than Paid interest is than subtracted in the Financing CashFlow. I have never seen something like this before… But I will find out what happend there…

Please don’t buy or sell stocks on recommendations of anyone especially not via phone and through a “cold call”. This post is just for education and the authors don’t have a position (long/short) in the stock. We are only trying to state the obvious facts. Always do your own research.

 

In this (somewhat unusual) entry, we want to tell an interesting story that is still relevant. A couple of months ago, a friend of us informed us about the company HQ Life, asking  if we knew anything about it. After a short look we told him that we have never heard of the company before. As we were very busy at this time, we didn’t ask him for more information. Than after a while, he told us that he himself bought some shares and that his father would have some insights. When I met him, I asked him about the insights and he told me that his father was called several times and he was told where the stock would trade at point x and point y and like a wonder, the stock price ended up at exactly that price. The guy on the phone told him he would only earn money if he would send him 5% of the return after his father had sold his shares. This would happen on a trust basis and if his father would not do it, he would be not informed by the company (BAH Consulting) anymore.

 

After a while, his father invested a huge amount into the stock and BAH-Consulting told him that he could get “bonus shares”. The only thing which his father would have to do would be to sign an NDA (Non Disclosure Agreement) and with this inform the biggest shareholder (MCT Consulting & Controlling AG) about the number of stocks he held.

 

When we heard that, we told our friend to directly sell all shares and informed him, that this is a fraud & scam with a 99% probability.

 

After we returned home that night, we directly start to investigate the case. The first thing that hit us was the chart. Have you ever seen something like this?

 

Price chart HQ Life AG

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You can find the Key-Highlights for the financial year 2015 below:

 

Net Sales                                                            618,4 Mio. SEK (+25,6%) We expected 622 Mio. and Brokers expected 585 Mio. SEK for 2015 and 626 Mio. for 2017

Operating Cash flow Margin reached           22,5%.

EBIT-Margin                                                    16% (+2%)

EBT                                                                      15%

EPS                                                                      2,66 (+65%) Brokers estimated 2,3

% of Recurring Revenue                                      78%

 

The really good thing in our opinion is, that the CEO clearly states, that they would like to continue to acquire more companies (Vitec has over 100 on the short list and are in direct contact with them) and has enough founding (+130 Mio. SEK) to do so. Furthermore, they have provided the EBIT-Margins of the different Segments. Here our Key Takeaway was that the only mature and fully rolled SaaS product (Energy) achieved an EBIT-Margin of 37%. The other segments achieved Margins, which ranged from 14-23%. Our personal favorite, the Healthcare business achieved a margin of only 9%. Here it has to be said, that they have recently sold their biggest single contract ever, the Diacor contract which is worth~15 Mio SEK over 36 months, which will be rolled out until the end of 2016 and is fully SaaS. With this, we should see an increase in margin, which should bring us easily above 20% in this business.

The Diacor deal brings 5 Mio. I revenue each year and should be pure EBIT!

 

We will update our valuation and come back with our findings shortly, but we clearly think, that Vitec is a position to hold on.

  • Judges

Today, I would like to present you one of our top picks for the next years:

Judges Scientific plc.

 

Judges is an AIM listed company which is specialised in the design and manufacturing of scientific instruments. Why is it one of our top picks? It has some wonderful characteristics which we are normally searching for:

 

  1. High return on invested capital
  2. A moat which protects the returns
  3. A lot of room for further growth where the earned money can be reinvested
  4. A capable, honest management which has excellent capital allocation skills and with which we love to team up

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On October 12, 2004 Yasser Arafat, the 75 year old leader of the Palestine Liberation Organization, became severely ill with vomiting and abdominal pain. Over the next three weeks his condition worsened. On October 29, he was flown to a hospital in France where he fell into a coma. On November 11, 2004 Yasser Arafat, who survived several Israely attempts on his life, died. What killed him was uncertain. But even before he died there was speculation that he had been poisoned.

 

In 2012 researchers at the Lausanne University announced that they had tested some if Arafat’s belongings and discovered unnaturally high level of polonium-210, the same radioactive element that was found in the body of Alexander Litvinenko in 2006.

 

In August 2012, Arafat’s widow gave the permission for his body to be exhumed and tested by two separate agencies, in Switzerland and France.

 

Now the question which you have to answer before you continue:

 

Will either the French or the Swiss inquiries find elevated levels of polonium in the remains of Yasser Arafat’s body?

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Fireworks4_amk

 

Dear readers,

 

a happy new year to all of you! Here is an overview of our main investment ideas of 2015 and their performance:

 

1

 

Our three investable ideas fortunately did well this year and we are happy if you trusted us with those. These are other stocks we have talked about, but not invested in:

 

2

 

After one major negative surprise which had to be booked out worthless, our company portfolio performed at 11.2% this year. Needless to say, one mistake can really hurt sometimes, but is usually a good lesson. The negative surprise was Globo plc where we met the management and visited the HQ without a notice in advance. Afterwards we established a half position as we where not 100% convinced, but the potential upside seemed so high. One key lesson was to trust our negative checklist and not to invest into a company when a certain threshold is reached. The only other negative portfolio contributor is our top pick for 2016 where we invested a little bit to early and which is now ~25% cheaper.

 

Overall, we are thankful for about 40,000 page views in 2015 with more than 1,600 on a single day. Our readers base has reached more than 500 this year. We also thank our top referring sites for 2015 which were: valueandopportunity.com, valuewalk.com, twitter.com, cornerofberkshireandfairfax.ca and marketfolly.com.

 

The best books of the year 2015, and certainly a good read for 2016 are:

  1. Superforecasting – The art and science of prediction
  2. Creativity Inc. – Overcoming the Unseen Forces that Stand in the Way of True Inspiration (Disney was next to Infinion the first stock of Nils in the age of 9)
  3. The everything store – Jeff Bezos and the Age of Amazon

 

At the end of June, Nils will sit his third level CFA while I will be doing my first level as well as hopefully completing my master’s degree and my thesis at HEC Paris.

 

We wish you all a successful year 2016 and hope to get as many great comments and feedback as last year!

Nils & Felix

  • Vitec
  • Vitec 1
  • Vitec 2
  • Vitec 3

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)

 

Vitec

 

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  • Smart Energy DCF
  • smart energy dcf 2
  • smart energy
  • S&T countries
  • S&T HN
  • HN2
  • Security
  • Fronius

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.

 

Pabrai  

Highlights:

  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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  • Westfield 1
  • Westfield 2
  • Castelbridge 1
  • Castelbridge 2
  • blindwells
  • Landbank
  • valuation 1
  • Valuation2
  • value2
  • value3
  • Value4
  • Value5
  • value 7
  • value 8
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