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:
- Operating Cashflow exceeds EBITA and Net Income by a wide margin and is up +29%
- EBITA increased by 23%
- 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
- Order Backlog up to 181 Mio. (+ 16%) / Project Pipeline (Mainly Smart energy) up to 701 Mio. (+8,7%)
- Plan for 2016: Over 500 Mio. in revenues (Q4 2015: 165 Mio. / 468 Mio. FY 2015)
- 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!
- 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.
- EBIT-Margins in the different segments:
- Service DACH: 0,25% vs. -0,7% in 2014
- Services EE: 2,4% vs. 3,3% in 2014
- Security Appliances: 11,74% vs. 11,84% in 2014
- Smart Energy -0,5% vs 0,4% in 2014
- 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).
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:
- Services is basically an IT-System house which generates 350 Mio. Euro revenue in 2016:
- 4% sustainable EBIT-Margin
- = ~14 Mio. EBIT
- * (1-tc(25%))
- = 10,5 Mio. OE
- Discount rate of 10%
- = ~105 Mio. Euro OE
- Security Appliances for niche markets generate 90 Mio. Euro revenue in 2016:
- 20% sustainable EBIT-Margin
- = ~18 Mio. EBIT
- * (1-tc(25%))
- = 13,5 Mio. OE
- Discount rate of 10%
- = 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
- Smart-Energy Real Option:
- Detail period of 9 years where revenue grows from 65 to 235 and falls back to 90 Mio.
- 9% WACC in detail period
- 10% WACC afterwards
- 3% Perpetual growth rate after 2024
- Marginal Tax rate of 25%
- Sum of DFCFs = 60,7 Mio.
- PV of TV= 94,6 Mio.
- Firm Value = 155,4
- 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…