Value Ideas Blog
Judges Scientific plc
  • 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
  • product
  • Profitability
  • Profitability2
  • region
  • ceoiro
  • customers
  • Express_banner_startsida
  • Niches
  • product
  • profitability segments
  • Profitability
  • Profitability2
  • region
  • shares
  • foxpublish
  • infoeasy
  • sub

Intro

 

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.

 
P/E P/B P/S EV/EBITDA EV/S Div Yield
 26.7 6.9 2.7  13.6 x  3.45 x  1.12%

Data: Bloomberg and own calculations, Website: http://www.vitecsoftware.com/en/

 

Live Stock Chart:

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  • Bild1
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  • ROTCE ROIC

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):

 

QuantInvesting

 

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.

 

Hargreaves

 

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.

 

Customers

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 salesforce.com 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.

 

Economics

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.

 

votes

 

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.

 

Risks

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.

 

Conclusion

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!