Value Ideas Blog
Presentation about Value Investing at TU Darmstadt

After the success of our last presentations we are happy to announce one new presentation about Value & Activist Investing. It will be held by us at the 09.11.2016 19 on the TU Campus in Darmstadt in room 123 of the old main building S103. The presentation will be presented in german and will deal with an introduction to Value Investing and two case studies. The Case studies will be interactive and contain a long pitch which we have not yet presented on the blog. You are kindly invited to the presentations but as place is scarce you have to quickly fill out the form below with you name and the number of guest first so that we can plan. We would be glad to host many visitors.

 

2016-11-06-tu-darmstadt

 

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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 has a position in MicroWave Vision, so do affiliated parties. Thus they participate if the share price increases. Additionally, the author and related parties may sell their shares without further notice.

 

Nearly 2 years ago we stumbled for the first time upon the small French company Microwave Vision, since then we followed them closely and bought in at around 7 Euro per share. As we see the fair share price around 15 Euro which could now be reached due to the ongoing catalyst in form of a new CFO, we would like to share our thoughts  with you and are looking forward to your comments. (Ben from WertArt covered Microwave in April 2015 and bought in and sold out within the year, here you can find what he has written back than.)

 

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Business Description

Microwave Vision (“MVG”) is a French company active in the niche market of antenna testing equipment (“AMS”).

The main segment AMS stands for 85% of Sales, 11,5% EBIT-Margin and is a decent business with a moat coming from high R&D spending (10% of Sales) in a small market niche (Total market size is around 320 Mio. USD) where MVG has more than double the size of its next competitor and with 30%, a high proportion of after sales. The products of MVG measure and display electromagnetic waves of all kinds of antennas. The equipment is used during all stages of a product’s life cycle, including product development, pre-production qualification, production testing and product maintenance. Typical companies using MVGs products are in the telecom, smartphone, satellite, automotive and aerospace/defence industry. Customers of MVG are Airbus, VW, Foxconn, Apple, Google and many more.

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Dear readers,

for those of you actively following Vitec, there were some news last week: the Q1 report as well as the annual general meeting. Firstly regarding the AGM:

  • Dividend has been proposed at SEK 0.90 per share, resulting at a dividend yield of 1.38%
  • All board members and the president were discharged from liability for 2015, balance sheet and income statement were approved
  • Christer Stjernfelt was re-elected chairman of the board, 4 board members were also re-elected, PricewaterhouseCoopers AB remains the auditor

Perhaps more importantly, the Q1 numbers have been published with a less-than-spectacular market reaction (but already some recovery today):

 

Vitec

  • Net sales SEK 157 M (143)
  • Profit before tax SEK 18,0 M (21,6)
  • Operating margin 12,4 % (16,1)
  • Earnings per share before dilution SEK 0,48 (0,59)
  • Cash flow from operations SEK 84,0 M (73,5)
  • New managers in BA Real Estate and Health

The major development here that likely hit the market was the lower operating margin. The CEO Lars Stenlund highlights the ‘anticipated reduction in volume of business are Estate Agent in Sweden’, weakening NOK and new business managers that have been appointed to Real Estate and Health, leaving the outgoing managers inside the firm to focus on ‘exploration, acquisition and group interaction’. This is accompanied by the loss of 2 of their largest customers; something that has been known before. The large drag on operating profitability was justified by development and delivery of the cloud based systems for the Health sector  (but really also all other areas, e.g. Vitec Express etc.) which increased recurring revenue to impressive 85%. This development has also pushed cash flows, on the other hand, as illustrated below. They see the sales decrease in Real Estate Agent as a positive development for the overall product mix, since no area now makes up more than 30% of total sales. I have to admit that although this naturally reduces exposure to this sector, it is not the way I would see a strong growth business think about diversification. However, the firm does enjoy a low natural correlation among their segments. 

 

VITEC OPCF

 

Lars Stenlund describes the financial position and preparedness for future acquisition as good: In fact, the Cash and Equivalents position now amounts to 218m SEK (likely due to an about equal drop in receivables) which gives a lot of space for acquisitions this year. The increase of subscription type services was significant: licences fell from 4.6m SEK to 3.5m SEK while recurring revenues increased from 111.2m SEK to 123. 0m SEK. The struggling Real Estate area is supposedly limited in growth due to the need of training services for integration. The important and necessary development of shifting from traditional licensing to cloud based subscription model will set up the company for the future of software licensing.

 

First quarter sales have shifted in proportion from Sweden (52%, now 45%) to Denmark (13%, now 18%) and Norway (23%, now 25.8%).  In absolute terms, first quarter sales have increased in every region except for Finland where they are just slightly below the last level. The weakening of the NOK has caused a significant slowdown in the Norwegian property market. The number of properties for sale decreased and the number of transactions benefiting Vitec decreased accordingly. This explains a decline is the Estate Agent business area by 14%.

 

In summary, we think that the short term costs faced in the Health business are a very natural part of Vitec’s strategy that has worked out well historically. In terms of the financial position we think there is now good opportunity for continued acquisition growth and in terms of market readiness of the business model great organic growth prospects. The loss of two large customers in combination with the slowdown of the Norwegian property market given the ongoing switch to ‘Software as a Service’ is definitely a ‘bump on the road’, but it does not change the long term view, nor long-term margin projections. We will not sell the position for anything below 82 SEK which is in line with our pre-stock-split valuation.

 

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 don’t have a position in Hargreaves but affiliated parties may have. Thus they participate if the share price increases. Additionally, the author and related parties may sell their shares without further notice.

 

We wrote about Hargreaves two times in the past, since then the stock price tanked another 50%. Here you can find the first and the second writeup about the company. In the meantime, we visited the company in the UK and more recently, Hargreaves published a trading update in which it basically revealed all cash which can potentially be realised within the next 5 years. After this update the share price rose ~20% within a couple of days.

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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 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…

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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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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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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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

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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