Value Ideas Blog
Hargreaves services plc

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!

Today we would like to present you METKA, which is probably one of the cheapest stocks in the world. Before we start with actual valuation, we provide an executive summary as this is a rather long post. Afterwards we would like to highlight the history of this over 50 year old company.


1. Executive summary


The share price is € 8.60. The company was founded in the year of 1964 in Volos Greece and was floated in 1973. In 2008 METKA’s share price hit a high of € 17,50 and slumped in the aftermath of the financial crisis to a share price level of around € 5.50. Since 1999 the Mytilineos Group owns 50.4% of Metka. Ioannis (current CEO of METKA) and his brother Evangelos Mytilineaos together own 31.8% of Mytilineos Group, split almost evenly.


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Recently BPER announced a change in the CEO position of the Group and the CHF jumped after the Swiss National Bank abandoned the CHF/EUR exchange rate of 1,20. Ariane de Rothschild will replace Christoph de Backer, which served BPER for three years, on the 31.01.2015. You can read the full press statement here. You can find our initial analysis here which we think is still intact despite the fact, that the new exchange rate possible decreases the Net Profit a little bit.


Christoph de Backer was the head behind the ongoing transformation and strategic repositioning of BPER. As we have read some rumors in the newspaper, this transaction has not pleased everybody and some older employees have left the group. The change was quiet surprising for us and we already observed some recent changes in the last years and months which are probably a result of the coming change. For example a new position of a Deputy CEO was created and Sabine Rabald, who worked for the Group nearly 20 years, was announced to serve in this role. But If you read the annual statements of the past years the change is not that surprising as it looks at first. Benjamine de Rothschild mentioned several times that the lead of the group will be taken over by a women in the foreseeable future. As Ariane de Rothschild already served in different banks in New York and Paris and has an education which is focused on finance we  see the change not as a negative step towards the future.


Lately the Group announced the acquisition of an extra stack in OROX Asset Management which should strengthen the Property Funds business of Rothschild. The overall stack is now at 82% and the purchase price was not disclosed.


In our view the semiannual result of the group was quiet satisfying, the business profit which is the best proxy for the ongoing operations rose by 32,4 %. Sadly this growth was not seen in the Net Profit of the Group which dropped by 18,8% for the half year, due to the result in the extraordinary income, which was quiet high last year. The total Assets under Management in the Group rose slightly by 1% in the half year. This is not really impressive but is explainable with the sale of non-core businesses in Italy. The like-for-like AUM rose by 4%; way more in line with our expectations of the groups’ expansion into Asia. The Tier I ratio remained unchanged on 36,9% under Basel III which is a really comfortable buffer.

In the first part of our analysis we explained the business model of Delticom; now we would like to give you and inside in its valuation. But before we begin with the number crunching we would like to start with a short summary of the key takeaways of our first part:

  1. Some other Value-Investors think that the problems of Delticom are only short-term issues: EBIT-Margins will bounce back to their old highs.
  2. Delticom has a really light business model: everything is outsourced to third party distributors.
  3. No use of purchase power: Delticom uses a fixed premium on the purchase price of every tire, sometimes it uses a flexible mark up to account for seasonality and inventory management.
  4. No customer captivity due to long purchase cycles of over 4 years.
  5. No lock-in of fitting shops.
  6. BBE-Study assumes that the online market share will reach 15% in 5 years, e.g. 2020. In an overall saturated market. (You can see the development of 2014 here)
  7. Bad strategic behavior in the acquisition of Tirendo and bad own brand strategy (The tires get really bad reviews.)
  8. Too high ROCE and ROIC even with small EBIT-Margins, which we will explain in the hereafter

What do we mean with too high ROCE and ROIC, and why is the biggest advantage of Delticom also its weakest spot?

Many other investors think that Delticom is able to return to its old EBIT-Margins, but we don’t think so. Why? The answer lies in the Business Model of Delticom which is extremely asset-light. As you can see in the chart below, the Capital Employed of Delticom is 7,1 % of 2013 Revenues, relatively low in comparison to other companies, but for Delticom itself higher than in the year of 2006 (6,6%) and virtually sky-rocketed from its low in the year of 2010 (0,9%) where Delticom also has shown its highest EBIT margin (11,1%).  The combination of high EBIT-Margins and low Capital Employed lead to an astonishing high ROCE of 276% in the year of 2010. Furthermore the ROCE was still high (51%) in 2013 where Delticom only had a EBIT-Margin of 3,6% and a Capital Employed of 7,1% of revenue. This high ROCE’s is also the reason why this business is so attractive for every competitor, if you cannot defend your turf with a big moat. As we don’t think that Delticom has a moat, we think that every time the EBIT-margins are high enough new competitor will enter the game.

  CE Delticom   So let’s come to our valuation of Delticom.

We have explained already that we don’t think Delticom has a moat and is a pure execution business only, so we use a discount rate of 10%. If we discount our Earning Power Value, assume an EBIT-Margin of 4% in the future and subtract the debt of Delticom we end up with a fair value of 16,62 EUR per share. This is not far away from our current trading price of around 17,5 EUR and is in our opinion quiet low  for an evaluation without any future growth.


Delticom was able to growth its revenues by 17,7% p.a. over the last five years. If we now assume a growth of 8,8% in average over the next 5 years (10% in 2015 declining to 7% in 2018) which we think is quiet conservative, we end up with an N-EPV of 28 EUR per Share in the year of 2018 or an IRR of 13,7%. (Capital allocation is assumed to be stable: 43% dividends, 3% growth CAPEX, 2% change in NWC and no share repurchases.) If you than use the Growth Multiple of Greenwald to calculate the Terminal Value with a 3% growth rate, you end up with an N-EPV of 37,92 EUR per Share at the end of the year of 2018. Which is equal to an IRR of 20,1%.


We also used the approach of total Market size as an approximation but where not really satisfied with this approach. Therefore the reasonable share price of Delticom should be around 30 EUR which gives you a nice little upside. But if we think in our 3 pillars Model, we end up with a fair or cheap price but with neither a beautiful business, nor a management we would like to be engaged with. (You can inform yourself here and take a look at the insider trading)

 We wish all of you a happy new year! Disclosure: No Position

In our today’s report we feature an idea which was already mentioned many times by other value investors. However, our outcome is different in one point which leads to a completely different picture. Here you can find the analysis of Profitlich&Schmidlin and from others (We have to add that these two funds share one platform). We would like to present you our 3 cents on Delticom. The online tire store Delticom was often proclaimed to be a value investment. Besides its growth rate that was because it used to have a solid balance sheet, an easily understandable business model, and because its extremely high returns on equity.

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    Today Hornbach announced that they consider changing the legal structure of the Holding into a KGaA. You can find the news here. The Baumarkt AG of which we are shareholders should not get affected by this considered change. This announcement happened shortly after the change of the CEO of the Group.   We don’t like above mentioned news due to the fact that the CEO has done a good work and that the change in the legal status to an KGaA can lead to a decrease of shareholder rights which we have already observed at STO KGaA SE (you can find our analysis here and here). But as we are not affected by the change of the legal status, no detailed information is yet available and because we think that this is only the first step to reach full controlled over the Baumarkt AG we stay long Hornbach Baumarkt AG.   Also, as you might have noticed, our posts have become a little less frequent recently. We apologize for this and promise improvement!  
Today we have a look at the German company Jungheinrich. This report was accomplished with the help of my good friend Benedikt Balthasar, who is studying Math and is currently in his last Master semester at the TU Berlin. Furthermore we would like to excuse our long absence period, this is due to the mentioned fulltime internship of Felix in an investment bank and that I had currently moved to Nice.  

Company Overview

  33063-logo-pressemitteilung-jungheinrich-ag   The forerunner of the Jungheinrich Group was established by Hermann Jungheinrich in 1908 as an import and export firm under the name H. Jungheinrich & Co. In 1953 his eldest son, Friedrich Jungheinrich, laid the cornerstone for the present company by establishing H. Jungheinrich and Co. Maschinenfabrik. After the passing away of the founder, Jungheinrich remains an independent family business owned by the shareholder families Lange and Wolf. read more

First off, a quick note: Felix is working for an investment bank for a couple of weeks, so he will not be involved in the reporting on German stocks for that period.

Today I would like to present you, in this quick write up, the SMT Scharf AG – ISIN: DE0005751986. SMT Scharf was founded in the year of 1951 and is based in Hamm which lies in the old industrial and mining arear of Germany the so called “Ruhrpott”. SMT Scharf is listed on the German stock exchange since the year of 2008 and the first time I heard of it on a value investing conference was in the year 2012. The company and the investment case was presented by the guys of the Frankfurter Aktienfonds für Stiftungen. Since than the development of the share price looks like this:


SMT Scharf_hist_wallstreet_online_20090811_20140811

(Source: WallStreet:Online)


SMT Scharf is the world market leader for the production, installation and maintenance of underground rail-bound railway systems which are used in the hard coal mining business. Its market share in this segment is over 40%, you can find an interview with the CEO from the year 2013 here, the number of installed rialways is really interesting due to the fact that you can calculated the future service revenue with it.

Das Segment, das Scharf bedient, sind „Einschienenhängebahnen“ = „Monorails“, eine sehr spezialisierte und kleine Nische: Weltweit gibt es etwa 1200 bis 1400 Monorails, wovon etwa 530 von uns sind, daraus resultiert unser 40%-Marktanteil. Der Jahresumsatz in dem Segment sind etwa 250 neue Bahnen (100 Mio. EUR) und eben so viel Service, also ca. 200 Mio. EUR. Auch davon hat Scharf mit 77 Mio. fast 40%. []

You can find an older presentation for the EK-Forum here. A nice video about the product can be found here. read more
Since our last post some interesting things happened which we think are still not reflected in the share price of the Hornbach Baumarkt AG. Hornbach-Treppe   1. The representatives of Kingfisher, which had owned 25% of the common stocks of the holding and 5% of the Baumarkt shares have left the supervisory board and have sold the shares back to the family and the Baumarkt shares to institutional investors. Kingfisher is now entering the German market. But I think that was not the main reason why they sold their shares and here is a very good article of the FAZ over the reals reasons.   Kingfisher would like to target the “professional” market and not the retail sector. I think that Hornbach has a little stronger position in the professional market than in the retail sector, but in total we are not concerned about this development due to the fact that Kingfisher’s major markets are in UK and France. At the moment you can observe what happened to Tesco etc. when Aldi and Lidl entered the UK market due to the fact that the German retail market is one of the most brutal markets in the world; our players know how to play the game.   2. A few days ago Hornbach Baumarkt was announced to become a SDAX member, this will attract new investors for the share.   3. Hornbach announced incredibly good Q1 numbers. EBIT nearly doubled for the Baumarkt and same store sales increased by more than 15%, this development actually exceeds our own expectations and you can observe a really big “Schlecker effect”.   But a really interesting thing is the development and valuation gap between the holding and the Baumarkt shares. What you can observe is that the Holding nearly performed twice as good as the Baumarkt shares did. We think this is due to the fact that if a bigger fund would like to establish a position it prefers to buy into the more liquid Holding.   Hornbach   So what can be a potential catalyst to change this valuation gab? We heard some rumors from knowledgable persons that the midterm perspective of the Hornbach family, now after they solve the problem with Kingfisher, would like to merger the two companies back into one company with two different traded shares. This is a logical step for the family due to the fact that they can save the money and still hold the full control over the company. So in our opinion it is way better to hold the common shares of the Baumarkt like the family is doing it, because we think the bearer shares of the Holding AG will be switched to bearer shares in the Baumarkt AG. With this move the family will also increase the free float of the total company, with this Hornbach is a clear MDAX candidate and will enhance the stock price of the Baumarkt AG shares.   We think these facts, the development and the future potential show that our first target price of 41,2 € was quiet conservative and still implies an upside potential of around 25% for the Baumarkt Shares which would lead to the same performance which the Holding AG shares already showed. At the moment the operational performance of Hornbach also exceeds our best case scenario which results in a share price of around 50 €. All in all we are really happy with the outcome and we think that  the future which lies ahead of Hornbach is also bright.   Disclosure: Long Hornbach Baumarkt AG