Value Ideas Blog
Hornbach Baumart AG First Quarter Update and potential catalyst
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    

8 Comments

  • Is this a schlecker effect or has the increase something to do with the wheather y-y, too? No position yet.

    • Thanks for your comment, I clearly missed this in the post.
      According to other Baumarkt managers: “If you have not achieved double digit growth you have made some mistakes.” But this is only in part a result of the weather, if you read related press you can estimated that it stand for round about 33% of the development.
      But I dont know any other DIY chain that hat shown such a good development in same store sales, EBIT and net income.
      Have a great week

  • Servus,

    I see the point of having the Holding and the Baumarkt joined, some way or the other. But is it really possible to switch the Holdings’ bearer shares into Baumarkt bearer shares? In fact these are two different companies, no? With the Holding being the mother of Baumarkt…

    Wouldn’t it be easier for the Holding to buy the 25% of the outstanding Baumarkt shares which trade on the stock exchange?

    Nice work anyway – all your articles, not only this one.

    Best Tom

    • Hey Tom,
      thank you for the flowers! I have heard several different constellations, but I think that the family will use the cheapest approach. I don’t know if this will be a reverse takeover or that if the family will simply buy out the existing shareholder. One point which is for this relevant, is the cash which is on the balance sheet of the Baumarkt AG.
      Either way this is no short term speculation. So let’s see and time will tell.

      Cheers Nils

  • Hallo Nils, Hallo Felix,

    do you have any view on the current development of Hornbach? You didn’t publish any new thoughts on this company recently.

    Regards,
    M.

    • Hello EasyWisa,

      we divested the position 1 year ago as we had a better investment opportunity. One key driver for this decision was the lower than expected earnings yield after the bankruptcy of Praktiker. Furthermore, over the last years our investment approach has changed significantly. I value compounding economics much more than I did before and look more for potential inflection points which are not seen by the market. I have to admit that I quit the business of low P/E, P/B investing completely.

      Best,
      Nils

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