Value Ideas Blog
Microwave Vision, can you get a growing business for free? (Executive Write-Up)

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.)

 

mvg-icon

 

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.

Electro Magnetic Compatibility  (“EMC”) stands for 12% of revenues, generates an EBIT-Margin of 13% and produces testing chambers to test electromagnetic shielding / to make sure there are no interferences with other devices.

 

Environmental and Industrial Control  (“EIC”) stands for 3% of revenues, generates an EBIT-Margin of 3% produces slightly smaller devices for measuring the effects of electromagnetic waves on citizens or workers e.g. from transmission towers.

 

National Security and Healthcare  (“NSH”) is a “startup” within the company– so far the segment only produces costs (1.2m or 2% of group revenues). The goal is to develop an innovative breast scanner and an airport scanner. Here, an IPO is planed which would result in a higher group margin (the segment currently loses 20% of group EBIT) and reveal the value of the segment.

 

Organization

The Group is organized in two main operating segments:

Subsidiary           

% Sales 2014    

MVG Stake

Comment

SATIMO

~ 45%             

100%              

Mostly European Civil Business

ORBIT/FR

~ 55%              

63%

Mostly Defense / US Business

 


The segmentation between those operating subsidiaries is highly correlated with the following segmentation by customer group. Thus by assessing the profitability of these subsidiaries we can estimate the profitability of customer segments.

 

MVG reports roughly € 200k in minority interests p.a. which are due to the 37% minorities in ORBIT. Thus we can conclude that ORBIT makes around € 540k in net profit or € 830k in EBIT. Compared to revenues of ca. € 30m, this indicates an EBITA margin of only 3% for ORBIT. On the other hand, SATIMO may have around 16% margins.

 

EMC

EMC Testing Chamber

 

History and Management

In 1986, SATIMO SA (Société d’Applications Technologiques de l’Imagerie Micro-Onde SA) was founded as a university spin-off. The company was led by Prof. Jean-Charles Bolomey. The company already did what MVG does today, “high-speed microwave field measurement systems”. It benefitted from the university’s years of research on “Modulated Scatterer Technique”.

 

1986-1995 – Development of the first multiprobe systems: During its first ten years, SATIMO performed research and prototyping of antennas, antenna measurement systems, non-destructive testing equipment, and topographic imaging systems. During that time span Prof Bolomey appointed Dr. Philippe Garreau as CEO. The CEO holds a stake of 3,4% in the company (> € 15m) so he is properly incentivized.

 

Historically the company did well operationally as well as with their P&L (they had their costs in check). However, the balance sheet exploded resulting in negative FCF. This lead to a “rebellion” against the CFO who was replaced after 2 years of “shareholder riots”. We assume that the new CFO is the right guy to fix those issues and get working capital down significantly. The CFO himself stated the target that he would like to bring NWC down to 20% of revenues

 

The Product

Normally the object / the antenna has to me moved very slowly and carefully to make different tests from different angles. This is called a mono-sensor (or “mono probe”) system.

 

MVG developed a multi-sensor system where the object doesn’t have to be moved. This makes it possible to measure an antenna with 10  – 100x the speed of a regular mono-sensor system. MVG describes the system as follows: “Unlike traditional mono-sensor technologies, which required long, fastidious mechanical movements, the MV-ScanTM scanners measure through numerous sensors. These electronically directed sensors drastically reduce measurement time by limiting mechanical movements. This reduction leads to a far better return on investment for the installations equipped with MV-ScanTM in comparison with those equipped with mono-sensor solutions … This technology is covered by several international patents. It allows Microwave Vision to propose a value-added offer to its customers.”

 

MVG calls this technology MV-ScanTM. The system is patented and one system costs between 150k and several Mio. Euro. So far MVG was the only player offering this system. This gave MVG an USP but as it wasn’t the standard and customers were reluctant to switch to multi-sensor systems MVG had to do some educational selling.

 

Now US competitor ETS Lindgren introduced a similar system (to MVG’s StarLab). MVG sued them for patent infringement. No matter how this lawsuit ends, from talking to innovative companies in the past I can tell that patents are often a fairly weak protection and sooner or later a competitor will be successfully dodge the patent, so I do not assume that MVG will go back to being the only company offering the system but from now on will have permanent competition.

 

On one hand this takes away their USP, on the other hand, multi probe systems may gain more acceptance among customers and become the standard, which will put pressure on all other competitors. Microwave will go into trial against ETS. The costs for this are ca. 1m p.a. 

 

MVScan

StarLab Measurement System

 

Economics

The EBIT Margins of the group were exceptionally high (20%) 2005 to 2007. Which was due to capitalization of R&D. Today all R&D is expensed. Then in 2008, the margin went to -14% due to some mess-ups. Today it has stabilized around 8% to 9%. I would make the following adjustments:

  1. Adjustment for cycle -1.5%
  2. Add back losses of NSH segment +2%
  3. Sustainable EBITA Margin 9%


If we would calculate more aggressively, we could use a 12% margin ex NSH which is in line with AMS and EIC margins.

 

Growth was excellent due to a strongly growing market for antenna testing. MVG grew by 10% p.a. over the last 5 years. In the future, the market is projected to grow by 8% p.a. going forward.

 

ROTCE is only 13% due to the high working capital needs, which are partly structural, and partly due to a lack of management focus. We should not expect ROTCE to get to 20% anytime soon but > 15% should be possible.

 

Valuation

The company trades around 4x sustainable EBITA or lower if we assume

  1. improvements in working capital towards 30% of sales which would bring 6 Mio. in cash or improvements of NWC towards 20% of sales which would bring 12 Mio. in cash which is the goal of the new CFO
  2. a sale of the NHS division which could add 20 Mio. in Cash

 

If both happens the company could actually trade below net cash.

  1. Earnings Power Value € 6,03
  2. Net Cash € 2,62                       
  3. Value of Growth € 1,16
  4. NSH Segment € 3,22
  5. NWC reduction € 1,93

Total Value:  € 14,96      

 

     

In our entity valuation (including adding back 20m for NHS) we arrive at a value of € ~15. Thus we are trading at ~45% of Intrinsic Value. This valuation is based on a sustainable margin of 9% ex NSH which I think is realistic, despite new competition in their core product.

 

Risks

I think the biggest risk is new competition in their core product – multi-sensor systems which could put pricing pressure on the highly profitable civil market. Recently, two competitors (#3 and #4 supposedly) were acquired by PE and merged. This is negative as it creates a bigger competitor. On the other hand PE ownership typically means no pricing pressure. Additionally, ETS also gets restructured by its parent company because of poor profitability over the last years and is facing the trial of MVG.

 

In addition there is a general risk from technological substitution which is hard to quantify, but I think is limited due to the fact that this is a small niche market where existing players spend heavily on R&D.

 

15 Comments

  • Thanks for the write up. Unfortunately my cost base quite a bit higher but holding for the long term

    • If you hold for the long-term, I’m pretty sure that you will make some money and you could now lower your purchase price. I have done the same 😉

  • What’s the exit and why is this stock not a typical value trap?

    • Hey Tony,
      thanks for your comment!
      The first difference is, that this company has a clear underlying growth path, which is profitable if they just hold their current NWC levels constant. Furthermore, there is change ongoing and we already know, that they are now really focused on costs and especially bringing down the NWC, they hired a person which is solely responsible to take care of the unpaid bills – they already see the money coming in since Q3 last year.
      When they show the underlying profitability of their business and just discontinue the lossmaking segment, this will turn out to a good investment. If they bring down the NWC and sell it – It will be a homerun.
      Oli actually wrote a really good comment where he clearly show the potential with a good downside protection.
      Cheers,
      Nils

  • Hi,

    a couple of (maybe stupid) questions:
    – how many (single) systemes do they actually sell in a year ?
    – Do they produce the sensors themselves or is this stuff you can just buy ?
    – are single sensor systems cheaper ?
    – how does customer concentration look like ?
    – could it be that they used longer payment terms because of the new competition ?

    mmi

  • Hi guys,

    Nice post as always, but I beg to differ on this one.

    My biggest problem with MVG is management, in particular the CEO. Typical French engineer, probably good at that, but really not a manager. The new CFO at least knows what he is talking about, but the CEO is really underwelming. They have raised equity to do an acquisition 2 years ago and…. nothing, the cash still sits on the balance sheet (what’s left of it after an increase in WC). I stopped keeoing track of the number of profit warnings and grew tired of pertetual push forward of breakthroughs.

    I had taken a small pôsition at €7.8 some time ago, and i am really glad ot be out of it at €7.4. I will buy big time when the CEO is replaced.

    If you like really cheap companies at 2x Ebitda and lots of cash on the balance sheet but with sub-par management, you should have a look at GEA (grenobloise d’Electronique Appliquée)!

    • I looked at GEA. The family is a large owner but they do nothing to improve the company. Their proprietary technology gets commoditized slowly and global competition occurs. The only advantage I see is their sales – they know whom to call and to convince. But will that be enough for the long term?

    • Hello Finifohun,
      thanks for your comment and insides, it is always good to have someone who challenges your thoughts, especially if it someone who has a better insight into the French system than I have. I really believe in the CFO and believe, that he is a good counterpart for the congenital engineer. I also send them the book “the Outsiders” and I hope that both of them will take a similar approach as the one who is described in the book. At those prices, I strongly believe, that the odds are really in your favour and I have a good margin of safety.
      I looked at GEA once but turned it down due to the same reason as Oli.

      • Just did my quarterly review of MWG, it looks like another missed half year, but management is saying that they will make it up in the second part of the year. The good news is that WC has stopped increasing even with growing sales. Cash flow is flat, so in a sense that’s also good news.
        The not so good news is a decline in Ebitda due to “unfavorable product mix” to €2.0M from €2.3M. Current operating income at €0.8M and an “exceptionnal” of €1.3M to defend IP (that’s some really expensive lawyer working for them!) results in a net loss of -€0.9M (+€0.4M last year).
        All this translates into a wonderful buying opportunity if you believe in the stock which is now trading at €5.85/share. The question is still the same in my opinion: is this credibly the last of a series of disappointing news / performance or just part of the continuing mismangement of the company?

        • Hello Fininfohub,

          thanks for the comment! A friend of mine has visited MVG in Paris recently and got a good impression. Even the people on the floor are now aware of the working capital problem and are working on it. We think MVG will be able to get the NWC below 40% of sales, the 20 is not realistic as the nature of the businesses doesn’t allow it. The top-line will be week this FY but they are showing some progress for the next years. Especially the scanners seem to perform really well, they brought the scanning time down to 5 seconds.
          Despite the fact, that MVG is the worst performer of my stocks since I bought it, I’m still happy with the position and even increased it in the downturn.

          So lets wait and see 😉
          All the best,
          Nils

  • Hi Nils & Flex,

    very informative and comprehensive summary! BUT … 😉

    I do not believe bringing down NWC is easy, because its a niche market (to small to have scale advantages (logistics, pricing, payment)) and than someone else has to keep NWC on their books (who wants that voluntarily and free of charge?).

    Numbers based on 2014 annual report:
    1. Earnings Power Value € 3,66 (r=15%; g=3% inflation)
    2. Net Cash € 2.25
    3. Value of Growth € 0.73 (2% above inflation growth = 5% yoy growth over business cycle)
    Conservative Value € 6.64
    ———————————
    4. EPV € 4.14 (r=10%; g=5%; Use 10% discount rate for normal economic conditions)
    Progressive Value € 10.78
    ———————————
    5. NWC Reduction € 0 to 2 (Restrcuturing costs, will lower NWC reduction effectively)
    6. Health Segment € 1.5 to 15
    Option Value € 12.28 to 28
    ———————————

    Selling strategy:
    1. Look that core business is healthy and has slow growth
    2. MVG core is cyclical, because its products are capex on the books of its customers
    3. Under distressed economic conditions use conservative value (capital is scarce; discount rate increases! puh, I brought near at that price 🙂
    4. Under normal economic conditions use progressive value
    5. NWC reduction has yet to realize (I see no scale advantages in value chain) and might be costly
    6. Health segment is conservative B2B market. Expect option to realize slowly over 5 years.
    7. Option value is highly volatile as an unknown-unknowable technology branch is introduced into mammography equipment market.

    Health Segment – Mammography:

    X-ray, ultrasound and haptic methods are very unreliable as breast cancer detection methods.
    9 (!) out of 10 breast cancer diagnosed women do not have cancer [Gerd Gigerenzer].
    It is very likely MVGs technology is better than state of the art.
    The method behind MVGs technology is likely applicable to many other use cases not known yet.

    Depending of it effectiveness MVG is likely to capture revenue of the mammography equipment market.
    Depending on the contract conditions – mammography equipment is an oligopoly market – MVG might license or produce and therefore incur R&D or R&D + production costs.

    mammography Equipment $ 550M (yearly)
    Captured Revenue $ 5M to 100M (license to production)
    Cost Guess $ 2M to 70M (R&D to production)
    FCF $ 3M to 30M (revenue less costs)
    DCF TV $ 20M to 100M (r=15%; g=0%; TV now)
    per share € 3 to 15 (per share)
    optionality range € 1.5 to 15 (50% sucess to full potential)

    best wishes from the sunny north sea coast
    Oli

    • Hey Oli,
      thank you for this really good comment, I highly appreciate it! Especially your back on the envelope valuation is a nice back check. (I even think, that it is one of the best comments ever written on thin blog ;))
      As I only see one question, I will try to answer it.

      The Trade and other receivables account for more than 80% of the WC and 121% of the NWC, so there is a high economic lever for the company and for me as a shareholder by reducing this.

      The new CFO of MVG is currently tackling the problem as he has hired a FTE to just track receivables and invoice them correctly. According to our knowledge this has already beard some fruits and they are pushing down DSO and have a positive Operating Cashflow. In the past, MVG didn’t really care to invoice the money from companies like apple and airbus, now they are really pushing for it and in some newer contracts they even have implemented upfront payments which should bring an additional effect.

      If you believe, that they could reduce their NWC by ~20% of revenue, this would be >12 Mio. Euro in FCF to the company. I as the CEO has turned down a nearly finished acquisition, he found some not so nice things in the due diligence and wasn’t willing to pay a to high price, I believe that his capital allocation capabilities aren’t that bad if we speak about M&A. Think about it, he could rather do it the Siemens way around and just overpay for a shitty business. I hope that he will do some wise capital allocation decisions in the future.

      Thanks again for you comment!
      Cheers,
      Nils

      • Another positive thing which you cannot see yet, is that they currently produce noise cancelling foam blocks in the US and then ship them to Europe. According to my information, this business will be sold, so that MVG can reduce its work in progress significantly and get write of a nearly loss making business in the same time.

        • Hi Nils,

          thanks for the explanation!

          In 2014 MVG took on avg 182 days to collect the money from their customers (Italian conditions ;-). Taking the receivables down by 1/3 (or 60 days), frees up 12M€ FCF and bringing the days down to about 110 days, which would be in line with 100 days MVG takes to pay its bills. I think your thesis is even on the conservative side.

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