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.)
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.
The Group is organized in two main operating segments:
% Sales 2014
Mostly European Civil Business
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.
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
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.
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:
- Adjustment for cycle -1.5%
- Add back losses of NSH segment +2%
- 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.
The company trades around 4x sustainable EBITA or lower if we assume
- 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
- a sale of the NHS division which could add 20 Mio. in Cash
If both happens the company could actually trade below net cash.
- Earnings Power Value € 6,03
- Net Cash € 2,62
- Value of Growth € 1,16
- NSH Segment € 3,22
- 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.
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.