Value Ideas Blog
Hargreaves Services PLC, a diamond in the mud?

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).





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…

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

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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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
You can find a really good article about amazon and its business model and its long-term perspective in the latest economist, her is the link to the  “short” online version. About the, in our opinion, value trap of taxi medallions and potential value investment in the business behind it due to disruptive innovation such as uber, and the strategy behind BlaBlaCar etc. Related to this you can find an older business insider article about the death of Value Investing due to disruptive innovations. A really interesting article by Wexyboy about European Islamic Bank and the value of shareholder activism. For me even more interesting due to the fact that I have written my bachelor thesis about islamic finance in germany and the potential market size for one bank. Moatology explains you how to use stock screeners to find undervalued gems. A great post from oddballstocks over investing styles   Some thoughts about entrepreneurship and what it has to do with value investing:   The job of an entrepreneur is to figure out where opportunities lie, they do it by tinkering with the market, learning new capabilities and creating value. Normally entrepreneurs blend strategic thinking and opportunistic actions at different junctures and become more strategically focused on a small niche (a value investor would say circle of competence) throughout this process and progress in learning within age and career stage. This extensive planning helps the entrepreneur to spot gaps in the market or simpler opportunities to invest his time and money. Realizing an investment idea for both a product for an entrepreneur or an investment thesis for a value investor which is not seen by the market – usually means overcoming significant resistance by others. The more contrarian the idea is, the greater is the natural resistance and normally the payoff. Due to the fact that entrepreneurship and value investing are an iterative, messy and uncertain process, both require a lot of effort, time and hard work.   Entrepreneurship and Risk taking   Usually everyone seems to know: Higher return = higher risk. This is essentially what every economist will tell you, but is this really the truth? I don’t think so. If you talk to entrepreneurs you will hear that they are trying to reduce risk everywhere they can (this is also called risk mitigation). The main difficulty in creating value is that you have to go against the grain, by delivering something new to the market while creating a profit. This normally includes a high level of uncertainty in the process and the outcome of your venture. Often you have to kill your most loved ideas due to the fact that you cannot sell your product in sufficient quantities to make it worthwhile. For this reason the probability that an entrepreneur will succeed with one idea is by far less than 100%. If you see some outcomes by entrepreneurs and what they initially invest into the venture in terms of money and time you will observe that this is often not the case. And in my opinion it is the same with value investing, you have to overcome many hurdles with different percentages of success. So entrepreneurship and value investing are more like poker where you are faced with uncertain outcomes which are influenced by the player’s capabilities, it is an uncertain game with skill. The game depends to some extend on the luck of the draw, but how you play your hands over time is what creates the true champions. For this reason the capabilities of an entrepreneur or a value investor determine whether he or she sits down at the table and plays at all.   Have a great week  
Today we want to take a look at 3U Holding (ISN: DE0005167902, Symbol: UUU). It’s a small cap enterprise that caught our attention. The book value at the end of Q3/13 was about three times the current shares price, i.e. 1.29 EUR (by our calculations) vs. 0.42 EUR on Jan 10, 2014! In the chart below you can see that the company is today 80% equity financed, up from 36% in the year 2006. So, let’s take a closer look to find out if this is an investing opportunity from a value investing point of view or a potential value trap… (This is the first part of the analysis, keep in mind that you should do your own research and that this is not a selling or buying advice)    Equity development   read more