Tuesday, December 6, 2022
HomeValue InvestingKnorr Bremse AG: German Mittelstand”Hidden Champion” with a number of points

Knorr Bremse AG: German Mittelstand”Hidden Champion” with a number of points


Intro:

Knorr is an organization I’ve been wanting into now for a while. It’s a type of “hidden Champions” that Germany is known for. As I drive by their HQ frequently, I made a decision to have a deeper look into them.

Historical past:

Knorr logo

Knorr Bremse has a really attention-grabbing historical past. The corporate was based in 1905 in Berlin and for a number of years, BMW (in its authentic type) was really a subsidiary of Knorr. In 1985, Karl Herrmann Thiele, who initially joined the corporate in 1969, took over the bulk from the Knorr household and developed the corporate right into a International Participant. The corporate is now headquartered in Munich and solely went public for 80 EUR/share in October 2018.

Karl-Herrmann Thiele

Thiele died fairly surprisingly in early 2021, the heirs nonetheless personal round 59% of the shares by way of a basis.

Thiele was a typical “Patriarch” and clearly had points to cede management.

kht

His son, who was groomed as successor left the corporate in 2015, his daughter had a place at Knorr however little managerial accountability. On the time of his demise, Thiele’s internet value was estimated to be shut to twenty bn EUR.

Based mostly on his will, the 59% share holding in Knorr is meant to maneuver right into a basis, nonetheless it appears to be like like that is nonetheless work in progress. To me it isn’t clear, if and the way the household at the moment influences issues at Knorr.

Administration points

Knorr Bremse at  the second doesn’t have a “actual” CEO, at the moment the CFO is operating the store after the earlier CEO had been fired in March 2022 after round one 12 months. Amongst different issues, he unsuccessfully tried to bid for Auto provider Hella which for many observers didn’t make a variety of sense.

Even earlier than, many CEOs had solely very quick tenures at Knorr. Michael Buscher had the job from 2013-2014, his successor Klaus Deller lasted 5 years. His Successor, Bernd Eulitz lasted just one 12 months.

The earlier Head of the supervisory board, Klaus Mangold additionally had a fairly blended popularity. In keeping with many rumors, Thiele nonetheless mainly managed the corporate though hew was solely “Deputy Head” of the Supervisory board. He additionally appeared to have been fairly erratic in his later years.

On the plus facet, the present Chairman of the board, Reinhard Ploss, the previous CEO of Infineon, is taken into account to be one of many higher managers in Germany. As of the time of writing, Knorr nonetheless hasn’t discovered a CEO, however general, I do suppose that issues can solely get higher from right here.

The enterprise:

Knorr specializes largely in advanced braking programs each, for vehicles and trains. The practice and truck segments had been kind of equal in gross sales in 2021, however profitability within the practice sector is considerably increased:

knorr segmente

Even within the tough 12 months 2021, the rail section confirmed an EBIT margin of 19% whereas the truck section “Solely” made ~8% EBIT margin. ROIC is sort of excessive, earlier than Covid the return was round 30%. 

Knorr additionally tries to develop into a key participant for automated driving programs within the truck section.

Aftermarket gross sales are at round 30-40%, with a better proportion within the rail enterprise in comparison with the truck enterprise. This may also clarify a part of the upper profitability in addition to the worldwide market share of Knorr in each segments (in line with the Knorr IR presentation).

Knorr market shares

As Knorr has dominating market shares in its core product classes already, progress will come largely from progress of the general section and potential “horizontal” progress into new merchandise for a similar clients.

My rationalization for the excessive margins within the rail enterprise is a mixture of a excessive “aftermarket” share in gross sales, i.e. spare components (at the moment 40%, up from 33% in 2017) and a sure stage regulation particularly within the rail sector. This appears to resemble to a sure extent the Aerospace sectors, the place the regulation gives important obstacles to entry.

Knorr appears to have created one thing like a standardized manufacturing system, that ensures the identical high quality throughout its ~60 worldwide manufacturing websites. From what I perceive, the flexibility to supply regionally at a top quality commonplace can be considered one of their aggressive benefits.

Faux Knorr Bremse:

There’s an attention-grabbing story on the web site that somebody created a whole pretend Knorr Bremse outlet in Hongkong:

After months of painstaking work, “Knorr-Bremse Restricted” seems to be a whole counterfeiting ring. Not content material to easily promote their very own merchandise regionally below the title of the worldwide market chief, the businesses concerned have hatched a radical plan to mainly copy all the pieces humanly potential: the corporate title in massive letters on the manufacturing unit entrance, the product together with the Knorr-Bremse brand, outer packaging to match the unique. Even the web sites have confusingly comparable URLs, and the corporations have their very own entries within the business register. Mattusch: “Evidently they needed to make the enterprise absolutely official at house and had been planning to go worldwide. Anybody who registers 40 model names worldwide is trying to broaden on a grand scale. Manufacturing capacities of round 2.5 million brake pads per 12 months are one other clear indication that they needed to play on the worldwide stage.” Apparently these product pirates don’t love to do issues by halves, even when their strategies are fairly shameless.

Worker attractiveness

Each, in Glassdoor and Kununu, evaluations are blended. Apparently, Knorr requires a 42 hour work week, which is sort of distinctive. Total, the staff appear to be very pleasant and useful to one another, whereas Administration is seen fairly vital, which could need to do with many modifications.

Salaries appear to be an issue, too, particularly adjusted for the 42 hour workweek.

2022 not wanting good up to now

The 6M presentation clearly exhibits that KB is struggling. Each, the Russia sanctions and the decelerate in China have hit the corporate. Total EBIT margins declined to ~10% and even the EBIT margins of the rail enterprise solely reached 14%. 

One comment: With regard to the European power disaster occurring, I suppose Knorr is perhaps one way or the other much less impacted. The corporate produces globally for native markets, so in distinction to another gamers their competitiveness in native markets shouldn’t be harm that a lot by the present turmoil. In fact they do have improve in enter prices, however I assume that after some months they will move on this to shoppers.

China Publicity:

Round 30% of Knorr’s gross sales come from Asia, about half of that is China. Knorr has been an early entrant in China and has 3 totally different firms working and producing regionally. As with different German firms, my guess is that the share in profitability of the China enterprise is far increased. China has been stagnating already within the first 6M 2022 how this chart exhibits from their 6M presentation:

Knorr China

It additionally exhibits how dramatic the present decelerate in China is in these sectors.

Share value:

I suppose each, the uncertainty with regard to the management and in addition the problems within the first 6M have taken their toll on Knorr Bremse as one can see within the share value which has misplaced ~60% because the final 12 months:

knorr 09 2022

Nevertheless, additionally different European rail associated producers are struggling as this chart exhibits:

knorr comps 3

Each Spanish practice makers, CAF and Talgo are struggling, in addition to Alstom, solely Vossloh, the place Thiele personally held a majority stake, is doing higher.So there are clearly general headwinds within the rail trade for the time being and I hae no concept if and when this cycle will flip.

Valuation:

On the present share value, Knorr has a market cap of seven,1 bn and an EV of 8,7 bn EUR. Knorr ist guiding for six,9-7,2 bn in gross sales in 2022 and an EBIT margin (in any case results) of 10,5-12%.

This lead to a predicted vary for EBIT  from 725 mn EUR to 864 mn EUR or a midpoint of round ~800 mn EUR, which might interprets into ~11x EV/EBITDA. 

“Reversion to the imply” potential

Knorr Bremse might be a doubtlessly attention-grabbing “imply reversal” story. The massive query is, what’s the imply profitability for Knorr Bremse ? Taking a look at historic numbers by way of TIKR, from 2007 to 2021, Knorr’s common EBIT margin has been 12,7%, so in comparison with 2022 estimated 11,3% there’s some upside.

The larger “imply reversion” potential can be with regard to valuation. 11 EV/EBIT is a fairly low valuation for “high tier” industrial firms. This can be a small comparability the place checked out some friends:

Friends2021   
 EBIT MarginReturn on capital2021 ProgressEV/EBITDA
Burckhardt9,20%15,50%4,60%15,8
Atlas Copco20,50%24,50%11,10%15,9
Honeywell21,70%17,70%5,40%13,5
Wabco13,10%7,10%3,50%16,8
Ingersol Rand13,20%5,90%29,70%18.7
Avg15,54%14,14%10,86%16,1
     
Knorr Bremse13,20%22,50%8,90%11,0

So wanting on the friends, we will see that at the moment, a “Top quality” industrial is buying and selling someplace at round 16x EV/EBIT, which might point out important upside for Knorr in case they return to be seen as a top quality industrial.

So combining the avg, EBIT margin with present gross sales and assuming a goal EV/EBIT of 16x, Knorr might commerce at round 80 EUR per share or 83% increased than the present share value.

Nevertheless, and this can be a massive nonetheless, Knorr for the time being clearly deserves some type of low cost as a result of uncertainties round possession, administration and geopolitical points. My intestine feeling is that not less than a reduction of 20-30% can be justified.

Professional’s and Con’s 

So let’s take a look at this stage on the Professional’s and Con’s of Knorr up to now:

+”hidden Champion” with excessive margins and Excessive market share and a few clear aggressive benefits
+ very attention-grabbing enterprise space rail, regulation is a barrier to entry
+ excessive aftersale share, growing share in complete shares
+ International standardized manufacturing system as one other aggressive benefit
+ KPIs like ROCE, FCF and so forth. simply out there, very restricted use of “adjusted numbers”
+ low cost in relative phrases to its Friends, some imply reversion potential
+ particularly rail section with doubtlessly good long run tailwinds
+ first insider buys from govt staff
+ Firm appears to be “underfollowed”

+/- Acquisition historical past /capital allocation not dangerous however not nice
+/- worker job satisfaction okay, however not nice

  • founder died, many CEO modifications, at the moment management and shareholder affect unclear
  • 2022 could be very difficult for Knorr and different gamers within the area
  • Important China Publicity, market share within the US is comparatively low (Wabco)
  • Truck section is considerably extra aggressive than the rail section
  • Administration & Supervisory board very German
  • excessive dividend pay outs restrict flexibility sooner or later
  • Excessive market share limits progress in core space
  • Rail cycle on a downwards pattern 
  • Working capital points within the first &;
  • time lag in passing by way of value will increase

Abstract:

Total, I discover Knorr Bremse a really attention-grabbing firm, nonetheless I can not encourage myself to speculate presently.

The principle points are as described above, that there appears to be “management vacuum” which, mixed with the present sector particular and general downturn (plus geopolitical threat) creates the chance that the enterprise may endure and may not be ready to make the required changes rapidly.

I’ll subsequently stay in a “watch” mode to see how particularly the management matter develops.

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