Disclaimer: This isn’t funding recommendation. PLEASE DO YOUR OWN RESEARCH !!!!!!
Abstract:
In my relentless effort to create essentially the most boring and unremarkable inventory portfolio conceivable, I believe I recognized a really perfect candidate with SFS Group from Switzerland. Regardless of having a market cap of ~4 bn CHF, this majority family-owned firm just isn’t very well-known and its merchandise and B2B enterprise mannequin look similarily unremarkable.
The corporate doesn’t have an simply identifiable moat, doesn’t pay excessive dividends or buys again inventory, just isn’t tremendous low cost and likewise not tremendous worthwhile, doesn’t develop like loopy and doesn’t have horny merchandise that one can see within the grocery store.
However I do suppose it’s an nice addtion to my portfolio as it’s attractively priced and each, the enterprise in addition to the administration are of excessive (Swiss) high quality. Primarily based alone estimates, the inventory trades at a PE of ~12x for 2023, regardless of having delivered EPS development in EUR of round 15% p.a. since its IPO in 2014 and maintaing double digit EBIT margins throughout the cycle.
Because the put up has grow to be fairly lengthy, right here an outline of the chapters:
- Background
- Firm Historical past
- Enterprise Mannequin
- Why did I grow to be ?
- The place does the expansion and margin improve come from ?
- Moat and competivie benefits
- The Hoffmann Group acquisition
- Administration
- Shareholders
- Valuation
- Dangers
- Different stuff
- Professional’s and Con’s
- Abstract & Return expectations
- Recreation plan
1. Background:
SFS Group has been on my watchlist since 2021 after I encountered them in my “All Swiss shares” collection. Again then, the inventory seemed too costly regardless of displaying some engaging traits (EBIT margins, ROC and so on.). Within the meantime, they’ve made a major M&A transaction and the share value got here down by-25%.
2. Firm historical past:
Regardless of being a 95 yr outdated firm, SFS Group solely IPOed in 2014 at a share value of 64 CHF. In response to the very detailed firm historical past, they went worldwide in 1971 and added new enterprise and enterprise strains alongside the way in which on an opportunistic foundation. SFS Group’s Web site, it isn’t really easy to grasp what they’re really doing. Due to this fact let’s bounce into the enterprise first:
3. Enterprise mannequin
Successfully, they’re energetic in 3 totally different segments that I attempt to describe in my very own phrases:
a) Manufacturing of a various vary of very small however “Mission crucial” excessive precision components for quite a lot of prospects. SFS elements might be present in vehicles, cellphones and even Airplanes
b) Manufacturing of fastening and riveting options which are used within the building and industrial sector
c) Distribution of instruments to manufacturing companies. Initially solely in Switzerland however since 2022 additionally by way of an acquisition internationally.
What these segments have in frequent, that they’re all targeted on B2B enterprise fashions catering to bigger corperates. Inside these 3 segments, SFS operates 8 totally different divisions that appear to be roughly impartial:
To get a a primary overview on their broad number of merchandise, their very own product website is an effective start line.
Considered one of their slogans is “native for native”, so that they manufacture regionally in round 100 websites in 26 nations world wide. The HQ primarily coordinates and helps if further know-how is required, as an example to develop new particular machines.
4. Why did I grow to be ?
Since its IPO in 2014, SFS Group has delivered very strong outcomes regardless of having confronted ultimately 2 disaster and a really sturdy CHF. That is how margins and earnings developed from 2014 to 2021:
Regardless of rising gross sales solely by 4,5% (in CHF), SFS managed to enhance Internet revenue by ~14% p.a. and EPS in nearly 12% by annum since its IPO. This was primarily achieved by bettering margins signifcantly. EBIT margins improved from 9-10% to fifteen% and internet revenue margins nearly doubled.
As an Euro investor, one also needs to take note of, that over this era, the CHF elevated considerably towards the EUR from 1,23 to 1,04. So in Euro, EPS would have elevated even 14,2% p.a. vs. the 11,8% in CHF.
Now comes the fascinating half: This improve in margins and earnings went together with a steady lower in valuation as we will see within the subsequent desk:
Perhaps the valuaion on the IPO was priced too wealthy, however for a “Swiss high quality” firm, SFS doesn’t look costly as of late. As we will see within the inventory chart, IPO traders won’t be too pleased, as SFS has even underperformed the SMI because the IPO:
To me, an organization with steadily rising margins is value taking a look at anyway and mixed with a declining valuation much more so.
5. The place does the expansion and margin improve come type ?
Trying one stage beneath the Group to the segments, we will see a really fascinating, diverging growth:
The three segments diverge fairly broadly. The smallest section, the Swiss targeted Distribution section has roughly stagnated, each in prime line and working revenue. The biggest section, Engineered Parts, has carried out very soldily. Nevertheless the star section was clearly the Fastening methods section that just about doubled gross sales and improved working revenue by 5x. This section is clearly the principle driver in the intervening time and appears to have accomplished very effectively in 2022 as effectively.
6. Moat & Aggressive benefits
In my understanding, SFS doesn’t have a “onerous Moat”. Nevertheless, they appear to have some aggressive benefits. Particularly within the Engineered division, the competivie benefit appears to be the detailed know-how in sure manufacturing applied sciences, together with the design of particular machines, that enable them to provide excessive precision elements in areas world wide.
Many merchandise that they produce are solely a small portion of the ultimate product in absolute worth, however fairly necessary for the performance which is commonly a great place to have as a provider. They appear to be very shopper centric and attempt to grow to be a growth accomplice slightly than an exchangeable provider for his or her shoppers.
On a extra strategic stage, the truth that SFS remains to be a household owned firm. appears to provide them entry to sure M&A transactions the place the vendor doesn’t need to maximise the worth however needs to be sure that the corporate stays a comparatively independently run enterprise. So far as I perceive, the Hoffmann Deal was an instance but in addition doable as a result of hey are nonetheless household owned.
So general, no onerous moats however a mixture of aggressive benefits that enable them to earn respectable margins and returns whereas rising at a passable velocity.
7. The Hoffmann Group Acquisition
In late 2021, SFS introduced that they may take over the German Hoffmann Group, a privately owned, 1 bn EUR gross sales software distribution and producer. For SFS , that is clearly the most important transaction in its historical past and as such clearly a danger. SFS has paid ~1 bn for Hoffmann, I haven’t seen any express EBIT/revenue numbers for Hoffmann but.
A couple of components would possibly mitigate the dangers:
- SFS and Hoffmann collaborate since greater than 20 years and in accordance with Breu have comparable values and tradition
- Hoffmann will run as an impartial division
- The Hoffmann CEO will be a part of the chief board
- A sure a part of the acquisition value has been financed with on stability sheet money and shares, the remaining leverage just isn’t crucial. (<1,5 Internet debt/EBITDA)
In one of many interviews, the CEO talked about that with this acquisition they plan to open up a 3rd platform on prime of the manufacturing and Fastening sector, as distribution to this point was solely a neighborhood Swiss enterprise. In addition they appear to mean to develop this platform internationally. As well as, a few of SFS merchandise could be bought by way of Hoffmann (Fastening).
The Acquistion was consumated as of Might 1st 2022. This leads to an fascinating impact that the 2022 outcomes will solely embrace 8/12 of the earnings impression, whereas debt and addtional shares are already totally accounted as of yr finish. so EV/EBIT and EV/EBITDA at yr finish 2022 are usually not totally represetative.
Simply the impact of totally together with Hoffmann in 2023 will improve gross sales by one other ~12,4% vs. 2022 (all different issues equal).
Thus far, SFS has indirectly talked about how worthwhile the acquired enterprise is. Nevertheless, administration has dropped some hints, particularly of their second investor day with this slide:
With this info, one can estimate the anualized 2022 EBIT of Hoffmann in addition to the EBIT margin and the implied a number of that SFS paid which I did on this desk utilizing mid factors for all estimated ranges:
So general, the Hoffmann acquisition appears to have been accomplished at a fairly affordable a number of. Though the EBIT margin is decrease than the common EBITT margin of the SFS Group, a double digit EBIT margin remains to be good and buying this for an EV/EBIT of round 8,6 is clearly not overpaying.
It must be talked about nevertheless that Hoffmann didn’t grew that a lot for a few years. That is from a 2021 presentation and would possibly clarify the comparatively low cost value:
One other fascinating side is that ~25% of Hoffmann’s gross sales appear to be their very own software manufacturers.
8. Administration
The CEO Jens Breu (since 2016) has an fascinating background. He isn’t from the founding household and likewise not a “MBA/McK clone” however began as an industrial apprentice and labored his approach up after becoming a member of SFS in 1995. I’ve watched a few movies with him and I’m actually tremendous impressed together with his down-to-earth strategy.
On the age of fifty years, he clearly has some years to go, however mixed already with a variety of expertise. He’s additionally member of the Supervisory board of Daetwyler, one other, 3,5 bn market cap “Hidden Swiss Champion”. General plainly SFS Group principally develops Administration from inside as a substitute of hiring “Mercenaries”, an strategy I like quite a bit.
The supervisory board accommodates members of the founding famlies Huber and Stadler. The long run CEO and Supervisory board head Heinrich Spoerry retired (as a result of age) in 2021 and was changed by the previous CEO of Schindler, Thomas Oetterli. Oetterli himself was a part of the Supervisory board since 2011, so continuity appears to be ensured. The Supervisory board could be very Swiss, as a coicidence, one of many members (Urs Kaufmann) heads the Supervisor board at Schaffner Group, one other o my Swiss holdings.
Apparently, one member of the founding household, Claude Stadler is Govt Director and HEad of Company companies, proudly owning round 400K shares (or 40 mn CHF) however he appears to maneuver out by the top of 2024 with the intention to concentrate on the household workplace.
Compensation for the full government board was ~7 mn CHF in 2021, with 1,6 mn CHF for the CEO which I believe is kind of low. Jens Breu owns ~28k shares and will get round 2500 shares per yr as a part of his compensation package deal.
9. Shareholders
Even after the capital improve to finance the Hoffmann transaction, the founding households Huber and Stader personal greater than 50%, joined now by the heirs of the Hoffmann Group with 4%. There aren’t any different “well-known” or noteworthy traders in accordance with TIKR.
10. Valuation
Utilizing SFS’s forecasts from above, the midpoint estimated EBIT for 2022 would by 370 mn CHF. Assuming ~10 mn of curiosity bills and 20% in taxes, this would end in 7,55 CHF per share in Incomes for 2022 or, at a share value of 105 CHF a trailing p/E of ~13,9. For a top quality firm like SFS this isn’t tremendous low cost however fairly cheaup.
Nevertheless, trying into 2023, issues appears much more fascinating. Assuming a 4,5% development price in earnings plus the impact of the complete yr for Hoffmann, I count on round 433 mn EBIT and ~8,70 CHF EPS. This is able to imply a P/E of solely 12x and an EV/EBIT of ~11x for 2023.
another “Swiss high quality manufacurers”, we will see that this appears actually low cost, though gamers like VAT and LEM are clearly extra worthwhile:
Daetwyler nevertheless, can be clearly a peer to SFS and so they commerce at round 2x the valuation of SFS Group.
What I discovered fascinating is, that promote aspect analysts who cowl SFS have considerably decrease estimates wich for my part don’t replicate the Hoffmann acquisition:
The Bloomberg consensus is barely 6,72 EPS GAAP for 2022 and seven,00 for 2023 which is considerably even beneath the low finish of managment estimates. For some causes, the promote aspect appears to disregard this acquistion.
Seeking to 2024 and additional, I believe it’s real looking to imagine a strong mid-single digit development price
11. Dangers
Thus far we have now targeted on whats good and fascinating. However there are clearly dangers. Amongst them are:
- the enterprise is geared in the direction of the manufacturing and building trade. A significant and prolongued slowdown on this sectors may also hit SFS
- An M&A transaction in that measurement is at all times a danger
- The Hoffmann transaction will increase the burden in the direction of Europe, particularly Germany
- The corporate has publicity to China particularly within the very worthwhile Fastening division
Structurally, the most important wager one is making with SFS is that European manufacturing is not going to die. Studying the press as of late, as soon as once more many individuals suppose that Europe will grow to be a historic theme park for wealthy Asian vacationers. This is able to be clearly not optimum for SFS. Personally nevertheless; I do imagine that prime high quality manufacturing has really a reasonably good future in Europe. The latest disaster has proven that suply chains shouldn’t be too lengthy and that the outsourcing of producing just isn’t a good suggestion.
As well as, the approaching Power transition requires a variety of manufacturing and because it appears like, the US and Europe is not going to make the identical mistake once more and outsource the whole lot to China. My feeling is that prime worth manufacturing may have a reasonably respectable future.
12. Different matters (Reporting, Capital allocation, Cashflow era and so on.)
What I do like about SFS that they’ve excellent reporting. One very particular merchandise that I like is how the current returns on capital. The present Return on invested capital (ROIC) in addition to ROCE.
Below Siwss GAAP, they’re allowed to deduct Goodwill instantly from Fairness after they make an acquisition. Due to this fact the ROIC (based mostly on Fairness and internet debt) would look fairly good however they’re displaying and are monitoring the “actual” numbers:
As well as, they at all times present clearly which a part of the expansion is natural and which is due to M&A. Many corporations don’t do that.
General, capital allocation for my part is nice. They appear to be disciplined in M&A, have a transparent dividend goal and are occassionally shopping for again some inventory though they used the present treasury shares for the Hoffmann acquistion. One mustn’t count on giant and even debt financed share purchase backs from SHS. Following the Hoffmann acquisition, they’ve clearly communicated that they prioritize decreasing debt and that they even goal a internet money optimistic place. I can stay with this.
The enterprise as such is producing respectable cashflow. Clearly with Hoffmann, the dynamics would possibly change a little bit bit as distribution is a little bit bit totally different to an industial.
My impression is that SFS is run very conservatively. They appear to personal most of inheritor actual property, slaary ranges for Managment are enough and steerage is at all times conservative. SFS is “constructed to final”.
One different subject I discovered very fascinating is that SFS has been ranked because the quantity 8 of all Corporations energetic in Switzerland with regard to Digital Transformation. Inside the Manufacturing trade they have been rated no 1. Though one ought to at all times be cautious with such rankings, that is clearly an fascinating side and an extra poece of the puzzle.
Lastly, I additionally like the truth that SFS doesn’t do quarterly studies. For a long run funding, this protects my at the very least 2 occasions a yr the place I don’t must learn or analyse studies.
13. Execs and Cons
Earlier than shifting to a conclusion, as at all times I’ll attempt to summarize whats good and what’s not so good:
Professional:
- household owned, long run orientation
- an excellent enterprise (low worth however mission crucial excessive precision consumable components)
- an honest valuation (particularly in comparison with Swiss friends)
- good managment
- Strong funds, conservatively run
- decentralized construction
- resilient enterprise (vitality, enter materials)
Cons:
- very giant acquisition closed in 2022
- unsexy and onerous to clarify merchandise
- not tremendous low cost
- no clear moat
- Publicity to manufacturing / China
14. Abstract & return expectations
SFS Group is neither an “glorious broad moat” firm nor a brilliant low cost alternative. Nevertheless it’s a excellent enterprise/firm at a really respectable valuation. Getting excellent corporations at respectable valuations is definitely my candy spot, particularly when I’m satisfied that the corporate is run with a view to the long run which I believe is right here the case.
I additionally like the truth that the corporate just isn’t very horny from the surface. It doesn’t appeal to a variety of consideration which is one other large plus for me.
On the present valuation, I might count on a return of round 10% p.a. with out considering any a number of enlargement. That’s based mostly on a 2023 FCF yield of 4-5% and a long run development price of additionally 5-6% that I believe is real looking and even conservative, contemplating the monitor document. So my base case can be to double my cash in 7 years plus dividends..
I subsequently determined to allocate ~4% of the protfolio into SHS at a mean value of round 104 CHF/per share throughout January.
15. Recreation plan
Though the discharge of the earnings on March third may possibly set off a sure revaluaton if EPS is available in as I count on, my plan is to carry this positon long run. If my EPS expectations transform right and relying on their steerage and the share value response, I’d improve the place by one other 1% or 2%.
Disclaimer: This isn’t funding recommendation. PLEASE DO YOUR OWN RESEARCH !!!!!!
Appendix: Some bonus materials.
https://www.moneycab.com/particular person/jens-breu/