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 possible, I believe I recognized a super candidate with SFS Group from Switzerland. Regardless of having a market cap of ~4 bn CHF, this majority family-owned firm will not be 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, will not be tremendous low-cost and in addition not tremendous worthwhile, doesn’t develop like loopy and doesn’t have horny merchandise that one can see within the grocery store.
Nonetheless 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 progress in EUR of round 15% p.a. since its IPO in 2014 and maintaing double digit EBIT margins throughout the cycle.
Because the submit has develop into fairly lengthy, right here an outline of the chapters:
- Background
- Firm Historical past
- Enterprise Mannequin
- Why did I develop into ?
- The place does the expansion and margin enhance come from ?
- Moat and competivie benefits
- The Hoffmann Group acquisition
- Administration
- Shareholders
- Valuation
- Dangers
- Different stuff
- Professional’s and Con’s
- Abstract & Return expectations
- Sport plan
1. Background:
SFS Group has been on my watchlist since 2021 once I encountered them in my “All Swiss shares” sequence. Again then, the inventory appeared too costly regardless of displaying some enticing traits (EBIT margins, ROC and many others.). 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 12 months previous firm, SFS Group solely IPOed in 2014 at a share value of 64 CHF. In accordance with 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 truly doing. Due to this fact let’s bounce into the enterprise first:
3. Enterprise mannequin
Successfully, they’re lively in 3 completely different segments that I attempt to describe in my very own phrases:
a) Manufacturing of a various vary of very small however “Mission essential” excessive precision elements for a wide range of clients. SFS elements might be present in vehicles, cell phones and even Airplanes
b) Manufacturing of fastening and riveting options which can be used within the development and industrial sector
c) Distribution of instruments to manufacturing companies. Initially solely in Switzerland however since 2022 additionally through an acquisition internationally.
What these segments have in frequent, that they’re all centered on B2B enterprise fashions catering to bigger corperates. Inside these 3 segments, SFS operates 8 completely different divisions that appear to be roughly impartial:
To get a a primary overview on their huge number of merchandise, their very own product web site is an effective place to begin.
Considered one of their slogans is “native for native”, in order that they manufacture regionally in round 100 websites in 26 nations around the globe. The HQ primarily coordinates and helps if further know-how is required, as an illustration to develop new particular machines.
4. Why did I develop into ?
Since its IPO in 2014, SFS Group has delivered very strong outcomes regardless of having confronted finally 2 disaster and a really robust 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 Web 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 must also have in mind, that over this era, the CHF elevated considerably in opposition to 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 enhance in margins and earnings went together with a steady lower in valuation as we will see within the subsequent desk:
Possibly the valuaion on the IPO was priced too wealthy, however for a “Swiss high quality” firm, SFS doesn’t look costly lately. As we will see within the inventory chart, IPO traders won’t be too completely happy, as SFS has even underperformed the SMI for the reason that IPO:
To me, an organization with steadily rising margins is price taking a look at anyway and mixed with a declining valuation much more so.
5. The place does the expansion and margin enhance come type ?
Wanting one stage under the Group to the segments, we will see a really fascinating, diverging growth:
The three segments diverge fairly extensively. The smallest phase, the Swiss centered Distribution phase has roughly stagnated, each in prime line and working revenue. The most important phase, Engineered Elements, has carried out very soldily. Nevertheless the star phase was clearly the Fastening methods phase that just about doubled gross sales and improved working revenue by 5x. This phase is clearly the primary 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 permit them to provide excessive precision elements in places around the globe.
Many merchandise that they produce are solely a small portion of the ultimate product in absolute worth, however fairly essential for the performance which is commonly a superb place to have as a provider. They appear to be very shopper centric and attempt to develop into a growth associate somewhat than an exchangeable provider for his or her shoppers.
On a extra strategic stage, the truth that SFS continues to be a household owned firm. appears to offer them entry to sure M&A transactions the place the vendor doesn’t wish to maximise the value however needs to ensure that the corporate stays a comparatively independently run enterprise. So far as I perceive, the Hoffmann Deal was an instance but additionally doable as a result of hey are nonetheless household owned.
So total, no onerous moats however a mix of aggressive benefits that permit them to earn first rate margins and returns whereas rising at a passable velocity.
7. The Hoffmann Group Acquisition
In late 2021, SFS introduced that they’ll 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 number of components may mitigate the dangers:
- SFS and Hoffmann collaborate since greater than 20 years and in response to Breu have comparable values and tradition
- Hoffmann will run as an impartial division
- The Hoffmann CEO will be part of the manager board
- A sure a part of the acquisition value has been financed with on stability sheet money and shares, the remaining leverage will not be essential. (<1,5 Web 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 thus far was solely an area Swiss enterprise. Additionally they appear to mean to develop this platform internationally. As well as, a few of SFS merchandise could be bought through Hoffmann (Fastening).
The Acquistion was consumated as of Could 1st 2022. This ends in an fascinating impact that the 2022 outcomes will solely embody 8/12 of the earnings impression, whereas debt and addtional shares are already absolutely accounted as of 12 months finish. so EV/EBIT and EV/EBITDA at 12 months finish 2022 are usually not absolutely represetative.
Simply the impact of absolutely together with Hoffmann in 2023 will enhance gross sales by one other ~12,4% vs. 2022 (all different issues equal).
To date, 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 data, 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 total, the Hoffmann acquisition appears to have been accomplished at a fairly cheap a number of. Though the EBIT margin is decrease than the common EBITT margin of the SFS Group, a double digit EBIT margin continues to be good and buying this for an EV/EBIT of round 8,6 is clearly not overpaying.
It must be talked about nonetheless that Hoffmann didn’t grew that a lot for a few years. That is from a 2021 presentation and may 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’s not from the founding household and in addition not a “MBA/McK clone” however began as an industrial apprentice and labored his manner up after becoming a member of SFS in 1995. I’ve watched a few movies with him and I’m actually tremendous impressed along with his down-to-earth method.
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”. Total it appears that evidently SFS Group largely develops Administration from inside as an alternative of hiring “Mercenaries”, an method I like so much.
The supervisory board incorporates members of the founding famlies Huber and Stadler. The long run CEO and Supervisory board head Heinrich Spoerry retired (resulting from 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 may 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.
Curiously, one member of the founding household, Claude Stadler is Government Director and HEad of Company companies, proudly owning round 400K shares (or 40 mn CHF) however he appears to maneuver out by the tip of 2024 so as to give attention to the household workplace.
Compensation for the full govt board was ~7 mn CHF in 2021, with 1,6 mn CHF for the CEO which I believe is sort of low. Jens Breu owns ~28k shares and will get round 2500 shares per 12 months as a part of his compensation bundle.
9. Shareholders
Even after the capital enhance 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 response to 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, wanting into 2023, issues appears much more fascinating. Assuming a 4,5% progress price in earnings plus the impact of the total 12 months for Hoffmann, I count on round 433 mn EBIT and ~8,70 CHF EPS. This may 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 nonetheless, could be clearly a peer to SFS they usually commerce at round 2x the valuation of SFS Group.
What I discovered fascinating is, that promote facet 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 under the low finish of managment estimates. For some causes, the promote facet appears to disregard this acquistion.
Seeking to 2024 and additional, I believe it’s real looking to imagine a strong mid-single digit progress price
11. Dangers
To date we’ve centered on whats good and fascinating. However there are clearly dangers. Amongst them are:
- the enterprise is geared in the direction of the manufacturing and development business. A serious and prolongued slowdown on this sectors will even hit SFS
- An M&A transaction in that dimension is all the time a danger
- The Hoffmann transaction will increase the load in the direction of Europe, particularly Germany
- The corporate has publicity to China particularly within the very worthwhile Fastening division
Structurally, the most important guess one is making with SFS is that European manufacturing won’t die. Studying the press lately, as soon as once more many individuals suppose that Europe will develop into a historic theme park for wealthy Asian vacationers. This may be clearly not optimum for SFS. Personally nonetheless; I do imagine that top high quality manufacturing has truly a fairly good future in Europe. The latest disaster has proven that suply chains shouldn’t be too lengthy and that the outsourcing of producing will not be a good suggestion.
As well as, the approaching Vitality transition requires a variety of manufacturing and because it appears like, the US and Europe won’t make the identical mistake once more and outsource every part to China. My feeling is that top worth manufacturing may have a fairly first rate future.
12. Different matters (Reporting, Capital allocation, Cashflow era and many others.)
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.
Beneath 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 all the time present clearly which a part of the expansion is natural and which is due to M&A. Many firms don’t do that.
Total, 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 prevailing treasury shares for the Hoffmann acquistion. One shouldn’t count on giant and even debt financed share purchase backs from SHS. Following the Hoffmann acquisition, they’ve clearly communicated that they prioritize lowering debt and that they even goal a internet money optimistic place. I can stay with this.
The enterprise as such is producing first rate cashflow. Clearly with Hoffmann, the dynamics may change a little bit bit as distribution is a little bit bit completely 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 satisfactory and steerage is all the time conservative. SFS is “constructed to final”.
One different matter I discovered very fascinating is that SFS has been ranked because the quantity 8 of all Corporations lively in Switzerland with regard to Digital Transformation. Inside the Manufacturing business they had been rated #1. Though one ought to all the time 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 no less than 2 instances a 12 months the place I don’t have to learn or analyse studies.
13. Execs and Cons
Earlier than transferring to a conclusion, as all the time 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 essential excessive precision consumable elements)
- an honest valuation (particularly in comparison with Swiss friends)
- good managment
- Stable 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 “wonderful huge moat” firm nor a brilliant low-cost alternative. Nevertheless it’s a excellent enterprise/firm at a really first rate valuation. Getting excellent firms at first rate 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 will not be very horny from the surface. It doesn’t entice a variety of consideration which is one other huge plus for me.
On the present valuation, I’d count on a return of round 10% p.a. with out bearing in mind any a number of growth. That’s based mostly on a 2023 FCF yield of 4-5% and a long run progress price of additionally 5-6% that I believe is real looking and even conservative, contemplating the monitor document. So my base case could be to double my cash in 7 years plus dividends..
I subsequently determined to allocate ~4% of the protfolio into SHS at a median value of round 104 CHF/per share throughout January.
15. Sport plan
Though the discharge of the earnings on March third may perhaps 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 become right and relying on their steerage and the share value response, I would enhance 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/
