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Disclaimer: This isn’t funding recommendation. PLEASE DO YOUR OWN RESEARCH !!!!!!
Abstract:
In my relentless effort to create probably the most boring and unremarkable inventory portfolio possible, I feel I recognized an excellent candidate with SFS Group from Switzerland. Regardless of having a market cap of ~4 bn CHF, this majority family-owned firm is just not 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, is just not 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.
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. Based mostly 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 turn into fairly lengthy, right here an summary of the chapters:
Background
Firm Historical past
Enterprise Mannequin
Why did I turn into ?
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 once I encountered them in my “All Swiss shares” collection. Again then, the inventory regarded 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 worth 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Regardless of being a 95 yr outdated firm, SFS Group solely IPOed in 2014 at a share worth of 64 CHF. In accordance with the very detailed firm historical past, they went worldwide in 1971 and added new enterprise and enterprise traces alongside the best way on an opportunistic foundation. SFS Group’s Web site, it’s not really easy to grasp what they’re truly doing. Subsequently let’s bounce into the enterprise first:
3. Enterprise mannequin
Successfully, they’re lively 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 elements for quite a lot of prospects. SFS parts might be present in vehicles, cellphones and even Airplanes
b) Manufacturing of fastening and riveting options which might be 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 widespread, that they’re all centered on B2B enterprise fashions catering to bigger corperates. Inside these 3 segments, SFS operates 8 totally different divisions that appear to be kind of impartial:
To get a a primary overview on their broad number of merchandise, their very own product web site is an efficient place to begin.
One in every of their slogans is “native for native”, so that they manufacture domestically in round 100 websites in 26 nations world wide. The HQ primarily coordinates and helps if additional know-how is required, as an example to develop new particular machines.
4. Why did I turn into ?
Since its IPO in 2014, SFS Group has delivered very stable 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 Web revenue by ~14% p.a. and EPS in virtually 12% by annum since its IPO. This was primarily achieved by enhancing margins signifcantly. EBIT margins improved from 9-10% to fifteen% and internet revenue margins virtually doubled.
As an Euro investor, one also needs to consider, 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 improve in margins and earnings went together with a steady lower in valuation as we are able to 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 are able to see within the inventory chart, IPO buyers may not be too comfortable, as SFS has even underperformed the SMI for the reason that IPO:
To me, an organization with steadily rising margins is value anyway and mixed with a declining valuation much more so.
5. The place does the expansion and margin improve come kind ?
Wanting one degree under the Group to the segments, we are able to see a really fascinating, diverging improvement:
The three segments diverge fairly extensively. The smallest phase, the Swiss centered Distribution phase has kind of stagnated, each in prime line and working revenue. The biggest phase, Engineered Parts, has carried out very soldily. Nevertheless the star phase was clearly the Fastening techniques phase that just about doubled gross sales and improved working revenue by 5x. This phase is clearly the principle driver in the mean time and appears to have carried out very nicely in 2022 as nicely.
6. Moat & Aggressive benefits
In my understanding, SFS doesn’t have a “exhausting 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 parts in areas world wide.
Many merchandise that they produce are solely a small portion of the ultimate product in absolute worth, however fairly vital for the performance which is commonly an excellent place to have as a provider. They appear to be very shopper centric and attempt to turn into a improvement accomplice quite than an exchangeable provider for his or her purchasers.
On a extra strategic degree, the truth that SFS remains 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 desires to guarantee that the corporate stays a comparatively independently run enterprise. So far as I perceive, the Hoffmann Deal was an instance but additionally potential as a result of hey are nonetheless household owned.
So general, no exhausting moats however a mix of aggressive benefits that permit them to earn respectable margins and returns whereas rising at a passable pace.
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 device distribution and producer. For SFS , that is clearly the most important transaction in its historical past and as such clearly a threat. SFS has paid ~1 bn for Hoffmann, I haven’t seen any specific 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 worth has been financed with on steadiness sheet money and shares, the remaining leverage is just not crucial. (<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 to this point was solely an area Swiss enterprise. Additionally they appear to mean to develop this platform internationally. As well as, a few of SFS merchandise is perhaps offered by way of Hoffmann (Fastening).
The Acquistion was consumated as of Might 1st 2022. This ends in an fascinating impact that the 2022 outcomes will solely embrace 8/12 of the earnings impression, whereas debt and addtional shares are already absolutely accounted as of yr finish. so EV/EBIT and EV/EBITDA at yr finish 2022 will not be absolutely represetative.
Simply the impact of absolutely together with Hoffmann in 2023 will improve gross sales by one other ~12,4% vs. 2022 (all different issues equal).
Thus far, SFS has in a roundabout way 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 general, the Hoffmann acquisition appears to have been carried out at a fairly affordable a number of. Though the EBIT margin is decrease than the typical 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 nonetheless 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 worth:
One other fascinating facet is that ~25% of Hoffmann’s gross sales appear to be their very own device 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 method up after becoming a member of SFS in 1995. I’ve watched a few movies with him and I’m truthfully tremendous impressed along with his down-to-earth strategy.
On the age of fifty years, he clearly has some years to go, however mixed already with plenty of expertise. He’s additionally member of the Supervisory board of Daetwyler, one other, 3,5 bn market cap “Hidden Swiss Champion”. Total plainly SFS Group principally develops Administration from inside as an alternative of hiring “Mercenaries”, an strategy I like rather a lot.
The supervisory board accommodates members of the founding famlies Huber and Stadler. The long run CEO and Supervisory board head Heinrich Spoerry retired (on account 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 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 Govt Director and HEad of Company providers, proudly owning round 400K shares (or 40 mn CHF) however he appears to maneuver out by the tip of 2024 with the intention 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 feel is kind of low. Jens Breu owns ~28k shares and will get round 2500 shares per yr as a part of his compensation bundle.
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 are not any different “well-known” or noteworthy buyers 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 lead to 7,55 CHF per share in Incomes for 2022 or, at a share worth 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 to be like much more fascinating. Assuming a 4,5% development fee in earnings plus the impact of the total yr for Hoffmann, I anticipate 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 are able to see that this appears to be like actually low cost, though gamers like VAT and LEM are clearly extra worthwhile:
Daetwyler nonetheless, can 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 simply 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.
Trying to 2024 and additional, I feel it’s sensible to imagine a stable mid-single digit development fee
11. Dangers
Thus far now we have centered on whats good and fascinating. However there are clearly dangers. Amongst them are:
the enterprise is geared in direction of the manufacturing and building trade. A significant and prolongued slowdown on this sectors can even hit SFS
An M&A transaction in that dimension is all the time a threat
The Hoffmann transaction will increase the burden in direction of Europe, particularly Germany
The corporate has publicity to China particularly within the very worthwhile Fastening division
Structurally, the largest guess 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 turn 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 reasonably good future in Europe. The current disaster has proven that suply chains shouldn’t be too lengthy and that the outsourcing of producing is just not a good suggestion.
As well as, the approaching Vitality transition requires plenty of manufacturing and because it appears to be like like, the US and Europe is not going to make the identical mistake once more and outsource all the things to China. My feeling is that top worth manufacturing might have a reasonably respectable future.
12. Different matters (Reporting, Capital allocation, Cashflow technology and many others.)
What I do like about SFS that they’ve superb 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 immediately from Fairness after they make an acquisition. Subsequently 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 sweet. 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 shouldn’t anticipate 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 reside with this.
The enterprise as such is producing respectable cashflow. Clearly with Hoffmann, the dynamics would possibly change slightly bit as distribution is slightly 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 satisfactory and steerage is all the time 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 Firms lively in Switzerland with regard to Digital Transformation. Throughout the Manufacturing trade they had been rated #1. Though one ought to all the time be cautious with such rankings, that is clearly an fascinating facet and an additional poece of the puzzle.
Lastly, I additionally like the truth that SFS doesn’t do quarterly reviews. For a long run funding, this protects my no less than 2 occasions a yr the place I don’t have to learn or analyse reviews.
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 crucial excessive precision consumable elements)
an honest valuation (particularly in comparison with Swiss friends)
good managment
Stable funds, conservatively run
decentralized construction
resilient enterprise (power, enter materials)
Cons:
very giant acquisition closed in 2022
unsexy and exhausting to elucidate merchandise
not tremendous low cost
no clear moat
Publicity to manufacturing / China
14. Abstract & return expectations
SFS Group is neither an “wonderful broad moat” firm nor an excellent low cost alternative. Nevertheless it’s a superb enterprise/firm at a really respectable valuation. Getting superb firms 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 feel is right here the case.
I additionally like the truth that the corporate is just not very horny from the skin. It doesn’t appeal to plenty of consideration which is one other large plus for me.
On the present valuation, I might anticipate 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 fee of additionally 5-6% that I feel is sensible and even conservative, contemplating the monitor file. So my base case can be to double my cash in 7 years plus dividends..
I due to this fact determined to allocate ~4% of the protfolio into SHS at a median worth of round 104 CHF/per share throughout January.
15. Recreation plan
Though the discharge of the earnings on March third might possibly set off a sure revaluaton if EPS is available in as I anticipate, my plan is to carry this positon long run. If my EPS expectations grow to be appropriate and relying on their steerage and the share worth response, I would 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/individual/jens-breu/
https://www.linkedin.com/posts/sfs-group_transformation-digitalisierung-invintingsuccesstogether-activity-6916751547762667520-mQGf?utm_source=linkedin_share&utm_medium=ios_app
Jens Breu, CEO SFS, im Interview
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