Mikron Group AG – Super Cheap (EV/EBIT ~4) and +33% EBIt 6M 2023- what is not to like ?

Disclaimer: This isn’t funding recommendation. PLEASE DO YOUR OWN RESEARCH !!!!

Spoiler: In case you are brief on time: I didn’t purchase a place right here. No must learn all the things.

Mikron is an organization that I had on my (passive) radar since my “All Swiss shares” collection some years in the past (since I handed on it, it made round +100%, so hold this in thoughts for the remainder of the publish). It’s a Swiss primarily based equipment producer with a market cap of 200 mn CHF and has some connection to SFS (SFS is a shopper, identical Chairman prior to now).

These have been the principle objects that motivated me to seems to be deeper into Mikron this time:

+ presently very (very !!) low-cost (P/E 7,5, EV/EBIT 3,5)+ presently VERY good enterprise momentum (6M 2023: Gross sales +22%, EBIT +33%)+ higher buyer/product combine than prior to now+ Rock stable steadiness sheet (100 mn CHF money vs 200 mn CHF market cap)+ good share value momentum

Nonetheless some adverse issues bounce out when trying on the historical past of Mikron:

– unstable enterprise, particularly machining (order consumption already declined 6M 2023)– no significant service revenues that might stabilize the enterprise– not very excessive Returns on capital– present profitability above historic averages (that are fairly low).

So there may be clearly a motive why the inventory is affordable which can also be mirrored within the inventory Chart: Principally a 15 12 months sidewards growth after a drop publish GFC, howver with one thing like a “mini get away” these days:

Generally, corporations with such a previous could be superb investents if one thing structurally has modified. There may be a minimum of a touch that one thing has modified. Within the “previous days” the Machining phase, which caters principally to the Car business, had greater than 50% share in gross sales and this was very unstable.

Nonetheless, within the final 9-10 years or so, the Automation phase, which principally sells to the Pharma business has gained significance. As we will see under, the Auomotive business now’s solely within the single digits:

2013: Automotive: 42percent6M 2023: Automotive: 7percent2013: Pharma: 27percent6M 2023: Pharma 55%

As talked about Mikron runs two segments:

Automation, which comproses automated trial testing equipement

Machining& Instruments (reducing, metallic working) (2013: 52%, 2022: 38%)

Listed here are two examples of their merchandise:

These are clearly large machines that want time to construct. Mikron due to this fact has important invenotry and work in progress merchandise on the steadiness sheet. Nonetheless, they obtain important prepayments from cusomers which, within the first 6M of 2023 truly led to adverse working capital.

Valuation/Monetary KPIs (from Tikr)

What stands out is clearly that at a market cap of 200 mn CHF and web money of round 100 mn CHF, the corporate trades at round 7,5x 2023 P/E and three,5x (!!!!) EV/EBIT. A part of the 2023 revenue is a one among 2 mn CHF acquire and 20 mn CHF money influx on account of a sale of an funding property.

The corporate is clearly “dust low-cost” for a corporation that has een rising gross sales by greater than +20% within the first 6M of 2023 and EBIT/working revenue by greater than +30%. Nonetheless, if we take a look at all the important thing figures we will see that order consumption within the machining phase already confirmed some weak spot:

My foremost concern is that presently, margins and returns on capital are far above something that has been achieved over the previous 17 years or in order we will see on this TIKR web page:

So the “imply reversion” potential is sort of important, sadly to the draw back. One may argue that possibly as a result of decrease significance of the machining phase, the downturns look much less unhealthy prior to now. The Automation phase for example nonetheless broke even in 2020 whereas Machining had a adverse EBIT margin of -22%.

Possession:

41% is owned by the Ammann Group, a privately held firm with round 900 mn in gross sales that manufactures principally street building tools (asphalt mixers). One other 20% is held by wealthy Swiss people (Rudolf Maag, Thomas Issues).

Ammann appears to be concerned for the reason that early 90ies and stepped in when Mikron virtually went bust in 2003 after an enormous acquisition spree that backfired. Earlier than the Dotcom bubble burst, Mikron tried to change into an enormous participant in TelCo provides however that in the end resulted in catastrophe. Ammann appears to be a typical Swiss “patriarch” and has been energetic in a number of different Swiss compaies, equivalent to Implenia. I assume his motivation will not be purely monetary but in addition “patriotic”.

Administration Incentives:

No return on capital is included within the targets, solely order consumption and EBIT and to a sure extent freee cashflow. Administration solely holds a restricted quantity of shares by way of their incentive plans, however the positions are rising. The present CEO has been put in solely in 2021 in addition to new Supervisory Board members. Total not unhealthy, but in addition not nice both.

Major points

Mikron’s manufacturing appears to be nonetheless principally in Switzerland, which clearly creates a possible drawback on account of prices in opposition to rivals. Personell prices are round 40% of gross sales. Even in an excellent 12 months like 2022, they don’t handle working margins above 10% and returns on capital of 15% in 2022 are nonetheless comparatively unhealthy for an industrial firm.

In one of many linekd articles above, it was additionally talked about, that the Mikron Machines are sometimes very tailor-made to the wants of the purchasers and therfore it’s a lot arder to realize economies of scale. Which explains the low amrgins through the years.

I additionally assume that Mikron is usually a “late cyclial” firm. They get the orders when their prospects did nicely prior to now and have cash to broaden. then it takes a while to fabricate the machines. So Mikron then will get hit some quarters after different gamers are hit.

As we will see with SFS: They only confirmed not so good leads to the engineered parts sector which is a long run buyer of Mikron. So SFS may not order that many Mikron machines within the subsequent quarters.

For my part the enterprise mannequin of SFS can also be extra versatile: The can use the machines wherever on this planet to construct merchandise additionally regionally, whereas Mikron solely appears to have the ability to manufacture these machines in Switzerland, which is pricey.

It needs to be talked about, that a minimum of one promote aspect analyst may be very optimistic about Mikron and thinks that their enterprise has change into much less unstable. Additionally in 2020 Mikron appears to have streamlined some models, amongst them a German unit in Berlin.

No funding regardless of “Deep Worth”

A number of years in the past, I’d fortunately inevsted into Mikron. The valuation is clearly deep worth and there is likely to be an excellent likelihood that the inventory would possibly go larger. Then again, I’m trying today extra for long term, larger high quality corporations that a minimum of look like “low upkeep”.

In Mikron’s case I’m not 100% certain if the inventory is an effective long run funding. The enterprise stays cyclical, comparatively low margins and returns on capital with unclear progress alternatives. Administration and shareholdes additionally don’t appear to be optimally incentiviced and aligned with minority shareholders.

Due to this fact I’ll cross regardless of the very enticing monetary KPIs and in addition on account of some focus points, as with SFS and Schaffner, I do have already two Swiss primarily based manufacturing corporations in my portfolio. Within the present environement, I don’t wish to chubby cyclicals that a lot.

Perhaps it may very well be an excellent “punt” on a a number of enlargement, however presently, I believe it’s a dangerous time for punts.