Pipe it up.
Investment Idea
Hello,
Today I will be speaking about what I believe is very underfollowed company in a european country I have not invested in before. There is a reason why it is underfollowed. Its market capitalization is €65 million and the number of listed companies in this country is just under 200 and its average daily volume is just €16.700. I have looked at all the micro-caps companies there and this one stood out to me.
It has goodwill adjusted ROE of 50% and excluding cash and goodwill this is almost 100% ROE. Given that this is serial acquirer in MRO industry, even with considering the goodwill, I am getting to 20% ROE for a company trading at 8.5x EV/EBIT.
The company is consoldiating local competitors in a very small industry, where local presence matters and is operated on a very decentralized structure. This combined with organic growth resulted in growing the sales by 64x since the foundation in 2008.
It trades at 6.7x EBITDA but is buying their competitors out at 4-5x EBITDA—competitors which are usually small and very local. That is not everything though. The company has highly recurring revenue stream, which is becoming more and more visible as the project-driven business is declining and becoming lower % of revenue.
Furthermore, the core business has negative working capital and very high cash conversion rate, which makes the cash flow higher than the reported net income. This allows company to return 4-5% a year via dividends and buybacks, while still growing organically and via acquisitions. Generally I believe this is one underfollowed serial acquirers in the Nordics.
Furthermore the corporate tax-rate is going lower next year which will imediatelly increase. At 8.5x EV/EBIT this is highly intriguing setup for IRR of 19-20% over the next four years, while the risk of losing money seems small. Investors will collect 4% dividend while waiting for another acquisiton or organic expansion, while margins should still rise from here.
This company suits my current approach well. Capital-light business model selling at GARP multiple, multi-year contracts, 17% market share in their top vertical, good M&A vehicle, low liquidity and most importantly easily understandable business model and when the potential value will come from.