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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 feel I recognized a 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. Based mostly by myself 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 publish has change into fairly lengthy, right here an outline of the chapters:
Background
Firm Historical past
Enterprise Mannequin
Why did I change 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
Recreation plan
1. Background:
SFS Group has been on my watchlist since 2021 after I encountered them in my “All Swiss shares” sequence. Again then, the inventory appeared too costly regardless of displaying some engaging traits (EBIT margins, ROC and so on.). Within the meantime, they’ve made a big M&A transaction and the share worth got here down by-25%.
2. Firm historical past:
Regardless of being a 95 12 months outdated firm, SFS Group solely IPOed in 2014 at a share worth of 64 CHF. In line 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. Taking a look at SFS Group’s Web site, it isn’t really easy to know what they’re really 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 important” excessive precision components for quite a lot of prospects. SFS elements will be present in automobiles, cell phones and even Airplanes
b) Manufacturing of fastening and riveting options which can 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 completely different divisions that appear to be roughly unbiased:
To get a a primary overview on their huge number of merchandise, their very own product web site is an efficient start line.
One among their slogans is “native for native”, in order that they manufacture regionally in round 100 websites in 26 nations all over the world. The HQ primarily coordinates and helps if further know-how is required, as an illustration to develop new particular machines.
4. Why did I change into ?
Since its IPO in 2014, SFS Group has delivered very stable outcomes regardless of having confronted finally 2 disaster and a really sturdy CHF. That is how margins and earnings developed from 2014 to 2021:
Regardless of growing gross sales solely by 4,5% (in CHF), SFS managed to enhance Internet earnings 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 earnings margins nearly doubled.
As an Euro investor, one must also bear in mind, 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 attention-grabbing half: This enhance 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 nowadays. As we are able to see within the inventory chart, IPO buyers may not be too completely satisfied, as SFS has even underperformed the SMI because the IPO:
To me, an organization with steadily growing 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 are able to see a really attention-grabbing, diverging improvement:
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. Nonetheless the star phase was clearly the Fastening programs phase that nearly doubled gross sales and improved working revenue by 5x. This phase is clearly the primary driver in the intervening time and appears to have completed very properly in 2022 as properly.
6. Moat & Aggressive benefits
In my understanding, SFS doesn’t have a “laborious Moat”. Nonetheless, 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 supply excessive precision elements in areas all over the world.
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 usually a great place to have as a provider. They appear to be very shopper centric and attempt to change into a improvement companion somewhat than an exchangeable provider for his or her purchasers.
On a extra strategic stage, the truth that SFS continues to be a household owned firm. appears to present them entry to sure M&A transactions the place the vendor doesn’t wish 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 additionally potential as a result of hey are nonetheless household owned.
So total, no laborious moats however a mix of aggressive benefits that permit 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 are going to 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 elements may mitigate the dangers:
SFS and Hoffmann collaborate since greater than 20 years and based on Breu have comparable values and tradition
Hoffmann will run as an unbiased division
The Hoffmann CEO will be part of the chief board
A sure a part of the acquisition worth has been financed with on stability sheet money and shares, the remaining leverage just isn’t important. (<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 up to now 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 bought by way of Hoffmann (Fastening).
The Acquistion was consumated as of Might 1st 2022. This ends in an attention-grabbing impact that the 2022 outcomes will solely embrace 8/12 of the earnings influence, whereas debt and addtional shares are already totally accounted as of 12 months finish. so EV/EBIT and EV/EBITDA at 12 months finish 2022 should not totally represetative.
Simply the impact of totally together with Hoffmann in 2023 will enhance gross sales by one other ~12,4% vs. 2022 (all different issues equal).
To this point, SFS has indirectly talked about how worthwhile the acquired enterprise is. Nonetheless, 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 total, the Hoffmann acquisition appears to have been completed 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 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 worth:
One other attention-grabbing 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 attention-grabbing background. He’s not 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 actually 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 a whole lot of expertise. He’s additionally member of the Supervisory board of Daetwyler, one other, 3,5 bn market cap “Hidden Swiss Champion”. General evidently SFS Group principally develops Administration from inside as a substitute of hiring “Mercenaries”, an strategy I like quite a bit.
The supervisory board incorporates members of the founding famlies Huber and Stadler. The long run CEO and Supervisory board head Heinrich Spoerry retired (because 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 providers, proudly owning round 400K shares (or 40 mn CHF) however he appears to maneuver out by the top of 2024 so as 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 feel 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 buyers based on 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.
Nonetheless, wanting into 2023, issues seems much more attention-grabbing. Assuming a 4,5% progress price in earnings plus the impact of the total 12 months for Hoffmann, I anticipate round 433 mn EBIT and ~8,70 CHF EPS. This might imply a P/E of solely 12x and an EV/EBIT of ~11x for 2023.
Taking a look at another “Swiss high quality manufacurers”, we are able to see that this seems 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 attention-grabbing is, that promote facet analysts who cowl SFS have considerably decrease estimates wich for my part don’t mirror the Hoffmann acquisition:
The Bloomberg consensus is just 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 life like to imagine a stable mid-single digit progress price
11. Dangers
To this point we now have centered on whats good and attention-grabbing. However there are clearly dangers. Amongst them are:
the enterprise is geared in direction of the manufacturing and building business. A serious and prolongued slowdown on this sectors will even hit SFS
An M&A transaction in that measurement is at all times a danger
The Hoffmann transaction will increase the load 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 nowadays, as soon as once more many individuals suppose that Europe will change into a historic theme park for wealthy Asian vacationers. This might be clearly not optimum for SFS. Personally nonetheless; I do imagine that prime high quality manufacturing has really 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 just isn’t a good suggestion.
As well as, the approaching Power transition requires a whole lot of manufacturing and because it seems like, the US and Europe is not going to make the identical mistake once more and outsource every part to China. My feeling is that prime worth manufacturing might have a fairly respectable future.
12. Different matters (Reporting, Capital allocation, Cashflow era and so on.)
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.
Beneath Siwss GAAP, they’re allowed to deduct Goodwill immediately 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 prevailing treasury shares for the Hoffmann acquistion. One mustn’t anticipate 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 may change slightly bit as distribution is slightly 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 sufficient and steering is at all times conservative. SFS is “constructed to final”.
One different matter I discovered very attention-grabbing is that SFS has been ranked because the quantity 8 of all Firms lively in Switzerland with regard to Digital Transformation. Inside the Manufacturing business they have been rated number one. Though one ought to at all times be cautious with such rankings, that is clearly an attention-grabbing side and an extra poece of the puzzle.
Lastly, I additionally like the truth that SFS doesn’t do quarterly stories. For a long run funding, this protects my not less than 2 instances a 12 months the place I don’t must learn or analyse stories.
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 important 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 laborious 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 an excellent low-cost alternative. Nonetheless it’s a superb enterprise/firm at a really respectable valuation. Getting superb 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 feel is right here the case.
I additionally like the truth that the corporate just isn’t very horny from the skin. It doesn’t entice a whole lot of consideration which is one other massive plus for me.
On the present valuation, I might anticipate a return of round 10% p.a. with out taking into consideration any a number of enlargement. That’s based mostly on a 2023 FCF yield of 4-5% and a long run progress price of additionally 5-6% that I feel is life like and even conservative, contemplating the observe document. So my base case could 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 perhaps 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 transform right and relying on their steering and the share worth response, I’d 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/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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