„Breakfast At Douglas“ - The Hut Group

Jeff Bezos started with books and hit the eCommerce Bull’s Eye. Matthew Moulding started with CDs, then had to radically reinvent himself and has since been writing a story of resilience and adaptability for the past 17 years.
Founded in 2004, The Hut Group, now known as THG plc, is a prime example of intelligently using the current liquidity environment to carve out an attractive long-term market position.


In 2004, former management consultant Matthew Moulding and his colleague John Gallemore founded The Hut Group to sell CDs on the Internet. After the industry began to disintegrate due to the confluence of Napster and iTunes, THG started looking for diversification opportunities. Direct-to-consumer business models, however, should remain the focus. The next big vertical was opened with the online prestige cosmetics retailer "Lookfantastic". THG acquired it in 2010 for just under GBP 19 million. One year later, THG expanded its spectrum with the takeover of the protein powder mail order company “MyProtein”. The acquisition cost just under GBP60 million and laid the foundation for the "Nutrition" vertical. THG is able to roll out relatively small brands and platforms globally. This D2C expertise started to attract outside brands that are either too slow or incapable to convert their organizations to digital distribution channels. THG began setting up whitelabel websites for retailers such as Tesco and Asda.

Since inception, THG has completed more than two dozen acquisitions. THG follows an incremental approach, and it typically adds new building blocks around the three major pillars of Beauty, Nutrition, and Ingenuity (the D2C services platform). In Beauty, for example, this includes acquisitions of additional distribution channels such as the U.S. online platform "Skinstore" (2016), the subscription model "Glossybox" (2017), and also a global Spa chain called "ESPA" including its own product range (2017).

Ingenuity is also constantly being expanded with new tools. These included the content studio "Hangar Seven" (2017), the web hosting company "UK2" (2017), and the translation service provider "Language Connect" (2018).

Status Quo

THG is constantly transforming and it is not always easy to thematically fit the new acquisitions into the existing pillars of the business model. In its 2020 annual results presentation, dated April 15, 2021, THG itself communicates four business segments:


This includes the distribution channels "Lookfantastic", "Skinstore", "Dermstore", "Glossbox", "ESPA"; various own brands such as "Illamasqua" (2017), "Eyeko" (2018), "Christophe Robin" (2019) or "Perricone MD" (2020); and even contract manufacturers such as "Bentley Labs" (2021). Just under 50% of the private label brands are produced in-house as well. With the recent acquisition of "Bentley Labs", this share is set to increase.
Most recently, the segment served 6.9 million customers with a repurchase rate of slightly over 80%. More than 500k customers are even beauty box subscribers. In 2020, the segment generated GBP 752m in sales, with an annual increase of 53% over the last five years.


THG's core asset is its nutritional supplement brand "MyProtein." The protein powder was placed in the minds of potential customers early on via fitness influencers. "MyProtein” has a market share of just under 15% in the UK and Western Europe, according to management, which is an amazing position in a fragmented market like protein powder. 80% of "MyProtein" comes from its own production and THG is also pushing ahead with vertical integration here. In 2020, the flavor manufacturers "Claremont Ingredients" and "David Berryman" were acquired. In 2021, THG additionally entered the cereal bar business with the acquisition of "Brighter Foods."
Most recently, the segment served 6.3 million customers, with a "MyProtein" repurchase rate of 84%. In 2020, the segment generated GBP 562 million in sales, with an annual increase of 27% over the last five years.


The segment was redefined in the 2020 financial statements. Basically, Ingenuity can deliver various services for customers. These include website creation and hosting, localization (translation and adaptation to local market conditions), providing an online store, fulfillment, marketing with in-house influencers, production, and even development of completely new brands. The segment generated GBP 137.3 million in revenue in 2020 and counts brands such as L'Occitane, Dulux (Akzo Nobel) and Microsoft among its clientele. Ingenuity is an attractive business model itself, but presumably also serves as a due diligence instrument and test laboratory to identify new takeover candidates or optimize the company's own activities.

Other and OnDemand

The segment is either a pile of leftovers or an optionality basket. In its 2020 year-end presentation, THG renamed the segment into OnDemand, focusing primarily on the "Zavvi," "Pop in a Box," and "IWOOT" brands. "IWOOT" ("I want one of those") is an online store mainly to provide gift inspiration. "Zavvi" and "Pop in a Box" are also niche online stores with collectibles related to movies and video games. It's a surprisingly profitable niche in light of where Gamestop generates profits and the recent product range expansions of Mediamarkt and Saturn. The segment generated GBP 101.3 million in sales in 2020.


With all the different business units, an aggregated view across the entire organization is helpful to understand what Moulding has created over the last 17 years. Vertical integration has given THG a comprehensive toolbox for the next generation of eCommerce. THG now includes 6 manufacturing facilities, 18 warehouses and fulfillment centers, 31 data centers, and 19,000 associated influencers. As a result, the company serves a customer database of 31 million people and generated 900 million website visits in 2020.

THG also operates two luxury boutique hotels and a "country club" that are, among other things, a scenery for influencers.


THG acts like an opportunistic financial investor, but can often exploit synergies or cross-selling potentials via its existing footprint that are otherwise reserved for strategic investors. CEO Moulding has a clear preference for industries where structurally high gross margins are achievable. The verticalization strategy is aimed at steadily expanding the accessible margin.

In the process, acquisitions sometimes seem somewhat "far out of the box" and overpriced, and the acquisition logic only reveals itself years later. A prominent example was the acquisition of “Glossybox”, a subscription model where cosmetic samples are sent out monthly. The business model was ridiculed by many (including the author), but has since evolved into a useful customer acquisition model with 515,000 subscribers. "Lookfantastic" and "Dermstore" also offer subscription boxes. Glossybox is self-sustaining with an EBITDA margin of around 10%. If the strategic effects do not materialize after an acquisition, THG is patient enough to park a business model in the "pile of leftovers" and possibly integrate it more meaningfully at a later stage.


Both management and supervisory board are excellently staffed. In addition to the founders Matthew Moulding (49 years) and John Gallemore (52 years), we are pleased to see that the two most important verticals Beauty and Nutrition are led by two women. Rachel Horsefield has been with THG for 9 years and has been CEO of the Beauty division for 4 years. Lucy Gorman has been with THG just as long and has been CEO of the MyProtein brand for just over 3 years. The board of directors includes Zillah Byng-Thorne, chairman of the listed media group Future plc, and CVC partner Dominic Murphy (previously a partner at KKR for 12 years).


THG has issued explicit growth targets for its individual verticals. In 2021, the beauty segment should achieve the one billion annual sales milestone and thus account for more or less half of the company's sales. In the medium term, THG is aiming for 25% growth in the beauty segment. Driven by great potential in Asia, the nutrition segment is also expected to grow by 20% p.a. Annual growth of 40% is targeted for Ingenuity. On an aggregated basis, THG calculates 20-25% annual growth at group level. Up to GBP 250 million is to be invested annually in acquisitions. Basically, the entire free cash flow is invested to expand the market position. Adjusted EBITDA is expected to remain at 9-10%. Structurally, however, the verticals offer higher margin potential. US prestige beauty competitor "Ulta" with significant brick-and-mortar exposure achieves EBITDA margins of over 15%. In the long term, this should also be possible for THG Beauty. The margin potential of "MyProtein" should be similarly attractive due to the vertical integration.


Douglas CEO Tina Mueller recently said on the OMR podcast that she would like to see a valuation for her company in the direction of 5x sales. That means she could easily buy THG's online pure play business for GBP 3 billion (i.e. 3x sales) and it would still be accretive.

The Nutrition segment is much more concentrated and has a strong brand in "MyProtein". (53% of sales come through "free" marketing channels like SEO). Nestlé's recent acquisition could serve as a valuation benchmark. In April this year, the acquisition of "The Bountiful Company", a nutritional supplements manufacturer, was executed at 3x revenue and 17x EBITDA. The valuation of THG's Nutrition segment should thus implicitly be between GBP 2 - 2.5 billion.

The "pile of leftovers" is more difficult to value due to its fuzzy profile. However, if the individual assets were broken up, it would presumably be possible to realize GBP 250 - 500 million.

The wildcard Ingenuity is binary as a valuation component. Cash is still being burned in this segment due to growth investments and in a conservative scenario, no value should be attributed to the business model. However, there are first indications. Notorious investor Softbank already knocked on THG's door and wanted to invest directly in Ingenuity. But there was not yet a clearly defined legal entity that could have accepted the investment. Therefore, Softbank invested USD 730 million at THG group level and secured an option to invest USD 1.6 billion in Ingenuity once the legal entity for it was created. In return, Softbank would receive a 19.9% stake in Ingenuity, representing a valuation of USD 6.3 billion, or just under GBP 4.5 billion. It is possible that Ingenuity will subsequently be listed separately, which would uncover the valuation.

So when you add it all up, the enterprise value ranges between GBP 5.25 and 12.5 billion. Currently THG has no net financial debt. So broken down to a single share, the valuation is somewhere between GBP 5 and GBP 11. Most recently, the stock was trading around 6 pounds.

There is one factor weighing on valuation at THG. Matthew Moulding has a so-called "golden share" that can be used as a veto over unsolicited takeover attempts. This fact means that THG cannot be included in the FTSE100, and thus sees a lot of ETF capital flow past it. The golden share suits Moulding; he wants to stay in the driver's seat for the long term. In a mid-2020 interview, he was asked what his goals were with THG. His answer:

"All I intend on doing is building The Hut Group into something that stands out over the foreseeable future. I don't see an end to that. I don't think about it. So, billions and billions of revenue is your answer. But how many billions and billions?"



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"Add it up, add it up, add it up." - SLM Solutions AG

Business model and technology

SLM Solutions AG is a Lübeck-based manufacturer of 3D printers, machines that create three-dimensional objects. There are various ways to do this. SLM has specialized in "selective laser melting". This technology is primarily used to create metallic objects. SLM is a mechanical engineering company with a single production site in Lübeck and eight sales/service subsidiaries in North America, Asia and Europe.

There are various 3D printing processes, but in the industrial area, i.e., those that can process materials with high degrees of hardness while enabling maximum freedom of design, the following three so-called powder-bed fusion (PBF) processes are the most important:

Selective laser melting

In selective laser melting, the material to be processed is deposited in powder form in a thin layer on a base plate. The powdered material is selectively melted by a laser beam and forms a solid material layer after solidification. The base plate is then lowered by the amount of a layer thickness and powder is applied again. This cycle is repeated until all layers have been melted. The finished part is cleaned of excess powder, machined as needed, or used immediately.[1]

Laser sintering

Laser sintering is closely related to laser melting, but differs in that the powder is only fused together, not completely melted. The degree of densification can be varied by temperature, which can be controlled both in the build chamber and with the laser.

Electron-beam melting

The major difference from the previous processes is the energy source. The powder bed is not processed with a laser, but with an electron beam. In order for the electron beam to interact with the powder, the material to be processed must be conductive, which is a certain limitation compared to laser-based processes. Ceramic parts, for example, are not feasible.

A key component in PBF 3D printing is having the right powders available for printing. Part of the business model, in addition to the delivery and maintenance of 3D printers, is therefore the supply of powders. For its latest generation of machines, SLM now also obliges its customers to buy its powders. In addition to the immediate economic rationale of achieving a "lock-in" effect with customers, the company also looks to deliver a high-quality overall production setup. The physics of 3D printing are complex and require enormous fine-tuning. It takes an iterative process to achieve the desired quality of the part. When customers source their powder from third-party manufacturers, they may not meet the exact specifications of the SLM machines, which has led to dissatisfied and churning customers in the past.

The market

3D printing as a so-called “additive manufacturing” process has three major advantages over classical subtractive manufacturing, which suggests various areas of application. (1) Since large parts of the powder can be reused, the material loss is much lower than, for example, in turning and milling. If waste products from subtractive processes are recyclable at all, they must first be remelted. (2) Cavities can be directly imprinted in complex components, which enables considerable weight savings. (3) Shapes can be created that would not be feasible at all using traditional processes.

In addition to all kinds of experimental application areas, the aerospace industry, the automotive industry and the medical technology sector are therefore particularly suitable users of 3D printing technology.

The 3D printing industry went through a "hype" period from 2012-2016, which was mainly driven by research institutions and industrial R&D departments. However, this initial wave leveled off as first-generation printers failed to compete against traditional manufacturing methods from a cost perspective.

Today, big users of metallic 3D printing include companies such as Ford, GM, Blue Origin and SpaceX, which are ordering entire fleets of printers. Tesla and Porsche are also currently experimenting with the technology. It's hard to predict how widespread 3D printing will eventually become, but industry reports such as the Wohlers Report 2020 suggest that the market volume should increase more than tenfold to $146 billion over the next decade.

The PBF market is dominated by SLM and two other German companies, EOS and Concept Laser. Perhaps the most prominent competing technology to the PBF process is called binder jetting. The key twist is that a binder is added to the powder to be processed and cured. The process is versatile and fast, but less precise and currently unsuitable for critical aerospace parts. A leader in metal-based binder jetting is US-based Desktop Metal Inc - an MIT spin-off, which recently went public via SPAC.

Company history

Selective laser melting as a technology and SLM Solutions as a company find their beginnings in the mid-1990s at the Fraunhofer Institute in Aachen. Dr. Matthias Fockele and Dr. Dieter Schwarze were involved from the beginning, the latter is now head of research at SLM. The first commercial SLM machines result from a cooperation between Fockele & Schwarze Stereolithografitechnik GmbH and the British Mining and Chemicals Product Ltd. (meanwhile merged into a Canadian materials group called 5N Plus). In 2008, a business unit manager at MCP named Hans-Joachim Ihde succeeded in buying out what is now SLM Solutions as part of a corporate restructuring. In 2014, the company IPO’d as SLM Solutions AG. Barely two years later, GE made the strategic decision to occupy the 3D printing landscape and on September 6, 2016, published a takeover offer for all shares of SLM Solutions at €38 per share, which corresponded to a valuation of nearly €700 million. The takeover failed because activist hedge fund Elliot Associates, which had bought a sizeable stake meanwhile, tried to push for a higher price. GE didn’t want to play and decided to settle for two other 3D printing companies, Arcam Laser from Sweden and Concept Laser from Bavaria.

Following GE’s failed takeover attempt, significant operational weaknesses at SLM started to show. The company seems to have been trimmed in anticipation of a corporate takeover; sales had been prioritized over the research pipeline, controlling and corporate processes. Dissatisfied customers, a crumbling order book and cash burn followed in 2018 and 2019. The market cap fell from a high of nearly €900 million in January 2018 to a low of just over €100 million in March 2019. In 2018, the founder and major shareholder Hans-Joachim Ihde stepped down as chairman of the supervisory board and behind the scenes the company began to restructure under the leadership of activist Elliot. 

Why now?

New owners bring a new management…

At the beginning of 2019, another activist shareholder, ENA Investment Capital, joined the party and the work behind the scenes slowly became visible. The first big change occurred on May 1st, when Meddah Hadjar started his position as the new CEO. Meddah spent 20 years with General Electric and was most recently responsible for leading Concept Laser. As SLM's new CEO, he brought considerable knowledge of competitors and their products; his decision to jump to SLM speaks highly of his belief in SLM’s technological potential.

In June 2019, SLM further recruited René Magnus to the supervisory board. Magnus was CEO of GE's “other” 3D acquisition, Arcam Laser, for 17 years. The CFO and COO roles have also been professionalized with Dirk Ackermann and Sam O'Leary, two young, dynamic GE alumni.

…and the new management releases a new product

From the very beginning, the new all-star team focused on the development of the "Next Generation" printer, which would be presented in a launch event on November 10, 2020 despite all the adversities caused by the pandemic. The NXG XII 600 represents a quantum leap for the entire 3D printing industry with its 12x laser setup and a build chamber of 600x600x600mm. One of the first parts to be unveiled was a complete engine housing measuring 560x650x367mm, which was printed in 21 hours. The massive reduction in printing time combined with enhanced functionality paves the way for 3D printing to be integrated into real industrial mass production. We understand that SLM has achieved a technological lead of at least 2-3 years over competitors.



The business generates €66 million of sales (LTM June 2020), no profits, and is valued at €380 million market cap. As can be seen from the table below, SLM has consumed cash every year. The revenue base is still too low to support the fixed cost structure of roughly €50m, but management is confident in strong future sales growth driven by the company’s technologically leading tools.

The investment community lost faith in SLM’s management team as sales fell and losses mounted in 2018 and 2019. The market cap plummeted form €900m to €100m. With the new management team in place going in 2020, sales and earnings began to recover -- even before the release of the game-changing NXG XII 600, which will not book revenue until later this year. With SLM pivoting on the brink of profitability, investor confidence is being restored after years of disappointment.

SLM is an "adult" venture capital situation with significant strategic valuation components not reflected in the current valuation. Profit-based valuation multiples are not yet applicable. On EV/Sales, SLM is valued at 4.4x 2021 sales and 3.3x 2022 sales. This is low compared to the best public comp, trading at 40x sales. Desktop Metal Inc. is expected to generate just under $20 million in revenue in 2020 and foresees growth to $80 million and $170 million in the following two years. The company's market cap is $3.6 billion.

GE's 2016 takeover bid for €700 million is another valuation anchor. However, back in 2016 GE could only have priced in the theoretical potential of SLM's technology pipeline. As of today, that potential product has since been tested and just went to market. That should count for a premium. Even so, SLM’s value today is 46% lower than the 2016 bid.

Despite years of cash burn, the balance sheet does not present an undue risk to the investment case. As the corona crisis evolved in 2020 and automotive and aerospace customers delayed orders, anchor shareholders -- led by Elliott Associates -- backstopped SLM via the issuance and subscription of convertible bonds. SLM has €52m net debt, comprised €78m gross debt (mainly convertible bonds) and €26m cash on hand. In addition, SLM has €45m of undrawn borrowing capability via committed but unissued convertible bonds. Assuming full conversion of all the convertible bonds, the total outstanding shares would increase from 19.8m today to 28.7m or +45%.

End game

What’s the end game at SLM? The base case is increased sales as capital goods volumes accelerate in the post-pandemic economic recovery, a corresponding pivot into profitability, the restoration of investor confidence in the new management team, and a gradual re-rating of the shares. In an upside case, a strategic takeover could be in the cards:

Concentrated ownership with aligned goals. The largest four shareholders control 70% of the capital. The chairman of the supervisory board, Thomas Schweppe, is a representative of Elliot Associates. Both Elliott and ENA manage funds that are dedicated to crystalising gains within foreseeable timeframes. Their coordination and cooperation could deliver a painless and inexpensive de-listing of the company.

Technological lead. Given SLM’s technological lead and current valuation, the most logical strategic investors could easily take-over SLM. In a wildcard scenario, even one of SLM’s giant aerospace customers might consider securing the technology.

[1] We couldn’t explain it any better than Wikipedia



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"Out with the cars!“ - init innovation in traffic systems SE

Business Model

init is a university spin-off from Karlsruhe founded in 1983. In the 1980s, founder and CEO Dr. Gottfried Greschner developed a computer-aided operations control system for public transportation.  He sold his first such system to the city of Osnabrück in 1988. Such systems, known today as Intermodal Transport Control System (ITCS), are the brains of a public transportation authority. It contains many functionalities such as communication between the bus/subway driver and the control center, computer-supported driving or dynamic passenger information ("dynamic" because delay information can be transmitted in real time).

Early in the company’s history init started expanding abroad. In 1990, the first ITCS was sold to the city of Stockholm and at the turn of the millennium init ventured into the US. Taking quite some risk, init "gave away" some systems to gain market access. The proceeds from the IPO during funded this leap of faith. Today, init has placed more than 130 ITCS all over the world: Hamburg, Seattle, Dubai, Montreal, Portland, and many more. The ITCS segment accounts for around 25% of sales. This changes slightly each year, as larger projects shift the proportions.

The next business segment that init established is "Ticketing". As a result of the growth in recent years, ticketing has now developed into the largest segment, accounting for around 45% of sales. init has sold more than 130 ticketing systems around the world. Through a combination of in-house developments and thoughtful acquisitions, the company has achieved a market-leading position and today drives the innovation in the industry. Subway tickets or bus tickets offer considerable innovation potential. An ID-based hop-ticket system has been implemented at the progressive transportation authority in the city of Portland, Oregon.  Passengers no longer have to buy a ticket for a specific route or trip; they simply hold their NFC-enabled cell phone (Apple Wallet, Android Wallet, or other digital identification cards) against a sensor at the stop and get on. The init back-end system settles the billing automatically. This even works across state borders; init can allocate sales to the various transportation authorities precisely.

Parts of the "mobile" ticketing technology come from a clever purchase made in 2016. init acquired loss-making HanseCom, a joint venture between Siemens and Hamburger Hochbahn. According to the company, HanseCom has the second most frequently used mobile phone ticket platform in Germany after Deutsche Bahn. Further, HanseCom has a subsidiary called PTNova. 60% of all ticket payment flows and subscriptions in Germany are processed via this platform.

The third meaningful segment with approx. 20% of sales is automated passenger counting (“APC”). The key operation of the segment is Berlin subsidiary iris-GmbH. init became a majority shareholder in 2016. iris manufactures APC sensors and appears to be the gold standard in the industry, as init's competitors are also among its customers. The company has achieved this status with so-called "time-of-flight" camera systems. This enables three-dimensional imaging. iris can therefore not only count how many passengers enter and exit a subway but can also recognize whether the passenger is a wheelchair user, a child, or a dog. This technological advantage has led to the most important competitor Hella Aglaia (subsidiary of the automotive supplier Hella) gradually being pushed out of the market.

The value-add of the APC technology for customers is manifold. The capacity utilization of buses and trains can be better monitored.  It’s now also possible to identify at which stops and specific doors it takes particularly long for all passengers to de-board and board.  With this knowledge, a transport authority can better optimize its operations and gain valuable seconds & minutes that can be translated into significant cost savings in the overall context.

What we like about the business model

ITCS and ticketing are products/services with high switching costs. Problems and failures in switching providers can seriously interrupt a city's public transportation network. Accordingly, changing an ITCS provider is as sensitive as a company switching its ERP system. In addition to the sticky nature of the products, we consider init's customer base -- public transportation authorities -- to be extremely attractive. Conversely, this also means that it is difficult to steal customers from competitors and generate growth with completely new platform implementations. It is therefore important to present new solutions and innovations within the existing, well-protected customer landscape. Among ITCS providers, we consider init to be the most broadly positioned and innovative player. The customer and market structure appear to be ideal for profitable cross-selling.

The market is oligopolistic. There are typically 2-3 relevant players in each country. In Germany, these include init, Berlin-based IVU Traffic Technologies, and a former Siemens technology, which is now in private equity hands and operates under the name "Trapeze".

init seems to be leading its competitors in its ability to adapt its own business model to provide additional value to customers.  This can best be illustrated by the ticketing project in Seattle. In 2007, init installed its ITCS.  It was awarded the contract for ticketing at the end of 2018. init and Seattle then set up an "operator model". init was awarded an 11-year contract with a total volume of €42m.  init is responsible for the entire ticketing infrastructure:  besides operating and hosting the software platform, this also includes the replacement of defective screens on ticket vending machines. This allows init to grow even deeper into its customers and improves the predictability of its sales. The Seattle experience shows how init transformed a project business into long-term recurring sales. The efficiency gains that init is achieving increase its margin.

Two strong tailwinds


The ticketing example of Seattle is radical outsourcing of transportation operations. A similar situation can currently be observed in Germany. In March 2019, Deutsche Bahn announced that software from init competitor IVU would be involved in vehicle planning. In the future, external software will be used within the core systems of Deutsche Bahn. We believe that these outsourcing projects are part of a larger trend in the sector. Public transportation is getting ever more demanding and at the same time it is becoming more difficult for public authorities to recruit enough staff. Thus, there is a very strong argument to invest more and more in software and to outsource processes to small, agile niche providers such as init or IVU. If the outsourcing thesis is correct, it is wise to offer an integrated product and solutions portfolio from ITCS, over APC, to ticketing: the simpler the outsourcing process, the better.


Nearly every day brings a new climate change horror story.  This narrative has reached both politics and the business world (note the cash inflows to ESG funds, green bonds, sustainability funds etc).  One simple lever to attack pollution and reduce CO2 emissions within cities is better public transportation. Inner-city traffic jams are harmful to the environment and slow economic activity.  Municipalities are increasingly using cheap capital to renew and expand the public infrastructure.  This is the perfect setting for innovative, agile solution providers such as init to grow quickly.

Increasingly, there are car bans both within cities and on important roads.  Germany’s ban on older diesel engines within its largest five cities is one example.  In another example, as of July 2019, the Mainkai, the street along the river in Frankfurt, is closed for a trial year; Frankfurt is considering a similar test on the lively Berger Strasse.  If such car-bans become more common within cities, it is increasingly important that the public transportation system becomes more flexible.

Why now?

In the years 2015 to 2018, there was an investment slump in ITCS systems. Many municipalities had previously made sizable investments and expansion budgets were not available. Such cycles are par for the course.  Instead of sitting out this slump, init pushed ahead with innovations and diversified its sales base. This included the HanseCom acquisition, taking a majority stake in iris, and investing in internal research projects.  This strategy had the beneficial dual effect of reducing the company's product concentration risk while making its increasingly integrated products more attractive to its customers.  As the next phase of public infrastructure investment begins, init’s future looks bright indeed.

Like many university spin-offs with a technical background, init is blessed on the one hand with inventive talent and an entrepreneurial culture, but at the same time burdened by an underdeveloped awareness of business issues. One sign of this is lax working capital management in the form of inflated inventories as the company wants to offer its customers perfect delivery capability; it also has inflated accounts receivable as it does not want to disturb its customers with systematic payment reminders. The latter was only introduced in 2019.  Much more potential could be unlocked by a more commercial owner such as private equity.

Corporate governance is not ideal. For a listed company, too many family members serve on the boards. However, we have met talented non-family board members such as CFO Jennifer Bodenseh, who has consistently been promoted within the company.


The following table[1] depicts what can happen to the margins of a business too dependent on new projects. Previously delivering a 15-20% EBIT margin, init’s margins contracted in 2015 - 2018. However, these years were also an investment phase (see the capex line) and management anticipates a resulting period of harvesting cash flows.

init is currently valued at an enterprise value of c. €250m, with a market capitalization of €234m. One could buy the entire company today, notably on a compressed margin profile, for slightly more than 12x EBITDA (2019e) or 15x EBIT (2019e). A financing bank would provide a buy-out debt package of c. 6x leverage. If an investor held the company for 4-5 years and met current market expectations, this would yield a return of 20% p.a. We model only slight improvements in working capital and capital allocation. We never assume multiple arbitrage in our LBO models, but one can make a compelling argument.

init’s current valuation appears low relative to listed competitors and comparable transactions. Competitor IVU is trading at 28x EBIT following its re-rating this year.  In 2016, the Karlsruhe-based traffic software company “PTV” was acquired for almost 30x EBIT.  This would imply that the current price of init stock should not be €23-24, but rather north of €40.

For the value of init to unfold, however, no private equity fund needs to submit a takeover bid. init must first and foremost execute operationally. Increasing professionalization should put the company on the map for many investors. In addition, the market might eventually realize that a technology like iris has much broader application potential than passenger counting, e.g. in the retail sector. If iris were to be auctioned today, we would not be surprised if it turned out to be worth more than half of the entire EV of init group, (i.e. more than €100m).

This train does not end here.

[1] source: S&P Capital IQ. FY2019ff based on broker consensus.

[2] inventory + accounts receivable – accounts payable



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"Italian liquor protection“ - Guala Closures S.p.A.

Yeah, we know: The title sounds like Al Capone during prohibition times. But believe us - these Italians make their living from entirely legal “protection activities”. From a risk-adjusted perspective we think this business model is superior to a plain vanilla mob system.

Today, we are taking a look at Italian bottle closure producer Guala Closures S.p.A. ("Guala“). 

Business model

Guala is the world market leader in aluminum closures for spirits, wine and other bottles. The Piemont-based company has 5 main product categories. Just over 40% of revenue is derived from safety closures, also called “non-refillable closures”. You know these from whiskey bottles, that will open with a loud “crack”. After that you won’t be able to connect the actual bottle cap with the sleeve around the bottleneck. 19% of sales come from aluminum screwcaps for wine bottles. Further 29% of sales are generated by classic aluminum "roll-on closures” which you might know from San Pellegrino water. The final 10% of sales are made up of complex and heavy luxury closures as well as pharma and food closures (others).

Guala has been around since 1954 and today is present on 5 continents with 29 production sites. In 2018, the company generated sales of around €543m and adjusted EBITDA of €105m. From 2008 to 2018 the company was owned by private equity firm “aPriori” [1]. Through a thoroughly executed buy & build strategy, with 13 add-on acquisitions, Guala has become a dominant global player in its sector. CEO Marco Giovannini has been with the company since 1998 and has helped turn, what could be a commodity product, into an indispensable value-add component for the beverage industry.

In numbers, the business looks as follows. You will quickly notice the “surprisingly” high EBITDA margin with a relatively low capex ratio (especially maintenance capex).

Business quality

One will only understand the margins and strength of the business after considering one specific aspect of the global spirits industry. Spirits or liquor are the fourth most counterfeited product in the world. The situation is worse only for audio/video, fashion and pharmaceuticals. According to industry association INDICAM, 12% of global spirits are believed to be counterfeited. That can happen either through refilling of empty original bottles or near perfect replication of bottles, labels and closures. The problem is most pronounced in Eastern Europe, Latin America, Asia and Africa.

The complex and multi-patented closures that Guala produces are one of the most effective lines of defense for global branded spirit producers. It’s hard to believe but for instance Guala’s closure model “1612A” has a total of 9 security components, some of which you won’t even recognize from the outside. (if you’re really interested, we can send over a technical image). This technology obviously makes it impossible to re-close an original bottle. But even if a professional counterfeiting organization wanted to perfectly copy those closures, it would probably be too expensive for them. Naturally, such security closures are more expensive than standard ones and companies like Pernod Ricard, Diageo and Bacardi (by the way all key accounts of Guala) monitor their cost base closely. The math for the branded producers, however, is more holistic than a simple gross margin per bottle. When a consumer buys a bottle of fake Johnnie Walker and, due to lower quality, wakes up with an even stronger headache than usual on the next morning, he will probably go for a different brand next time. This threat of customer loss is much more expensive than a few extra cents on the security closure. Thus, in the grand scheme of things, with a low-cost component, Guala is making a big contribution to brand hygiene for its clients. Now, remember that high EBITDA margin? It’s not so surprising any more…

Over the years, Guala has earned its market position not only through M&A, but also through technological leadership. It owns 60% of the safety closure market for spirits. Despite being six times bigger than the next competitor, the company is innovating. Recently, they launched the first RFID chip enabled closure in cooperation with Malibu liqueur.

All these dynamics drive Guala’s 5-10% organic growth. In 2018, the company achieved 6.5% organic, fx-adjusted growth. The first quarter 2019 also kicked off nicely with 7.1% organic, fx-adjusted sales growth.

Growth drivers

The spirits market in the developed world is not incredibly exciting. Large mainstream products grow with inflation through gradual price increases. The big producers generate growth by making their product portfolio more complex and thus become better at precisely harvesting customers’ willingness to pay. (Does any of our readers know how many different label colors Johnnie Walker has by now?) Guala wins on several levels. More and more producers realize that it makes sense to roll out safety closures across the board. The market is still fragmented and has standardization potential. Ballantine’s whiskey for example decided to use only one type of closure around the world (a safety closure, of course). Only few closure producers can deliver on that scale. The fragmented market further provides opportunity for more buy & build. Guala’s latest acquisition of Scottish UCP added Johnnie Walker to its client portfolio. In addition, important purchase synergies could be realized. UCP used to buy aluminum sheets in all kinds of different sizes. Guala buys aluminum rolls and cuts them down as needed. If you use enough aluminum, this is much cheaper.

We haven’t even talked about wine. Guala owns 30% of the global aluminum screwcap market. Penetration of screwcaps is increasing. On a global scale it currently stands at 22% and the potential is large. China, for example, has a penetration of 8%, while the UK, Australia and Germany stand at 85%, 70% and 44% respectively.


Competitors and packaging players such as Amcor, Orora or Berry Global trade between 8-11x (13-15x) 2019e EBITDA (EBIT). With an expected year-end net debt of €450m, this would imply a share price of €7-12 for Guala. Potential upside to the current share price (€6.40) ranges from +10% to +90%.

If you were to expand the peer group based on the underlying quality of the business model, one could argue that flavor & fragrance players like Symrise, IFF or Givaudan would also make for a good comp set.

Common features include:

  • products are sold into robust, non-cyclical end markets (there is in fact customer overlap between the closure and F&F industry)
  • organic growth drivers lead to mid- to high single digit growth
  • ability to generate sustainable EBITDA margins around 20% and high free cash flows
  • the products are a fraction of the overall bill of materials for end products but have a significant impact on end-customer perception
  • once installed the products are hard to replace without changing customer perception
  • interesting buy & build opportunities

Despite all similarities, there is significant discrepancy when it comes to valuation. Symrise trades on 19x EBITDA and 27x EBIT (2019e). Guala stands at 7.5x and 11x.

What we also find interesting is the fact that at just over 7x EBITDA and a leverage ratio of 4x, Guala looks like a textbook LBO (maybe a bit conservatively levered). Just the process of deleveraging over the next 3-4 years should yield a 20% IRR – you don’t even need a multiple rerating. We talked to bankers and heard that there would be a willingness to lever the business up to 7x EBITDA. This means that you could buy the whole business at a significant premium to its current valuation and still expect a decent return.

How did this opportunity come about?

We believe that we are looking at a suboptimal private equity exit that was followed by a few unfortunate events. PE funds have a typical lifetime of 10 years. As Guala was acquired in 2008, we speculate that pressure to exit the business had been mounting in 2017. Reading the news coverage from 2017, we understand that there were quite a few interested parties, but a final agreement wasn’t reached.[2] Hence, the company ended up in an Italian Special Purpose Acquisition Company (SPAC), presumably associated with CEO Giovannini. SPACs are common in Italy and we would describe them as "listed cash boxes“ through which companies can enter the public markets through the backdoor. SPACs are typically funded by old Italian industrial money and some retail investors. Guala’s entry into the public markets in August 2018 couldn’t have been much worse. The company was first hit by high aluminum prices and then by poor wine markets in Oceania caused by a bad harvest. (Guala has overcompensated the aluminum prices already through price increases in Q1 2019). Both events pushed EBITDA margin under its normal level of 20%. This turn of events made for a nasty overall picture just months after going public. The stock hadn’t been placed with a broad European investor base and many investors were scared out of the stock immediately without enough buyers on the other side to provide liquidity. The price declined from an initial €10 to €5.34. With 2019 Q1 results the price has been starting to stabilize again over €6.

What can we say – with such a company it probably makes sense to wait for further percentage points…

[1] Former private equity division of Credit Suisse

[2] https://www.reuters.com/article/guala-closures-ma/italys-guala-boss-puts-auction-on-hold-with-own-bid-plan-sources-idUSL8N1O44O6



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“A Royal Kegstand” - Majestic Wine plc

Those of you who have been following us know that we are not fans of stationary retail (Hi Gerry!).  But there is more in this bottle than meets the eye.  Majestic is best known for its just over 200 wine store outlets across the UK (we will call this part of the business “MR”). The best comp is German “Jacques’ Weindepot”. MR is the leading specialist wine retailer in the UK. The outlets look more like wine warehouses in non-prime locations than high-street stores. The typical customer drives to an MR outlet every three months or so and loads the back of her SUV to be well-stocked with wine for a while.

Luckily there is more to the business than this. Majestic consists of two completely different divisions.[1] Besides the retail division Majestic has "Naked Wines” ("NW“). NW was acquired in 2015 for c. GBP70m. A key asset which entered the firm with that acquisition was NW founder and CEO, Rowan Gormley, who subsequently became CEO of the entire Majestic Group. NW runs an innovative direct-to-consumer wine club which is revolutionizing the classic supply chain of the global wine industry with its various intermediaries and indirect order processes. It connects consumers directly with vintners. The takeover of NW was a picture-perfect example of: “if you can’t beat them - join them.”

Majestic Retail

MR is active in the highly competitive wine retailing sector. The business model is under pressure from a variety of competitors. MR sells at affordable to upper middle price points. On average, customers of MR are not high-end wine experts but people who appreciate good wine and are willing to pay a reasonable price for it. Competition thus includes increasingly aggressive supermarkets and even discount retailers. If you, like we do, regularly shop at ALDI, you will have noticed that the wine aisle has been through upgrade cycles for quite a few years now and you can get much more than the good old “headache in a box”. Discounters themselves are in heavy competition and are always looking for opportunities to give their outlets a more upscale experience. While the customer groups are not perfectly congruent, there is some overlap. Moreover, digitization does not spare the wine industry. The number of online wine stores has been increasing. Especially for consumers who buy wine by the case, home delivery is an attractive value proposition. While this all sounds terrible, we believe that we are still early in the cycle of creative destruction. MR is flat on revenue and according to management should generate roughly GBP20m of EBITDA in 2019.

Naked Wines

NW was founded in 2008 by Rowan Gormley. Rowan is a serial entrepreneur and previously built Virgin Wines and Virgin Money. Today, NW is available in the USA, UK and Australia, while long-term the US will be the most important market due to volume and an attractive price point.

On the website www.nakedwines.com customers can register as Angels. As an Angel you will be funding at least GBP20 monthly into your account and can use that credit to buy wines from mostly tiny vineyards across the world. The benefit of being an Angel is that you will be getting major discounts on the wines of the roundabout 120 vineyards that are on the NW platform. Some of the vineyards produce a very limited number of bottles. This model creates benefits both for consumers and producers. One of the key challenges that small vineyards face is a lack of sales visibility. A trip to one of the world’s most important wine trade fairs in Duesseldorf (“ProWein”) makes the problem tangible. Talk to the owner of a tiny vineyard in Uruguay and you will learn about how the guy boards a flight to Germany once a year and approaches random passer-by importers at his stand. The fair happens every year in March. The wine that is tasted at that fair has been made from grapes that were harvested many months, perhaps years ago. The vineyard thus needs to plan its capex and working capital far in advance. For us finance people this is nauseating. NW is part of the cure as its platform connects customers with producers at a much earlier stage in the production cycle. NW collects funds and orders, and is able to provide more visibility to vintners. Furthermore, winemakers receive direct customer feedback through the social networking part of the platform and are thus closer than ever to their end-markets.

The advantages for customers are obvious. By skipping the many intermediate salesmen, consumers get access to unknown, niche wines. The ability to directly interact with winemakers equips customers with the input to modestly brag and tell a story about the wine when drinking with friends. NW is thus both economically as well as psychologically elegant.

NW has only been around for just over a decade; its underlying profitability is hidden behind growth investments booked as operating expenses. This profile is common among online business models like Zalando, Takeaway.com or Hellofresh. Here, revenue growth is fueled by aggressive discounting. If you live in New York, you will regularly be bombarded with Hellofresh vouchers in your mailbox… During a conversation with Rowan Gormley you will quickly notice that he is not a fan of this shotgun approach. His market penetration approach is marked by a series of small A-B tests. He told us that on average he will be running 15-20 experiments with small investment amounts. Approaches that don’t work are killed ruthlessly and those that do will be backed with more resources. This reminds us a bit of Jeff Bezos.

This style of gradual incremental marketing spending leads to growth rates of 10-15% - modestly lower than the online comps previously mentioned.[2] NW does, however, nail down the most valuable customers (with high Customer Lifetime Value “CLV”) and has lower churn rates of newly acquired customers. That way, every year NW acquires new cohorts of customers with repeat sales. The following chart illustrates this:

In 2018, NW invested GBP14m into new customer acquisition. In 2019, this will increase to GBP20m, which temporarily depresses earnings but generates sustainable value going forward. So far, Majestic has produced the following unadjusted financial results:[3] 

How value is created

We can’t really tell whether Majestic was smart or lucky but with the acquisition of NW.  Nonetheless they acquired a digital powerhouse and dynamic management team which appreciates the dangers of traditional retailing.  Rowan holds just over 6% of the company’s equity, draws a sub-standard salary and regularly rejects a salary increase that the supervisory board wants to “burden” him with.

On March 25th, 2019[4]  Majestic announced “strategic considerations” for MR. The board will choose between freeing up capital from the MR division or keeping it and trying to convert as many customers as possible from MR to NW, as long as MR is generating cash flow. In a conversation with Rowan, he told us that this is an unemotional decision based on NPV (especially the sale price of MR) – he is not attached to the MR outlets. If Majestic thinks they can generate more shareholder value by converting customers, then they will keep MR.

What is all this worth?

Majestic as a group is valued with an enterprise value of c. 210GBP and a market cap of GBP190m.

Management told us MR could generate about GBP20m in 2019. Looking at the M&A landscape one might put a 5-6x EBITDA multiple on the business. There is still a decent cohort of PE houses willing to take on retail businesses at that multiple. In a conservative case you could value MR at GBP80-90m. SkyNews[5] recently reported that two private equity firms, OpCapita and Fortress, are interested. First rumors point to a valuation of around GBP100m.

The tricky question is valuing NW. The company was acquired in 2015 (in a much lower valuation environment) for GBP70m. Sales have more than doubled since then (at acquisition GBP80m sales) which gives us a first datapoint. In 2019, consensus estimates suggest that NW could generate GBP180m in sales and yield GBP10m EBIT. According to Majestic that includes GBP20m of growth investments. If you give their statement only 50% credit, an adjusted EBIT for NW would be GBP20m. The business thus has the potential to generate a 11% EBIT margin and is growing at 10-15% p.a. Hawesko, the owner of German Jacques’ Weindepot trades on 15x 2019e EBIT. Hawesko EBIT margin is only 6% and growth rates are around 5% p.a. Though we believe NW is far more future-oriented, it does give us a further data point

Our conservative valuation approach for the group includes the following safety margins:

  • Only GBP80m valuation for MR
  • We apply the same sales multiple for the valuation of NW as manifested in the 2015 takeover and ignore the fact that the business has reached critical mass with positive operating leverage
  • We ignore the two other divisions "Commercial“ and "Lay & Wheeler“ for which one would still get paid in a trade sale (maybe GBP10-15m)

This gives us a share price of roughly GBP 3.00 versus the share price today: around GBP 2.63

Removing the safety margins gives us a share price of GBP 7.50

Why is Majestic trading so cheaply? The name of the group and its retail legacy scares off many potential investors.  Furthermore, the true underlying profitability of the business is not easy to read and disguises the intrinsic value of the group. Also, the growth rates at NW are not as impressive as other e-commerce businesses. Finally, Majestic shares have also been hit with an undifferentiated broad sell-off of British small caps post-BREXIT referendum. All this contributed to the decline in the shares from their high of GBP 4.70 to their low of GBP 2.20.

Looks like we need to let this one breath a bit.  Upon closer inspection, the catalysts have long legs and the bouquet hints at a robust value creation.


[1] There are in fact two further divisions which we will neglect in the spirit of staying concise. One of them is called „Commercial“, which is wine wholesale. The other is a wine wholesale and advisory business that works with corporate customers, events and catering firms. („Lay & Wheeler“). Both divisions exhibit flat revenues, are profitable and thus support themselves.

[2] 2019 H1: 14% revenue growth at NW. By country: UK 6.9%, USA 19.3%, Australia 18.6%

[3] Source: S&P CapitalIQ

[4] https://otp.investis.com/clients/uk/majestic_wine/rns/regulatory-story.aspx?cid=1391&newsid=1242384

[5] https://news.sky.com/story/former-comet-owner-wants-to-toast-100m-majestic-wines-deal-11724788



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“Autonomous cars and a little bit of marijuana.” - OSRAM LICHT AG

Imagine you used to sell lightbulbs and now your products enable self-driving cars to recognize pedestrians and manage the distance from other cars.  You’re not buying it?  The capital markets are currently struggling with the story too.  While others argue about it, the whole thing can be picked up for 5x EBITDA or 9x EBIT…

A short introduction

The story of Osram Licht AG begins before WWI.  Osram was one of the early commercial lightbulb producers and rode that wave to become an enterprise of respectable size.  Osram became a full subsidiary of Siemens in 1978.  Fast forward to 2013 - Siemens was in the middle of conducting a full-scope portfolio review and spun-off Osram.

Cleanup efforts

Enjoying its newly gained independence, Osram began to transform with great farsightedness.  In 2015, Osram announced the carve-out of its consumer business with traditional lightbulbs and LED lights for general lighting applications. At the time, traditional lightbulbs had been suffering from declines for years while LED lights were not able to make up for the loss due to longer replacement cycles.  The carved-out business was renamed Ledvance and sold to a Chinese consortium on March 1st, 2017. 

A new Osram

With €4 billion of sales, Osram specializes in LEDs, which are smaller, more efficient, and cheaper over the product lifetime than substitutes.  LEDs can generate any wavelength, adjust dynamically, and fit into small devices where traditional lamps would never fit, enabling new fields of application such as photonics:  surface treatment, sensing, plants & horticulture, and human therapy.  The main difference between an LED and a standard semi-conductor is the high-tech functionality of its packaging - an LED emits photons.  Osram’s strategic goal is to become a global photonics and lighting systems player.

The company has three business units:

  1. Specialty Lighting (“SL”/€2.2 bn sales, €281m LTM EBITDA).  SL sells lighting systems for automotive and specialty applications.  LEDs continue to rapidly penetrate the global automotive market.  CEO Berlien estimates that the transition to LED headlamps is only approximately halfway through in new models.  The profitability of the division is above typical automotive suppliers at 13% EBITDA.
  2. Lighting Solutions & Systems (“LSS” /€954m sales, -€95m LTM EBITDA). The LSS division offers light management systems, control systems and luminaires.  The products including relevant serviced are used for advertising, bridges and similar large projects. The business has been stagnating for years and is unprofitable.  Projects tend to be highly bespoke which prevents economies of scale.  Zumtobel, a European competitor, has a revenue development and profitability that confirms the difficult market environment.  In August 2018, Osram announced its intention to sell the luminaires business.  Luminaires are low margin lighting components that are used for large projects and decorative lighting.  We assume that it’s burning cash.  Its intention to exit luminaires underlines Osram’s willingness to move away from low margin end products, towards the more knowhow intensive part of the lighting industry.
  3. Opto Semiconductors (“OS” /€1.7 bn sales, €428m LTM EBITDA).  OS is Osram’s future.  Opto-semiconductors are light emitting semiconductors which are the basis of many modern lighting and sensing applications. The OS division has grown at a sales CAGR >10% and recorded an EBITDA margin >20% since 2007.  Osram is the #1 emitter player including LED, VCSEL, Laser, MiniLED and uLED.  Osram scientists file on average 3 patents per day.  Within the general industrial space, the application fields of visualisation, sensing, and treatment are growing at 15% per year.  This includes 3D sensing (gaining information on objects around the sensor e.g. for security or positioning), vital sign monitoring, high resolution video walls, mobile projection, robotic sensing, drones, and surveillance.

Allocating capital

Semiconductor manufacturing is at the heart of Osram’s transformation. In November 2015, Osram announced its plan to build the world’s most modern semiconductor factory in Kulim, Malaysia.  Up to €1bn was to be invested in the project and capital markets reacted skeptically.  The big bet, however, is now paying off.  The factory was successfully commissioned in November 2017 without delays and is already generating revenue.  Out of this factory, Osram produces greater volume at higher quality and lower cost than its competitors.  As cash-return oriented investors, we applaud companies that can profitably invest capital internally and gain a large edge on competitors.  Osram is one of those companies.

Future applications

In a variety of future technologies, Osram has an excellent position.  Amongst those are LIDAR (Light Detection and Ranging), which is radar with lightwaves (photonics) instead of radiowaves.  One of its applications is environment recognition for cars.  LIDAR is thus a core technology for autonomous driving. Osram has also developed smart LED headlights for cars that consist of thousands of pixels; when another car is approaching, the headlights recognize that and shut off exactly those pixels that could potentially blind the other driver.  With this technology, one could always drive with high beam on.  Furthermore, in May 2018, Osram acquired the Austin, Texas based company Fluence Bioengineering. The company develops LED systems for horticulture. Their technology enables energy and resource-saving Vertical Farming.  The business is growing attractively in part thanks to the flourishing marijuana industry in North America. 

Why now?

Osram’s market cap stood at €7.5bn in January 2018.  Two profit warnings later, a mere €3.3bn is left. The first warning in April was triggered by a higher dollar and higher restructuring costs.  The second profit warning in June was due to the German auto OEMs revising downward their expectations for 2H’18 volumes.  Faced with slower sales and earnings growth than originally planned for 2018, investors sent the share price from €79 to €34.  The chart below demonstrates that this was more of a de-rating than an earnings-induced correction.

The irony of the de-rating is that the timing broadly coincides with the company’s successful shift toward new technologies, just as the Kulim OS plant ramps up.  In many ways, the new Osram more closely resembles semi-conductor peers such as Infineon (15x NTM EBIT) than automotive tier-ones (c. 7x NTM EBIT), yet has traded down to this level over the course of the year.

Investors remain concerned about a potential slowdown in automotive volumes as well as implications of a trade war on the global supply chain. Purchasing managers around the world are hesitant because it is often not clear which products and components are impacted by the tariffs. The trade war has begun to impair the systems of globally producing technology enterprises.

Nonetheless, the current situation is interesting for investors with a long-term view.  They should consider:

In 5 years, will there be more cars with intelligent LED lighting?

In 5 years, will there be more cars with environment recognition technology such as LIDAR?

In 5 years, will it be necessary to save space and resources within the agricultural sector?

Has Osram put itself in a position to capitalize from this development with its recent capex?

We believe the answer to all these questions is “yes.”  To get a grip on the current valuation of Osram, compare it to a company that has also been hit by the trade war and also has a very attractive positioning for the medium and long-term: KION.  The company manufactures forklifts and automated warehouse equipment which is indispensable for a world increasingly driven by ecommerce.  KION is priced at 12x of NTM EBIT (next 12-month).  Osram trades at 25% discount.  In fact, we think both companies are undervalued and reflect a significant fear discount.  Previously mentioned competitor Zumtobel trades at 20x NTM EBIT but is not nearly as attractively positioned for the future.

Health warning:  softness in auto volumes could lead to further near-term drawdowns for Osram.  However, if you can afford to take the long view, we think a company packed with long-term growth drivers valued at a single digit EBIT multiple is an interesting opportunity. You don’t need Uber, Google or Tesla for high-tech megatrend exposure. Go with the boring gals and guys from Germany that used to sell lightbulbs.



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