Good question, my approach is not perfect, but I just take equity + LT debt & leases - cash. Since I use the same simple approach for most companies, I am happy as long as I am directionally right.
For my own journey, I stick with napkin math over complicated spreadsheets. My worst mistakes have often come with the most detailed spreadsheet.
Hi Ole, thank you for the write-up. MBB popped up on my radar a while back, and (probably like most), I built a quick SOTP to decide whether to explore it further. This indicated minimal upside as I recall, but it would not be stupid to think of the SOTP as a rough downside protection with an option on a cyclical upturn? Curious about whether you’ve thought of it this way or done a SOTP also. I was also concerned about the underlying businesses, which seem to be in very competitive markets.
I rarely do SOTP on holding companies, because I want to also judge the capital allocators ability to compound its incoming cash flow. I’m not that worried about a discount to net asset value.
My analysis suggest MBB will receive a decent cash flow yield over the coming 3-5 years (eg. margin recovery, Vorwerk order backlog, EV tailwind Aumann), which can be reinvested. Also, their net cash position will enable them to deploy quite large sums of cashflows, at hopefully, decent returns.
Looking at the family-run holding company‘s track-record of value creation, my thesis depends on their ability to continue doing so. If I see them deploy capital at low ROIC or fundamentals of most of their holdings detoriate (over a market cycle) I will reassess my thesis and consider selling. I would be more worried about cyclicality and competition owning the subsidiaries individually. It’s also a question when the market has priced these factors into the mentioned companies.
If the holding company can compound its EBIT/share from 10 to let’s say 25 by 2030, I’d say it’s a good chance the stock price is not at €100 anymore. Similarly, if the consolidated earnings fall or fluctuates a lot, so will the holding, over the long run.
Thanks for a very interesting write-up. I took a closer look and had a couple of questions.
I'm a bit struggling with getting to your valuation of 5x EBIT. Market cap of 600m, less net cash of 282m, plus minority of 205m I get EV of 528m. Assuming 70m ebit, that's 7.5x EBIT.
I also like buying companies that are cheap on equity valuation because that's what we are buying. MBB doesn't look that good there.. Even assuming earnings after minorities nearly triple this year to c. 30m, it's still trading on 20x P/E. Not screaming cheap. How do you think about this?
But I do agree that it's an interesting situation. It's good to see management in Europe that is at least trying to allocate capital efficiently.
Hi Loki, thanks! & thanks for a couple of great questions!
You are completely right on the multiple, my bad. I should have specified using 2024 numbers, but see I must have mistaken it with the EBITDA guide of ~100M there. EBIT will be less, so your multiple is more correct. EV/EBITDA of 5x is more correct
Since the cash position could be used for example as a special dividend, or more likely for M&A, I think it is an unfair comparison to a company loaded with debt for example. If we consider that MBB have the optionality of loading up debt, they could probably boost Earnings per share quite significantly if they chose this route. Let´s say they go to 3x net debt to EBITDA. Potentially ~300M + ~250M from their net cash position they could invest in M&A. Let´s say they acquire companies for 7x EBITDA, this boost EBITDA by another ~80%. If you do a similar exercise on EPS, this would equal ~12x PE. You may be right that it´s unfair to discount all the net cash position, on the other hand, I do believe it is relevant to use EV here.
While debt help boost ROE for you as a shareholder, the net cash position also comes with some other benefits. One, being their ability to be aggressive when they see fit: ex. increase ownership stake in Vorwerk and Aumann when these got dirt cheap earlier, including buying up their own stock. Let´s see what the IRR on these were, my guestimate is very good. Management also highlights how equity-based financing has some advantages in a high interest rate environment. I am still unsure if MBB is a preferred buyer and can demonstrate higher ROIC than others, looking at the Vorwerk acquisition, it seem like they may be.
Hi Ole,
thanks for this great write-up.
How do you get to your capital employed numbers? When I calculate it using the annual report I get different figures.
Formula used
ROCE: NOPAT / capital employed (total assets-current liabilities)
Hi Andreas,
Thanks for the kind Words!
Good question, my approach is not perfect, but I just take equity + LT debt & leases - cash. Since I use the same simple approach for most companies, I am happy as long as I am directionally right.
For my own journey, I stick with napkin math over complicated spreadsheets. My worst mistakes have often come with the most detailed spreadsheet.
What do you use in the numerator?
Hi Ole, thank you for the write-up. MBB popped up on my radar a while back, and (probably like most), I built a quick SOTP to decide whether to explore it further. This indicated minimal upside as I recall, but it would not be stupid to think of the SOTP as a rough downside protection with an option on a cyclical upturn? Curious about whether you’ve thought of it this way or done a SOTP also. I was also concerned about the underlying businesses, which seem to be in very competitive markets.
Best,
Johan
Hi Johan, glad you liked it.
I rarely do SOTP on holding companies, because I want to also judge the capital allocators ability to compound its incoming cash flow. I’m not that worried about a discount to net asset value.
My analysis suggest MBB will receive a decent cash flow yield over the coming 3-5 years (eg. margin recovery, Vorwerk order backlog, EV tailwind Aumann), which can be reinvested. Also, their net cash position will enable them to deploy quite large sums of cashflows, at hopefully, decent returns.
Looking at the family-run holding company‘s track-record of value creation, my thesis depends on their ability to continue doing so. If I see them deploy capital at low ROIC or fundamentals of most of their holdings detoriate (over a market cycle) I will reassess my thesis and consider selling. I would be more worried about cyclicality and competition owning the subsidiaries individually. It’s also a question when the market has priced these factors into the mentioned companies.
If the holding company can compound its EBIT/share from 10 to let’s say 25 by 2030, I’d say it’s a good chance the stock price is not at €100 anymore. Similarly, if the consolidated earnings fall or fluctuates a lot, so will the holding, over the long run.
Understood. Best of luck!
Thanks for a very interesting write-up. I took a closer look and had a couple of questions.
I'm a bit struggling with getting to your valuation of 5x EBIT. Market cap of 600m, less net cash of 282m, plus minority of 205m I get EV of 528m. Assuming 70m ebit, that's 7.5x EBIT.
I also like buying companies that are cheap on equity valuation because that's what we are buying. MBB doesn't look that good there.. Even assuming earnings after minorities nearly triple this year to c. 30m, it's still trading on 20x P/E. Not screaming cheap. How do you think about this?
But I do agree that it's an interesting situation. It's good to see management in Europe that is at least trying to allocate capital efficiently.
Hi Loki, thanks! & thanks for a couple of great questions!
You are completely right on the multiple, my bad. I should have specified using 2024 numbers, but see I must have mistaken it with the EBITDA guide of ~100M there. EBIT will be less, so your multiple is more correct. EV/EBITDA of 5x is more correct
Since the cash position could be used for example as a special dividend, or more likely for M&A, I think it is an unfair comparison to a company loaded with debt for example. If we consider that MBB have the optionality of loading up debt, they could probably boost Earnings per share quite significantly if they chose this route. Let´s say they go to 3x net debt to EBITDA. Potentially ~300M + ~250M from their net cash position they could invest in M&A. Let´s say they acquire companies for 7x EBITDA, this boost EBITDA by another ~80%. If you do a similar exercise on EPS, this would equal ~12x PE. You may be right that it´s unfair to discount all the net cash position, on the other hand, I do believe it is relevant to use EV here.
While debt help boost ROE for you as a shareholder, the net cash position also comes with some other benefits. One, being their ability to be aggressive when they see fit: ex. increase ownership stake in Vorwerk and Aumann when these got dirt cheap earlier, including buying up their own stock. Let´s see what the IRR on these were, my guestimate is very good. Management also highlights how equity-based financing has some advantages in a high interest rate environment. I am still unsure if MBB is a preferred buyer and can demonstrate higher ROIC than others, looking at the Vorwerk acquisition, it seem like they may be.
Will be interesting to see how they execute.
Cheers Ole