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Seven months, seven acquisitions

Mutares 22 August 2019 Update
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Mutares

Seven months, seven acquisitions

Industrials

Scale research report - Update

22 August 2019

Price

€8.73

Market cap

€133m

Share price graph

Share details

Code

MUX

Listing

Deutsche Börse Scale

Shares in issue

15.2m

Last reported net debt at 30 June 2019

€4.4m

Business description

Founded and listed in 2008, Mutares acquires special situation companies that are underperforming and can be turned around through financial and operational restructuring. It currently owns multiple companies across three focus industries.

Bull

Exposure to a portfolio of potentially high-growth recovery companies actively managed by experienced industry professionals.

Prospect of high dividends following exits.

Trading at discount to NAV.

Bear

Exposure to German industrial sector experiencing headwinds from economic slowdown.

Turnaround investments are inherently risky.

Risk associated with narrow sector focus.

Analyst

Milosz Papst

+44 (0)20 3077 5700

Mutares (MUX) specializes in restructuring distressed companies and has been very active in M&A this year, with seven deals announced to date. It has concluded two platform investments in the automotive and mobility segment and acquired two goods and services platforms. This provides additional diversification following the stronger focus on expanding the engineering and technology business in FY18. That said, the latter remains MUX’s key value driver for now (64% of NAV at end-June 2019) and was further expanded by three add-on acquisitions to the Donges Group completed so far in FY19.

H119 results reflect continued portfolio ramp-up

MUX reported adjusted EBITDA of €0.0m in H119 (vs €9.3m in H118), mostly due to a negative contribution from new add-on investments (particularly in the engineering and technology segment). Nevertheless, restructuring measures implemented in the key platforms in this segment (Donges, Balcke-Dürr and Gemini) are gradually bearing fruit, according to management. The automotive and mobility segment continues to be affected by macro and sector headwinds (including weak order intake), which triggered an efficiency improvement plan at STS. Group revenues were down 5% y-o-y to €443.2m in H119 as revenues lost from disposals outweighed partial contributions from recently acquired businesses.

Good base for the ‘buy and build’ strategy

Following the recent transactions, MUX’s portfolio now comprises 13 holdings broadly equally allocated to three segments (excluding add-ons to investment platforms). Its deal activity is already ahead of its last guidance, published with the FY18 results release (ie three new investments in 2019 on top of two completed). MUX still expects group revenues in excess of €1.0bn in 2019 (though its previous guidance of significantly higher adjusted EBITDA was not reiterated) and further transactions this year based on its solid deal pipeline. We believe the current economic slowdown should provide opportunities for investment as the number of companies in distress increases.

Valuation: Trading at a 31% discount to NAV

MUX’s last reported NAV per share stands at €12.85 (down c 6% from €13.32 at end-2018), with shares trading at a 31% discount to this NAV at present. The company plans to sustain an attractive dividend policy and recently paid out a dividend of €1.00 per share, which currently represents a yield of c 11.5%.

Consensus estimates*

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

899.7

35.5

2.85

1.00

3.1

11.5

12/18

865.1

14.8

0.96

1.00

9.1

11.5

12/19e

1,029.9

23.2

1.79

0.95

4.9

10.8

12/20e

1,177.1

29.2

1.91

0.92

4.6

10.6

Source: Refinitiv, 19 August 2019. Note: *Based on the estimates of five brokers.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials: EBITDA at zero due to recent add-ons

Mutares acquires majority positions in distressed companies, which are then sold after successful turnaround. It predominantly follows the buy-and-build strategy to extract synergy and value, making ‘add-on’ investments to its ‘platform’ companies. These are consolidated in full, so the financial statements reflect the combined state of the whole portfolio, including both performing companies and those undergoing restructuring processes. In H119, MUX reported a decrease in adjusted EBITDA to €0.0m (€9.3m in H118), with acquisitions performed by the company in the last 12 months contributing a negative €6.0m to operating losses as they continue their restructuring process. However, it is important to note that the Mutares group posted a sequential improvement with adjusted EBITDA at €3.5m in Q219 vs a loss of €3.5m in Q119. MUX reported a 5% y-o-y decline in revenues to €443.2m in H119, mainly due to the deconsolidation of BSL (disposal), Artmadis and Zanders (insolvencies), which contributed €78.9m revenues to the H118 top-line. This more than offset the positive contribution from acquisitions completed over the last 12 months (with a number of these closed towards the end of Q2 or in July). Please note that MUX implemented IFRS 16 for the first time (with no adjustments to comparable H118 figures). This led to the recognition of €87.9m rights of use assets on the balance sheet (with no impact on NAV though) and contributed €7.3m to H119 EBITDA.

Exhibit 1: H119 financial highlights

€m unless otherwise stated

H119

H118

% y-o-y

Revenues

443.2

467.0

(5%)

Reduction or increase of finished goods and work in progress

12.8

(6.9)

N/M

Other operating income

77.1

53.9

43%

Cost of materials

(277.7)

(287.3)

(3%)

Personnel expenses

(133.7)

(125.9)

6%

Other operating expenses

(54.6)

(79.2)

(31%)

EBITDA

67.1

21.6

211%

EBITDA margin

15.1%

4.6%

10.5pp

o/w Income from bargain purchases

70.8

5.8

N/M

o/w Restructuring and other non-recurring expenses

(3.7)

(32.9)

N/M

o/w Deconsolidation effects

0.0

39.4

N/M

Adjusted EBITDA

0.0

9.3

N/M

Adjusted EBITDA margin

0.0%

2.0%

N/M

D&A

(21.3)

(16.5)

29%

Interest and similar income

0.0

0.0

N/M

Interest and similar expenses

(5.6)

(3.3)

70%

Pre-tax profit

40.5

2.5

N/M

Income taxes

(3.9)

(4.0)

(3%)

Minority adjustment

0.8

0.7

14%

Group share of consolidated income

37.4

(0.8)

N/M

Net margin

8.4%

N/M

N/M

EPS (€)

2.45

(0.05)

N/M

Source: Mutares accounts

The year-on-year adjusted EBITDA decline at group level in H119 was mainly attributable to the engineering and technology segment, which posted a €6.9m loss compared to a €0.1m loss in H118. This was primarily due to a negative contribution from add-ons to Donges Group and Gemini Rail Group of €4.7m. Having said that, MUX’s main platforms seem to be progressing well with their strategic objectives and turnaround. This includes for instance the build-up of a strong order pipeline at both Balcke-Dürr and Gemini Rail Group, as well as the successful turnaround of Kalzip from the Donges Group (with July being the fifth profitable month in a row). Following the completion of five add-on acquisitions since being taken over by MUX in November 2017, Donges Group now has an extensive production footprint (organised in competence centres) as well as market exposure in Europe. Moreover, it plans to realise several synergies in terms of products and markets between its consolidated entities, eg Normek and RBS accessing western Europe through the sales networks of Donges, Kalzip and FDT or Kalzip, FDT and Norsik accessing the Nordic markets through Normek and RBS. On the back of a number of add-on investments (especially to the Donges Group), segment revenues went up 87% y-o-y to €184.8m in H119.

Exhibit 2: Segment details

 

Revenues (€m)

Adjusted EBITDA (€m)

NAV (€m)

Segment

H119

H118

y-o-y

H119

H118

y-o-y

H119

FY18

ytd

Automotive & Mobility

214.5

237.2

(10%)

11.0

13.9

(21%)

44.8

56.2

(20%)

Engineering & Technology

184.8

98.7

87%

(6.9)

(0.1)

N/M

125.0

104.6

20%

Goods & Services

43.9

52.3

(16%)

(2.0)

1.8

N/M

16.5

21.0

(21%)

Other*

0.0

78.8

N/M

(2.1)

(6.3)

N/M

9.4

21.2

(55%)

Mutares Group

443.2

388.1

14%

0.0

9.3

N/M

195.7

202.9

(4%)

Source: Mutares accounts. Note: *Includes corporate/consolidation effects and companies deconsolidated during FY18 that were not assigned in new segmental split introduced at end-2018. NAV includes net cash at holding level.

MUX’s main earnings contributor remains the automotive and mobility segment, delivering an adjusted EBITDA of €11.0m in H119. This is largely attributable to the STS Group where MUX holds a 65% stake, following successful partial exit via an IPO in 2018. STS manufacturers composite, acoustic and thermal components for global automotive industry. MUX acquired STS in 2013 as a loss-making entity and developed it with three add-ons. STS’s fully consolidated EBITDA stood at €10.1m in H119 while it generated 44% of MUX group’s revenues (€194m) following an 11% y-o-y decrease in H119. It is worth noting that the recently acquired platform investment in the automotive and mobility segment (Plati) contributed only one month to group results, while the new platform KICO has not been consolidated in H119 yet (deal signed in July 2019). The segment’s adjusted EBITDA declined 21% yoy on the back of lower revenues due to weaker demand in the European and Chinese automotive sectors. As a result, STS is now implementing a number of improvement initiatives (including but not limited to cost savings) that are expected to enhance profitability by c €20m in the low production volumes environment. During discussions with STS’s management, MUX is putting emphasis on the reduction of working capital by c €10–20m until the end of the year. STS is exploring a number of financing possibilities, such as factoring or external debt. However, MUX is confident that the subsidiary will not require a capital infusion from the parent company. STS’s net financial debt to last 12 months (LTM) adjusted EBITDA stands at 1.9x (Edison estimates based on company data).

The goods and services segment posted a €2.0m EBITDA loss in H119 (vs a €1.8m profit in H118), as key portfolio holdings face weaker consumer demand and challenging market conditions. Segment revenues were down 16% with a top line decline across all companies, partially resulting from optimisation measures. The segment was expanded by two platform investments (keeeper and TrefilUnion) as discussed below.

MUX focuses on the adjusted EBITDA performance after removing the distorting impact of gains or losses on acquisitions, disposals and liquidations, as well as non-recurring expenses. Its reported EBITDA came in at €67.1m in H119 compared to €21.6m in H118, assisted by €70.8m gains on bargain purchases. MUX closed five acquisitions in H119, of which three were new platform investments with total book value of net assets at €59.4m acquired for one euro each.

Busy with new acquisitions

MUX has already announced seven acquisitions in 2019, four of which are new ‘platforms’ (described below) and three are add-ons to the Donges Group. The latter includes Normek and FDT, as well as the agreed investment in Ruukki expected to close at the turn of 2019/20.

In May 2019, MUX completed the acquisition of TrefilUnion as a new platform investment in the goods and services segment, which represents a typical deal under MUX’s strategy. The company is a manufacturer of spring steel and wire products, mainly for the automotive, consumer and construction industries. It operates two production sites in France, employing 150 people. In 2018, the company delivered €42m in revenue, which translated into a €7m EBITDA loss. MUX aims to make the company profitable by 2021 through, among others, optimisation along the value chain, internationalisation and modernisation. This should stabilise its business and lead to higher production volumes as well as better product quality, while at the same time reducing material purchasing and indirect costs. TrefilUnion’s product range offers potential synergies with Donges’ bridge construction business.

Furthermore, MUX acquired keeeper in June 2019 to strengthen its goods and services segment. Keeeper is a manufacturer of plastic household products under both its own brand as well as label products for big supermarket chains in Europe. It generated 50% of its €64m revenue in 2018 from the DACH region, with limited export outside Europe. It operates two production sites (in Germany and Poland) where it employs c 500 people. In 2018, its EBITDA was close to zero. MUX plans to reduce keeeper’s costs (eg by optimising the company’s purchasing and value chain) and narrow its offering down to more profitable products. It also intends to leverage MUX’s injection moulding know-how. Keeeper is expected to grow its market share organically and through acquisitions.

In June 2019, MUX acquired 80% in Plati Elettroforniture from the Chinese Deren Group (which kept the remaining 20% stake). Plati represents a new platform investment in the automotive and mobility segment and may potentially realise sales and operational synergies with Elastomer Solutions (another portfolio company of MUX). Plati is an Italy-based company with subsidiaries in Poland, Ukraine and Morocco. It produces cable harnesses for a number of industries and is set to focus on vehicle wiring and healthcare devices. In 2018, Plati generated sales of €38m with a €4m EBITDA loss. MUX plans to simplify Plati’s logistics processes and eliminate loss-making products from the offer. It also sees room for improvement in work organisation and productivity.

Kirchhoff GmbH & Co. KG (KICO) was acquired after the reporting date (on 16 July 2019) for €1.0m. The transaction will be reflected in Q319 results and will strengthen MUX’s automotive and mobility segment as a new platform investment. KICO is a manufacturer of components for passenger cars, such as hinges, locking systems and mechatronic systems. It employs 830 employees in its two production sites in Germany and Poland, as well as the distribution hub in Mexico. The company generated €101m revenues in 2018.

Valuation: NAV built on add-ons

MUX’s portfolio NAV at end-June 2019 amounted to €195.7m (or €12.85 per share), down 21.1% yoy from end-H118 (but only c 4% lower vs end-2018). At the current share price of €8.73, Mutares is trading at a 31% discount to its last reported NAV. MUX actively supports the narrowing of its discount through share buybacks (in June and July 2018 it bought back 283k shares equalling c 2% of its share capital). Furthermore, members of the management and supervisory boards purchased 147k shares ytd at an average price of €9.30 (they now hold c 40% of MUX’s capital).

As MUX normally acquires a 100% stake in its portfolio companies for which no open-market valuation is available, its published NAV is based on its own valuation models. The models were adjusted for the purpose of the end-2018 valuation to reflect the more muted economic environment and the underlying assumptions for WACC and terminal growth rate have remained unchanged during H119. An exception here is the value of MUX’s holding in STS valued at market price, amounting to €27.3m (down c -31% ytd), which represented c 14% of MUX’s NAV at end-June 2019. The major value contributor remains engineering and technology at €125m (64% of Mutares’ NAV). The €20m NAV increase in the segment vs end-2018 is mostly related to Donges Group, which finalised two add-on acquisitions in the period and continued its restructuring process.

The successful IPO of STS in 2018 allowed Mutares to distribute a dividend of €1.00 per share. Management intends to sustain the current dividend level going forward, which would translate into an attractive yield of 11.5%. However, it must be noted that future dividend payments will depend on further gains from successful exits.

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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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