Mutares — Capturing the opportunities

The growing scale of MUX’s portfolio has led to a substantial increase in fees earned by the company, with total revenues at the holding level increasing by 61% y-o-y to €66.5m. This was driven both by consulting revenues (charged mostly in the initial realignment phase – €19.2m out of the total €31.9m consulting revenues in FY20) and by distributions from companies in the optimisation and harvesting stages. The holding company’s net income was €33.4m (+48% y-o-y), which was slightly ahead of management’s target at 2% of total portfolio revenues (2.1% in FY20).

We note that Mutares consolidates its portfolio companies in full, and thus its group financials resemble the results of an industrial conglomerate. At the consolidated level, Mutares reached €1.6bn in revenues in FY20 (+56% y-o-y), on the back of newly acquired entities yet organic sales decreased c 11% y-o-y. A higher share of young investments as well as the COVID-19 induced macroeconomic slowdown translated into lower operating results with an adjusted EBITDA loss of €28.8m (FY19: €7.5m profit). Net income increased 30% y-o-y to €27.1m, but this was largely assisted by the recognition of high bargain purchase income (€208m in FY20, +103% y-o-y), which reflects the consolidation effect of new companies acquired significantly below their book value (which is a standard practice of Mutares).

Mutares recognises three stages its portfolio companies go through during the holding period: realignment, optimisation and harvesting. As its investment activity was strong in 2020 (11 new investments including add-ons to existing portfolio companies), 12 out of 20 portfolio companies at end-FY20, representing 37% of FY20 total reported revenues, were in realignment phase. We also note that the optimisation bucket reported a negative adjusted EBITDA (while normally generating positive earnings), mostly due to the COVID-19 impact on Balcke-Dürr.

As the macroeconomic conditions in 2020 presented plenty of opportunities for distressed asset investors, Mutares obtained external capital to fuel its portfolio development. In 2020, it issued a €70m senior secured bond, which has a four-year maturity and pays a coupon at three-month Euribor +6.0%. In February 2021 it issued another €10m via a tap issue. MUX calculates its net cash at end-FY20 at €81.9m (FY19: €22.2m) as it ended the year with €145.3m in gross cash, and the financial liabilities due within a year stood at €63.4m (out of total short-term financial liabilities of €109.7m). We calculate that, including long-term financial liabilities, net debt stood at €33.9m at end-2020 (FY19: net cash €1.9m). We note that both figures do not include lease liabilities, which amounted to €148.5m (FY19: €118.9m).

Management reiterated its mid-term guidance of €3.0bn in consolidated revenues by 2023 (currently in excess of €2.2bn annualised expected for FY21 based on the existing portfolio). At the holding level, Mutares aims to keep net income at or above 2% of consolidated revenue, which translates into more than €60m by 2023 (generated on c €100m holding revenue). The high number of simultaneous restructuring processes called for an increase in headcount at corporate level to the current 70 (FY19: 35) and management expects to increase it to 100 by the end of FY21.

Mutares focuses on three broad segments (see Exhibit 4) and performed acquisitions in each of them during 2020: 11 in total, three of which were add-ons. At the same time, it fully divested KLANN Packaging (for a symbolic price with possible earn-out) and performed partial disposals from BEXity and Balcke-Dürr (two transactions, one of which closed in January 2021). Transaction activity remained robust after the reporting date with Mutares acquiring five further businesses and selling Nexive and STS (STS has not been closed yet), expecting further exits in 12–18 months. MUX seeks investment opportunities among companies with €50–500m in annual revenues.

MUX’s portfolio remains skewed towards industrials and was operationally strongly affected by COVID-19 induced lockdowns during 2020. The Automotive & Mobility segment is undergoing significant changes as Mutares is in the process of divesting its largest company STS, which made up 51% of segment revenues in FY20. In Q420, STS sold its acoustics division (over €100m in annual revenues) to Adler Pelzer Group, which led to a €3.9m deconsolidation gain in MUX’s results. Moreover, in March 2021, Adler Pelzer agreed to purchase Mutares’ 73.25% stake in STS. The transaction is expected to close in H121 and Mutares expects to receive a €33m consideration. The return on invested capital (ROIC) on this investment (initially acquired in 2013) is within MUX’s 7–10x target range, according to the company.

The segment remained the main revenue driver of Mutares in FY20 (38% share), with the organic revenue decline of c 10.5% y-o-y more than offset by new investments leading to a 34% y-o-y top-line increase. The new investments include SFC Solutions and PrimoTECS (described in our earlier notes in April and August, respectively), as well as the engineering services company iinovis acquired in November 2020 (c €40m in annual sales). Mutares highlights that since Q320 the sector has experienced a strong recovery, but overall weak macro and new additions during 2020 resulted in a €13.3m adjusted EBITDA loss compared to a €15.6m profit in FY19. Nevertheless, management highlighted that diversification across industries, countries and original equipment manufacturers helped mitigate the COVID-19 impact.

After strong acquisition activity in the Engineering & Technology segment (especially in FY19), Mutares focused on profitability initiatives, which led to a 62% adjusted EBITDA growth to €7.6m in FY20. The improved profitability reflects completed restructuring at Donges Group, which was partially offset by negative contributions from Balcke-Dürr and Eupec, which were strongly affected by lockdowns. Organic revenues decreased by 13% y-o-y, which was more than offset by new additions (mainly full-year consolidation of FY19 acquisitions). During FY20, Mutares bought two new platform investments. Lacroix + Kress manufactures copper drawing and wires, and was acquired as complementary business to Plati, which produces cable harnesses for various industries. Royal de Boer and Japy Tech were acquired in December 2020 and will form one integrated platform with annual revenues of €45m. The companies have complementary business models, as Royal de Boer manufactures barn equipment and Japy Tech produces cooling tanks used predominantly in the milk industry. The acquisitions represent typical Mutares deals as these companies are close to insolvency and all three were acquired for a negligible price, while presenting operational improvement potential. After the reporting date, Mutares performed three further acquisitions in the segment. It acquired French supplier of high-end steel processing line solutions Clecim (annual revenues of c €55m), as well as French packaging manufacturer La Rochette, which has a strong presence in the European market. The details of the transaction have not been disclosed yet, but we note La Rochette is profitable (with a high single-digit operating margin) and generates c €120m in revenues. The third transaction is Alan Dick Communications, which has a highly complementary business to Gemini Rail Group.

In FY20, Mutares was most active in its Goods & Services segment, increasing the segment revenues fourfold through new acquisitions as organic revenues were down by c 3% y-o-y. It acquired three new platform investments and a significant add-on to keeeper. The adjusted EBITDA figure decreased substantially to a €17m loss (FY19: €7.3m loss), but the decrease is attributable to new businesses as management highlighted the good operational developments in the existing companies (except for the still loss-making TréfilUnion). The new businesses are SABO and Nexive (described in our earlier notes), as well as Terranor, a new platform created from road services companies acquired in Scandinavia. Mutares paid €0.7m for the Terranor business – more than the usual symbolic price, yet significantly below the book value of the business (€7.2m). Interestingly, Nexive has already been sold, in January 2021, marking the fastest exit in MUX’s history (seven months) at an impressive ROIC in excess of 15x. After the reporting date, Mutares has acquired two additional platforms in the segment: EXI, a service provider of information and communication technology; and Carglass Maison, a provider of repair and emergency services.

MUX uses shareholder returns as its main performance indicator. During FY20, the price performance of MUX stock in total return terms was 31.3% (which includes the €1 dividend per share paid in May 2020). Since end-2020, MUX shares have rallied a further 46%, which still implies an attractive 6.5% yield based on the recent management-proposed dividend.

We also examine MUX’s book value per share (BVPS) performance, which delivered a solid 12% total return over 2020 (despite a weak H120 with a 6.1% decrease), resulting in a five-year average annual return of 20%. The recent rally has driven its P/BV multiple to 1.82x (vs 0.99x in our previous report). The market likely discounts the latest exit activity as Mutares has realised a ROIC multiple of 7–10x or above on six recent disposals (of which four have closed and two are signed), significantly above its historical average. As at end-H120 (latest available data), the ROIC on realised past investments stood at 1.9x (which is lowered due to some insolvencies) and the current portfolio money multiple was 4.8x (representing the return from held investments from fees, distributions and partial disposals over invested capital). We note that STS (MUX’s largest exit performed so far), while being executed at an attractive ROIC, is being sold below its last book value (MUX has been consolidating the business using the full method).