Mutares — Rapidly expanding portfolio

MUX acquires distressed companies and conducts exits following successful turnarounds. It consolidates the entities in full, making its financial results characteristic of a conglomerate. Newly acquired companies normally contribute negatively to overall EBITDA, while mature investments generate profits. Recent (FY19 and H120) robust investment activity has led to a relatively young portfolio contributing negative earnings to the consolidated results, magnified by the weakened results of industrial companies amid the Europe-wide lockdown. Management highlighted that companies are returning to normal operations and in June 2020 the portfolio was profitable. With recent robust investment activity, Mutares expects revenues over €1.5bn in FY20 (FY19: €1.0bn), as the current portfolio generates annualised revenue of c €2bn (assuming full-year consolidation).

The group normally acquires companies below their book value, which results in gains on bargain purchases. In H120 these gains amounted to €66m (7% less y-o-y) which has led to €41.5m in reported EBITDA (38% lower y-o-y). The one-off restructuring costs amounted to €9.2m (H119: €3.7m) and were limited as some of the processes were on hold due to COVID-19. Adjusted EBITDA removes the gains from bargain purchase, restructuring costs and deconsolidation effects, and was a loss of €16.7m in H120. Net financial costs increased twofold to €10.1m due to the Q120 €50m bond issue. Consequently, MUX reported a €1.35 earnings loss per share vs €2.45 in H119.

In February 2020 MUX completed a €50m bond issue (which may be increased by €30m) to support acquisitive growth of portfolio companies. Bonds have a four-year maturity and bear interest of Euribor + 6%. MUX ended H120 with €72.4m in current financial liabilities, which coupled with €109.3m of cash, resulted in a company-reported net cash position of €36.8m (up from €22.2m at end-FY19). This does not include long-term financial liabilities as per company methodology, and we calculate that including those (€83.9m) total net debt amounted to €47m (vs €2.6m net cash at end-FY19). It is important to note, that due to the full consolidation of held entities, most of the debt relates to portfolio companies. MUX publishes standalone accounts only on full-year results and as a point of reference, at end-FY19 it held €10m in cash with no financial liabilities (currently at €50m from the bond placement). It is also worth highlighting that MUX’s acquisition agreements usually limit its liability in case of unsuccessful turnarounds, and some restructurings are co-financed by the seller. This limits the risk associated with the currently above-average number of ongoing restructurings.

Amid the economic downturn, MUX increased its efforts to expand the portfolio. It finalised two new platform investments (PrimoTECS, BEXity) and increased the portfolio to 13 companies. The portfolio companies also performed three add-on acquisitions. A further five platform investments were in the process of being acquired at end-H120 (two of which were closed in July 2020), which will result in the portfolio consisting of 18 platform investments. Currently five companies have mostly finalised their restructurings and contribute earnings to the group results.

The acquisition of SFC Solutions was finalised on 1 July 2020. The acquired business (seal and fluid activities) generated c €180m revenue in 2019. MUX intends to realign the company to develop new technologies for electric vehicles, as there is increasing demand for thermal management. The total consideration, including potential funds and support up to end-2021, amounts to €5m. The SABO Maschinenfabrik acquisition was agreed in June 2020 and is still pending final closure. SABO is an outdoor power tools business of John Deere. On closure (expected in Q320) the company will strengthen the Goods & Services segment. Also in June, MUX signed the agreement to acquire a manufacturer of copper wire rod (currently Nexans Metallurgie Deutschland) from Nexans. The agreement to acquire road maintenance business of NCC was signed recently with limited details so far. The acquisition has been made to strengthen MUX’s footprint in the Nordic market, and the transaction is expected to close in Q320 as well. The last deal pending closure as at end-June 2020 is Nexive, signed early in 2020 and described in our earlier note.

MUX distinguishes three phases of a company’s lifecycle within the portfolio: realignment, optimisation and finally, harvesting. Five companies in its portfolio are profitable and considered ready to exit and contributed €5.0m to the adjusted EBITDA figure, which implies a 1.5% adjusted EBITDA margin (vs 4.3% in FY19). The four companies in realignment phase are still developing their roadmap to profitability, while four in the optimisation phase are on the way to implementing it. Overall, eight companies undergoing restructurings delivered €20m in adjusted EBITDA loss.

MUX groups its portfolio companies into three main industries: Automotive & Mobility, Engineering & Technology, and Goods & Services. The Automotive & Mobility segment is under heavy pressure from ongoing the COVID-19-induced slowdown and reported a minor 1% y-o-y growth in revenues, despite the first-time consolidation of KICO in H219 and PrimoTECS since January 2020. The largest company within segment is STS, which reported 30% decrease in revenues y-o-y in H120 (to €136m, 63% of the segment) due to COVID-related plant closures in Europe. This has also led to a significant decrease in profitability, as STS reported a c €4m adjusted EBITDA loss (compared to c €10m profit in H119). Similar, the remaining companies in the segment also experienced plant closures, which weighed on profitability. In consequence, the adjusted EBITDA of the segment arrived at €14m loss compared to €11m profit in H119. The reported EBITDA amounted to €2.4m, mainly on the back of profit from bargain purchase of PrimoTECS.

The Engineering & Technology segment reported 31% y-o-y growth in sales, and €0.7m in adjusted EBITDA (from €6.9m loss in H119). The segment was less affected by the pandemic, but there was a temporary slump in demand. The growth in sales was inorganic as it came from the consolidation of last year’s add-on acquisitions to Donges for the full six months, supported by H120 add-ons. Organically, Balcke-Dürr maintained sales flat y-o-y (but visibly below budget), Donges saw a considerable reduction in demand and staff shortages, which were offset by the consolidation of new business. The reported EBITDA of the segment amounted to €23.1m, which stemmed from income from the bargain purchases of the two add-on acquisitions. It was supported further by profit recognised on the sale of Balcke-Dürr Polska – the Polish subsidiary of Balcke-Dürr, which completed its repositioning. The subsidiary was sold for €5.5m, and MUX has recognised a €2.9m profit on the transaction. The price can be increased by €1.5m on earn-out.

The Goods & Services segment reported an almost threefold increase in revenues y-o-y, as three out of four companies in the segment were not consolidated for the full H119. The adjusted EBITDA loss was marginal at €1.5m. The main negative contributor to the segment’s results was TréfilUnion, which is undergoing realignment. The progress is far behind schedule as both its plants were closed due to the pandemic, which influenced output as well as stalled investment initiatives. However, Cenpa and keeeper saw increased demand for products in their toilet paper and napkins divisions. Keeeper acquired a paper napkin business from Metsä Tissue Corporation as an add-on in February 2020, and increased sales supported its liquidity and accelerated the ongoing restructuring process. The segment’s reported EBITDA amounted to €23.2m, mostly due to profit on the bargain purchase of the abovementioned add-on.

MUX stopped publishing the NAV of its portfolio holdings from FY19, so shareholder returns are its main performance indicator. We analysed the book value per share (BVPS) performance, which delivered a 6.1% decrease in H120 in total return terms (TR) ie including the €1.00 DPS paid during the period, which reflects the H120 net loss. Despite the recent market-wide downturn, the long-term (4.5 years) annual performance (TR of BVPS) remains at a healthy 18% pa. MUX acquires companies for a price materially below the respective book value and as its current portfolio is relatively new, it is understandable that MUX trades at a discount to BVPS, with the current P/BV multiple at 0.99x (vs 0.89x in our previous report).

Over the course of the lifecycle within MUX’s portfolio, companies benefit from financial support during the restructuring process and unlock cash once profitable. The distributions come not only from exits, but also from partial sales, dividends, interest on granted loans and consulting fees. Having said that, 10 companies currently held by MUX that have been in portfolio longer than 12 months as of end-H120, have already delivered 4.8x cash return on invested capital (ROIC) through distributions alone. Successful exits and further distributions should increase the multiple. This compares to an average ROIC of 1.9x on 21 realised transactions (which is lowered by deconsolidations due to insolvencies). We note that the realised multiple has decreased from an average 2.2x at end-FY19. We understand that this is due to the disposal of KLANN Packaging in H120 for a symbolic price (which could increase on earn-out until 2023). MUX expects the final ROIC on its 14-company portfolio to be in the range of 7–10x once sold.