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A High-Quality German Small-Cap at a Throw-Away Price

October 20, 2011 | About:
You know that you are neither right nor wrong because somebody agrees with you.

It is always nice, however, to have someone that you trust and respect also like an investment idea you came up with.

That's exactly what happened to me when I read the Forbes article Don't Buy Apple where Bruce Greenwald mentioned a few of his favorite investment ideas.

Surprisingly, one of his ideas was a small company in Germany that I recommended in July this year.

As the share price is down 11% since I recommended it and down 32% since Prof. Greenwald mentioned it at EUR13,00 I thought you may want to look at the company as it is now even more undervalued.

Moreover, the share price declined in spite of really good half-year results. But more on that later.

It’s one of those companies that form the backbone of the German economy. A small manufacturing business that sells its high-quality products worldwide with great success.

It is the sort of company I would like to recommend more often but unfortunately they very seldom become undervalued.

You have to be patient and wait for the share price to decline, usually because an overall market decline. And then buy quickly because the undervaluation usually does not last very long.

With a market value of just under EUR120 million it’s only large enough for your personal account.

It is even traded in the Pink Sheets but it doesn't look like there is much volume.

To give you an idea of how undervalued the company is here are a few valuation numbers (price of EUR8.80):

Price to earnings ratio 11.4

Dividend yield 3.5%

Price to free cash flow 6.1

EBIT to tangible assets 25.8%

EBIT to enterprise value 13.5%

Piotroski F-Score 7,5

Source: December 2010 annual report and www.value-investing.eu

As you can see it’s a classic Magic Formula company with a high return on assets and enterprise value.

The company is Washtec AG (ETR:WSU).

Here is the Financial Times link: Washtec Investor Relations

Now for a bit of background information on the company.

Washtec is a global leader in carwash equipment and related services and products. It was formed as a result of a merger between WESUMAT, A. Rohe Gmbh, and Kleindienst Gmbh & Co.

The company operates globally in Europe (both East and West), Northern America and the Asia Pacific region, has around 1,600 employees and has more than 30,000 car wash installations.

The company has four business lines:

  • New and used cash wash equipment
  • Spare parts and services
  • Chemicals
  • Operations business (financial services and carwash operations)


The company’s largest business is the sale of carwash equipment which generates 60% of sales. The main buyers are oil companies that sign bulk purchase agreements with the company.

The other 40% of sales is made up of services and spare parts, chemicals, finance/leasing and financial operations. The chemicals business is relatively small; however, it's important as it enables the company to offer a full range of carwash products.

Sales for 2010 break down as follows: new and used equipment 58%, spare parts and services 32%, with the remainder being chemicals and others services.

By geographic region, the sales are broken down as follows:

  • DACH (Germany, Austria and Switzerland);
  • CEE (Central and Eastern Europe);
  • RoW (rest of the world - North America and Asia Pacific), and
  • Others (chemicals, financial services and operations).


The DACH and RoW regions make up over 90% of sales.

Unfortunately management has virtually no shareholding in the company, and this has been the case over a five-year period.

One of the company’s largest shareholders, Massimo Pedrazzani, a member of the supervisory board, owns over 15% of the business through a fund called Sterling Strategic Ltd. He was elected to the board in 2010. This is a good development for shareholders as it’s the first time in the last five years that the company has had a significant owner on the board.

Now for more information on the good half-year results I mentioned.

On August 5, the company reported first half revenues of EUR140.4 million, an increase of 13% compared to the prior year. This increase results primarily from the expansion of the market position in North America and in Australia, and acquisition of AdeKema (chemical company) in Northern Europe. Organic growth was 4%.

Net income after tax was EUR4,2 million, an increase of 62% year on year. And earnings per share increased to €0,30 almost double the €0,19 reported during the same period last year.

In summary: Washtec is an attractively priced high-quality small-cap company for you to look at.

Disclosure: I have an investment in Washtec.

About the author:

Tim du Toit
Tim du Toit is editor and founder of Eurosharelab. On his website he reveals what more than 20 years of equity investment have taught him – sometimes at considerable cost. To discover how you can avoid costly mistakes and enjoy greater profits, sign up for his free newsletter “Investing that makes sense” at www.eurosharelab.com

Visit Tim du Toit 's Website


Rating: 3.2/5 (14 votes)

Comments

vgm
Vgm - 2 years ago
Tim, thanks for the interesting post.

Greenwald also recommended Renault in the article. It's also down 20% or so since then. Any thoughts on Renault? At first glance it seems cheap.
Figurenzauberer
Figurenzauberer - 2 years ago
Looking into their balance sheet one can spot several items that are of question:

- Activated deferred taxes where it's unclear whether they will be able to use them

- High pension liabilities discounted with an over-optimistic 5 %

- Intangible capital is increasing due to many small purchases they made of small operators which were not profitable

--> your analysis stays a little superficial!

e.g. it's also worthwhile mentioning that the markets they try to grow in are right now much less profitable than the core european market that doesnt grow at all.

Past 6 months ROCE:<6% EV/EBIT: 6,5X
Adib Motiwala
Adib Motiwala - 2 years ago
Tim,

Thanks for the interesting company.

Few points

1) Sales growth has been tepid at best over the years. My numbers are from M*.

Sales in 2002 : 233 million

TTM : 285 million ( also seen in 2008)

2) Op Margins peaked at 10% in 2007/2008. Bottom was 5%. Currently, in between at 7.5%. Do you believe margins will increase to 10% or beyond?

3) M* shows FCF as 11 million ( maybe their numbers are old?). P/FCF is much higher.

4) Net Debt of 21 million.

thanks

Adib

Eurosharelab
Eurosharelab - 2 years ago
@Vgm

Renault is quite an interesting story.

I have not looked at the company myself but the best summary of the company’s situation can be found in this Financial Times article (free registration may be required)

Renault: carmaker is running on empty

http://www.ft.com/intl/cms/s/3/9dbbad9c-8bbc-11e0-a725-00144feab49a.html#ixzz1O2BSaU69

@ Figurenzauberer

You are right in a short article like this you can of course not give a complete analysis of the company.

And as with all undervalued companies there is always something that is not right.

The new markets are less profitable (USA specifically) because they first have to put the maintenance infrastructure in place or it will be hard to sell even one installation. Once more units are sold these costs will be spread over more installations and margins will increase.

Washtec has been struggling in North America so far but good progress was made in the HY 2011.

@Adib

Yes, sales growth has been slow in Europe as mentioned above mainly because of the financial crisis. As mentioned the company has also struggled to get a foot hold in North America but this improved in 2011.

If they can increase sales in the markets where they do not have that many installations margins will definitely improve. If these markets will prove as profitable as their main European (high density) market is tough to say, probably not. At least they are moving in the right direction.

The EUR 11m TTM FCF number is correct. You must remember that the business is seasonal with a lot less car washing taking place in winter, especially in Europe, Canada and Scandinavia. The first quarter is usually loss making.

Eurosharelab
Eurosharelab - 2 years ago
Life's like that.

As soon as you find an interesting investment idea and mention it to a friend something unexpected happens. Usually not something good...

On 5 November 2011 Washtec released its Q3 2011 report saying that in Q3 lower order intake and unanticipated losses in North America impacted earnings.

A CEO from Europe has been sent to North America to correct the situation.

Outlook

Earnings for 2011 are expected to be 10-15% lower than 2010, and that in spite of the good half year results.

Restructuring and write-downs may however however reduce earnings "significantly" in 2011.

I still like the company because its a solid business but 2011 is going to look ugly.

You can read the whole report here:

http://www.washtec.eu/Quarterly-Reports.7834.0.html

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