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

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Oct 20, 2011
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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, Financial).


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.
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