Quick check: Washtec AG (ISIN DE0007507501)

One reader sent me an email, asking why I don’t include new German stocks in my portfolio and recommended Washtec, the German manufacturer of car washing systems. According to his opinion, the business is not really impacted by business cycles and the stock might be cheap because of a “one time” write off last year.

As I havn’t looked at a German company for quite some time, I decided to have a “quick check” to see if it is an interesting stock and might fit into the portfolio.

If we look at last years “traditional” numbers, valuation seems Ok (apart from the loss) but not overly cheap (based on BB):

Market Cap 120 mn EUR
P/E: negativ (loss)
P/B: 1.7
P/S 0.4
EV/EBITDA 7.7

In a second step, I always look at the history. I like the 1999-2011 period because it includes 2 booms and two crises:

EPS BV DVD FCF Net debt ROE ROIC
1999 0.75 3.32 0.61 0.62 4.6665 24.0 10.8799
2000 0.35 2.94 0.61 0.51 14.0485 14.3 #N/A N/A
2001 0.18 4.40 0.37 0.00 10.7338 4.8 3.1974
2002 -1.54 2.80 0.08 1.58 9.2173 -42.9 #N/A N/A
2003 -1.98 0.79 0.08 0.02 9.1881 -110.3 #N/A N/A
2004 -0.35 0.44 0.00 2.73 6.5114 -57.0 -46.9692
2005 0.81 3.24 0.00 1.13 2.9122 35.4 22.6559
2006 0.82 4.06 0.00 0.50 3.5661 22.5 18.3614
2007 0.83 4.80 0.00 0.81 3.5641 18.7 14.7734
2008 1.03 5.66 0.00 1.38 3.3548 20.2 14.4405
2009 0.41 6.12 0.00 0.93 2.6462 7.0 6.2274
2010 0.77 6.75 0.12 1.44 1.9015 12.0 9.508
2011 -1.04 5.38 0.31 0.57 1.7454 -17.1 #N/A N/A

We can see pretty strong FCF generation, averaging 0.94 EUR a share, which is very very good.

However one can also see that

– FCF and especially earnings are relatively volatile and definitely impacted by business cycle
– only a small amount (~20% ) was paid out directly to shareholders via dividends
– the majority of the free cash flow seems to have been spent of a debt financed acquisition in 2000 and in subsequent debt repayments

They seemed to have made a relatively large capital increase in 2006 but bought back some of those shares in 2009. In their latest press release they committed to distribute at least 40% of “net results” to shareholders.

Interestingly, the company doesn’t seem to have a majority investor, which in theory should support the valuation as a potential take over might be possible.

The share is covered by 7 analysts, however only German ones so no big international coverage, with 4 buy and 3 neutral ratings, average target price is 10.82 EUR.

Looking at the chart, one can see that the past earnings volatility has shown itself in the stock price as well:

I took a quick look into the annual report 2011.

I am in no position to judge the business model, but it seems to be clear that there are big issues in the US where the seem to have totally miscalculated the market developement. Usually I try to avoid German companies with significant US operations as this usually doesn’t work out well.

Despite the “one off” issues, in general costs seem to have risen faster in 2011 than sales which might indicate only limited pricing power.

They seem to have an increasing share of service business, but the segment numbers are only shown along regions, not business lines. So I can not judge if the service business is really profitable or not.

Management compensation seems to be OK, they have only 2 board members. Bonus is linked to EPS. They don’t seem to own shares themselves nor do they have options.

Summary: My first impression would be that it is an interesting company but not screaming buy. The business still seems to be quite volatile with a big unresolved problem in the US. At current price level it is not a reversion to the mean play. Historically it is also hard to argue that the company has a moat in all of its markets based on the volatile past results.

I also don’t really like companies with periodical large “one offs”, this is usually a sign of strategy issues. Normally I only buy such companies if they are really cheap.

I would become more interested either if the valuation becomes cheaper (significantly below 6.5 x EV/EBITDA) or the US issue gets resolved pretty soon.

One comment

  • I also think, that Washtec is a quite interesting company. But I can’t really figure out what it is worth. Maybe I would buy below Book Value, but it’s far from that point.

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