Updates: MAN SE & Sold Trilogiq

MAN SE “Special situation”

In November 2013, I entered a special situation investment with MAN AG, arguing that the proposed compensation payment of Volkswagen might be too low and the court may decide to increase it.

Last week, the Munich court now decided to increase the compensation payment from 80,89 to 90,29 EUR. This is less than some investors hoped for, in the past 100 EUR or more were assumed to be realistic.

In my understanding, together with regulatory required interest and minus the already paid annual amounts, the fair value of the MAN share is around 95 EUR which is where the stock trades at the moment.

At ~95 EUR, this results in a yield of approx. 13,5% over 18 months, not spectacular but with very low risk as we can see in the chart:

I don’t think that there is much further upside although some hedge funds seem to be keen to get even more. I will wait and see but I think I will exit the position rather sooner than later.

Trilogiq

Trilogiq is a stock which I bought 2 years ago as a potential “hidden champion” and based on very good historic profitability.

However, pretty soon after I bought, things turned south. The official explanation was that they introduced a new product made out of graphite instead of the metal tubes they used before which should replace most of the existing installations. Sales went down by around -7% in 2014 against 2013 and profit halfed.

Lats week, Trilogiq released 2015 numbers (Year ends at 31.03.).

At a first glance, things seemd to have picked up sligtly. Sales are up slightly and also profit is up from 0,94 EUR per share to 1,06 EUR per share. Cash and Cash equivalents are at a healthy 23,7 mn EUR or ~6,35 EUR per share.

At currently 15 EUR per share, this results in a P/E ex cash of around 8. Still very cheap.

At a second glance however, things don’t look as good. The operating result (EBIT) actually deteriorated by -17% from 4,9 mn EUR to 4,1 mn EUR. Only a swing of +1,1 mn EUR in the financial result driven by FX gains led to a higher EPS.

What irritated me even more was that in they mention in this document that only 7% of sales in FY 2015 were the new graphite products. They way they presented it before one had the impression that more or less the majoriy of sales would have been switched.

Although the second half year looked better than the first, I do think that they have some fundamental problems in their business. Many of their clients (EADS, German automakers) work at full capacity and many automotive suppliers are doing very well.

At Trilogiq however, this is not the case.The US business for instance shrank if one accounts for FX movements. Wages and Salaries increased significantly, not really a sign of tight cost control.

Overall it is not easy to understand what is going on because they don’t provide a lot of information.

My initial thesis relied on the implicit assumption that if their clients are doing well (EADS, automakers), Trilogiq should do well. It looks however that this is not the case and Trilogiq does have individual issues.

As a consequence, I sold the position in the last few days at an average price of 15 EUR per share, realizing a loss of -17,88% against my purchase price as I do not have any visibility on what’s going on at Trilogiq.

It still could be that Trilogiq could be a good value investment as it is still cheap but now it looks rather like a potential turn around case which is very different from the assumed “hidden champion” I was hoping to invest in.

11 comments

  • Benoit siester

    I am the CEO of a small to medium size business in automotive and aircraft manufacturing. It is the same client that Trilogiq. I very often see the Trilogiq product when visiting factories.

    According to my understanding the old range was getting more and more a commodity. Trilogiq look for high gross margin 60%. It is always the first line of comment I. Every financial communication. The change of technology was the possibility to differentiate and avoid the price pressure.

    The second element I understand with the new range is that they have internalized all the production which was not the case before. With the old technology Trilogiq was outsourcing a big part of the industrial part of the manufacturing.

    Bringing internally a complet production. With investment of 10 millions require time to ramp up.

    • Benoit,
      thank you for your insights. Let’s wait and see how it turns out.
      mmi

    • Benoit,

      one additional comment here: In my initial case I assumed that the competitive advantage comes from the consulting side, so that they actually help the clients to become more efficient.

      This would not fit with what you explained, namely that the material is the relvant factor. Again it seems to have been a research mistake made by me, assuming too much.

      mmi

  • Benoit siester

    Dear all,

    I am one of the investor of Trilogiq since 2011. The financial information Even in French si very limites. I Think it comes from the fact that the Chairman + Amiral Gestion nearly own 90% of the capital.

    Looking on linkedin I have been able to identify that the company has changes its CEO, CMO during the year certainly because the of the underperform. I have also been able to understand that the process of switching is very long due to the fact that automobile aircraft manufacturer need to validate the product before deployment. According to my experience this take 12 to 18 months.

    I will try this year to attend the AM in order to better understand the case.

  • I have a small position in Trilogiq since mid 2012. Not a good investment up till now. I share your analysis & frustration on the FY results. However, there were also some positives like the increasing positive impact of Graphit on the gross margin. This year personnel costs could even come down, given the impact of severance payments in 2014. I actually increased my position immediately after the results. Maybe I bought from you :). Let’s see what the future will bring …

    • JJ,

      good luck !! As I said, it could turn out to be a good investment but I didn’t buy it as a turn around. I am not a very good turn around investor, so I try to stay out of those situations.

      mmi

  • @mmi: I don`t know if someone has asked this already in your initial article, but is there an english AR available for Trilogiq?

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