value and opportunity

Disclaimer: This is not investment advice. PLEASE DO YOU OWN RESEARCH !!!!

The company:

Nabaltec is not a fancy Biotech company as the name might indicate, but a rather “old economy” Specialty Chemical company focusing on Aluminium-oxide based materials, located in the middle of nowhere in my home state Bavaria. This  typical “German Mittelstand” company had its IPO in 2006, and was created 1996  as management buy-out of a production facility from VAW AG. The beginnings of the plant as such seems to have been built in 1938 and looks like this:

When I looked at Nabaltec during my all German Shares series, I already classified it as “Watch” candidate but didn’t dig deeper so far.

The Anti-Pitch:

This time I start with some reasons  why one should maybe not invest into the company. Here are the major issues:

• The business is capital intensive, historical returns on capital have been Ok , but not great (6-16% ROE, 8%-11% ROCE in the past)
• The business is also energy intensive, it requires both, lots electricity and and natural gas. Prices for both inputs are rising strongly and Germany might not be the best country as a location
• The company had to write down a significant part of an US investment in 2020 in an amount of almost 24 mn USD. So far, their move into the US doesn’t look like a great success.
• The business relies mostly on short term contracts (order book year end is on avg. 2-3 months), some sensitivity to the overall economic cycle is clearly there, especially as the steel and automobile industry are major customers
• They have a 45 mn unfunded pension liability
• Their “star product” Boehmite which is used in EV battery packs might face more competition and might not be required in future battery technologies (solid state)
• The company is located in the middle of nowhere
• Free float is limited (300 mn market cap), no famous investors on board
• The stock is not cheap (2021 P/E of ~20, P/B 3,6x) and only pays a small dividend (1%)
• overall, the company looks quite boring

The Pitch:

Nabaltec in my opinion checks a couple of boxes why I would call it a “hidden Champion”:

• The company is still founder/owner-run (founders own > 50%)
• Decent long term growth track record: Since IPO, 2007-2021 +4,9% CAGR sales, +11,9% CAGR EPS.
• The main business of flame retardants seems to be a long term growth sector, some studies indicate that a 8% market growth over a longer time is realistic.
• Export share outside Germany: 75%. (This indicates that their products are competitive internationally)
• Operating profitability (Gross margins, Operating margins etc.) has been continuously expanding over the past years
• the company is conservatively financed, most likely there will be only little net debt at YE 2021 (10-20 mn EUR)
• Although the company sells globally, it sources most of its inputs locally and is not negatively affected by supply chain disruption which makes it a preferred partner for local businesses (Audi, BMW etc.)
• accounting is very conservative, no capitalization of expenses, no use of “alternative indicators”
• very “down to earth” management with clear operating focus
• decent pricing power, according to management, cost increases so far could have been passed to customers

So far so good, but not overly exciting considering the valuation.

The “Game changer”: Boehmite & Electric Vehicles

Now let’s look at something more exciting: Kryptonite ähh Boehmite.

Boehmite is technically a “Aluminium-Oxide-Hydroxide” and has been around for some time as part of their flame retardant product line. It’s main applications so far has been for instance in electronic circuit boards and as a base for other applications. Although it doesn’t sound very exciting , it became exciting for Nabaltec.

Over the past years however it has been “discovered” as a very interesting material to increase the power density of battery packs for Electric Vehicles. In short, in the current Li-Ion batteries, a plastic membrane is dividing the liquids. However, especially the larger batteries develop significant amount of heat which could destroy the membranes and damages the battery. A thin layer of a special Boehmite on the membrane however seems to dramatically improve the heat resistance of these batteries. The principle is actually described very nicely in the 2020 annual report, pages 11-14.

There are other materials that could do the same such as HPA (High Purity Aluminium Oxide) but these are more expensive by a factor 3-5x (15-18 k EUR/ton vs. 3-3,5k EUR/Ton for Boehmite).

According to the CEO, this development is like a Jackpot in a lottery for Nabaltec for several reasons.

First, It seems to be that it is not so easy to produce the quality of Boehmite that is required and Nabaltec seems to be one of the very few players being able to do so in the world. They claim that they can do this because they have a fully vertically integrated production process.

Second, they can charge a decent price which enables them to earn EBIT margins of 30% (!!!) on this product compared to their historical 10-11%. Why is this the case ? In my opinion it has to do with the fact that the EUR value of this material per battery/car is small, around 20-30 EUR per car. However the quality is critical: The battery is the most valuable part of an EV and the quality of the membrane is very important. This is a pattern that can be seen in many situations: the suppliers of a relatively small ticket but important item often can earn very good margins.

And just to be clear: This is not at R&D stage, Boehmite is already used for this application, so far mostly at the higher end of EVs. This is from the 2020 annual report:

Capacity increase: New facility

This clearly shows how Boehmite sales grow very dynamically. At a selling price of somewhere between 3000-3500 EUR per ton, Nabaltec has been most likely been producing around 5000 tons per year in 2020. According to some interviews (see links at the end), they have a current capacity of 10000 tons per annum in the current facility.

As EV production is just ramping up, it looks like that the existing capacity might be exhausted relatively soon. That’s why the board of Nabaltec has decided in December to build a new facility (next to the old one) that can produce an additional 15.000 tons. As this is not a “digital business”, they need to invest a “middle double digit” amount before the facility will begin production in the second half of 2023.

According to some rumours, they plan to spend around 35 mn EUR for the new plant, which however, at full capacity will have an EBITDA payback period of 2 years if the current pricing persits.

Assuming that the prices and margins remain the same, it is not difficult what this would mean for Nabaltec’s profits in the future: 15000x3250x30%= 14,6 mn additional EBIT p.a. Not bad for a company which has been doing 18 mn EBIT in 2019.

Solid state batteries & Wright’s law

As mentioned above, Boehmite is required for the current (liquid) Lithium Ion batteries and also likely for “semi solid state” batteries. however for fully “solid state” batteries, Boehmite is not required in larger quantities.

When I first heard about Boehmite, my first thought was: Well, nice windfall but this can be over pretty fast. Solid State batteries have been around for quite some time and one can hear news about some break through or another every few months or even weeks. In a recent announcement for instance Quantumscape, a SPACed Solid State battery company announced that their current prototype charges in 5-6 Minutes compared to 20-25 minutes for a Lithium Ion battery.

Speaking and hearing some experts, one could believe that these superior batteries will be available already in a few years (and at competitive costs). Quantumscape actually has a good paper on the basics of Solid State Batteries. However, these experts in my opinion miss one important point:

Lithium-Ion batteries in the mean-time will as well get better and cheaper. This is where Wright’s law or the experience curve is a relevant concept. It says that with each doubling of productions, cost per unit go down at a relatively constant percentage. There are a couple of estimates around, but in general, the learning rate seems to be somewhere between 15-25% per doubling of production capacity.

So let’s have a look again at a chart from Nabaltec’s annual report:

So to keep things simple, from let’s assume we are now at ~300 GWh per annum battery production capacity. Then we will see another 3,5 “doublings” in capacity until 2030 which in turn means a cost decrease of -90% for Lithium Ion batteries until then or -58% in 2025, assuming a 20% learning rate. Based on a Quantumscape presentation from August 2021, they expect a “commercialization” starting in 2025.

So any solid state battery coming onto the market in maybe 2025 needs to compete against a much better and much cheaper Lithium Ion batteries than today and the longer it takes, the cheaper and better Lithium Ion batteries will become.

This reminds me a little bit about thermal solar power vs. photovoltaic discussions 10-15 years ago, where many experts favoured thermal solar power as the superior technology, but photovoltaics just became cheaper and cheaper and won.

In my opinion, there is a significant probability that the runway for Lithium Ion batteries especially for EVs could be a lot longer than a lot of people, including OEM “experts” think. I might be totally wrong, but I guess this is also the major reason why the share price is not higher today, as a lot of investors do not want to have this kind of “certain uncertainty”.

It is difficult to get exact information about this topic, but the general consent at this stage seems to be that solid state batteries could become important in 2030 but might have a hard time to compete on price by then (emphasis mine):

Back in 2010, the cost per 1 kWh in lithium-ion batteries was over $1,000 and in the space of a decade, it has gone down nearly tenfold. It is predicted that the cost of lithium-ion batteries will keep going down and that by 2030, the average price per 1 kWh will dip below $60. It currently seems implausible that SSBs would drop so much in cost by then, but with the sheer number of companies actively working on this, a breakthrough that could allow it is not out of the question.

Share Price & valuation

Looking at the chart, we can see that Nabaltec underperformed the SDAX since its IPO but this was mostly because the IPO valuation just seems to have been too high before the GFC:

As for my return expectations, I build a very simple model:

I took the analyst estimate of ~2 EUR EPS for 2022 and let that grow by 5% p.a. Then I add the impact of the new Boehmite facility, assuming that it runs at 100% capacity in 2025. I also assume a flat selling price of 3500 EUR per ton and 30% EBIT margins.

This results in EPS of 2,61 EUR for 2023, 3,19 EUR for 2024 and 3,62 EUR for 2025. Assuming a PE of 20, this would result in a price target of ~72 EUR in 3-4 years or +100% compared to the share price of 36 EUR at the time of writing (plus dividends).

Interestingly, Nabaltec has not been discovered so far by many Cleantech/Electric mobility funds. Only one, the Belgian based Capricorn funds seems to have discovered them so far.

Overall this looks like an attractive risk/reward ratio to me. Therefore I decided to buy a 4% position at around 36 EUR per share for the portfolio.

Game plan:

The game plan is relatively easy: I will sit and wait how Nabaltec executes. I will also monitor progress on the solid state battery side. If Nabaltec reaches my fair value estimate earlier, i will most likely sell out as then the risk/return will look different. If the stock goes down because of an overall market decline, this would be one of the positions to increase. If for some reason the capacity extension doesn’t work out, I will sell.

Summary:

As I have tried to outline above, Nabaltec indeed looks like an extremely interesting opportunity that benefits from the mega trends towards electric vehicles.

There are of course a lot of risks, however at least for the next few years there is a very clear growth path and there might be other areas of upside as well, for instance the recovery of the US business and also the overall flame retardant business will benefit from the trend towards Electrification.

Overall, the company fits very well into my strategy focusing on small cap companies that look rather boring from the outside, are run conservatively for the long term and have some decent upside.

As mentioned above, I allocated 4% of the portfolio into Nabaltec at EUR 36 per share. In order to keep my cash allocation, I funded it partially through selling both, Euronext and ABB as mentioned in the comments.

Some more links/background

Flache Kurve, großes Potenzial

Supervisory Board :

https://www.mittelbayerische.de/region/schwandorf/gemeinden/schwandorf/gerhard-witzany-gibt-das-zepter-weiter-22800-art1464904.html

https://www.br.de/nachrichten/bayern/strompreise-und-energiewende-energiesorgen-bei-nabaltec,SnceVh4

https://pegasussolutions.de/Boehmit

https://www.zc-newmaterials.com/boehmite/?gclid=Cj0KCQiAoY-PBhCNARIsABcz770geaL37tflflYNChWnx0IEjTKzrl4DweLgcKgOeTUAQaXYA8z5l6IaAgC5EALw_wcB

https://www.marketsandresearch.biz/report/162280/global-high-purity-boehmite-market-2021-by-manufacturers-regions-type-and-application-forecast-to-2026

https://thewest.com.au/business/public-companies/altech-muscles-into-lithium-market-with-hpa-technology-c-4152828

https://nanoinitiative-bayern.de/nano4emob/partner/nabaltec

Click to access Doc%20ATC%20HPA%20Market%20White%20Paper%20Final%20Mar%2020.pdf

Click to access 6980243.pdf