Search Results for: Bilfinger

Arcadis NV (ISIN NL0006237562) – One deal too many ?

Arcadis is a stock which popped up in my “BOSS score model” which I still use regularly to find ideas. It is a Dutch based Design, Consulting & Engineering company with global reach and a diversified business. Historically, they have consistently produced ROE’s of 20% and grown nicely.

Some key figures:
Market cap 1,7 bn EUR
P/B 1,7
P/E 19,5 (2014), 11,6 (2015 est)

The company trades at a ~20% discount to Peers like AF AB, Ricardo or SWECO.

What I did like about Arcadis at “first sight”:

+ consulting is capital light business
+ potential growth areas like infrastructure, water, urbanization
+ ROIC as relevant measure for compensation
+ organic growth as target for compensation
+ well-regarded in the industry

What I didn’t like so much:

– large project exposure
– China / EM Exposure (26%)
– Utility exposure (22%)
– big M&A transactions in 2014
– annual report focuses on adjusted numbers
– debt significantly increased, far above target

Hyder Consulting acquisition in 2014

In 2014, Arcadis did several larger acquisitions, the largest one being the UK listed Engineering company Hyder Coonsulting Plc. After the first bid, a Japanese bidder emerged and at the end they had to pay around 300 mn GBP for a company that earned around 6 mn GBP in 2014. This really looked expensive and is maybe one of the reasons why EPS in the first 6 months 2015 fell from 0,77 EUR to 0,70 EUR per share.

Looking into historic annual reports one can see that there was little organic growth for many years (page 15) and growth was driven by acquisitions:


Arcadis looks pretty much like your typical “roll up”, gobbling up competitors one after the other. However with the Hyder deal, it looks like that they made maybe “one deal too many”. Debt is now clearly above their own targets and business is not doing well. They acquired Hyder for their Asian presence which maybe looked like a good idea last year.

Management incentives: The reality test

When I did read the annual report 2014, I really like the fact that management seems to be incentivized on ROIC and organic growth. However, this is the score card they presented with their half-year numbers:

arcad sct

At first sight the source card looks, great, everything green, only organic growth “orange”. A closer look actually shows that the only target they hit was actually external growth which in itself is a pretty stupid target. All the other targets were either misses or not available.

This slide alone to me indicates that management doesn’t take its stated goals that serious. Yes, on paper it looks great but such a “target achievment assessment” is clearly a joke.


Although the “roll up” strategy seems to have worked for some time, in my opinion there is the risk that the 2014 acquisition spree was maybe too much. If they can make the acquistions work, the stock would be relatively cheap, but combined with the current debt load the stock is now much riskier than it was in the past. Bilfinger is a good example how a seemingly working “buy and build” strategy can implode over night.

It is also a good lesson in checking if a compensation system which looks good on paper is actually implmented and followed or if management just adjusts everything to look good despite not achieving the targets.

So I will watch this from the sidelines although I like the business and industry in general.

Vossloh (DE0007667107) – another potentially interesting “Fallen Angel” with an activist angle ?

Vossloh AG is a mid-sized German company and calls itself “a leader in the rail infrastructure and rail technology”.

Looking at the stock chart we can clearly see that not everything is going well there:

Vossloh lost almost 50% from their peak 3 years ago. If we look at some profitability measures of the past 10 years we see an interesting pattern:

EPS Profit Margin ROE
30.12.2004 3,91 6,2% 18,5%
30.12.2005 3,08 4,8% 13,3%
29.12.2006 2,98 2,0% 5,7%
28.12.2007 4,26 7,0% 18,2%
30.12.2008 6,30 11,5% 31,1%
30.12.2009 6,57 7,5% 18,5%
30.12.2010 7,32 7,2% 19,0%
30.12.2011 4,32 4,7% 11,0%
28.12.2012 4,15 4,8% 12,4%
30.12.2013 1,00 1,1% 3,1%

Vossloh showed only little impact during the financial crisis but then results deteriorated. They showed a small profit for 2013, but for the first half-year 2014, they shocked everyone with an “Accounting Bloodbath”, showing a loss of ~12,20 EUR per share, wiping out all profits for the last 3 years and some more.

So what happened ?

This is a quote from the CEO letter of the 2010 annual report:

For the years ahead, we intend to accelerate our growth while sustaining the rate of profitability. It is especially in the international markets that we will be amplifying our presence and we will be scoring in particular with the new products. For 2011, we are targeting group sales of €1.4 billion and an EBIT above €160 million.

This is from the 2011 CEO letter, where profits already declined:

Dear Stockholders:
Following a series of very successful fiscal years marked by above-average growth rates Vossloh suffered setbacks in 2011. Contrary to our expectations, Group sales and earnings declined. The chief influencing factors were the slowdown in the progress of Chinese rail projects, which only became evident as the year proceeded, the suspension of shipments for a major project in Libya and, from the summer onward, weak demand in key European rail markets. Under these circumstances, the Rail Infrastructure division’s sales, which at around 65 percent of the Group’s continued to contribute the lion’s share of revenue, dropped for the first time in years, by some 13 percent. The sales shortfall at Vossloh Fastening Systems was especially severe at the Chinese location and could not be offset by business elsewhere. The Switch Systems unit also performed below expectations due to the military conflict in Libya, which prevented the planned extensive shipments to that country in 2011. In addition, in several European countries demand slackened and price pressure stepped up.

In 2012, the outlook for 2013 was not that good but still “solid”:

However again, they disappointed, as stated in the 2013 annual report:

There were two significant reasons for the downward development in 2013: For one, we were confronted with extensive non-recurring charges that were due to expenses for the final out-of-court settlement of a dispute in the Transportation division in an amount and extent that was not to be expected. For another, there were additional expenses in this division in connection with the processing of several projects, which entailed additional and unexpected losses of earnings. In contrast, the Rail Infrastructure division performed significantly better than expected, and revenues as well as the result increased significantly. The Fastening Systems business unit primarily contributed to this positive development.

Not too surprisingly, both, the CEO and COO stepped down in February making way for a new management. Normally, CEO hate to step down even after management disasters so what happened ?

The activist angle:

Vossloh had been more or less controlled by the founding Vossloh family for more than 100 years although they only owned around 34%. Since 2011 though, another strong shareholder emerged: Hermann Thiele, the owner of German unlisted company Knorr Bremse who had built up a stake of close to 30 % from 2011 to 2013.

Although Thiele is not widely known and keeps a low profile, he is one of the most succesful German entrepreneurs of the last 30 years. He bought Knorr Bremse in 1985 as one would call it a “leveraged management buyout” and then grew the company by a factor of 15-20 times over the last 30 years. Despite being a non-listed company, Knorr Bremse issues a relatively good annual report where onr can see that the company is spectacularly profitable. Net margins of 8-9% and cash adjusted ROICs of more than 30% are clearly an indicator that this guy seems to know what he is doing. Besides that, depending on how you value Knorr Bremse, he is also one of the richest persons in Germany.

A little side story: World famous BMW AG once was the engine subdivision of Knorr Bremse until 1922 when it was sold to an investor as they didn’t find the engine business interesting enough……

In 2013, he finally succeeded in being elected as boss of the supervisory board against the explicit wish of the founding family. The founding family finally sold most of their shares in late 2013. It was him who kicked out the old management and brought in 2 new guys, among them the new CEO Hans Schabert who used to run the rail operations of Siemens.

In one of Thiele’s rare interviews in 2013 he stated that Vossloh is his private investment. Although he likes the business, he doesn’t want to take full control and leave Vossloh listed.

As a supplier to the rail industry, he knows the sector pretty well. I could imagine that long-term this might help Vossloh to get back on track. However I do not believe that he will remain a minority shareholder for ever. I do think that sooner or later he will try to take control. There would be clearly synergies between Knorr Bremse and Vossloh as both have the same clients and Knorr is even a supplier to Vossloh’s locomotive unit.

The 6 months 2014 “accounting massacre”

If you ever want to see a “how book as many losses as possible” financial report then look at the recent 6 month report from Vossloh. The new management wasted no time and did not even wait until year-end in order to write down everything they could.

Even in the investor presentation, they don’t make the slightest attempt to normalize the result.

Digging deeper into the report, you will find among others:

– goodwill write offs
– inventory write downs
– extra provisions against “risks”
– and even a charge because they did an early retirement of a higher coupon debt facility, which is clearly earnings accretive in the future.

In their outlook the state that one can expect some more losses in 2014 but from 2015 on Vossloh will be profitable again. But they did not specifc how profitable. Operationally they made already some significant changes. So overall this looks a little bit similar to the Van Lanschot story. The new CEO (with the support of the Supervisory Board) has written off whatever he could in order to show increasing profits going forward.

However there could also be a problem here. At some point in time, Thiele could decide that he doesn’t want to share the upside of a turn-around with the other shareholders and try to take Vossloh private as cheaply as possible. Other than Cevian at Bilfinger, Thiel has no track record with capital markets and many “old school” German business tycoons do not care very much about minority shareholders. This is clearly a risk to be considered

What could be a “turned around” Vossloh be worth ?

This is an overview of average margins (10/15 Years) of Vossloh and its 3 listed European “pure play” competitors:

Avg NI Margin  
  10 Y 15 Y
Vossloh 5,67% 5,19%
CAF 5,40% 6,46%
Faiveley 6,50% 5,00%
Ansaldo 5,98% n.a.

Overall, I would say a 5,5% net profit margin on average is not unrealistic. Based on 2013 1.325 mn sales and assuming no growth, this could mean that Vossloh at some point in the future makes ~ 73 mn EUR profit or ~5,5 EUR per share If we assume a 12-15 P/E range, this would mean that a target share price of 66-82 EUR would be realistic.

Based on today’s price of ~49 EUR this would mean a potential upside of 35-68%. However one should assume that this turn-around needs at least 3 years. For a turn around, I personally would require a higher return than for a normal “boring” value stock as there is clearly a risk that the turnaround does not work out as planned.

If I assume a target return of 20% p.a., i would need to be sure that the price of Vossloh is in 3 years at around 85 EUR. This is clearly at the very upper end of my target range. So I would either need to have more aggressive assumptions or I would need a lower entry price. As a value investor, I would not want to bet on growth or on a shorter time frame for the turn around, so the only alternative is to wait for a lower entry price.

Taking the midpoint of my range from above at 74, I would be a buyer at ~42 EUR per share but not before.

How does this compare to the Bilfinger case ?

A few weeks ago, I was looking at a similar case, Bilfinger. Similar to Vossloh, an activist investor (Cevian) managed to get rid of the CEO and tries to turn around the company after mutliple earnings disappointments.

At a high level comparison I like Vossloh’s underlying business better. Bilfinger clearly has some structural issues especially with its power business where the underlying market (electrictiy) is undergoing a big fundamental change whereas the railway business to me seems fundamentally intact. On the other hand, Cevian as “activist” has a very good reputation and is easier to “handicap”. They will most likely treat minority shareholders fairly and do some kind of spin off etc. So the risk of getting screwed by the activist is lower.

In a dirct comparison however I would prefer the “activist risk” at Vossloh against the fundamental issues at Bilfinger. Additionally, the real “accounting bloodbath” at Bilfinger hasn’t happened yet.


In general I think Vossloh could be an interesting turn around story, especially considering the involvement of German self-made billionaire Hermann Thiele. I do like the industry better than for instance Bilfinger. It is clearly cyclical but I don’t see any structural issues. On the other hand, the current price is too high with regard what I would expect for such a relatively high risk “turn around” investment. The “Mean reversion potential” at the current price is not high enough, I would need a ~20% lower share price to justify an investment.

Looking at the chart, this might not be unrealistic as the stock price is still in free fall and any “technical” support levels would be somewhere around 39 EUR per share if one would be into chart analysis. In any of those “falling knife” cases, patience is essential anyway.

Vossloh will therefore be “only” on my watch list with a limit of 42 EUR where I would start to buy if no adverse developments arise. Additionally I will need to check Vossloh against Alstom once

Boss score harvest: Morgan Sindall (GB0008085614) part 2 – no investment

After part 1, I have to admit that I share some concerns some commentators raised:

– the lack of tangible book value combined with a P/B of 1.3
– the cyclically of the business which however does not really show in the balance sheet (yet
– volatility of cash flows

The first issue is something one has with almost all UK groups. Anglo Saxon companies are almost always “capital light”. I guess the reason is that there are so many active PE investors, raiders, activists etc., which make sure that a well capitalized company will not long stay well capitalized.

However, this pressure sometimes produces much more capital efficient business models. As we all know, price to book is not really a good value indicator. Let’s look at a small collection of construction companies with some multiples:

MORGAN SINDALL GROUP PLC 5.30 1.22 8.60 14.30 11.88 1.52 -0.03
STRABAG AG 9.81 1.25 11.77 10.90 3.05 -5.75 0.05
KONINKLIJKE BAM GROEP NV 11.42 0.57   9.62 2.86 -13.43 0.13
HEIJMANS N.V.-CVA   0.29   -8.84   0.38 0.12
BILFINGER SE   1.94 15.09 21.95 7.71 4.80 -0.02
VINCI SA 7.15 1.47 9.88 15.01 6.59 4.37 -0.06
CARILLION PLC 7.04 1.38 8.23 16.38 11.64 3.24 -0.06
KIER GROUP PLC 4.66 3.36 9.25 34.35 37.95 2.89 0.06
BALFOUR BEATTY PLC 6.62 1.71 10.86 16.22 8.24 1.72 -0.08
COSTAIN GROUP PLC 0.82 4.13 5.98 64.01 66.71 3.17 -0.01

Here we can see some interesting items:

Generally, the higher the ROE & ROIC the higher the price book valuation. With the exception of Kier, there is also a clear relationship between WC to sales and ROE and ROIC. Especially the Dutch companies seem to have to fund a lot of their working capital themselves. Interestingly those companies also operate at a loss level.

For me it is very interesting to see how the UK companies seem to have changed their business models to a certain extent.

Interestingly, the largest company Balfour seems not to be able to create any advantage out of their market share, which according to this list of UK construction market share for 2011 was around 15%.

On the same page, there are also a lot of news about the UK construction sector. All in all it doesn’t look pretty, it seems to be that 2012 seems to be even worse than 2008 at least in the UK. That might be the reason why UK construction groups look so cheap.

If we go back to Morgan Sindall, I see another issue: There is not a lot of mean reversion potential. Morgan Sindall is only 10% below its average profit margin. Historically they were values ~10 P/E and 4.7 x EV/EBITDA which is more or less where they are today.

Combined with a clearly donwtrending ROE (both, absolute and under “boss” definition”, I will pass over Morgan Sindall for the time being.

Nevertheless I want to follow up more on “negative working capital” companies because I firmly believe there is a lot of hidden value in such business models.

Boss score harvest Bouygues family – back to Bouygues SA (FR0000120503)

After looking at one of the main subsidiaries Colas in the last post, let’s have a quick look back at Bouygues, the holding company itself.

Sum of part valuation

As I have mentioned in the initial post, Bouygues has 3 listed subsidiaries, Colas, TF1 and Alstom as well as 3 unlisted major subs which are Bouygues Construction, Bouygues real estate and Bouygues Telecom.

To get a feeling for a “sum of parts” valuation, we should start with the listed subs and then make assumption for the unlisted ones.

Read more

Record Profit Margins – follow up German companies

Following up on Tim’s comment, I had a quick look at German HDAX companies. Unfortunately, only a subset of 2011 figures are currrently available.

What I did was the following: For those companeis where 2011 net margins were available, I calculated the 10 year average net margin. I then subtracted this from the 2011 margins to see if 2011 was better or worse than the average.

name avg 10 Y margin 2011 NI margin Current vs. average
FUCHS PETROLUB AG -PFD 6.0% -0.3% -6.3%
PUMA SE 10.6% 7.6% -3.0%
BEIERSDORF AG 7.3% 4.4% -2.9%
SALZGITTER AG 4.7% 2.4% -2.3%
KRONES AG 3.2% 1.8% -1.5%
RWE AG 5.1% 3.6% -1.4%
QIAGEN N.V. 15.4% 14.2% -1.2%
HOCHTIEF AG 0.5% -0.7% -1.2%
ADIDAS AG 4.8% 5.0% 0.2%
HENKEL AG & CO KGAA VORZUG 7.6% 8.0% 0.4%
AURUBIS AG 2.1% 2.6% 0.5%
BECHTLE AG 2.6% 3.1% 0.5%
BILFINGER BERGER SE 1.9% 2.7% 0.8%
DEUTSCHE TELEKOM AG-REG -1.9% -1.0% 0.8%
COMMERZBANK AG -0.5% 0.7% 1.1%
GILDEMEISTER AG 1.3% 2.7% 1.4%
CONTINENTAL AG 2.3% 4.1% 1.8%
CARL ZEISS MEDITEC AG – BR 6.7% 8.9% 2.1%
BAYER AG-REG 4.5% 6.8% 2.3%
SGL CARBON SE 2.5% 4.8% 2.3%
LEONI AG 1.8% 4.2% 2.4%
SOFTWARE AG 13.6% 16.2% 2.6%
FRAPORT AG 7.5% 10.1% 2.7%
BASF SE 5.5% 8.4% 2.9%
DUERR AG -0.5% 3.2% 3.7%
SIEMENS AG-REG 4.5% 8.6% 4.1%
PSI AG -0.2% 4.3% 4.5%
DEUTZ AG -0.1% 4.5% 4.6%
HUGO BOSS-PFD 8.9% 13.8% 4.9%
K+S AG-REG 6.9% 12.8% 5.9%
VOLKSWAGEN AG-PFD 3.2% 9.7% 6.4%
SAP AG 16.7% 24.1% 7.5%
DRILLISCH AG 2.0% 12.0% 10.0%
AIXTRON SE 3.1% 13.2% 10.1%
MORPHOSYS AG -7.6% 7.9% 15.5%

So from the 42 companies with relevant data, only 11 are below average, whereas 31 are above the 10 year average net income margin in 2011.

On average, 2011 profit Margins were 6.4% of sales for those companies against 3.9% for the last 10 years. If we would assume constant P/Es, than a return to “normal” would mean a drop in earnings on average by -39% or implcitly an over-valuation of those companies of 39% (keeping everything else constant).

I will try to update as sson as more results are published, but if one believes in reversion to the mean, some of those comapneis should be avoided.

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