Description

Business Overview

Brockhaus Technologies (“BRKT GY”) is a ~€230mn market cap company focused on acquiring and building fast growth (>20%), high margin (>35% EBITDA margin) technology companies in Germany. The company’s tagline is “Elevating Champions”, and it was founded in 2017 by CEO Marco Brockhaus, an experienced private equity (“PE”) practitioner with an impressive track record (30% IRRs for ~20 years) spanning three successful private equity funds. Prior to launching Brockhaus’ private equity business in 2000, Marco Brockhaus was employed as a banker at Rothschild and worked for 3i’s private equity team based in London for several years.

In 2018, to start the company Brockhaus Technologies raised ~€50mn of private capital from German family offices, entrepreneurs, and other managers from its previous portfolio companies and acquired one asset. Next, in July 2020, BRKT raised ~€115mn by issuing ~3.5mn shares on the Frankfurt stock exchange and it became a publicly listed company. Marco Brockhaus, and his management team, still represent BRKT’s largest shareholder (>30% of shares) and Mr. Brockhaus has hinted that ~50% of his net worth is in shares of the company. Brockhaus Technologies now serves as the de facto successor firm to the teams’ three previously successful PE funds.

Target Price and Valuation

Brockhaus currently trading at <7.0x proportionate 2023 EV/EBITDA which is remarkably cheap for a high quality, capital-light software business that’s very scalable and growing revenues ~20%/year with ~35% EBITDA margins. Moreover, in May 2023, Brockhaus provided its first set of midterm targets (2025) as they wanted to increase transparency for its potential investors and to highlight their confidence in the sustainability of its current growth rates. These targets were >20% higher than consensus, but the market has shrugged it off and shares are now lower.

However, for 2025, or in ~2 years, the company now targets >€300mn revenues and ~40% EBITDA margins, (~€120mn EBITDA). This compares to its 2023 guidance of ~€170mn revenues and ~35% EBITDA margin, (~€60mn EBITDA). Therefore, Brockhaus strongly believes that they can increase EBITDA by 2x over the next two years without any M&A. Despite this appetizing growth and margin outlook shares are currently trading at just ~3x 2025 proportionate EV/EBITDA. This valuation is more akin to a coal miner than a fast growth, high margin technology platform.

Based on a simple sum-of-the-parts (SOTP) valuation methodology using ~15x EV/EBITDA for Bikeleasing and ~12x EV/EBITDA for IHSE and a ~25% illiquidity discount, we believe Brockhaus’ base case target price is ~€40, providing ~90% upside to our base case.

Footnotes: 1) BRKT ~52% owners

Also, if we assume IHSE were valued at ~12x EV/EBITDA, a fair multiple for a ~10% organic growth, >35% EBITDA margin industrial business, then IHSE would be worth ~€75-80mn. If we also subtract the parent cash (~€50mn) this implies that investors are getting its gem, Bikeleasing for ~4.5x proportionate 2023 EV/EBITDA.

Business Strategy Overview

Brockhaus is now akin to a private equity fund without the fees and lockups. Brockhaus also has the potential to own its assets over an infinite time horizon. A major reason for an IPO, rather than just raising another PE fund, was so the Brockhaus team could “support its businesses over the long term and realize the full value creation potential from their actions”. The Brockhaus team had grown weary of being forced to exit its best assets in five years as necessitated by the finite life of a private equity fund and they pursued a public listing as it allowed them to achieve longer more lucrative holding periods. Another reason for Brockhaus’ public listing as explained by Mr. Brockhaus, “is to allow individual investors access to thriving German [Mittelstand] companies, which would otherwise be inaccessible to most people.”

Brockhaus has a clearly defined circle of competence focused on B2B assets with low capital intensity, low cyclicality, and stable recession resistant cash flows, all of which allow for strong cash flows generation that can be re-invested at high rates of returns. They seek to build a portfolio of niche, market leading tech companies in Germany’s “Mittelstand” which makes for ripe hunting grounds as many of these businesses are extremely attractive but fly under the radar given their size and more limited PE/VC activity in Europe.

Germany’s “Mittelstand”, where you’ll find most of its SME’s, is a unique market compromised of Germany’s strongest family-owned companies and it has become a synonym for technological strength, innovation, and entrepreneurial spirit. In fact, Germany’s Mittelstand accounts for an overwhelming majority of all businesses in Germany and it also provides ~60% of all jobs in the country despite each individual company being relatively small. Brockhaus’ expertise and its focus on innovation leaders located in its home market of Germany is now supported by ~25 years of experience and this serves as a tremendous competitive advantage.

It is also worth noting that Brockhaus’ management team believes that Roper Technologies is a good proxy for its corporate development, and they highlight that Roper’s market cap has gone up 100x since its IPO in 1992. Despite this ambitious outlook, Brockhaus’ shares are currently trading at ~€21.00 (~7x proportionate EV/EBITDA) vs its 2021 highs of >€35.00.

Business Segment Overview

Brockhaus Technologies currently consists of two assets: a ~52% stake in Bikeleasing and ~100% ownership in IHSE. Both of which fit Brockhaus’ highly selective acquisition criteria and provide strong foundational assets for continued earnings growth and future acquisitions. In addition, they have ~€50mn in cash sitting at the parent entity.

Bikeleasing Business Overview (~52% owned by Brockhaus)

Brockhaus acquired a 52% stake in November 2021 for ~€181mn (implied ~€350mn EV) while its ambitious founder/entrepreneur remained as its CEO and still owns ~40% of the company. This represents true decentralization with a strong alignment of interests, which act as hallmarks of Brockhaus’ strategy.

Founded in 2015, Bikeleasing (“BLS”) is a market leading digital platform for the facilitation and management of B2B bicycle leasing contracts. BLS offers a highly automated solution not only for onboarding users but also for managing bikes in a corporate network. BLS ensures that its customers can offer its employees leased bicycles which come with large tax incentives as well health and wellness benefits and they take care of everything including insurance, financing and leasing leaving no work or cost for employers to implement corporate bikes as an employment benefit. In addition, it’s an ESG friendly business as greenhouse gas reductions are associated with commuting via bicycle instead of driving a car. Also, in Germany and in several other EU countries, bike leasing is a unique market as there are tax incentives and bikes can be funded using pre-tax dollars, like commuter benefits in the US.

Bikeleasing’s business model is also very simple. It makes subscription fees from each bike at use on its network, while all the actual logistical work (bike delivery, insurance, financing, etc) is done by the regular participants in the bicycle industry. Moreover, BLS touts having essentially every bike that’s available on the market as bike retailers realize the same sale price that they would’ve received otherwise. Thus, the biggest advocates for BLS are oftentimes the bike retailers themselves and Brockhaus is working at onboarding some of the largest bike brands for direct selling to its customers. This business model allows for a virtuous two-sided business model that has network effects working to strengthen its moat. As more users sign up, BLS can offer a better and better product at lower prices which in turn makes for an even sticker customer base.

The German government basically subsidizes the cost of the bikes and in most cases lease payments are paid by the employees on a pre-tax basis which can be a fraction of the cost it would have otherwise been. Therefore, there’s little reason to not provide corporate bikes when also considering the health care cost savings for an employer and many corporates should continue to get added to the BLS “community”.

The BLS investment thus far has been a home run for Brockhaus and there’s been strong reception for the product driving revenue growth of ~251% over the last three years. This also proves that Brockhaus excels at growing its businesses after they acquire them. In 2022, BLS’ revenues were +50% y/y and the business earned a juicy ~43% EBITDA margin. In 1H 2023, the business grew revenues by >32% and EBITDA margins were >44% while the company provided bikes to >80,000 subscribers with access to >2.5mn employees.

In addition, the company has consolidated its sales force in 1H 2023 which should lead to higher margins going forward. Lastly, like most other software businesses, BLS is highly profitable, and given its low capital requirements it’s proven to a be tremendous cash flow machine. Ultimately, Bikeleasing is a high-quality growth business with significant barriers to entry as there’s little to no incentive for a company to buy and manage its own bikes, as well as handle all the financing and insurance needs. As a result of this Bikeleasing sees very high stickiness and ~100% customer retention rates. Therefore, cash isn’t wasted trying to acquire a treadmill of new customers that they constantly need to replace.

Moreover, even before covid there was an emerging trend towards bike riding and community bikes in Europe and there are large efforts in Germany and throughout Europe to improve its biking infrastructure to facilitate this demand. In addition, there’s still tremendous white space as BLS’ management believes that only ~30% of German companies have even looked at offering bikes to its employees. In addition, companies where Brockhaus has existing relationships are seeing ~MSD penetration, but they think this could easily double through increased marketing efforts and increased visibility.

Outside of Germany, corporate bike leasing remains in its infancy, but Brockhaus has made its first move internationally by entering Austria in November 2021, where BLS is already seeing positive early results. Beyond bikes, management has highlighted that its infrastructure and its leasing platform business model could be used for other products such as corporate laptops or cell phones. But rest assured, Brockhaus sees a large enough growth potential within bikes alone and they don’t intend to pursue these other opportunities in the near term.

IHSE Business Overview (100% owned by Brockhaus)

Brockhaus acquired 100% of IHSE in December 2019 for ~€135mn. Its CEO Dr. Lottman agreed to stay on and continue to run the company as its CEO. Then in November 2022, IHSE added kvm, its first tuck-in within the IHSE business, which helped to future proof the business, and they expect many more highly accretive tuck-in deals to come.

IHSE is a technology leader in providing hardware and systems for mission-critical applications in need of highly secure networks such as data centers, airport traffic controllers and municipal grid management. Its customer base ranges from Netflix to Heathrow Airports to ExxonMobil and as data and cybersecurity spending continue to grow IHSE stands to benefit from these secular tailwinds. Moreover, data security is becoming a strategic priority as companies realize how critical these services can be in a digitally enabled world and we believe this should only bolster IHSE’s long term growth trajectory.

Prior to covid, IHSE was a phenomenal asset that enjoyed ~15 years of >10% revenue growth and ~35% EBITDA margins. Nevertheless, given IHSE’s large exposure to air traffic control centers, the business was hit quite hard by travel restrictions during covid. By year end 2022, IHSE’s revenues were still ~10% below its pre-covid levels, but EBITDA was ~40% lower due to negative operating leverage. Simply put, while the company has benefitted from a re-opening in most markets outside of Asia (~1/3 of revenues pre-covid), IHSE is yet to see the benefits of a China travel recovery. Prior to covid, China was ~10% of IHSE revenues, but it’s now ~1% of revenues. Despite this headwind, 1H 2023 revenues grew by ~20% y/y and EBITDA grew by a similar amount as EBITDA margins were still ~20% (~15% below pre-covid levels). IHSE was faced with several component shortages and input cost inflation, but these headwinds have now dissipated. Gross margins have remained consistent with pre-covid levels and there has been no change in industry fundamentals. Therefore, management believes that IHSE should regain its ~35% EBITDA margins once its revenue surpasses pre-covid levels, which we believe could happen in 2014.

Longer term, IHSE cited many attractive growth opportunities around air traffic control as well as products lines for control centers that manage autonomous vehicle fleets and smart cities. In addition, IHSE has opened its own offices in S. Korea and China ensure to support for its existing business and closer ties to its largest potential customers. Moreover, in the case of future covid lockdowns, Brockhaus will now already have boots on the ground, unlike pre-covid, allowing for sufficient sales opportunities in whatever the future brings.

Snöboll Compounder Roll Up Framework

We believe that Brockhaus represents an attractive Phase 1 Snöboll Compounder Roll Up. This is highlighted by the company’s attractive organic growth and capital allocation strategy, its small size, its low valuation, the market’s low expectations, as well as its limited institutional awareness and ownership. We believe this Framework provides some of the most compelling risk/rewards as these smaller companies can realize faster growth through acquisitions and they can benefit from a significant appreciation in their valuation vs. their larger more well-established peers.

As Brockhaus moves into Phase 2 “Replication”, we believe its growth should accelerate, its ability to extract synergies should increase and its cost of capital should come down. Combining this with a significant re-rating in the valuation of its shares should provide compelling upside for investors over the foreseeable future.

Key Investment Factors (KIFS)

Unstainable Cheap Valuation for High Quality Assets

Due to Russia’s invasion of Ukraine, amongst other reasons, 2022 was a tough year for Brockhaus and many European small caps, and it was especially tough for German-listed companies due to the subsequent removal of Russian energy supplies from the heavily dependent German market. Nevertheless, lower energy consumption, an increase in LNG imports and a warm winter led to ample energy supplies and in turn a normalization in energy prices just as fears of all-out war in Europe receded. Since then, consumer sentiment in Germany has shown a recovery which stoked a strong 2H 2022 performance for many German-listed equities. Nevertheless, Brockhaus has not fully recovered, and its shares are still >40% from their 2021 highs despite its continued ~30% EBITDA growth.

As it stands, Brockhaus is currently trading at <7x proportionate EV/EBITDA which is remarkably cheap for a high quality, capital-light business that’s very scalable and growing revenues ~20%/year at ~35% EBITDA margins.

Moreover, Brockhaus should be easy to value as it only consists of two operating assets. If we assume IHSE were valued at ~12x EV/EBITDA, a fair multiple for a ~10% organic growth, >35% EBITDA margin industrial business, then IHSE would be worth ~€75-80mn. If you also subtract the parent cash (~50mn) this implies that investors are getting its gem, Bikeleasing for ~4.5x proportionate 2023 EV/EBITDA. Paying ~4.5x EV/EBITDA for a software business that has doubled EBITDA over the last two years and should double its EBITDA again over the next two years while earning ~45% EBITDA margins seem like quite an attractive valuation.

Additionally, we believe that Bikeleasing’s private market value would to be ~15x EV/EBITDA, which is inline with Brockhaus’ original purchase price. This implies that Brockhaus’ 52% stake in Bikeleasing alone could be worth ~€450mn vs. Brockhaus’ current enterprise value of ~€250mn, or almost 2x its current valuation. In addition, investors would still get any future value created from its acquisitions for free.

While it seems inconceivable that a business of this quality, managed by best-in-class investors, could be this cheap, there are structural reasons for this opportunity. First, Brockhaus is very small and thinly traded (<$0.5mn ADV) – although local brokers can secure shares in higher volumes. The company only issued ~3.5mn shares in its IPO (~30% float) and it went off with little fanfare. Also, the management remains large shareholders (~35% ownership) and Brockhaus’ investor relations team explained that there are many loyal family office investors which hold shares and have no intention of selling shares anytime soon.

The company also has a limited public track record. They only provide quarterly and semi-annual updates and until recently they didn’t even host quarterly investor calls. In addition, given Brockhaus’ small size and its lack of public comps, there are only three analysts (Jefferies, Berenberg and M.M. Warburg & Co) that provide limited research coverage of the company. This limited coverage allows for a potentially larger informational advantage

Another reason for Brockhaus’ cheap valuation might be because the market believes that Brockhaus will have to issue additional shares to pursue its growth by acquisition strategy. However, management prefers smaller lower valuation tuck-ins acquisitions and they have said they would avoid >€200mn deals that require equity issuance at discounted valuations unless they could find spectacular deals that fit all its criteria.

Nevertheless, these dynamics have led to the opportunity at hand. During my prior experience at a >$200bn AUM mutual fund, as is the case for most large and sophisticated institutional investors, these firms just can’t own shares in companies like Brockhaus given the liquidity constraints, no matter what the upside is. Therefore, we believe that this unsustainably low valuation provides an attractive opportunity that patient investors can exploit given the company's current small size.

As in the case with most successful Snöboll Compounder Roll Ups, we believe it’s only a matter of time before Brockhaus’ continued success leads to a higher stock price and in turn more institutional focus, increased sell side research coverage and a rising daily trading liquidity which should help to drive its valuation higher as sophisticated investors buy up shares at bargain levels. This is a playbook that we have seen play out many times for previously successful investments and we believe this situation will play out in a similar fashion for Brockhaus Technologies.

Proven Track Record of Value Creation

Just like most of the best Snöboll Compounder Roll Ups that we’ve previously invested in, Brockhaus has a very specific and repeatable approach to acquisitions. As described above, Brockhaus is solely focused on technology and innovation leaders with B2B business models that are highly profitable (>30% EBITDA margins) and have strong growth (>20% revenue growth), where Brockhaus can take a majority ownership position or acquire 100% of the company. Also, as outlined in the IPO roadshow, Brockhaus has no intention of paying a dividend in the near term and most of its cash flow will be reallocated towards more acquisitions.

Regarding sourcing, Brockhaus avoids auctions, and they typically generate acquisition opportunities through its own proprietary in-house M&A team and its decades-long relationships that it has built with entrepreneurs in Germany’s Mittelstand. It’s also highly selective as it analyzes >100 deals/yr and only ~10 deals per year get more attention beyond their initial due diligence. Ultimately Brockhaus looks to only do 1-2 acquisitions/yr. For its target size, Brockhaus seeks targets with €3-25mn EBITDA/yr and deal sizes of €30-300mn. While Brockhaus does look to make larger tent pole acquisitions they must compete with sophisticated financial buyers for assets and valuations might not be as attractive as its tuck-ins. This M&A strategy allows BRKT to pay sustainably lower acquisition multiples (6-8x EV/EBITDA), which helps to boost its return on invested capital. Over the last two years M&A at Brockhaus has been challenged by high valuations for technology assets and high sell expectations, but management has suggested that they are seeing an increasingly attractive set up for accelerating its M&A ambitions.

Moreover, BRKT has already proven that they can generate large returns on its acquisitions at Brockhaus Technologies. While they do have the option, Brockhaus hasn’t just simply held its assets in perpetuity. The company has already proven to be phenomenal sellers of assets as well. In 2019, Brockhaus acquired a ~70% stake in a business called Palas, which was focused on air purification products. During its three-year ownership, Palas’ EBITDA more than doubled. In November 2022, Brockhaus announced the sale of its Palas business for ~€100mn. Brockhaus’ sale proceeds were ~€59mn with another potential ~€18mn earn-outs over the next two years. This potential return of >€70mn in proceeds appears quite favorably vs. the ~€18mn that Brockhaus invested in Palas as Brockhaus will have made 3-4x on its investment in the company in four years. Brockhaus is also able to use this cash flow to re-invest into new acquisitions at more favorable valuations.

Thus far, Brockhaus has proven to be an “Advantaged Acquiror” and small business owners prefer selling to Brockhaus vs. another strategic or financial buyer, like private equity. Also, Brockhaus is an impressive operator who has repeatedly proven that they can accelerate growth at its acquired assets. Brockhaus’ tagline elevating “Tech Champions” is more than just a cliché. Brockhaus acts as a strategic partner to assist companies in business-scaling operations. They speed up market expansion and help to boost profit margins. It also helps entrepreneurs structure growth-capable organizations and optimizes their management capabilities.

In contrast to the finite lifetime of a PE fund, Brockhaus aims to provide its acquisition targets with a more permanent home as well as resources for its business owners to remain at the helm at Brockhaus. Ultimately, Brockhaus provides its entrepreneurs a safe haven for their lifetime work and Brockhaus runs all of its companies in a truly decentralized manner.

Brockhaus is managed by a lean corporate team of ~10 employees. However, Brockhaus provides all of its relevant know-how as well as its network of business contracts to optimize and scale its businesses into global markets. After completing each acquisition, Brockhaus creates a new board of directors for each subsidiary made up of highly experienced industry practitioners which help to develop a specific growth strategy and financial targets for the newly acquired assets. As a result of this structure and its support, Brockhaus is allowed to bring these target companies to the next level as they “elevate” these champions.

Looking at Brockhaus’ previous Bikeleasing acquisition also highlights how this strategy drives higher returns on capital for its shareholders. When Brockhaus announced its acquisition of Bikeleasing in early 2021 they agreed to purchase its ~52% stake at a ~€350mn EV. At the time run-rate EBITDA was ~€20mn and Brockhaus was paying ~15x EV/EBITDA. However, due to Brockhaus’ success, we now expect Bikeleasing 2023 EBITDA will be ~€57mn, implying Brockhaus’ current purchase price is only ~6x EV/EBITDA.

Catalysts for Unlocking Value:

On top of its attractive valuation and its compelling acquisition strategy, there are several catalysts which should help to unlock Brockhaus’ discounted valuation and allow for a large share price appreciation.

First, IHSE is expected to show a sizeable pickup in growth in 2023 due to a pent-up travel recovery. IHSE’s core business is providing secure computing infrastructure and one of its largest end markets is air traffic control, which came to a halt during covid travel restrictions. Moreover, China is one of IHSE’s largest growth markets and Brockhaus mostly sold direct to this market which was also impacted by China travel lockdowns in 2020-2022. During this time, IHSE had limited ability to visit and sell to its customers in this market, but this has now changed.

In Q4 2022, IHSE revenue growth was +37% and we’ve started to see this strong rebound in growth continue 1H 2023. However, given the delayed re-opening in China, IHSE will only start its full recovery in 2H 2023. Furthermore, we believe its 2023 growth will be bolstered by several recent large traffic control contracts that IHSE signed at much higher values in its recent tenders. As of Q2 2023, IHSE’s backlog was >€10mn and it includes its largest order in the company’s history (>€7mn), which should be delivered in 2H 2023.

Next, we believe Brockhaus’ 2023 guidance for €165-175mn in consolidated revenues and its ~35% EBITDA margin target (implying EBITDA of €58-61mn), could prove to be conservative. Brockhaus has a track record of beating and raising its own targets and it’s on pace to achieve this despite several one-time headwinds in Q2 2023. In 2021, its first year as a publicly traded company, BRKT beat its revenue guidance by ~10% and its EBITDA targets by >30%. This allowed Brockhaus to achieve its midterm IPO roadshow growth targets in ~18 months, or twice as fast as planned despite its covid-related headwinds. In 2022, Brockhaus once again easily surpassed its revenue and EBITDA targets and we believe 2023 guidance for revenues and EBITDA growth may prove to be overly conservative, especially as IHSE makes its full recovery from covid headwinds.

Lastly, shareholders in Brockhaus are getting no value for potential acquisitions and their subsequent value creation. Following its divesture of Palas, the sale of some commercial real estate at IHSE and its steady paydown of Bikeleasing’s acquisition debt, Brockhaus has already paid down >€100mn in debt over the last two years. Currently the company only has ~€28mn net debt (~0.7x ND/EBITDA), including ~€50mn cash at the parent and Brockhaus could be debt free by year end 2023 without any additional acquisitions.

As Brockhaus is comfortable going up to 2.5x ND/EBITDA, we believe Brockhaus can make another ~€150mn acquisition in 2H 2023 and using its desired multiple paid of ~7x EV/EBITDA, this could add >€20m in incremental EBITDA, or >30% EBITDA growth without any equity issuance. Brockhaus has said that they intend to do 1-2 deals per year, but M&A isn’t included in Brockhaus’ guidance and it’s definitely not in consensus estimates. Therefore, we believe M&A could also serve as a solid catalyst to start driving Brockhaus’ share price to much higher levels in 2023 and we believe management is looking at new tuck-in deals with increased urgency.

Catalyst

Accelerating growth at IHSE (China travel recovery)

M&A both large and small

Beating 2023 rev/EBITDA guidance

Increased share price, trading volms and institutional coverage