Description

SUMMARY

Sweden’s Bufab AB delivers savings and efficiency to OEMs globally in sourcing C-parts, small components with high transactional costs and risks. Due to its entrepreneurial culture and strong execution, Bufab over the decades has outgrown peers and established itself as a reputable industry consolidator. In its next chapter, Bufab is targeting a higher ROIC just as its growth is approaching a cyclical inflection point – an attractive investment setup.

C-PARTS SUPPLY CHAIN PARTNERS

“C-parts” are small connector components essential in industrial and consumer product manufacturing. Their low-value (5% of materials costs), high-volume (85% of orders) nature requires extensive efforts including handling of inventory and numerous suppliers, quality and ESG assurance, and logistics coordination. As a result, 80% of OEMs’ C-parts costs are transactional, and execution risk to the assembly process is high (Exhibit 1A).

“Supply chain partners” assume end-to-end responsibility for C-parts management, consolidate suppliers and improve purchasing terms. This achieves savings (up to 25% of transactional, 10-25% of direct costs) and risk reduction for OEMs (Exhibit 1B). Unlike transactional distributors, partners price service comprehensively rather than on a cost-plus basis. Their advanced offering includes vendor-managed inventory, customer IT integration and product design advisory. The partner industry is growing 2-3x faster than the mature $150+ bn C-parts market.

Supply chain partners themselves benefit from a scale-driven network effect, whereby the combination of local presence (to ensure customized service, VMI and just-in-time delivery) and global footprint (to efficiently source and ship a wide range of SKUs) enhances customer value proposition, while a leading franchise and greater financial capacity facilitate consolidation of the fragmented industry (Exhibit 1C).

The leading and increasingly global C-parts supply chain partner is Sweden’s Bufab AB.

OVERVIEW OF BUFAB AB

Founded in 1977 in Sweden’s region of Småland – IKEA’s birthplace known for entrepreneurial spirit and cost-consciousness – Bufab AB (“Bufab” or the “Company”) through consistently profitable organic growth and self-funded acquisitions has developed into a global group of 51 companies with $831 mn in 2023 revenue.

A self-designated “Solutionist”, Bufab wins customers – and outgrows competitors (50 large regional, 3-4 global) – through focus (one of two dedicated C-parts partners globally) and expertise (account managers act as sales representatives and customize service to address customer needs). True to its entrepreneurial spirit, Bufab (i) runs a decentralized regional model, (ii) maintains the independence of the local “sister companies” it acquires, whereby most founders continue running them, and (iii) seeks “pull integration” with revenue, sourcing and best operating practice rather than cost synergies – the reasons for Bufab’s reputation as an acquirer of choice among the founders (Exhibit 2).

Over the past decade, Bufab grew revenue by 12-18% YoY (MSD organically in a PMI-correlated, cyclical manner through new customers and existing accounts’ wallet share, ~10% via acquisitions), increased EBITA margins via scale and efficiency measures by several points to 12%, and delivered a low-teen ROIC. The pandemic proved Bufab a beneficiary of supply chain constraints and an inflationary environment, although in a cyclical manner organic growth turned negative last year (as low as -9% organically in 4Q23). Under the new CEO Erik Lundén, in addition to organic and acquired growth, by 2026 Bufab seeks improvements in profitability (to 14% by 2026) and working capital management (37% of revenue currently vs low 30% at peers) – a set of initiatives aimed at elevating the Company’s ROIC in its next chapter.

Bufab’s tightly owned stock trades in Stockholm.

LONG THESIS

We are compelled by Bufab’s (1a) business model that facilitates durable organic and acquired growth and (1b) new set of operating initiatives aimed at elevating its ROIC. We also believe that (2) Bufab is a timely investment given the upcoming inflection in the Company’s business cycle and its normalized valuation.

1. Bufab is a textbook Swedish enterprise, (a) growing and (b) improving itself over the cycle(s)

(a) As argued earlier, the leading C-parts supply chain partners are attractive businesses. We believe Bufab further stands out among such businesses due to its unique “Solutionist” mindset, low-key but entrepreneurial and competitive culture, and consistently strong execution. We find evidence in Bufab’s decades-long (out)performance record and our conversations with industry participants.

We therefore anticipate further customer wins and market share gains in the fragmented industry by Bufab. At the same time, Bufab’s disciplined acquisition strategy with an emphasis on founder retention and “pull integration” will maintain it as a center of gravity for high-quality targets in the C-parts industry. We thus project Bufab’s continued mid-teen revenue growth in 2024-28 (MSD organically and the rest through acquisitions at ~10x EBITA).

(b) Quality Swedish companies grow stronger over each cycle. Bufab is no exception, having in stages developed from a local Nordic into a global and more profitable operator, with a compelling new set of operating initiatives ahead.

Profitability: Bufab’s target EBITA margin of 14% by 2026 appears conservative, as it was already achieved at the cycle’s peak in late 2022 and should return in the next growth cycle and beyond. Further upside to Bufab’s profitability (reflected in our Bull, but not Base Case) could come from acquiring niche C-parts companies (a focus since 2019; 1.5-2x more profitable compared to trading companies) – a strategy directionally resembling peer Lagercrantz’s boost of gross margins via acquisitions of “proprietary products” over the past decade (Exhibit 3A) – as well as potential disposal of two low-margin manufacturing companies (5% of revenue, 5-10% EBITA margin).

NWC: At 37% of revenue, Bufab’s NWC is the least efficient among peers, as Bossard and Fastenal’s are in the low-30%, and certain Nordic peers are even more efficient (Exhibit 3B). The delta is due to Bufab’s historically high inventory levels, a legacy approach now changing with a focus on supplier stock consignment and stricter customer demand forecasting under the capable leadership of Bufab’s veteran Johan Lindqvist. We observe no structural impediments otherwise and project a convergence with Bossard and Fastenal’s NWC levels by 2026.

In our Base Case, by 2026 we expect the improvements in profitability (EBITA margin of 14%; 2/3 of the incremental ROIC vs 10-year average) and NWC management (33-34% of revenue; 1/3) to elevate Bufab’s ROIC to 15%.

2. Bufab appears to be a timely investment

After a customary downcycle and a trough in 2023, Bufab’s organic growth is likely to accelerate this year in the wake of rebounding Industrial PMIs (Exhibit 3C). Acquisitions, following a digestion period in 2023, are also likely to resume, as Bufab’s leverage is approaching 2x, a historically low level. At the same time, after a pandemic spike, the Company’s valuation has largely normalized (NTM EV/EBITDA of 13x currently, 10-12x historically, Exhibit 4A). Together with the aforementioned operating initiatives, these considerations make Bufab a timely investment.

valuation

We value Bufab on an EBITDA basis, applying the FY1 EV/EBITDA multiple of 13x (one turn above the average level for Bufab and its Nordic peers in 2013-19 to reflect the anticipated ROIC improvement) to our 2028 EBITDA estimate of SEK2.5 bn for the 2027 target share price of SEK765, a 94% upside from the current price. Our bear and bull scenarios provide for share price targets of SEK296 and SEK1,136, respectively (Exhibit 4B).

RISKS

1. Execution of the acquisition strategy

Acquisitions are at the core of Bufab’s capital allocation, and misexecution would suppress ROIC. We are encouraged by Bufab’s track record with continued growth and improved profitability of acquired companies, tenure of their founders with BUfab, and discipline in paid multiples (10x EBITA on average, even for niche players).

2. A non-linear (cyclical) pattern of Bufab’s growth

Although Bufab’s business is cyclical, our investment thesis focuses on over-the-cycle organic and acquired growth. We also believe that investors understand Bufab’s cyclicality, which is also reflected in an undemanding valuation.

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Exhibit 1.

Exhibit 2.

(A) Bufab's customer acquisition, wallet share increase and value proposition (a single customer facility as an example)

(B) Bufab's company acquisition and integration

Exhibit 3.

(A) Bufab's current revenue mix and similarities with Lagercrantz's evolution

(B) Bufab's Net Working Capital

(C) Organic revenue growth (YoY), acquired revenue (annual contribution) and US & EU Industrial PMIs (YoY)

Exhibit 4.

(A) Bufab peer's FY1 EV/EBITDA multiple over the last 10 years

Note: Swedish peers include Indutrade, OEM International, Lagercrantz and AddTech; U.S. industrial distributors include Fastenal and WW Grainger

(B) Valuation scenarios for Bufab

• Bear case (highly conservative) - 6% total revenue CAGR in 2024-28, no margin expansion, elevated acquisition multiples, no ROIC improvement, low target valuation multiple
• Base case (conservative) - 13% total revenue CAGR, 14% EBITA margin in 2026-28, 10x EBITA multiple paid for acquisitions, target valuation multiple of 13x (one turn above historical level to reflect ROIC of 15%)
• Bull case (reasonable) - 17% total revenue CAGR, 16% EBITA margin by 2028, 10x EBITA multiple paid for acquisitions, target valuation multiple of 16x (above historical peer level/closer to current level to reflect ROIC of 17%)

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Additional considerations

• Bufab can afford an HQ anywhere in Stockholm/Sweden. Yet the company remains loyal to its birthplace, a small, Palo Alto-like city of Värnamo in Southern Sweden halfway between Stockholm and Copenhagen.

• The broader region of Småland has few natural resources other than wood and running water (used to facilitate metal processing), and its people made the best of those, giving rise to global companies like Ikea and Husqvarna. Bufab follows the region’s entrepreneurial tradition, having developed from a C-parts distributor for local customers into a value-added partner for global companies
• Bufab’s HQ is small and humble, with minimal amenities and no reception desk reminding of the adjacent warehouse rather than the headquarters of a sizable company. This seems to reflect the Company’s low-key culture and focus on delivering efficiency to clients

Bufab's largest recent acquisitions

Performance of the most recent six acquisitions (including the two above)

Bufab's closest competitors/peers

(*) CAGR includes acquired growth for Bufab, Bossard and Wurth

Bufab's growth vs competitors/peers

Bufab's top shareholders

Note:  Founded by Bengt Liljedahl in 1982 in Southern Sweden as a local Volvo dealer, Liljedahl Group is a family-run conglomerate of seven fully owned Nordic and European industrial and logistics companies, and a holder of a 29% stake in Bufab (accumulated in steps beginning in 2016)

Catalyst

Positive inflection in organic and acquired growth in 2024

Improvement in operating margin and NWC management in 2024-26 and a higher ROIC as a result