Description

Summary investment thesis

Interpump, an Italian-headquartered company with Euro 4.5bn market cap, Euro 2bn revenue and 19% EBIT, is the global leader in the manufacturing of high-pressure piston pumps and a key reference player in the larger hydraulics market.

The Company, led by its founder and controlling shareholder Fulvio Montipò and an experienced stable management team, leverages on a global footprint, the excellence of its production, a premium customer service and long-lasting customer relationships. The successful business development and the ability to stay innovative keeping the costs under control turned into constant sales and profit advances recording a 18% 10Y-CAGR of the Operating Income.

As happened in the past, the growth is expected to come from both organic expansion and M&A. Interpump has got opportunities to extend its business reach by introducing further different applications for its core high-pressure ceramic piston pumps in flow handling, supported by unrelentless R&D activity. In the hydraulics market, gaining market share primarily requires executing strategic acquisitions: Interpump built an impressive track record of more than 100 deals. Post-deal integration is rapid and antidilutive, ensuring a constant enlargement of the business’s offering while preserving margins and profitability.

In the position of the minority shareholder of a business generating more than 20% ROIC, the investor benefits from a fully aligned controlling partner. The market price, after the decline from the 2021 peak that compressed the market multiples, appears as a favourable entry point for the long-term owner, envisaging more than 6% current yield coupled with a solid perspective of further compounding through the proven mix of organic expansion and expansion via M&A. Following 3 years of outstanding growth and a prudent 2024 guidance, Mr. Market offers an opportunity entailing a reasonable 8-9% nominal growth rate expectation to achieve a satisfactory consistent long-term return.

Interpump, at a glance

https://www.interpumpgroup.it/en/investor/highlights

Stock Exchange: Milan        Market Price: Euro 42          Market Cap: Euro 4.5bn         

Interpump Group (“Interpump” or “Company”), historically the leading manufacturer of high-pressure piston pumps, since the late nineties, through a series of acquisitions, has expanded into the hydraulics sector, affirming itself as one of the global groups in the field.  

The Company was founded in 1977 by the Italian entrepreneur Fulvio Montipò who currently is the majority and controlling shareholder (20%).

The business is currently organised under two operating segments:

• The Water-Jetting Business (25% of turnover) represents the historic core activity of Interpump, centred around the manufacturing of highly powered piston pumps and related components/accessories mostly used in construction and automotive end-industries. Since 2017, this area also encompasses the production of special pumps, mixers, agitators, cleaning systems, valves and tanks for the food, cosmetic and pharmaceutical end-markets (this is known as the “flow handling segment”).
• The Hydraulics Business (75% of turnover, more capital-intensive absorbing 80-85% of Capex) developed since 1997, encompasses manufacturing and marketing of a range of hydraulic components: everything from power take-offs (used to transmit power from an engine of an industrial vehicle to the other hydraulic parts) where it is the global leader, to cylinders and directional control valves (the valves represent the key interface among the user and the machine operation), hoses, pipes and fittings and the latest reduction gears. Hydraulics Business primarily serves trucks, construction, earth moving and agriculture end-markets.

Customers are OEMs in the respective end-industries reached through the wholesale channel or dealers.

Interpump’s growth has always been characterised by both endless organic expansion (7% 10Y-CAGR) thanks to a strategy that pursues geographical, product and application sector diversification, focused on widening the product range.

The acquisitions further bolstered the growth. In doing so, Interpump adopts a decentralised model where the acquired companies are independent units preserving brands, organisational structure, their key strengths, and recognition in the market while leveraging on a larger platform to efficiently execute cross-selling of a wider products’ portfolio.

As far as the M&A perspective is concerned, the management recognizes the existence of a long pipeline of potential targets and therefore a framework where they can pick the most interesting ones to seize the long-term goals. They have historically demonstrated the ability to negotiate low entry multiples. According to the management, this is not by chance. It's because Interpump offers a way-out for a motivated seller together with the prospect for the interested entrepreneur to stay within the group and to continue managing the company benefiting from a larger platform and an international organisation.

Historic background and reference market

In the late seventies, Interpump introduced a radical innovation in the piston pumps market: the replacement of steel pistons with ceramic ones. This became the new technological standard in the field: the new material improved the efficiency, performance, and reliability of pumps and in just a few years the Company became the world market leader in its niche. Interpump’s positioning strengthened thanks to product’s improvements and upgrades of the applied technologies ensuring a high customer satisfaction and a progressive diversification in “adjacent” segments. In the nineties, the Company penetrated the hydraulics sector thanks to large acquisitions and became the largest global manufacturer of power take-offs.

The group posted an enviable growth path through which it recorded only a few years of decline in turnover mostly due to the major global downturn and shocks (2008-2009 and 2020). During Covid, despite the challenges, Interpump maintained a record-high EBITDA margin, emphasising its operational efficiency and adaptability.

Looking at the reference markets where Interpump operates:

• The segment of high-pressure pumps is a niche one valued nearly $1bn where there aren’t large operators. It is characterised by a high degree of fragmentation. Interpump is the undisputed market leader (estimated 40% market share) with a premium positioning due to the quality provided and top reputation. Piston pumps find several applications. The group expanded into the design and manufacturing of flow handling components which is a $9bn market where the engineering and manufacturing requires high skills (like the production of very high-pressure pumps) and there is ample room to grow via acquisitions.

• Hydraulics is a segment valued $50bn where any player competes on manufacturing efficiencies and economies of scale. As mentioned, Interpump entered the sector taking the leadership in the power take-offs. The crucial competitive advantage to be in the segment is the global footprint to serve the largest OEMs in every geography. By being global and offering key components, a player can smooth the swings in demand through diversification and leverage on a wide range of products to pursue cross-selling opportunities. This approach is crucial to establish long-lasting sticky relationships with the customers. The strategy to grow is mostly via M&A.

Products and applications

Below are appended examples of the products offered by the Company from some of the reference brands:

Financial performance

Since 2013, revenue increased on average by 15%. Interpump got that result by combining a 7% average organic growth and expansion via M&A. The Company executed more than 100 acquisitions in its history largely creating a global diversified business.

Turnover reached Euro 2.2bn in 2023 (nearly doubling since 2020). Gross Margin’s erosion from 38% in 2017 to the current 35% was offset by higher scale that permitted to improve EBIT margin (from 14% to the current 19%) although the numerous acquisitions executed. The notional Operating Income grew annually on average by more than 18% with the sole decline occurring in 2020. EPS’s CAGR was 20%.

The cash flow profile adjusted for the effects of the acquisitions highlights cash conversion on average being 67%. The ratio shifts upward to 85% if we adjust for the effect on working capital expansion due to growth (the Company successfully kept unchanged the trade working capital terms).

According to the management, the extraordinary peak of Capex in the last years responds to the needs of (i) entering the power transmission business (White, the largest and most complex acquisition in the Company’s history, absorbing Euro 40m in Capex out of total Euro 400m in the last 3 years) and (ii) setting up the technological foundations for the long-term. Starting from 2024 is expected to normalise towards the 4-5% long-term ratio. This fact appears supported by the Capex/D&A ratio that diverged in the last 3 years topping at 1.6x in 2023 vis-à-vis a 1x ratio previously observed.    

Invested Capital set close to Euro 2.4bn as of the end of 2023 while Tangible Invested Capital set close to Euro 1.6bn adjusting for the large Goodwill figure resulting from the acquisitions.

The Return on tangible Invested Capital in the last 10 years has been on average stably around 21-22%. Tangible ROE was setting on average close to 37% in the last 10 years.

Competition

In the very high- and high-pressure pumps, competitors are mostly private Italian and German companies. There is limited comparison with listed flow handling operators – Gea Group and Alfa Laval AB - while SPX Flow was delisted in 2022 by a PE fund.

Within hydraulics, the competition is fierce among large global players. The close competitors are companies like Parker-Hannifin, Eaton Corp, Danfoss, Robert Bosch, Rotork and Bucher Industries which are commonly listed in public markets. Notwithstanding, there does not exist a company perfectly comparable to Interpump in consideration of size, organisation, and strategies.

Bearing in mind the limitations outline above of any comparative analysis, observing the financial performance of Interpump and of the peers it emerged the following:

• Water-Jetting shows a high resiliency that confirms the existence of a wide moat at the Company (Gross Margin >45%). The two peers in flow handling have got on average lower Gross Margin and EBIT margin compared to Interpump. Moreover, the Company appears highly efficient having a NOPAT/Gross Profit ratio close to 40% while the peers set at 26-27%. On top of the pricing power as the market leader in pumps, Interpump emerges as a cost-effective organisation.
• Hydraulics highlights lower Gross Margin than the peers. But the net profitability consistently improved in the last 10 years reaching 13%. Interpump preserved its Gross Margin (31-32%) in the segment but significantly increased the efficiency reporting a wide improvement with the NOPAT/Gross Profit ratio that permitted it to outperform the peers in terms of net margin evolution. The strategy in this field, where the degree of competitive pressure is particularly intense, is to remain highly competitive through pricing and to get reward from cost effective management and constant manufacturing organisation improvements. Provided that this is achievable, the performance will benefit from exploiting the operating leverage. Within this context, the acquisitions create the framework to achieve fixed cost synergies.

Interesting is to look also at the return on capital metrics:

• Tangible ROIC, stably above 20% for Interpump, appears generally higher for the peers (on average 35% in the last 10 years). The result arises from a significantly more rapid turnover of invested capital of the listed companies analysed, particularly the trade working capital. That occurs mostly as the effect of the inventory policy adopted by the Company that keeps wide availability of the products as a competitive advantage and exhibits therefore slower turnover.
• Moreover, peers present higher turnover also of tangible fixed capital. My sense is that (a) there are sensible considerations having regard with the absolute size of the companies (b) the improvements in the fixed capital utilisation can benefit from a long-term strategy aimed at contributing additional volumes (bolt-on acquisitions) although, in the short-run, the integration of acquired businesses may burden on this metric.

Market valuation

Market price grew from Euro 8.7 (2013) to the current Euro 42 envisaging a 17% CAGR. The trailing earnings multiple sets close to 16x.

Taking an Enterprise Value perspective, the total capitalization sets close to Euro 5bn. The associated multiples are significantly down from the peak of 2021 in consideration of the 36% decline of the market price and the meaningful growth of the profitability.

Investment considerations

I recommend Interpump as a compelling investment case for the long-term owner: this is a compounder and global serial-acquirer retaining a solid leading position in its field.

• The Company is controlled and led by its founder, a renowned entrepreneur in the sector. There is a motivated, stable, and experienced management team in place.
• Interpump is known globally for its advanced engineering and innovative solutions. It exhibits a strong leadership in the core business (high-power pumps) and successfully pursues expansion opportunities into adjacent business fields. The diversification of the products’ portfolio helps mitigating risks and permits to capitalise on the various market opportunities. Through its international footprint, with production facilities in many countries, Interpump is a reliable supplier. Consistent execution capabilities are a key differentiating factor.
• Interpump works closely with its customers to provide tailored solutions: that helps in building long-term relationships.
• The Company demonstrates pricing power: during the latest inflationary spike, it successfully pass-through the increases to customers preserving the margins.
• Vertical integrated manufacturing and control over the supply chain ensure a high standard of quality control.
• The Company exhibits an impressive track record of disciplined and winning strategic acquisitions that enabled Interpump to enter new markets. Growth via M&A is not pursued “per se” but targeting businesses instrumental to the enlargement of Interpump’s global offering. The outcome is an effective post-deal integration that does not jeopardise the profitability profile and the return on invested capital of the Company. According to the management, there are significant M&A opportunities, and the Company will prioritise deploying capital for acquisitions in the near term.

From the standpoint of the minority shareholder, the investor can benefit from:

• A business generating consistently high return on invested capital over a long period of time. Sustainability of ROIC over time ensures beneficial investments and value creation.
• A current yield exceeding 6% coupled with a rational expansion strategy that is expected to deliver a material and sensible growth of the business. The profitability translates into a solid cash generation thanks to the ability of the management to protect margins and optimise the operating structure.
• A full alignment of interests with the founder and controlling shareholder. Moreover, Tamburi Investment Partners (https://www.tipspa.it/en/) retains a large stake into the business since 2003, being a long-term financial sponsor.
• The investor can take advantage of the decline of the stock from the peak (-36%). The current market price implies a conservative 2-3% perpetual growth assuming 8.5% cost of capital. At the current yield (6.4%), a moderate growth rate makes attainable a 15% long-term target yield.

Catalyst

M&A

Organic growth