Description

Lindbergh S.p.A. (LDB)





Lindbergh S.p.A. – Thesis Summary

Lindbergh is a provider of niche, complex, mission-critical logistics services for industrial maintenance & repair operations (MRO) technicians in Italy and France. The complexity and niche end markets allow for stellar unit economics. Gross customer and revenue churn is zero in most years. >90% of total revenue is contractually recurring with automatic inflation escalators. ROTC is >40%. There are virtually no close competitors. The industry is characterized by high switching costs, high barriers to scale, and growing secular demand. Lindbergh has ~6.3% market share based on total number of technicians in Italy and France. In addition, in 2023, Lindbergh founded a subsidiary to be the first consolidator of the highly fragmented B2C thermohydraulic MRO services market in Italy. The company has 65% insider ownership and is led by its co-founders – CEO Michele Corradi and President Marco Pome.

Valuation

Market cap as of Dec 2023: €19.4mm = $21mm

Net 5 year IRR, assuming an exit multiple of 15x NTM adj. FCF (10.7x LTM EV/EBITDA): 39.5%. Net MOIC: 5.3x.

Net 10 year IRR, assuming an exit multiple of 15x NTM adj. FCF (11.8x LTM EV/EBITDA, 2.0x sales): 24.9%. Net MOIC: 9.2x.

If Lindbergh trades at the MRO peer average at exit (16x LTM EBITDA): 28.0% 10 year net IRR, 11.8x net MOIC.

Assuming entry = exit (6.8x LTM EV/ EBITDA), this would be 18.5% and 5.5x, respectively.

Stock currently values Lindbergh at 0.7x 2024 EV/sales, 5x 2024 EV/EBITDA, 12.2x 2024 P/E and 10x normalized adj. FCF.



Overall Unit Economics

We forecast overall revenue to grow at 21% and 15% CAGR over the next five and ten years respectively. We believe these forecasts are conservative.

We expect ROTC in the range of 45-55% due to low PP&E and negative working capital, which combined is ~23% of sales in FY23. We expect ROIC in the range of 25-38%.

We expect maintenance capex (which is mainly IT spend and vehicle leasing) to decline from ~5% in FY23 to 3% and 2% in five- and ten-years’ time, respectively.

We expect Lindbergh to grow EBIT margin from 6.7% to 12% in the period FY23-33. This can be achieved by improving Lindbergh France margins through upselling of value-added services, as well as the revenue mix shifting towards waste management and B2C, which have 35% and 15% EBIT margins, respectively.



Analogs – Value-Added MRO Service Providers

Many MRO-related companies have proven to be good compounders over the years and, in some cases, decades. They range from distributors (i.e. W. W. Grainger, MSC Industrial, Bufab, Momentum Group) to actual maintenance service providers (i.e. Cintas, Rollins, Duratec, Mader, Shin Maint, Japan Elevator Service, Norva24, Green Landscaping, Chemed, Rentokill, Viafin). Due to their capital light and relatively non-cyclical businesses, they can generate consistent, strong FCF. This allows them to make highly accretive, serial acquisitions in highly fragmented and growing market niches. As they scale, they gain additional cost efficiencies, and their margins expand. Their base rate as a category of businesses for generating outsized investment returns has been impressive. Cintas, for example, has been a 100-bagger since 1995 (and a 600 bagger since 1984), due to 30% annual profit growth for 35 years:



As you can see in the below chart, the ROTCs and EBITDAPS CAGRs of the top MRO service providers indicate they have competitive moats. Sell-side brokers generally do not categorize these companies within a distinct MRO category, but merely as “industrials,” not taking the time to understand what is unique about them. For the most part, especially for those that IPO as small caps, they are often priced at modest valuations and initially misunderstood as highly cyclical or low-moat.



While Lindbergh is an MRO-related company, none of the above MRO companies is a perfect analog for them. They do not distribute MRO parts, but like the above MRO distributors, they do provide value-added services. They are not exactly like the non-distributor service providers either, since they not only provide services to the end-customers in their B2C business, but to MRO technicians as well. Moreover, none of the above MRO listed peers have a niche, industry-focused logistics offering, which is one of Lindbergh’s core strengths (and which allows them to offer additional value-added services).i



Business Description, Competitive Moat, Growth, and More on Unit Economics

Lindbergh was founded in 2006 by Michele and Marco. It mainly provides very complex logistics network management, micro-waste management and other value-added services for industrial technicians in Italy and France. That the markets served are niche and complex means no competitors have the desire to enter.

Management segments the business in three: Network Management, Waste Management and CE, and Thermohydraulic MRO services. This write-up will take each in turn.

1) Network Management

Lindbergh delivers MRO-related parts sourced from OEMs or local suppliers to technicians ‘in-night’ and ‘in-boot’ (i.e. during the night, and into the technicians’ vans). These technicians of industrial OEMs like Jungheinrich, KION, KONE, etc. repair the industrial machinery rented or bought by their business customers. They place orders for these spare parts via Lindbergh’s proprietary software T-LINQ before 8pm and will receive them in their vans in their home driveway by 7am the next day.

Apart from this, network management includes other value-added services for technicians such as micro-waste management, washing of uniforms, recalibration of tools, re-supply of PPE (personal protective equipment), warehouse management, etc. Think about it like this: a technician uses some spare parts on each service call, and once he runs out of certain parts, he needs a refill, otherwise he will visit certain service calls and have to come back when he realizes that call requires a part he no longer has. It’s just a few parts, so a large courier like DHL has no desire to deliver them to his van every night. In addition, the tech generates less than one kilo of waste for which the Italian government has tight and complex regulations around disposal: the tech’s company is obligated to separate waste by type and fill out paper forms at each stage of that waste’s journey from the tech’s van to disposal. This is obviously complex and onerous, and Lindbergh manages all of it for their customers. The tech also needs his uniforms washed periodically (think Cintas), and his tools, by law, must be recalibrated a few times a year. This gives you a sense of the kind of niche, complex services Lindbergh provides, and why no potential competitors have any desire to take Lindbergh’s business.

Lindbergh charges an average of ~€25 per delivery, or ~€35 if value added services are requested. This appears to be expensive when compared to standard couriers like UPS and FedEx that charge ~€15 per delivery. Think of the difference between Lindbergh’s model and the standard couriers’ and waste managers’ as low volume, high complexity, high cost per unit versus high volume, low complexity, low cost per unit.

In addition, standard couriers cannot make in-night in-boot deliveries and do not offer waste management or other value-added services, the combination of which save an average of 4-6 working hours per technician per week to collect parts, dispose of waste properly, wash uniforms, etc. Technicians must also place orders with standard couriers, on average, at least a full day in advance (two days in advance for more remote areas) and then drive to the courier’s warehouse each morning to pick up the parts, which takes 1-2 hours. Each technician is paid €60-80 per hour. Lindbergh saves their customers €240-480 per technician per week before Lindbergh’s fees; since Lindbergh’s average customer requires 2.3x deliveries per technician per week, customers pay Lindbergh ~€80 per technician per week and thus incur net savings of €160 – 300 per tech per week.

Why can't/ won’t standard couriers or other integrated logistics providers replicate the services that Lindbergh offers? These competitors have a fundamentally different strategic orientation / DNA. They are focused on maximizing the number of deliveries to increase route density, thereby lowering the average cost per delivery per customer. Delivering a few parts to thousands of scattered technician vans, and managing a small bag of waste and its onerous paperwork for each, is not of interest to them.

Opportunity lurks where responsibility has been abdicated. TNT was a former logistics competitor that offered in-night delivery in Italy. At the time, they were the only in-night provider. They have since exited the business for good. First, in-night comprised a low single digit percentage of their revenue but required a completely different infrastructure and approach. Lindbergh actually got its start in network management because a customer of TNT asked Lindbergh to help them do it better (Lindbergh thus built their business in partnership with TNT until TNT exited the business). TNT wasn’t earning sufficient profit to move the needle back when it had a (deficient, but serviceable) in-night infrastructure, but now that they no longer do, there would be no way for them to rebuild that infrastructure and earn a sufficient profit; their costs would be higher due to start-up costs, but they would also struggle to win customers from Lindbergh, whose service is far superior to that which TNT once offered. Second, TNT has neither the expertise nor the authorizations required to manage waste – which is a highly demanding undertaking due to complex Italian and French regulatory requirements.

Separately, no local waste management company would be willing to build out all the logistics to process the pithy volumes of waste produced by technicians. The total waste produced by these technicians in Italy in a year is a fraction of one day’s worth of waste processed at their facilities. The waste management companies, like the standard couriers, optimize for volume and efficiency.

Unlike Lindbergh, competitors barely use any routing software, which computes the most optimal allocation of deliveries to each driver each day. Most of them operate under a system which allocates a certain number of drivers to a fixed area. This overly simplified operational set-up may be sufficiently useful for the handling of large delivery quantities by standard couriers like DHL or UPS, but it is a highly inefficient system for dealing with the dynamic nature of in-night in-boot deliveries.

Apart from standard couriers, Lindbergh has no competitor for parts delivery in Italy, and no close competitors in France. There is only one other in-night in-boot service provider in France (TCS). However, TCS is not able to deliver parts before 7am, especially in southern France, due to its existing logistical constraints. It also can deliver the parts to the technicians’ vans only if they are parked at certain designated locations (not in the techs’ home driveways).

Additionally, Lindbergh can afford to make lower margins on delivery due to its higher overall profit margins due to value-added services. This allows Lindbergh to provide higher quality services in terms of consistency, reliability, and flexibility. This delights their customers, which builds more trust over time that in turn allows Lindbergh to sell more value-added services, increase ARPU, and create a virtuous flywheel effect. Most importantly for Lindbergh, its model is capital light, translating decent profit margins into high returns on capital.

A potential entrant would need to lure Lindbergh’s customers away with even better value-added services, reach the scale necessary to service all of Italy (or France) and obtain sufficient profit margins, and obtain the necessary authorizations and know-how to manage waste (which takes at least three years). For most of their customers, Lindbergh’s services have become inextricably intertwined with their daily mission-critical work processes. In the words of one of their largest customers: “We do not see Lindbergh as a service provider. They are an integral business partner.” In our meetings with several customers, it was clear this was not lip service; we are convinced these customers have essentially no option besides Lindbergh.

>90% of Lindbergh’s revenue is recurring with customer contracts of 3-4 years. There has never been customer churn in Italy. Historically, there have only been two French customers that churned in a bid to reduce cost, seeing that Lindbergh charges a higher price than their competitors. These were customers with <2 years of relationship with Lindbergh France. The gross revenue churn for Lindbergh was ~2%. In both cases, their plan is to utilize standard couriers, in-source a significant part of the logistics processes and get their technicians to order required parts 3-4 days in advance. They are beginning to realize this is not feasible as it’s impossible to plan ad-hoc MRO demands from end-customers. As this continues, we believe it will only prove more costly and inefficient, and they will likely return to using Lindbergh in a year or two.



Lindbergh also boasts negative net working capital, which we expect to remain at a single digits percentage of their overall revenue. Their customers pay within 30 days - which is uncommon in Italy and France where the industry average is 60-90 days. They have some bargaining power over suppliers and pay them within 30-60 days.

There are two revenue drivers for network management: i) the number of technicians, and ii) ARPU.

To increase ARPU, we expect Lindbergh to sell more value-added services to customers. Management also plans to raise prices over time. This should drive ARPU to increase at a 5-7% CAGR over the next five years. Most of their customer contracts have automatic monthly adjustments linked to the price of diesel and/or a broader inflation index.

There is ample room to raise prices since Lindbergh’s services comprise a low single digit percentage of their average customer’s MRO revenue. For example, despite being the largest customer, Jungheinrich pays Lindbergh only 2.5% of their MRO revenue, which is also their highest margin and most defensive business line. Having spoken to three of Lindbergh’s ten largest customers, we can confirm that MRO revenues have been growing steadily and were resilient during the global financial crisis of 2008-09. Postponement of MRO activities is uncommon practice even during economic downturns due to the importance of ensuring worker safety and continuity of operations. For example, you don’t stop servicing a broken elevator or warehouse pallet loader during a recession. Indeed, customers are more likely to extend the useful life of such equipment during a recession, servicing it for longer to avoid replacing it with new equipment.

There is a significant opportunity to sell more value-added services to French customers. Lindbergh first began operations in Italy a decade ago and entered France only in 2020. They recently gained their first French customer in waste management for technicians. We believe they should be able to raise French ARPU by ~30% over the next 5-10 years. The near-term challenge is for Lindbergh to upsell their French customers and drive margins from breakeven to ~15% EBITDA margin. Lindbergh Italy’s network management EBITDA margin is currently 23% and increasing. For Lindbergh as a whole, it is reasonable to expect EBITDA margins to be 15-20% by FY27.

To increase the number of technicians serviced, Lindbergh needs to service more technicians from their existing customers and acquire new customers. The former is a low-hanging fruit as most of their existing customers are hiring more technicians to decrease their reliance on external independent technicians. This phenomenon of in-sourcing technicians is likely to continue as OEMs look to increase their profit margins and leverage higher quality aftersales service as a source of competitive differentiation. Therefore, we expect the number of internal technicians for Lindbergh’s existing customers to grow at 5-7% CAGR over the next five years.

Of the ~180k technicians in Italy and France, we estimate there are ~100k technicians working for mid- and large-sized industrial companies. Lindbergh has seven large customers (totalling ~2K technicians) in Italy and thirteen (totalling ~5K technicians) in France. Over the next decade, we believe Lindbergh could potentially acquire 10 and 80 additional medium/ large customers with ~100-300 technicians each in Italy and France, respectively.

However, acquiring new customers in bureaucratic Italy and France takes time. Switching service providers risks disrupting MRO services that are critical to Lindbergh’s customers’ end-customers. Lindbergh will usually also have to negotiate with the technicians’ union before making the switch (as happens with any change in Italy or France); however, Lindbergh makes technicians’ lives easier, so the negotiations aren’t difficult, they just take time. It takes a year for Lindbergh to begin a pilot test trial for a customer, and 3-5 years to acquire a new customer and fully on-board all their technicians. This is one of the reasons we believe Lindbergh can grow steadily above 20% CAGR for decades, rather than extremely quickly for a few years only.

Lindbergh typically begins a new customer relationship by offering them something their current service provider lacks – that is, waste management services for technicians. Over time, they persuade these customers to replace their existing logistics service provider by offering them a higher quality logistics service, a wider breadth of value-added services, and cost-savings on PPE procurement. Customers become hooked on Lindbergh’s superior value proposition relative to standard couriers.

Overall, we expect network management revenue to grow at a 10-15% CAGR over the next five years, driven by existing and new customers.



2) Waste Management & CE (Circular Economy)

What we describe in this section is not to be confused with waste management services provided to technicians within the network management business unit. There are two parts to this business: i) micro-waste management of branches, and ii) CE (Circular Economy).

The former deals with the management of the waste produced at branches/ production facilities/ warehouses of industrial OEMs and brands. Lindbergh collects the waste, processes the paperwork, and dispatches it to their subcontractors for disposal and incineration. This waste includes hazardous substances, machinery, equipment, etc. Lindbergh charges a fixed price per kg of waste with inflation escalators linked with diesel prices. Apart from that, it is not dissimilar with waste management under network management. Its revenue should approximately grow in line with that of network management revenue.

Circular Economy is what we believe will drive rapid growth for this business segment.

Lindbergh charges a fee per kg of waste under the waste-to-incineration model and the waste-to-recycle/reuse/incinerate model, respectively. They do not yet have any CE revenues for the latter, though they expect to commence that business soon. There will also be automatic inflation adjustments tied to diesel prices and/ or an inflation index. We forecast waste management CE to grow revenues at a 21% CAGR over the next five years.

Once again, Lindbergh has no close competitor who possesses their unique combination of logistics infrastructure and waste management expertise. We learned there are other competitors for such lucrative contracts such as a large multi-utility company that has large incineration plants, water treatment facilities, etc. However, it became apparent that they neither have the will nor incentive to manage the intricate logistics, complex regulatory requirements and waste management processes for these micro-wastes. In fact, the quantity of waste that Lindbergh does with this niche customer in a single year is less than the amount of waste that the utility processes in a day (i.e. 3-4k tons).

It is not hard to conceive of the level of commitment and service quality their customers could expect to receive from the utility as compared to Lindbergh. Their CE partner also must conform to the highest standards of regulatory requirements, ESG norms, IP protection measures, etc. They also need them to have sufficiently robust IT systems to connect with their ERP systems and manage workflows seamlessly.

Who else might possibly be able to execute these types of projects? There are independent subcontractors that own and operate warehouses, but have none of the operational expertise to manage logistics (delivery vans across Italy – and trying to develop a delivery network would be a nightmare, because all of the standard couriers to whom they’d subcontract optimize for volumes and efficiency, and thus only use large trucks that can’t fit into the small streets within Italian city centers). There are also costly professional consulting agencies like Omnisyst that could coordinate a group of subcontractors to fulfill the basic requirements of the projects, but they have neither the first-party infrastructure (like Lindbergh’s driver network) nor systems and processes to manage the logistics surrounding the collection of waste across hundreds of location points across Italy. Additionally, they would need to maintain stringent regulatory compliance, IP protection standards, and waste traceability at each stage, none of which they have the expertise or desire to do. The next best alternative would be for Lindbergh’s potential CE customers to manage all these in-house. This would be a highly complex undertaking outside their core competence and they wouldn’t be able to do it as well as Lindbergh. Thus it is highly unlikely they will ever attempt such an effort.

Therefore, Lindbergh is uniquely positioned to provide micro-waste management in Italy.



3) B2C Thermohydraulic MRO services

We expect this business to be the key driver of upside for Lindbergh over the coming decades.

In 2023, Lindbergh began acquiring small companies of 5-10 technicians in Italy’s B2C thermohydraulic market. These technicians provide MRO services for heating and cooling equipment in residential homes. They have acquired four companies – three in Parma and one in Marche - with a total of thirty technicians thus far.

These businesses have highly recurring and non-cyclical revenues. It is mandatory by law to perform such maintenance in your home at least once per year. There may also be additional repair and preventive work required throughout the year. Some households may opt to pay upfront for 2–3-year maintenance contracts to secure better prices. It is also not difficult to raise prices by ~5% CAGR over time as customers do not switch service providers based on price alone. Many of these residential customers have very long-term relationships with these service providers and generally do not switch unless the service provided is consistently unsatisfactory (we have discovered there is a lot of consumer inertia).

This is a highly fragmented market with no national or regional player. Many of these companies face succession issues or suffer from waning profits. According to our estimates, there are ~5K companies with ~11K B2C technicians Lindbergh can possibly acquire from a total of 19K technicians in Italy. Each technician generates €70-100K in annual turnover, making this a €1.5-2bn market.

Our estimates indicate Lindbergh should be able to acquire ~100 technicians by 2025 (currently ~30). Once they reach 150 technicians, the B2C business unit should be able to maintain an annual growth of 50 additional technicians (i.e. four acquisitions with an average of 12-13 technicians per year) through M&A without the need for cash infusion from Lindbergh, the holding company. If we are roughly right, B2C thermohydraulic revenues would grow at ~60% and ~35% CAGRs over the next five and ten years, respectively.

The operational director of this BU and two industry veterans/ former business owners (whose businesses Lindbergh has acquired) scout for acquisition targets. They also work with external M&A brokers. They have external accountants to thoroughly audit the financial statements of these businesses during DD. We believe they have a solid M&A pipeline in place. Over time, they hope to increase the number of deals per year and, to a lesser extent, the size of the average. However, they are unlikely to acquire large companies with >30 technicians, which carry higher valuations.

Because this is a fundamentally local business, Lindbergh’s growth strategy is to first make key strategic acquisitions in each region in Italy. Those companies would serve as platforms for them to grow organically by hiring technicians, as well as inorganically by doing bolt-on acquisitions. Hiring organically generates a higher ROI, but it is difficult to hire in a market in which there is a shortage of labor. They must invest time and resources in building a hiring and training center. Bolt-on acquisitions are more costly but allow them to scale faster. In the longer term, they may also sell other value-added services to household customers.

Presently, and unlike most countries we’re familiar with, there are no PE funds or serial acquirers active in this market. A few multi-utility companies had previously tried acquiring these companies but failed. Their objective was securing the end-customer relationships to sell them energy rather than to grow the business or improve operations. This led to poor management and attrition of workers. Over time, such a reputation made other business owners wary of selling to them. These business owners are looking to leave their legacy and employees in good hands rather than to sell their businesses at the highest price they can fetch. But for these aged entrepreneurs, time is not on their side. If they fail to find a suitable buyer, they will have to wind down their business without monetizing their ownership, since there are no buyers besides Lindbergh, and no one within their small firms who could buy them out. Hence, they are willing to transact at low valuation multiples. Nonetheless, management is cognizant that they cannot be complacent because the thermohydraulic OEMs may one day decide to in-source their technicians or other PE funds may target the market. For instance, in a bid to improve their overall profit margins, Bosch has aggressively consolidated their thermohydraulic technicians in France. However, in such a scenario, OEMs would not be able to force consumers to use their technicians, and consumers would receive no advantage choosing the OEM’s technicians over Lindbergh’s; in such a scenario we believe consumers would continue using the technician with whom they already have a relationship, due to inertia (no reason to switch).

Management looks for companies with a long history of audited financial statements. They generally avoid companies with significant outstanding payables or debt. They also consider their local market share, revenue growth, free cash flow margins, net working capital, etc. For the companies that do make it past their initial filters, they meet them in person a few times to assess the ‘softer’ elements. These include the openness of their technicians to work with new business owners, the willingness of the existing business owner to stay on post-acquisition for a smooth transition, the availability of a suitable candidate usually amongst the technicians who could be appointed as the technical managerii, etc.

Lindbergh has so far acquired companies for ~5x pre-acquisition FCF, and from our work we believe that is around what they will pay for future deals. Half the total consideration has been paid upfront with cash and debt. We believe they can and will use leverage of 1.5x debt/ EBITDA per acquisition. The first type of leverage they use is an interest-free debt at the subsidiary level in the form of unpaid retirement obligations and salary for each employee when they resign. The second type of leverage is debt borrowed at the holding company level at rates of ~5%iii for four years or more.

The remaining half is to be paid in monthly installments over 1-2 years. Management states they will not issue shares for acquisition, unless a potential seller demands it, in which case they will consider if it makes sense. Business owners who intend to remain with their business are encouraged to buy Lindbergh shares in the open market (a few have already done so).

Post acquisition, we believe Lindbergh should be able to expand FCF margins from 9% to 15% in five years' time by reducing operating costs: i) eliminating unnecessary offices and storage facilities by using Lindbergh’s warehouses from their network management business; ii) lowering logistical fees by utilizing Lindbergh’s network management services at a lower price than their existing service provider, but at little marginal cost to Lindbergh (this will also provide an incredible competitive advantage for the B2C business, especially vis-à-vis any PE firms that want to enter the space, as there are no peers that have such an impressive parts delivery and micro-waste management network); iii) centralizing the back-office functions like HR, accounting, etc into the holding company; iv) centralizing their procurement to obtain better pricing from their suppliers and distributors over time; and v) reducing the administrative staff headcount from the typical one staff for every two and half technicians to one for every four technicians or so. It was clear to us that management has thought this margin expansion playbook through very carefully, that they are rigorously testing it in their first acquisitions, and that all signs are positive so far that they will be able to execute it. We believe there is a very high chance their capabilities from their core network management business will prove helpful in raising margins and widening their moat in B2C. Importantly, it is clear management are true entrepreneurs in that they naturally test and learn, find the best approach, and pivot if necessary.

Furthermore, they can optimize net working capital by gradually extending account payable days by virtue of their increasing scale and bargaining power. They can also optimize inventory by utilizing their warehouse management software system. Inventory tends to be poorly managed at these B2C firms and often comprises ~10% of turnover prior to acquisition. There is little room to improve for account receivables since household customers generally pay in cash upon completion of service.

Apart from operational efficiency gains, they can also grow revenue at a high single digit organic CAGR by recruiting a new technician every year or two. Applying these assumptions, we forecast a five-year and eight-year project-level IRR of 29% and 65% respectively:





Management

Lindbergh’s CEO/ CFO Michele (48) and President/ COO Marco (58) are the owner-operator duo at the helm with excellent capital allocation sensibility. They are supported by a team of highly competent and motivated founding members: Andrea Allegrini (Sales Director), Matteo Vaccari (B2C Director), and Marco Rodini (IT Director). We believe Lindbergh’s management are very smart, entrepreneurial and talented, operating in a “boring" business that does not tend to attract such a high level of talent. They operate a great business, but the talent level and drive of other players in the ecosystem is very low, leading to a “blue ocean,” A.K.A. a wide open playing field.

Incentives

~65% of Lindbergh is owned by insiders; Michele and Marco have 14.4% and ~21% ownership stakes respectively. The other three have 4.5% each (each of the three bought their ownership stake for €45k in 2010. All five of them have very modest fixed salaries with no bonus. Each of the two co-founders earn €95K per annum.

Furthermore, William Thorndike’s public equities fund Sun Mountain now owns ~3.8% of Lindbergh. William Thorndike is the author of The Outsiders. Christian Solberg, the managing partner of Sun Mountain, has publicly endorsed the quality of management and the business.

Management largely do not intend to sell their stake but build their wealth through long-term ownership of the company. As profits per share grow, they should have the opportunity to uplist to more liquid exchanges over time.

They currently have an existing employee stock grant with no vesting hurdles of 17K shares (0.2% of shares outstanding) that is expected to be funded entirely from treasury shares. Going forward, they will only incentivize the executive and operational directors with employee stock options with vesting hurdles based on stringent 3-4 year KPIs linked to revenue and FCF per share growth linked to their respective BUs (business units). The rationale is to align senior managers to act as long-term owner-operators. There will be no net dilution to existing shareholders as the vested shares will come from treasury shares.

Capital Allocation

Currently, Lindbergh has 1.4% of shares outstanding (~120K shares) in treasury. Management plans to continue share repurchases next year to fund ESOP and M&A (if a buyer demands shares as part of the deal). They are also rational enough to consider doing open tenders at a slight premium to the prevailing share price to repurchase shares, considering the stock is undervalued. The remaining treasury shares that are not utilized will eventually be eliminated. Regardless, they remain committed to not diluting existing shareholders.

Management is conservative and prefers not to exceed 1.5x net debt/ EBITDA. However, if a rare, compelling and transformational deal that arises, we wouldn’t be surprised if they considered stretching their balance sheet to 2-3x net debt/ EBITDA.

They have no plans to issue dividends over the next several years, as they are excited about the ample high ROI growth opportunities in the business for reinvestment. They recognize that dividends are less tax-efficient than buybacks.

Culture

Management operates a highly decentralized organizational structure with a lean HQ dedicated to serving the four BUs: Lindbergh Italy (network management), Lindbergh France (network management), Waste management CE, and B2C Thermohydraulic services.

Each BU is a standalone P&L center. They invoice each other for any intra-group services rendered. This structure is to streamline the organizational structure of 150 employees, devolve accountability to the lowest levels, and minimize bureaucracy. Michele and Marco delegate to such a large extent that they each receive an average of no more than ten work-related emails a day. This frees up time to allow them to strategize, work on new initiatives, help mentor the BU directors, as well as aid them in solving important problems.

Management has demonstrated the attributes of an astute capital allocator and strong operator:

i) Focus: They have rejected additional businesses that dilute their competitive moat. For example, other large customers had requested Lindbergh to manage tens of thousands of tons of general waste. Lindbergh declined because they do not want to provide commoditized waste management services that are at risk of intense price competition with large waste management players. Separately, they had an opportunity to acquire a dominant Normandy delivery supplier at 5x EBITDA last year but decided not to do it. This was primarily because only a small part of its turnover was derived from in-night MRO delivery services, and the rest were dedicated to generic courier activities. It would be a diversion from Lindbergh’s core focus on niche MRO service, and management felt they could get higher returns in the B2C business.

ii) Data-driven: Management uses a best-in-class SaaS ERP to obtain granular operational data on each driver/ technician under network management and B2C respectively. For drivers, they primarily track their service quality metric (defined as the actual number of deliveries made divided by the number of assigned deliveries per day). For B2C technicians, they keep tabs on their weekly turnover generated per technician and operating margins at the subsidiary level. Every week, they are ranked based on how they fare relative to their peers on these metrics. It is printed on a slip of paper for each personnel to see their own results, as well as everyone else’s. It has proven a powerful non-monetary incentive for them to improve. Furthermore, B2C technicians stand to earn a commission on the turnover in excess of the target that they are to generate within that year.

iii) Grit: Lindbergh France was initially severely loss-making, losing hundreds of thousands of euros per month. Even though Lindbergh was a minority shareholder, management rolled up their sleeves, learned the French language from scratch, and uprooted themselves from Italy to France for six months, in order to restructure the business and nurse it back to breakeven today.

iv) Frugal: They bought an abandoned warehouse in the middle of the highway in Cremona and converted it into an office. They chose that location because it was almost equidistant from each of the founding team member’s homes, and it was far less expensive than most office spaces near Milan. They hate to spend unnecessarily.

v) Opportunistic: For example, they stumbled into their B2C business by observing Bosch successfully consolidating the French B2C market and realizing there is no equivalent player in Italy. They initiated the circular economy project with a luxury customer by exploring new proposals and ideas from their existing customers. By listening closely to customers, they learn what other value-added services they need under network management. They are fanatically customer focused. There are potentially new business areas they could venture into beyond those that we are underwriting today.

vi) Engaged, always learning: Not only did management answer all of our questions satisfactorily, but they also wanted to understand what we considered to be their areas of strengths and weaknesses. Very few management teams have demonstrated this level of engagement and willingness to understand our point-of-view at the beginning of our relationship.



Why Does This Opportunity Exist?

Lindbergh is a microcap stock. The shares are very illiquid with <31% effective free float. An average of $45K worth of shares is traded daily.

There are limited English IR materials published by Lindbergh.

Lindbergh is a unique MRO business with no like-for-like comps in the world.

Management has only one sell-side analyst to cover them.



Where we are conservative in our modelling assumptions:

We assumed Lindbergh will add no more than 50 new B2C technicians per year from 2025 onwards. They could be more aggressive with the use of cash and debt to add more than 50 technicians per year. They certainly could grow faster than 50 new technicians per year (i.e. 4 acquisitions with an average of 12-13 technicians per year) - much depends on whether they can make the integration process systematic and add more skilled employees to oversee that.

We assumed a net cash financial position from FY25 onwards. How fast could they grow if they fully utilize their cash balance by the end of 2025? They should have €4mm in their cash balance and OE of €3.5mm. We forecast they’ll spend €4.4mm in growth and maintenance capex. They would have €2.9mm left to spend. If they were to spend it all on B2C acquisitions at 0.45x P/S multiple of which 27% is funded by debt, it would add approximately €4mm in revenue to the B2C segment. This would increase our forecasted FY25 revenue YoY growth rate from 19% to 31%.

We assumed there will be no more than one significant new micro-waste management CE customer, however, we believe there is potential for other customers to adopt Lindbergh’s state of the art services.

We did not assume aggressive share repurchases. However, there is reason to believe that management would be open to performing regular share repurchases through open tenders as long as the share price remains attractive.

We assumed network management’s ARPU will reach €4.2K in FY30 to be conservative, but they may be able to grow ARPU faster than that.





Risks

Mitigants

1) Customer concentration risk. The largest customer accounts for ~30% of FY22 revenue – down from ~60% a decade ago. The five largest customers account for 66% of FY22 revenue – down from 75% four years ago.







We expect their largest customer’s contribution to decline to 15-20% of total revenue within five years. We expect the five largest customers to comprise 50% in four years’ time. Lindbergh has had a strong working relationship with them for about 15 years now. These are all customers of >5 years. As explained above, there is no credible alternative to Lindbergh.

The risk of losing key customer relationships due to a change in the Lindbergh-facing representative from their customer is very minimal. Their largest customer changed their service director thrice and not once did they even raise the prospect of switching to another service provider (again, there is none in Italy).

The risk of Lindbergh’s customers’ (OEMs) customers (end users of the OEMs’ equipment) switching to using independent MRO technicians instead of the OEM’s is also very low. 60-70% of end-users in Italy and France rent their equipment from OEMs, in which case only the OEM’s internal technicians are allowed to provide maintenance services. Even the end-users who own their equipment rely mostly on the OEM’s technicians for regular maintenance as they have all the spare parts and the product-specific knowledge required to ensure the equipment is properly maintained.

Nonetheless, two of Lindbergh’s large customers are highly levered, presenting a risk. KION group and Jungheinrich have significant financial leverage: 7-8x and 4-5x debt/ EBITDA respectively. Both have very strong brands and market positions. If they had to file for bankruptcy (which we think very unlikely), and based on how bankruptcy proceedings work in Germany, we believe they would be acquired by competitors and their businesses would continue to run, creating very little impact on Lindbergh.

2) Inability to upsell value-added services to their network management customers in France to improve their operating margins.





We believe Lindbergh France will be successful in generating high returns on tangible capital. However, it is very important to note that there is minimal risk undertaken in case they don’t: in the worst case, if Lindbergh France should face some unforeseen structural challenges in scaling, we are confident they can divest the business for a tidy profit.

We think Lindbergh France’s operating margins should be able to grow from breakeven to ~5% based on price adjustments this year. To attain Lindbergh Italy’s operating margins of 23%, they must upsell value-added services in addition.

However, waste management regulation in France is not as stringent as in Italy. French MRO technicians manage their waste in a haphazard, non-compliant manner as per EU standards of waste traceability. This is not yet enforced as strongly in France as in Itay. E.g. in France, you can generally go unpunished for transporting a small quantity of non-hazardous waste without the relevant documents, but not so in Italy.

Italy had similarly loose enforcement of regulations before the leading player, Jungheinrich, began rigorously implementing waste management standards in 2013. Soon afterwards, the rest had to follow as they were at risk of suffering from regulatory or reputational backlash.

Moreover, customers can recover a part of their waste management expenses from their end-customers by passing on the cost.

Driven by ESG motivations and requests from end-customers, a few of Lindbergh France’s customers have already requested waste management services. Lindbergh France has already begun managing waste for one customer. We believe it is likely this trend will gain traction over time.

The challenge for Lindbergh France is to provide high quality and efficient waste management services through their third-party delivery subcontractors. It was easier in Italy to train their own drivers, obtain the necessary authorizations, and ensure high quality of customer service rendered. We believe Lindbergh will in-source their French subcontractors over time, increasing quality and margins.

Finally, it must be recognized that they still may not fully reach Lindbergh Italy’s margins due to their reliance on third-party suppliers of logistics like Globe Express – who has a 21% minority ownership of Lindbergh France and manages ~30% of their French deliveries. But this has declined from 50% two years ago and we expect it to continue decreasing. In the long term, Lindbergh France expects to operate with a hybrid model of both in-house and third-party delivery drivers.



3) Failure to hire new B2C technicians or technical managers post-acquisition to drive organic growth and replace the retiring former business owner. Or worse, an inability to retain acquired technicians or managers. There is a structural shortage of technicians in the market that makes hiring difficult. The number of heating/ cooling units in Italy is gradually increasing against the backdrop of a declining replacement rate for technicians.

Management is focused on developing a strong reputation as the preferred employer amongst B2C technicians. They offer their B2C technicians monetary and non-monetary benefits. As previously mentioned, they raise the wages of employees by offering them commissions on any turnover they can generate beyond their target turnover per annum. They have also increased their average bonuses by a month’s wage. They allow technicians to drive their vans for personal use when they are not working. These initiatives are bearing fruit as Lindbergh has begun receiving in-bound enquiries from other B2C companies and technicians to join them.

Furthermore, management plans to set up a recruitment & training center to hire blue-collar workers from adjacent industries to be trained as B2C thermohydraulic technicians. They have roped in a couple of former B2C business owners/ industry veterans whose businesses Lindbergh has acquired to help craft the curriculum and teach the courses.

Even if these technicians or managers were to resign, it is ultimately the company that owns these customer relationships, and not the individual technicians per se. The maintenance contract is signed with the company and not a specific technician.

4) Share price volatility. The share price volatility of Lindbergh is likely to be higher than that of the market over time. Also, if share illiquidity persists, it may be more challenging for the share price to consistently move in tandem with the performance of business fundamentals. In this case, management may become disenchanted and decide to privatize the company.



Due to the micro cap and early stage nature of the stock, volatility is to be expected.

Some potential shareholders suggested privatizing the company. But Michele and Marco decided to remain public to gain credibility and financial creditworthiness in suppliers’ and customers’ eyes. More importantly, they do not want to give up their autonomy and work alongside an external shareholder who is mainly interested in a near-term exit strategy.

Management is very unlikely to privatize the company. They are not worried about the share price declining and believe the stock market is a weighing machine in the long run. Even if they were to privatize, based on our entry valuation, we would earn a positive return; we would just miss out on future compounding.

Management’s plan to improve share liquidity: Increase investor relations efforts while being selective with whom they want as their shareholders. Focus on improving business fundamentals. This should lead to greater share liquidity. At higher share prices, they could uplist to the main market and gain additional share liquidity.

Catalyst

Accelerated improvement of Lindbergh France's margins will significantly compressed P/E in the near term, making the stock look even cheaper. Significant progress in the B2C Thermohydraulic HVAC business will also spur growth and lead to a rerating.