Mekonomen MEKO
February 15, 2019 - 4:42pm EST by
manatee
2019 2020
Price: 69.70 EPS 9.67 11.92
Shares Out. (in M): 56 P/E 7.2 5.84
Market Cap (in $M): 423 P/FCF 9.9 6.3
Net Debt (in $M): 485 EBIT 779 942
TEV ($): 889 TEV/EBIT 10.3 8.6

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Description

 

Mekonomen is the leading automotive parts distributor and service chains in the Nordic region (Norway, Sweden), and, through its recent purchase of FTZ and Inter-Team, which almost doubles the size of MEKO SS, it is expanding its reach into Denmark and Poland.  The business has come under pressure in recent years.  A perfect storm of terrible weather, currency pressures (sek vs eur down 5%-7% over past 2 yrs), reduction in digital radio product sales that soared ’16-’17, cost pressures and a shift to electric vehicles impacting their offerings at their stores and service centers.   The shares are trading at their lowest level since the financial crisis as a result of the poor performance, a recent acquisition to expand into new geographies, as well as the technical selling pressure due to a recent rights offering and the subsequent cutting their dividend immediately thereafter.   MEKO SS currently trades with a 355mm Euro mkt cap, 760mm Eur EV and on 2020 estimates (post restructuring & synergies) 8.5x EV /’20 EBIT, ~7x EV/EBITA and 15% LFCF Yield (~9.5% UFCF yield).

Background of Recent Events:

In Sept 2018 MEKO closed on the FTZ + Interteam acquisition, which was its largest, financed via a rights offering (at 79 sek/sh; trades at 69 sek today) and debt.  FTZ in Denmark was founded in 1962 has 300 mm EUR in sales, attractive 11% EBITDA margin and is the market leader in workshop concepts and dealer concepts.  Similar to Norway + Sweden, Denmark grows ~ 1% - 2%, and FTZ has 50 branches and 10 DCs throughout Denmark.  Interteam in Poland was founded in 1967, has 200 mm EUR, grows more rapidly at 5%+ in sales and has ~2% EBITDA margin (3 mm EUR EBITDA).  Interteam plans to take share in a faster growth market of Poland as parts move to private label.  As a result of the combination, MEKO now has 466 stores and 3,410 affiliated workshops across their Nordic and E European regions and employs 3100 people.   MEKO acquired these businesses for 400mm EUR (paying ~8x ev/ebitda post synergies, 9.7x pre-synergies) and expects them to drive growth in excess of their legacy markets’ growth.    

 

While revenue growth has been mediocre in their local markets (with Sweden struggling in particular offset by growth in Norway, Finland, Poland), margins have been pressured as the company has invested in streamlining their logistics/warehouse/distribution infrastructure, fx transaction headwinds around purchasing, and training their workforce particularly in Norway around repairing the car of tomorrow (ie electric vehicles, vehicles with more electronic / technical components).   They have laid out a plan for 50mm SEK central warehousing savings as well as 65 mm SEK restructuring plan, totaling ~11mm EUR savings by 2020 (10-15% of ebita).  Additionally, they have put in place pricing increases across their 150K SKUs + services to offset the inflationary and fx pressures they have encountered the last couple yrs.  

 

Today MEKO has a number of underperforming assets (ie workshop equipment vehicles, shops in Finland, car leasing solutions) within their portfolio of parts distribution centers and affiliated workshops and the management team is on a short leash.  In the next 12-18 months the company is undergoing a plan to raise prices (has passed through price since Jan ’19 to offset FX headwinds + inflation), cut costs that should generate 6-7mm Euro, drive 15mm eur of synergies and prune of its portfolio of assets to focus on profitable and growing businesses + markets.  All of this should drive meaningful margin recapture.

 

Management seems to be quite confident in this plan as indicated by their insider buying.  In the past 6 months insiders have purchased 5mm SEK (~0.5 mm Eur) worth of shares at prices roughly 50% greater than today’s price (they also purchased shares yesterday after their terrible report).  On top of this, the largest owner of MEKO with ~26% ownership and the Chairman seat, is US-based LKQ, the leading provider of after market parts in the US.  LKQ purchased the stake at roughly 2.5x where the shares currently trade, and they did so as part of their strategy to build out a pan-europe mechanical + collision car parts distribution empire.  LKQ is down over 65% on this investment and given their former CFO is the Chairman who just oversaw their transformative deal to expand into Denmark + Poland, it is reasonable to think they may take advantage of the depressed price and purchase the remaining 74% of MEKO. LKQ could pay a 30% premium for MEKO and it would be accretive and not a substantial burden to their balance sheet ($8bn mkt cap, $12 bn ev and levered 2.8x).

 

The thesis is that there are multiple ways to win:

1)      They right the ship by passing along fx and inflationary impacts thru pricing (which mgmt. says have been sticking since by); the execute on cost cuts, deal synergies (purchasing, warehouse consolidation), and we can see EBIT growing 40% from ~75mm Eur in ’19 to ~105mm Eur in 2021.  Note, this does not assume any improvement or divestitures of underperforming segments which would be upside.

2)      LKQ acquires the company at a premium and folds MEKO into their growing European segment.  Note that beyond their historical investment, LKQ participated in the recent rights offering at 79, and likely approved of the transaction & its synergies

3)      Strategic consolidation.  In Europe there is ongoing consolidation in the spare parts market, as leading co’s get larger and larger in pursuit of purchasing and logistics synergies and capabilities to service a changing fleet of cars (ie electric vehicles and vehicles with increasingly more technologically advanced parts).  Anyone who wants to get into the scandanavian market for after market parts would see MEKO as the most logical target.  Today MEKO trades at <7x EBITDA, and most strategic transactions have been done at 9x to 14x ev/ebitda.

 

Our base case model below assumes stagnant market growth of 0% to 1.5% in all markets except Poland (growing 4%-5%) and assumes they are not able to fix or sell non-core segment that is driving losses.  If nothing happens, on our base case we think shares will be worth 9x ev/ebit by 2020, or 100 sek, or 45% upside.  Re downside, we assume Management isn’t able to correct the trajectory of the business, margins decline 150 bps, they only get 50% of the synergies and cost saves and multiple shrinks to 8x ev/ebit, we can see downside to 60 sek/sh, or 13% downside.



MEKO SS Equity

             

Price

69.7

 

SEK mm

             

Shares out

56.4

 

MECA

2017

2018E

2019E

2020E

2021E

   

Mkt Cap

3931

 

Revs

1907

2008

2038.1

2068.7

2089

   

Net Debt

4133

 

EBIT

265

249

245

252

255

   

TEV

8064

 

EBIT Margin

13.9%

12.4%

12.0%

12.2%

12.2%

         
               

In EUR

   

Mekonomen

             

Price

6.97

 

Revs

2683

2684

2711

2738

2765

   

Shares out

56.4

 

EBIT

317

331

325

329

332

   

Mkt Cap

393

 

EBIT Margin

11.8%

12.3%

12.0%

12.00%

12.00%

   

Net Debt

410

 
               

TEV

803

 

Sorensen

                   

Revs

778

739

702

709

716

         

EBIT

120

106

100

99

100

         

EBIT Margin

15.4%

14.3%

14.3%

14.0%

14.0%

         
                     

FTZ

                   

Revs

 

1088

3264

3427.2

3598.56

         

EBIT

 

67

228

257

288

         

EBIT Margin

 

6.2%

7.0%

7.5%

8.0%

         

Inter-team

                   

Revs

 

638

1971

2011

2051

         

EBIT

 

6

39

44

55

         

EBIT Margin

 

0.9%

2.0%

2.2%

2.7%

         

CORE SEGMENT TOTAL

               

REV

 

7157

10686

10954

11220

         

EBIT

 

759

938

981

1030

         

EBIT Margin

 

10.6%

8.8%

9.0%

9.2%

         

Non-Core

                   

Other

                   

Revs

618

622

622

622

622

         

EBITA

-76

-159

-159

-159

-159

         

EBITA Margin

                   

Amortization/other items

               

Ebit

 

-103

               
                     

TOTAL REVS

5986

7779

11308

11576

11842

         

Total EBIT

 

600

779

822

871

         
   

7.7%

6.9%

7.1%

7.4%

         
                     

purchasing synergies

 

50

100

   

Projected 100mm SEK

Central warehouse cost saves

25

50

   

Project 50mm SEK

cost savings

     

45

65

         
                     

Total EBIT

 

 

 

942

1086

         

Total EBITA

 

 

 

1142

1286

         
                     

EV/EBIT

 

 

10.3x

8.6x

7.4x

         

EV/EBITA

 

 

 

7.1x

6.3x

         



 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

realization of synergies

eventual deleveraging/dividend reinstatement

sale of co to LKQ

    sort by    

    Description

     

    Mekonomen is the leading automotive parts distributor and service chains in the Nordic region (Norway, Sweden), and, through its recent purchase of FTZ and Inter-Team, which almost doubles the size of MEKO SS, it is expanding its reach into Denmark and Poland.  The business has come under pressure in recent years.  A perfect storm of terrible weather, currency pressures (sek vs eur down 5%-7% over past 2 yrs), reduction in digital radio product sales that soared ’16-’17, cost pressures and a shift to electric vehicles impacting their offerings at their stores and service centers.   The shares are trading at their lowest level since the financial crisis as a result of the poor performance, a recent acquisition to expand into new geographies, as well as the technical selling pressure due to a recent rights offering and the subsequent cutting their dividend immediately thereafter.   MEKO SS currently trades with a 355mm Euro mkt cap, 760mm Eur EV and on 2020 estimates (post restructuring & synergies) 8.5x EV /’20 EBIT, ~7x EV/EBITA and 15% LFCF Yield (~9.5% UFCF yield).

    Background of Recent Events:

    In Sept 2018 MEKO closed on the FTZ + Interteam acquisition, which was its largest, financed via a rights offering (at 79 sek/sh; trades at 69 sek today) and debt.  FTZ in Denmark was founded in 1962 has 300 mm EUR in sales, attractive 11% EBITDA margin and is the market leader in workshop concepts and dealer concepts.  Similar to Norway + Sweden, Denmark grows ~ 1% - 2%, and FTZ has 50 branches and 10 DCs throughout Denmark.  Interteam in Poland was founded in 1967, has 200 mm EUR, grows more rapidly at 5%+ in sales and has ~2% EBITDA margin (3 mm EUR EBITDA).  Interteam plans to take share in a faster growth market of Poland as parts move to private label.  As a result of the combination, MEKO now has 466 stores and 3,410 affiliated workshops across their Nordic and E European regions and employs 3100 people.   MEKO acquired these businesses for 400mm EUR (paying ~8x ev/ebitda post synergies, 9.7x pre-synergies) and expects them to drive growth in excess of their legacy markets’ growth.    

     

    While revenue growth has been mediocre in their local markets (with Sweden struggling in particular offset by growth in Norway, Finland, Poland), margins have been pressured as the company has invested in streamlining their logistics/warehouse/distribution infrastructure, fx transaction headwinds around purchasing, and training their workforce particularly in Norway around repairing the car of tomorrow (ie electric vehicles, vehicles with more electronic / technical components).   They have laid out a plan for 50mm SEK central warehousing savings as well as 65 mm SEK restructuring plan, totaling ~11mm EUR savings by 2020 (10-15% of ebita).  Additionally, they have put in place pricing increases across their 150K SKUs + services to offset the inflationary and fx pressures they have encountered the last couple yrs.  

     

    Today MEKO has a number of underperforming assets (ie workshop equipment vehicles, shops in Finland, car leasing solutions) within their portfolio of parts distribution centers and affiliated workshops and the management team is on a short leash.  In the next 12-18 months the company is undergoing a plan to raise prices (has passed through price since Jan ’19 to offset FX headwinds + inflation), cut costs that should generate 6-7mm Euro, drive 15mm eur of synergies and prune of its portfolio of assets to focus on profitable and growing businesses + markets.  All of this should drive meaningful margin recapture.

     

    Management seems to be quite confident in this plan as indicated by their insider buying.  In the past 6 months insiders have purchased 5mm SEK (~0.5 mm Eur) worth of shares at prices roughly 50% greater than today’s price (they also purchased shares yesterday after their terrible report).  On top of this, the largest owner of MEKO with ~26% ownership and the Chairman seat, is US-based LKQ, the leading provider of after market parts in the US.  LKQ purchased the stake at roughly 2.5x where the shares currently trade, and they did so as part of their strategy to build out a pan-europe mechanical + collision car parts distribution empire.  LKQ is down over 65% on this investment and given their former CFO is the Chairman who just oversaw their transformative deal to expand into Denmark + Poland, it is reasonable to think they may take advantage of the depressed price and purchase the remaining 74% of MEKO. LKQ could pay a 30% premium for MEKO and it would be accretive and not a substantial burden to their balance sheet ($8bn mkt cap, $12 bn ev and levered 2.8x).

     

    The thesis is that there are multiple ways to win:

    1)      They right the ship by passing along fx and inflationary impacts thru pricing (which mgmt. says have been sticking since by); the execute on cost cuts, deal synergies (purchasing, warehouse consolidation), and we can see EBIT growing 40% from ~75mm Eur in ’19 to ~105mm Eur in 2021.  Note, this does not assume any improvement or divestitures of underperforming segments which would be upside.

    2)      LKQ acquires the company at a premium and folds MEKO into their growing European segment.  Note that beyond their historical investment, LKQ participated in the recent rights offering at 79, and likely approved of the transaction & its synergies

    3)      Strategic consolidation.  In Europe there is ongoing consolidation in the spare parts market, as leading co’s get larger and larger in pursuit of purchasing and logistics synergies and capabilities to service a changing fleet of cars (ie electric vehicles and vehicles with increasingly more technologically advanced parts).  Anyone who wants to get into the scandanavian market for after market parts would see MEKO as the most logical target.  Today MEKO trades at <7x EBITDA, and most strategic transactions have been done at 9x to 14x ev/ebitda.

     

    Our base case model below assumes stagnant market growth of 0% to 1.5% in all markets except Poland (growing 4%-5%) and assumes they are not able to fix or sell non-core segment that is driving losses.  If nothing happens, on our base case we think shares will be worth 9x ev/ebit by 2020, or 100 sek, or 45% upside.  Re downside, we assume Management isn’t able to correct the trajectory of the business, margins decline 150 bps, they only get 50% of the synergies and cost saves and multiple shrinks to 8x ev/ebit, we can see downside to 60 sek/sh, or 13% downside.



    MEKO SS Equity

                 

    Price

    69.7

     

    SEK mm

                 

    Shares out

    56.4

     

    MECA

    2017

    2018E

    2019E

    2020E

    2021E

       

    Mkt Cap

    3931

     

    Revs

    1907

    2008

    2038.1

    2068.7

    2089

       

    Net Debt

    4133

     

    EBIT

    265

    249

    245

    252

    255

       

    TEV

    8064

     

    EBIT Margin

    13.9%

    12.4%

    12.0%

    12.2%

    12.2%

             
                   

    In EUR

       

    Mekonomen

                 

    Price

    6.97

     

    Revs

    2683

    2684

    2711

    2738

    2765

       

    Shares out

    56.4

     

    EBIT

    317

    331

    325

    329

    332

       

    Mkt Cap

    393

     

    EBIT Margin

    11.8%

    12.3%

    12.0%

    12.00%

    12.00%

       

    Net Debt

    410

     
                   

    TEV

    803

     

    Sorensen

                       

    Revs

    778

    739

    702

    709

    716

             

    EBIT

    120

    106

    100

    99

    100

             

    EBIT Margin

    15.4%

    14.3%

    14.3%

    14.0%

    14.0%

             
                         

    FTZ

                       

    Revs

     

    1088

    3264

    3427.2

    3598.56

             

    EBIT

     

    67

    228

    257

    288

             

    EBIT Margin

     

    6.2%

    7.0%

    7.5%

    8.0%

             

    Inter-team

                       

    Revs

     

    638

    1971

    2011

    2051

             

    EBIT

     

    6

    39

    44

    55

             

    EBIT Margin

     

    0.9%

    2.0%

    2.2%

    2.7%

             

    CORE SEGMENT TOTAL

                   

    REV

     

    7157

    10686

    10954

    11220

             

    EBIT

     

    759

    938

    981

    1030

             

    EBIT Margin

     

    10.6%

    8.8%

    9.0%

    9.2%

             

    Non-Core

                       

    Other

                       

    Revs

    618

    622

    622

    622

    622

             

    EBITA

    -76

    -159

    -159

    -159

    -159

             

    EBITA Margin

                       

    Amortization/other items

                   

    Ebit

     

    -103

                   
                         

    TOTAL REVS

    5986

    7779

    11308

    11576

    11842

             

    Total EBIT

     

    600

    779

    822

    871

             
       

    7.7%

    6.9%

    7.1%

    7.4%

             
                         

    purchasing synergies

     

    50

    100

       

    Projected 100mm SEK

    Central warehouse cost saves

    25

    50

       

    Project 50mm SEK

    cost savings

         

    45

    65

             
                         

    Total EBIT

     

     

     

    942

    1086

             

    Total EBITA

     

     

     

    1142

    1286

             
                         

    EV/EBIT

     

     

    10.3x

    8.6x

    7.4x

             

    EV/EBITA

     

     

     

    7.1x

    6.3x

             



     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    realization of synergies

    eventual deleveraging/dividend reinstatement

    sale of co to LKQ

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