September 06, 2019 - 9:17pm EST by
2019 2020
Price: 19.53 EPS 0.74 1.00
Shares Out. (in M): 66 P/E 26 19
Market Cap (in $M): 1,414 P/FCF 0 0
Net Debt (in $M): 48 EBIT 60 83
TEV (in $M): 1,470 TEV/EBIT 24 18

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Summary:  S&T AG is an IT hardware and services provider based in Austria.  We believe the company has significant revenue growth, margin expansion, and acquisitions opportunities ahead of it that will support attractive earnings upside for the next several years. 

Business Overview:  S&T operates 3 segments: IT services (40% of revenue) that is regionally focused on Germany, Austria, Switzerland and Eastern Europe;  IOT Europe (45% of revenues) that supplied embedded technologies and security applications; and IOT Americas (15% of revenue) that provides embedded technologies in the transportation, aviation and communications sector.  The company has 4,855 employees (including 2,300 engineers) in 30 countries. 75% of its revenue comes from Europe; 20% from the US; 5% China. 

Key Pillars of the Thesis:

1.   Impressive management team.  We believe that S&T has a very entrepreneurial management team that is aligned with common shareholders through stock ownership.

2.   Significant opportunities for revenue growth.   We believe that many of S&T’s end markets continue to grow dramatically, offering S&T natural opportunities for growth.   

3.   Continued growth from opportunistic acquisitions.  Much of S&T’s long-term growth has come from opportunistic acquisitions of small players or of turnaround situations. 

4.   Increasing margin profile.  The company continues to focus on increasing its Gross and EBITDA margins through a focus on mix-shift and cost control. 

5.   Buffers against economic slowdown. Though the macroeconomies of some of S&T’s main markets are slowing, we believe there are multiple levers the company can pull to continue its growth.    

6.   Attractive Valuation. 

#1.  Impressive management team.   Hannes Niederhauser became CEO in 2011.  At the time, the company had revenue of €154mm and €8mm in EBITDA.  Through organic growth and a series of acquisitions, he has over the last 8 years, he grown the company’s revenue to over €1b, and its EBITDA €100mm.  With the exception of one member, every member of the company’s Executive board has been at S&T since at least 2011. Niederhauser is aligned with the common shareholders – he owns nearly 2% of the outstanding stock.  The CFO owns approximately 1%.  

#2. Revenue growth.  The company’s officially stated goal for 2023 is to double its Revenue from 2019’s  €1.1b to €2b and to also double its EBITDA from €100mm to €200mm. There are several factors that support this significant growth. 

Secular growth market in IoT/embedded computing

S&T’s IOT business focuses on embedded computers, which are installed in machines in industrial environments to make the machine IOT capable.   Microsoft estimates that 80B connected things will be generating 180ZB of data by 2025. The company itself assumes its addressable market will be up to €25b by that time. 

S&T has fairly broad industry coverage in some of the largest markets addressed by this trend.  Specifically, its European IOT business focuses on industrial automation, medical technologies, infotainment, and energy markets;  while its North American business focuses on aviation, transportation and communications. managed to develop various niches in this market that should help it continue to grow along with the market.  In these generally large markets, S&T has strong positions in various niches: its in-flight entertainment hardware and software are installed on over 4,000 aircraft, while 700 types of vehicles worldwide use S&T technology to operate autonomously. 

Continued New Product Introductions:

In recent years, S&T has focused more heavily on developing its own proprietary products.  A key area of focus is developing proprietary software for sale into the IOT solutions businesses is key.  Today, the company has 2,700 engineers on staff and spend approximately €123mm per year on R&D. Notably, the company has focused on using lower cost Eastern European software developers.  Based on our channel checks, these developers can be had for 30+% cheaper than developers in Western Europe. Ultimately, we expect that proprietary software should drive both Gross and EBITDA margins higher over time. 

Growth into new Geographies:

Today, S&T is subscale in both North America and China. With recent acquisitions, the company has now got a strong foot hold in the US, and is working to optimize its portfolio there.  Its presence in China is minimal, but Foxconn is now a partner and 29% shareholder of the company. While its early days, we expect that both the US and China should continue to be growth markets in the coming years.

 #3.  Continued growth from opportunistic acquisitions. Over the years, S&T has done a significant number of small, bolt-on acquisitions, and a handful of large acquisitions to drive growth.  These acquisitions can be classed into two categories: small tuck-ins that help to complete the company’s product portfolio or turnaround opportunities. 

With the small tuck-ins, the company has been able to realize value by cutting redundant overhead and adding the acquired company’s product to the larger S&T sales offering.  Typically, the company will pay anything from €500k to €30-40mm. S&T will typically acquire 3-5 or more companies per year. The company has a sort of corporate development “swat team” that will analyze transactions, complete the acquisition and quickly integrate it into the S&T system. 

We believe the company will continue its pace of small acquisitions.  At least €400mm of the company’s €1b revenue growth target explicitly relies on future acquisitions.  There is the risk that the company faces competition for software assets from the PE firms with significant dry powder, but often, the S&T acquisitions are small enough that the competition may be more limited than might be expected. 

The most notable recent acquisition was of Kontron Management in 2016/2017.    Kontron faced revenue declines (2016 revenue was down 18% to €385mm) and was losing nearly €40mm in EBITDA.  Hannes Niederhauser had been the CEO of Kontron till 2007, so he had some familiarity with the business. S&T approached the deal somewhat cautiously, acquiring a 29.9% foothold in 2016, starting a turnaround phase, then acquiring the balance of Kontron in 2017.  Foxconn helped to fund the deal by buying a 29% stake in S&T.  

Strategically, the Kontron deal offered several advantages for S&T, Kontron, and Foxconn.  Kontron got access to S&T’s software offerings and sales/IT service channel customers, as well as access to Foxconn as a manufacturing partner.  S&T got exposure to the embedded computing/IOT market (Kontron forms the basis of its IOT operation). S&T’s core IT services business also faced additional competition in its core Eastern European market, and Kontron opened an entirely market to its software and services capabilities.  Foxconn got access to the Eastern European markets where it had minimal presence but S&T is strong. 

#4.  Increasing margin expansion.   S&T has struggled over the years to break out of the 4-6% EBITDA margin range.  We think this is largely due to the predominance of the IT services business for many years, which is the lowest margin business, currently running at approximately 5-7% margin.  We believe the company has multiple levers to pull to help drive its margins higher in the coming years:

·         Continued growth in the IOT solutions business in Europe, which is the company’s most profitable segment at 12-13% EBITDA margin; 

·         Optimization of the IOT Americas asset, which is subscale with 7% margin.  In North America, they have been optimizing the product portfolio. In the short-term, this program should slow revenues but improve margins.  The company has explicitly said it would like to take gross margin in North America from GM of 34% to 40% by increasing the software capabilities of that business; 

·         In IT services there is (slow-moving) attempt to develop more to recurring revenue.

#5.  Buffers against an economic slowdown.  There is exposure to an economic downturn.  75% of the business is in Europe, with its largest market Germany, which is slowing if not already in recession. 

In the event of a continued slowdown in European economic activity, we believe there are at least 2 factors at play that can help to limit downside: 

Possibility to acquire even more cheaply:

Given that a key element of the company’s strategy is opportunistic acquisitions, we believe that a macro slowdown could offer the opportunity to buy companies are more attractive multiples than are available in a stronger market.  We also believe that economic slowdown could create additional opportunities for turnaround acquisitions that are a hallmark of the management team.

PEC teams:

In anticipation of a potential slow-down in Europe, the company has created the PEC (profitability-efficiency-cash flow) program.  The teams will focus on control and working capital management. The company has guided that they expect to gain 2 EBITDA margin points from this and other initiatives.  Working capital management. Cost control. PEC has set up things like a working capital management team to optimize their cash flows. 


#6.  Attractive Valuation.  The stock currently trades for 19x 2020 estimated earnings of €1.    The company currently has just under a 1% dividend yield. If the company can hit its organic guidance target of for 2023 of €1.6b in revenue at 10% EBITDA margin, it implies nearly €1.50 in EPS (without any accretive acquisitions).  At a steady multiple, it implies nearly 50% upside from here. Assuming the company add 10% to the share count to acquire the additional €400mm in revenue needed to hit its official targets, we calculate EPS of approximately €1.60, implying 60% upside.  

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.


- Execution 


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