The strong market position of this owner operator results in a consistency of high returns and margins. At the same time the company is able to deliver organic growth by not only growing with the industry but also gaining market share and entering new markets. At the current share price the company is trading with a discount to its peer group of approx. 40% (based on EV/EBITDA) and yields an attractive non-growth normalized free cash flow yield of 10.5%.
Miba is a niche, global supplier of components to the automotive industry (40% of its EUR 0.6 bn turnover) and to producers of trains, ships, aircraft and power plants (60% of turnover). 60% of sales come in Europe and a fifth in North America. The company has a strong market position in different segments by investing approx. 6% of sales in R&D and is one of the five most innovative Austrian companies measured by the number of patents granted. Miba avoids the production of higly competitive mass goods. Customer concentration is low with the largest customer accounting for less than 4% of sales. Many of its products are developed together with the company’s clients leading to long lasting relationships. The company is run by the Mitterbauer family which also holds a majority stake in the share capital.
Put simply, Miba products focus on making motor vehicles, trains, ships, aircraft and power plants more efficient, more reliable and more environmentally friendly. Over the last years the demand for Miba’s products accelerated. Though the situation in Europe has been challenging, the company indirectly profited from strong revenue growth of German premium car manufacturers in the emerging markets as all of them are Miba’s clients. Due to the complex capital structure the information below is given on a per share basis:
I have extrapolated the Q3 2013 numbers to get an estimation for the full year of 2013. Though the company is part of a cyclical industry, I find their performance over the last ten years truly impressive indicating that the company is in fact a producer of niche products which are less dependent on the development of the overall economy. Over the last ten years book value grew at a CAGR of 9.1% per year despite substantial dividend payments (e.g. EUR 8 per share for 2012). It is important to note, that growth was generated mostly organic without large acquisitions. Goodwill is only EUR 5.6 per share. The rest of intangible assets (EUR 32.5 per share) consists of client relationships and patents. Net debt is EUR 31.0 per share including pension liabilities and operating leases. As a consequence, we have a company with relatively high returns on capital and a rock solid balance sheet.
Miba has four divisions:
Based on the management, Miba Sinter (36% of sales) is the technology leader for powder metallurgy applications. The sintered components are used in car engines, transmissions and steering systems of passenger vehicles. Its customized products contribute to achieving greater efficiency and greater savings on fuel and energy consumption. Shorter development cycles, increasing price pressures among customers and new environmental guidelines need to be countered with continuous R&D spending.
Miba Bearing (33% of sales) produces engine bearings for trucks, ships, trains, heavy-duty vehicles and power stations. Engine bearings support crankshafts and camshafts, minimize friction during operation and protect the engine against damage and breakdown. They are also offering aftermarket replacement services. Again many of the products are developed in close collaboration with clients.
Miba Friction (23% of sales) makes components for clutch and brake systems for a wide range of different engines (from motorcycles to industrial presses).
New Technologies Group (8% of sales) is the centre for development of new business. Here the company made two smaller acquisitions. The segment focuses on passive electronic components such as resistors and cooling systems for power electronics and special machinery.
Based on the information provided in this document concerning the emission of a bond with a nominal value of EUR 75 m in 2012, Miba Bearing seems to be the most profitable segment with an operating margin of approx. 18% followed by Miba Sinter (12%) and New Tecnologies/ Miba Friction (roughly 3%).
Management is straight forward about the challenges in its industry as outlined in the latest annual report:
“The Company operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to require periodic cost reductions which drive the Company to continually assess, redefine, and improve its operations, products, and manufacturing capabilities to maintain and improve profitability.”
Generally, a company with short product lifecycles is always risky from an investor’s point of view. However, Miba has a strong record of technological innovation. In addition to that, operating cash flow can easily finance investments in new technologies/products. Hence, in this competitive environment, management has been able to generate above average returns for an extended period of time.
Apart from that, I see the following risks:
- Costs of materials are 43% of revenue. Price fluctuations in raw materials (e.g. cooper) can negatively affect profitability.
- So far Miba is only offering components, but not complete systems or solutions to their clients.
- Though a niche operator, Miba is part of a cyclical industry. As a consequence, it is important to come up with an estimate for normalized earnings.
- Recently, the company has been in a transition, as the long term CEO stepped down to hand the management of the business over to his son. Though this could be a risk for Miba’s future development, the new CEO is supported by a group of experienced managers who have been working for Miba for a long time.
Share capital and Shareholders
Miba’s share capital is divided into 1.3 million shares. The shares are broken down into 870,000 common shares, 130,000 non-voting shares category A and 300,000 non-voting shares category B. Only the non-voting category B shares are listed. The Mitterbauer family holds approx. 77% of all shares. Miba holds approx. 7% of the share capital (all category B) in the form of treasury shares. The company is already holding almost one third of the listed category B shares and is entitled to buy another 12% of the outstanding shares until the beginning of 2015. As a consequence, trading volume at the Vienna stock exchange is extremely tight.
From an absolute and relative valuation Miba looks quite attractive:
GKN and Federal Mogul are direct competitors. Elring Klinger, SHW and Leoni are all suppliers to the automotive industry focusing on different niches.
Over the last ten years the average operating cash flow margin has been 13.2%. My estimation for maintenance capex is EUR 29.8 per share (Using the Bruce Greenwald method). Based on these assumptions normalized FCFE is EUR 36.8 per share. This leads to the following DCF valuation on a per share basis:
With the share price currently trading at EUR 350, a potential investment delivers a 10.5% yield ignoring any growth potential. Based on the company’s strong industry position and past performance, a 3% growth rate should be manageable. Based on a 10% discount yield my intrinsic value estimation is therefore EUR 526 per share or a potential upside of 50%.
For me, with the share price having tripled over the last years, it is a bit worrying to make an investment here. Nevertheless, Miba seems to be very well positioned in its industry. Also valuation, considering a full economic cycle, looks still very attractive. This is certainly due to the capital structure and the lack of ability of many investors to take this opportunity due to low trading volume. What we get here is an owner operator with financial flexibility and a leading position in a competitive industry at a very reasonable price. In addition, management makes continuously use of the repurchase programme which should put a floor under the share price.
I will establish a 2% position for the portfolio with a share price limit of EUR 365. Please click here for more information on WertArt Capital and the virtual portfolio.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!