Portfolio Update: Q2 2023
Find out what companies I bought and sold in Q2 2023
It feels like a long time since my last post, even though, it has only been 3 months. But in this 3 months a lot has happened. Twitter basically banned Substack, introduced a view limit and Facebook launched threads. Only to mention what happened in the Twitter universe.
I will also keep this update rather short because I am currently busy running my own company and prefer to spend my spare time researching companies instead of writing about them. After all, the goal has always been, to become a good investor and not to become a famous finance blogger. Sometimes I think it is easy to confuse the latter with the former on social media.
New Buys in Q2:
STS Group is an automotive supply company. Meaning, it is not a good company at all. But I think it is cheap. Adler Pelzer Group bought a 70%ish stake for €7 per share in 2021. Back then, it was speculated that they delist and take it private. They even stated, that this is their intention, however, it never happened. Because of that and operational bad results, the stock fell below 4€ one year later.
STS has three segments: Plastics, China and Materials. Historically, Plastics and China accounted for the majority of their EBITDA and Revenue. STS mainly operates for truck companies. In 2020 and 2021 there was a Fleet Renewal Program for Trucks in China resulting in increased revenue and EBITDA for STS in the China segment (EBITDA in China 2019: €8.7mm, €17.4mm in 2020 and €16.9mm in 2021.)
During the same time, the other segments suffered from covid in Europe. In 2022, when the Plastics segment came back to pre-covid numbers, the china segment suffered because of the lockdown and the ending of the “Fleet Renewal Program”.
My thesis is: I believe that China can get back to 2019 levels in terms of EBITDA and the plastics segment should be operating on 2022 levels. For 2024 they also announced the start of a new factory in the USA, where they will work for Volvo. Furthermore, the whole automotive supply industry had very tough years from 2020-2022 because of covid and then the inflation. They usually have long term contracts with the carmakers in which they agree on prices for the next years, so if prices of the materials increase, it is the problem of the suppliers. For 2023 STS renegotiated all contracts, adjusting for the higher prices in materials. Overall management says 2023 is the first normal year so far since covid.
I believe normalized earnings (which should happen in 2023) are around €18mm in EBITDA. This would lead to the following valuation:
Current Share price: 5,3€* 6,45 S/O = €34mm MC
€34mm + €15mm net debt = €49mm EV
€49 EV/€18m EBITDA = 2,7x
Industry peers trade at least at 4x EV/EBITDA. So, I believe shares are worth at least €8.
Disc: I bought shares at €4.5, and I am still long STS Group.
Deufol transformed their business from being a packaging company for consumer and industrial goods to offering an End-to-End solution along the supply chain for industrial goods only. Meaning from the individual packaging, to warehouse storage, loading the goods on ships and controlling the shipments via their software, they are the partner for the whole process. See the video below from their website for a better understanding:
What is special about this offer is that there is no competitor which offers exactly the same. Obviously, you have competition in each of those areas, but there is no company that covers the whole supply chain. Second of all, they own a bunch of real-estate in strategic port regions. In 2021, they acquired a seaport terminal in Hamburg - this gives them a real competitive advantage and a natural moat because space in those areas is limited.
Because of this, their real-estate alone is worth more than the entire market cap. From the information, I gathered at the AGM, management believes there are €1-2 per share of hidden assets from the real estate alone, add that to the TBV of €1.63 per share (incl. €10mm legal settlement) and we arrive at a liquidation value of €2.63 - €3.63 per share. So even with the most conservative assumption, I see no way - how you could value this company for less than €2 per share.
But the company is not liquidating, so it should also be valued on their earnings. In 2022, they did €0.15 net income per share. As of this writing, the share price is €1.46 (P/E of 10). For 2023 they already increased their guidance to €13-17mm in EBIT. I calculate with €15m in EBIT, but wouldn‘t be surprised if they achieve €17m in EBIT for 2023. If we take €15m in EBIT, subtract €3.4mm in interest and assume a 25% tax rate, we get to €8.7mm, subtracted by €0.5mm of minority interest, we have €8.2mm in net income, divided by 42.5mm S/O (0.6mm shares get retired because of the legal settlement) we would have €0.19 net income per share (P/E 7,7).
They aim to grow 10-15% per year, mainly by increasing revenue with their current customers. Their Top 10 customers are mostly already shifted to the new End-To-End service, but there is still great potential in their 11th-25th biggest customers.
When I have more time, I will maybe do a write-up on this company because there is more to say, but for this post, I think, I showed that it is cheap on multiple angles.
Disc: I bought shares for €1.1, and I am still long Deufol.
Sells in Q2
Harbor Diversified: $HRBR
While HRBR is still cheap, the problem for me was that the case has become too complex. When I bought shares in 2022, it was a classic high uncertainty, low risk situation. Their contract with their only customer expired in 2023, and the market was uncertain what will happen after that. The downside was protected, in the sense, that they traded below liquidation value. So even if the contract wasn‘t renewed, or they didn’t find a new customer/ use of their airplanes, you would not have lost money. At the end of 2022 they then announced, that they secured a new contract with a new airline. The stock rose to $3 per share, I didn’t sell because I thought it was worth at least $4 per share. Unfortunately, there was no information of the contract terms and a vague language about the profitability of this contract, so the stock came back down to the $2 region. Now the thesis is more about how much they will earn with this new contract, I think there are some risk which I cannot or don’t feel comfortable in assessing, so I sold my shares for a small profit at $2.3. What is to learn on this one?
My thesis was correct and even played out, but with a bad company like this, it may be wiser to sell for 0.75 cents on the dollar instead of waiting that they reach what you believe is fair value.
Outlook for the rest of 2023
A lot of Microcaps have come down in valuation. Either the stock price literally collapsed (Leatt) or they kept executing well, but the stock just went nowhere (Supremex, Redishred). I see a lot of good businesses for a cheap price currently. Even though, I feel comfortable with my portfolio, I will most likely exist the lower quality companies, in order to change them for better companies with good management teams. It looks like now is the first time since I started investing in Microcaps that you can have your cake and eat it too. Meaning a cheap company, trading below 10x norm earnings, with a good business and good management team.
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