TSS.F - Innotec TSS AG

[farbelow]

Thank you, Ni-co, for pointing out this small cap German company, TSS.F, in this thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/stocks-you-own-but-not-discussed-on-board-yet/msg207678/#msg207678 . I have digged into TSS and find the company so solid and such a bargain that I believe it deserves it's own thread. And I am long TSS.

 

Why this is a great company for a fair price:

- PE of 11.

- TSS has steadily, organically grown revenue 5.5% CAGR and EBIT over 8% CAGR since 2004 without practically missing a beat. Even through the credit crisis: only 2008 slightly interrupted the continuous growth. And their business is products for the construction industry.

- ROIC of no less than 31% every year since 2010.

- Virtually no debt.

- No share dilution (no share repurchase either though)

- They are about to repay all their debt, so are going into excess cash

 

TSS has two business segments where they design and manufacture:

1. Entrance doors: this is a consolidation of about three companies that make entrance doors. They are a wholesale seller of the doors to f.e. architects.

2. Formliners and moulds for patterned concrete.

 

The synergy is that both segments are sold to large contruction projects. They sell their products worldwide.

 

I am not sure what the moat is of TSS and why they are so profitable. My take on this is that the CEO, Dr. Gerson Link, is a very conscientious capital allocator and does not waste. Mr. Link has been CEO with the company since 2002 and owns 24.9%. I have to guess his age, because there is very little information that I can find about him. On the picture in the annual report he looks 40-something, but that picture has not changed since 2004. So, my best guess is that he is 50-something. He should still have some runway to continue what he does well.

 

A minus is that the shares trade in very low volume: a typical day trades 1.000 to 2.000 shares. I did my purchases through Interactive Brokers at the Frankfurt Borse.

 

You find the TSS investor relation website with annual reports:

http://www.innotectss.de/investorrelations/berichte.html

 

TSS spends minimal effort on communication to investors: they do not seem to care. All information is in German. I understand a bit of German, but had to use Google translate to really go through the reports. The Google translation was not bad.

[constructive]

I'm an architect so here's my take. First of all their websites are pretty bad compared to US entrance door companies I have specified. I don't know how far along the German construction industry is in online adoption, but I suspect in most industries small companies will have an increasingly hard time keeping up with larger competitors with a stronger digital presence.

 

Rodenberg doors look very niche and unsuitable for the large majority of applications, for example:

 

http://www.rodenberg.ag/data/product/haustuer_colani.jpg

 

Polytec is more promising, they have simple flush doors and decent looking traditional designs.

 

Reckli actually has some nice looking stuff. However I am not sure how differentiated form lining is.

 

That said, sounds like the price is right. Maybe these warts just represent upside once they fix them.

[rb]

Firstly I want to commend farbelow for going through a whole annual report with google translate. You’re a trooper! I cheated and used Thomson. Not as accurate but good enough.

 

Now from my knowledge of German construction products is that they tend to be very well engineered, high quality, and very expensive. They get away with the pricing because they mainly fit two categories. 1. They make installation much easier and reduce expensive contractor time or 2. They ensure you don’t get some sort of failure and have to redo the job. I can see these applying to the patterned concrete business. Not so much for the doors.

 

This is quite a small company with much bigger competitors, so some things are a bit confusing.

 

1.How is this performance being achieved? I don’t think given their size that they can out R&D their competitors. In addition R&D expense is basically nonexistent.

2. Why is this company public? Aren’t these types of German companies usually private?

3. Why is the company paying down debt so quickly when it is growing so much? Maybe I’m being picky with this one, but it’s not exactly indicative of great capital allocation.

 

I also think that the key thing that makes this company so cheap is that growth rate. If it continues then it’s a steal. If it stops, then no so much.

 

What peaked my interest looking at the financials is their SG&A line. From the evolution it looks like the business is based on relationship sales. Maybe the past growth is due some personal relationships of management that enabled them to push product past competitors. Nothing wrong with that. The question is can it continue as they grow larger and need to move more product.

 

[lathinker]

I looked at this one recently but decidede to keep my hands off as I would be cautious from a cycle perspective.

Germany did not encounter a real estate boom pre 2008 like other countries. The property market was fairly muted back then. However, since 2009 or 2010 Germans have been buying houses and flats like never before, helped by zero interest rates and a generally sound economy. Since 2010, real estate prices have risen by 30-50% (my estimate).

Clearly, TSS has benefitted from this trend and it is still intact, but will not go on forever. I think it is therefore not adequate to extrapolate growth rates from the past five years to the future as they have been unusually good for pretty much all property-related businesses in Germany. In my view their great performance (numbers look very good, I'll admit) has more to do with the real estate boom than with outstanding products or stellar capital allocation.

 

There quite a few things to like about this company, but at this point, it is a clear "pass" for me.

 

 

[ni-co]

Thanks for this thread, farbelow,

 

I was to lazy to do it – and I can even read German reports  ;D

 

I looked at this one recently but decidede to keep my hands off as I would be cautious from a cycle perspective.

Germany did not encounter a real estate boom pre 2008 like other countries. The property market was fairly muted back then. However, since 2009 or 2010 Germans have been buying houses and flats like never before, helped by zero interest rates and a generally sound economy. Since 2010, real estate prices have risen by 30-50% (my estimate).

Clearly, TSS has benefitted from this trend and it is still intact, but will not go on forever. I think it is therefore not adequate to extrapolate growth rates from the past five years to the future as they have been unusually good for pretty much all property-related businesses in Germany. In my view their great performance (numbers look very good, I'll admit) has more to do with the real estate boom than with outstanding products or stellar capital allocation.

 

There quite a few things to like about this company, but at this point, it is a clear "pass" for me.

 

I think these are the right issues to think about but I'd draw very different conclusions. I don't see any fundamental reason – other than Germany exiting the euro – that keeps this RE boom from expanding. Quite on the contrary, German RE is one of the few markets I'm bullish on. We are not anywhere near exuberant levels but the interest rate environment strongly suggests that we might go there.

[ni-co]

I'm an architect so here's my take. First of all their websites are pretty bad compared to US entrance door companies I have specified. I don't know how far along the German construction industry is in online adoption, but I suspect in most industries small companies will have an increasingly hard time keeping up with larger competitors with a stronger digital presence.

 

Rodenberg doors look very niche and unsuitable for the large majority of applications, for example:

 

http://www.rodenberg.ag/data/product/haustuer_colani.jpg

 

Polytec is more promising, they have simple flush doors and decent looking traditional designs.

 

Reckli actually has some nice looking stuff. However I am not sure how differentiated form lining is.

 

That said, sounds like the price is right. Maybe these warts just represent upside once they fix them.

 

Keep in mind that this is only part of their business. One third of their business is cement molds that have higher margins.

 

Capital allocation is far too conservative (this is typical German Mittelstand policy btw.) and I don't like that he's paying out a fairly large dividend instead of buying back shares.

[farbelow]

Thank you for all the input: that adds good color. I was not aware of the real estate boom in Germany: interestingly enough it was exactly the other way around in the Netherlands: since 2009 construction went down. Macro predictions aside, I believe there are three things that support the case for TSS in regard of growth:

1. They steadily grew 2.9% CAGR revenue from 2004 until 2009. I.e. before the boom and when construction actually went down in Germany

2. They have steadily gone more and more international:

(i)  Doors making up 65% of their business: 20% of their business is in the EU outside of Germany (practically nothing outside of the EU)

(ii) Cement molds making up 35% of their business: 30% of their businesss in in Germany, 45% in the EU outside of Germany and 25% in the rest of the world

(iii) They just opened up an office in UAE.

3. Current price of 11.7 euro per share is about right if there would be no growth from here. And 30% roic is high so growth adds good value.

 

The moat is a difficult call because there is so little information to go by. I agree that probably a good part of the moat is personal sales by management, which has limited scalability.

 

Regarding capital allocation: I agree that this is too conservative and therefore not great. But I often see this with German companies as Ni-co also attests. I guess what I mean is that this management is not foolishly spending capital on goodwill to build an empire. And they have repaid a mezzanine debt with Merril Lynch from 2006/2007 with 8% interest: this seems wise. Of course, TSS could have rolled over this debt with other debt, but as the old debt was mezzanine, it must have been difficult to get that and they might be traumatised about debt.

 

A risk is the excess cash coming up: what is management going to do? I think share repurchase is unlikely: I hardly see that in Germany. Are there rules against share repurchase in Germany? Also, there are two owners with each 24.9%: is there a German law that kicks in from 25% ownership? This might be an extra reason they do not repurchase shares.

 

[ni-co]

Thank you for all the input: that adds good color. I was not aware of the real estate boom in Germany: interestingly enough it was exactly the other way around in the Netherlands: since 2009 construction went down. Macro predictions aside, I believe there are three things that support the case for TSS in regard of growth:

1. They steadily grew 2.9% CAGR revenue from 2004 until 2009. I.e. before the boom and when construction actually went down in Germany

2. They have steadily gone more and more international:

(i)  Doors making up 65% of their business: 20% of their business is in the EU outside of Germany (practically nothing outside of the EU)

(ii) Cement molds making up 35% of their business: 30% of their businesss in in Germany, 45% in the EU outside of Germany and 25% in the rest of the world

(iii) They just opened up an office in UAE.

3. Current price of 11.7 euro per share is about right if there would be no growth from here. And 30% roic is high so growth adds good value.

 

The moat is a difficult call because there is so little information to go by. I agree that probably a good part of the moat is personal sales by management, which has limited scalability.

 

Regarding capital allocation: I agree that this is too conservative and therefore not great. But I often see this with German companies as Ni-co also attests. I guess what I mean is that this management is not foolishly spending capital on goodwill to build an empire. And they have repaid a mezzanine debt with Merril Lynch from 2006/2007 with 8% interest: this seems wise. Of course, TSS could have rolled over this debt with other debt, but as the old debt was mezzanine, it must have been difficult to get that and they might be traumatised about debt.

 

A risk is the excess cash coming up: what is management going to do? I think share repurchase is unlikely: I hardly see that in Germany. Are there rules against share repurchase in Germany? Also, there are two owners with each 24.9%: is there a German law that kicks in from 25% ownership? This might be an extra reason they do not repurchase shares.

 

Buybacks are regulated but there are no rules against them. You basically need shareholders' approval and you can only do a certain percentage at once (out of the top of my head I think it's 10%). From a tax perspective, you lose some flexibility to sell your shares once you've crossed 25%. Further, shareholders with more than 25% share are able to veto important corporate decisions (spin-offs etc.). A very important hurdle is 30% because if you cross it you'll be obligated to make a tender offer to the other shareholders to buy their shares at a certain price (dependent on the market price in the months before).

[Olmsted]

Surprised nobody has brought up the ignominious history of the company chronicled in this documentary:

 

http://en.wikipedia.org/wiki/Office_Space

 

 

 

(Sorry for the non-value-add post.  I try to keep them minimal)

[lathinker]

ni-co,

 

I appreciate your thoughts. I think it is fair enough to state that we are not in a German real estate bubble yet, but in an expanding boom which may go further from. This is in fact what Bundesbank appers to see aswell:

http://www.bundesbank.de/Redaktion/EN/Reden/2015/2015_01_28_dombret.html

 

I think any kind of macro predictions are difficult. Rates are at postwar lows, most people think that will remain the case, but I cannot determine for how long. I can see that real estate is not as cheap as it was five years ago. Household formation in Germany is not as positive as in the US and German population is projected to shrink over the next thirty years (though this may or may not be balanced by immigrants). So medium to long term, German housebuilding may look worse than it does at the moment but there may be a few bright years before that. It is nothing I would bank on but it is possible.

 

I just think it is wrong to use the growth rate of the past five years to eternity and it seems like people on the forum agree on that.

[ni-co]

ni-co,

 

I appreciate your thoughts. I think it is fair enough to state that we are not in a German real estate bubble yet, but in an expanding boom which may go further from. This is in fact what Bundesbank appers to see aswell:

http://www.bundesbank.de/Redaktion/EN/Reden/2015/2015_01_28_dombret.html

 

I think any kind of macro predictions are difficult. Rates are at postwar lows, most people think that will remain the case, but I cannot determine for how long. I can see that real estate is not as cheap as it was five years ago. Household formation in Germany is not as positive as in the US and German population is projected to shrink over the next thirty years (though this may or may not be balanced by immigrants). So medium to long term, German housebuilding may look worse than it does at the moment but there may be a few bright years before that. It is nothing I would bank on but it is possible.

 

I just think it is wrong to use the growth rate of the past five years to eternity and it seems like people on the forum agree on that.

 

Oh, I'd agree on that, too. I completely agree with your assessment re. the RE market; just wanted to point out that there is no fully formed bubble, yet – like it is in so many other countries with large trade surpluses.

[LongHaul]

Thanks for posting.    Looks like ~2% EBIT margins in 2003 and 2004 although my German is non-existent so I could be wrong.  The stock also seems to have tanked from 5 Euro to .30 Euros from 2000 to 2003 so smells like something happened.  Any idea what happened in this time period with profitability?

 

 

[farbelow]

Below I address some points made.

 

TSS GROWTH IS MORE INTRINSIC THAN GERMAN CONSTRUCTION BOOM

I believe there is more to TSS's growth story than macro developments and that economic data supports this.

The following site gives the number of building permits for dwellings: https://www.destatis.de/EN/FactsFigures/EconomicSectors/Construction/Construction.html . I think the number of building permits is a good proxy for the development of the size of the german market of TSS. Find attached a graph with the number of building permits (blue, left axis) against TSS revenue (red, right axis) As you can see TSS was already growing before 2008 when construction activity was going down year after year. And after a small hiccup for one year TSS grew again (admittedly with tailwind from the boom).

So, I do not see TSS as a macro play on the german real estate boom. I see TSS as a company which seems a good buy in view of the profitability that it already has and even more so in view of the amount of organic growth it has shown so far. And, owing to it's high ROIC, TSS has had a positive FCF every single year since 2004 on top of it's growth.

 

LOW SHARE PRICE IN 2003

The following might be a background for the low share price in 2003 as addressed by LongHaul. Some history that I could extract from their press releases (with my limited German- and legal background) is that they had a litigation with public authorities about a capital increase in 2001. They concluded the litigation in 2009 and if I understand it correctly, pleaded guilty, did not appeal anymore and closed this case.

Mr. Link, CEO since 2002, and Mr. Klinkmann, chairman of the supervisory board since 2006, were not in charge in 2001, so it looks like they have not been part of the cause of the legal proceedings and that TSS has put that firmly behind them.

[farbelow]

A short update: today TSS issued a press release with modestly increased revenue from 89.6M in 2013 to 91.8M in 2014. This modest increase is disappointing, because the increase of 2013H1 (41.9) to 2014H1 (44.6) was higher, i.e. TSS's revenue decreased in the 2nd half of 2014 compared to 2nd half of 2013. And ebit and earnings decreased likewise. The press release is not open enough to admit to that and did not provide an explanation for the decrease. The full annual report will follow end of April.

 

I had expected better. However, for me this is no reason yet to change my position.

[farbelow]

Innotec TSS issued a brief update on their Q3 YTD performance. Revenue for the 9 months is up 6.8%, 74.2M vs 69.5M last year. And EBIT is up 25.7%, 12.7M vs 10.1M last year. The stock is now up 18% since I started this threat in February this year.