Background / The company
In part 6 of my “All Swiss Series” I mentioned that Maier Tobler looks interesting, at least if you like “boring” stocks, which I do.
Today, Meier & Tobler is a company focused on Switzerland that is active in the areas of heating, cooling and ventilation of apartments and buildings. They are both the sales of devices and spare parts and the direct maintenance service.
Until 2013, the predecessor company Walter Maier was a very diversified company, with a focus on cooling / air conditioning (DACH), tools (US) and machines (including woodworking machines). In 2013/2014 they completely changed their strategy: They sold the tool division and the German air conditioning business and outsourced all manufacturing activities that they had bundled under the name WM Technology.
In 2017 they took over / merged with the Swiss competitor Tobler, creating the clear market leader in Switzerland.
The business as such has been quite stable over the years, although the core business was already facing some difficulties at the time of the merger, such as: B. increased transparency on websites and slowed down renovation / construction activities in Switzerland as well as increased competition from European players due to the CHF appreciation made things more difficult.
To say the merger was bumpy would be an understatement. Profitability fell and Meier Tobler had to post losses in both 2017 and 2018. At the time of going to press, full integration has not yet been achieved. According to some press articles, the full integration of distribution logistics will not be achieved until 2023.
They had to cut the dividends for both 2018 and 2019, which then bombed the share price before Covid:
So what has changed?
The big question is: what’s next? The botched merger is a good excuse for a year or two and Covind-19 is counting for 2020, so why should things change in the future?
New CEO / founding family
Meier Tobler has had a new CEO since September 2020 and I assume that the chaotic integration could have been one of the reasons for this. They also seem to be quite successful in using e-commerce channels (40% of sales in 2020 were online) and they are very active in developing new retail concepts such as 24/7 automation solutions.
In the past, everything was not good in the founding family. According to a Swiss article, the exit of long-time CEO Reto Meier did not go very smoothly. His heir, Silvain, who retired from active office as CEO in 2013, has remained Chairman of the Supervisory Board to this day.
What I liked a lot was the fact that when Ferguson sold its 29% stake for EUR 8.50 in 2020, Silvain offered all minority shareholders to buy at roughly the same price. The company has also treated minority shareholders fairly in the past. I haven’t found a case where they tried anything lazy.
Interestingly, with the 2020 annual report For the first time in several years they have actually issued a cautious forecast: 2021 should be better than 2020 and in the medium term they are aiming for EBITDA margins of at least 8%.
I think that all areas have structural tailwind. In the heating sector, the switch to heat pumps is picking up speed. This could be attractive for Meier Tobler, both to increase sales in the short term and to provide more service in the long term. Heat pumps are very efficient, but require more maintenance than a typical natural gas burner, for example. The service business, which accounts for around 1/4 of sales, also grew well in 2020-
Cooling is becoming increasingly important with hotter summers, but also with the increase in data centers. And ventilation has become a key issue since the pandemic and people have learned what an “aerosol” is.
So all in all, I think that they can still grow at least modestly for some time, even within the Swiss market.
Balance sheet repair
At the end of 2017, Meier Tobler had charged a net debt of CHF 150 million, at the end of 2020 it was CHF 33 million. This decrease of CHF 120 million was due both to the sale of assets and to the very good operating free cash flow.
For example, they succeeded in reducing net working capital from around 14% of sales to 6%, which freed up CHF 40 million. In general, the business is relatively poor in capital and the cash conversion is good.
I assume that the company will be net debt-free by the end of 2021 (excluding finance leases, which are not reported under Swiss GAAP). This allows them to pay a dividend again or even start a share buyback program, which they have sometimes done in the past.
What is interesting about Meier Tobler’s business is that the service business generates a decent float. Heating service customers seem to pay the service fees a year in advance, which creates around CHF 50 million in “float”.
Meier Tobler is currently trading with an EV / EBITDA of around 10 in 2020. Assuming a growth rate of 3% from 2022 (no growth in 2021) and a return to 8% EBITDA margin in 2025, this could result in an EBITDA of 44 million . CHF will result in 2025 (from 24 in 2020). Including the cash generated until then and keeping the EV / EBITDA multiple constant, this would correspond to a price target of CHF 45.6 or an upward trend of + 165% (5-year IRR of 21.6%). In my opinion, this is a very reasonable return compared to the risks, especially since it is based on constant multiples. An increase in the multiples would be another benefit.
When considering the EPS or PE, the annual goodwill amortization of CHF 10 million should be deducted, which would not occur under IFRS. In terms of FCF, Meier Tobler is currently trading with ~ 11% FCF / EV yield, which is very cheap.
Why is the stock cheap / big risks?
My best guess is that it could be a combination of investor patience, a lack of analyst coverage of the stock, and the lack of a dividend that makes the stock unattractive to many investors. Combined, the stock could just be too boring for many investors.
There is clearly a risk that the integration with Tobler will never really work. There is always a risk when two companies that merge and are of a similar size argue for a long time. Other risk factors are also there. For example, in 2019 a cyber attack stopped all activities for 4 full days and cost them several million. Since the final integration of the logistics center will not take place until 2023, many problems could then arise.
Another point is that as a company focused purely on Switzerland, the company cannot diversify or grow outside of Switzerland. Many of the very successful Swiss companies operate globally, which is not the case with Meier Tobler for the time being. On the other hand, it will not be so easy for foreign competitors to enter the market.
Overall, what I like about Meier Tobler is the fact that the underlying business model is good (stable, low capital intensity), there is some longer-term fundamental tailwind and the worst seems to be behind them.
The risk / return profile looks attractive. That’s why I assigned Meier Tobler a 3.5% portfolio weighting at an average price of CHF 17.25 per share. The target holding period is at least 5 years, the price target (including dividends) is CHF 35-45.
The stock becomes part of my “boring” bucket, which also includes G. Perrier, Netfonds and Bouvet. The drill handle has become very small and I intend to enlarge it further in the future.
As a side note, I like the fact that they only give updates every six months. That makes the shaft even more boring and less maintenance-intensive.