Disclaimer: This is not an investment advice, please do your own research and don’t follow anyone blindly. Furthermore, it has to be mentioned that the author and related parties are long-term shareholders of S&T AG for many years and thus participate if the share price increases. Additionally, the author and related parties may sell their shares without further notice. As this post is already extremely long, I will write another one for the Smart-Energy business.
1. Executive Summary
S&T AG (‘SnT’) is an Austrian company active in three different markets.
- IT Consulting and System House
- Niche market Security Appliances
- Hardware & software products for Smart Energy
Today, the System house activity stands for over 80% of revenue and is used to cross sell S&Ts smart energy & security Appliances. In the system house division S&T offers IT and ERP implementation services but also outsources the whole IT-Infrastructure of customers. The regional scope of S&T is focused on Eastern Europe and Russia. Major clients are governments and big companies like Skoda and Mikros.
In the Appliances segment, S&T integrates software and hardware to a customized IT security solution. In this segment S&T already generates EBIT margins of 20% if you add back R&D costs which are related to the smart-energy segment. The major clients are betting companies such as BWin and Admiral Sportwetten. Other big customers are Siemens, Bosch, Fronius and Lufthansa maybe Boeing in the next year. In the Smart Energy segment, S&T is a one stop full service provider which produces the smart-meters, other necessary hardware and the software, which is needed to monitor the whole system. Major customers are E.ON, Tauron S.A. and other utilities. In smart energy appliances, S&T has a high potential for long-term recurring revenues which are based on the OSGP License revenue and head-end software.
The CEO Hannes Niederhauser (HN) holds a stake of 13,8% of the company (> € 30m) and only earns 500 Euros per month. In my opinion HN doesn’t work for the money, he is only driven by his entrepreneurial spirit.
HN says about himself that he and his team are technology crazy – it was stated from different sides that he is a technological genius, but also has a strong operating mindset. On the other side, the risk is that when he leaves the company, the new management will fail. By looking at the balance sheet we can see, that he also has a strong cost awareness – he was able to reduce TTC to just 14% of revenue and the Cash Conversion Cycle to 25 days. Furthermore, other sources stated that he only flies economy class.
1.3. Economic Characteristics
Due to the strong growing market and the buy and build strategy, S&T was able to grow by 25% p.a. over the last 4 years since HN reached the helm. As we have a huge potential for Smart Energy in Europe, I assume a growth rate of 15% p.a. for the future which is in line with management expectations and the Total Addressable Market sizes. The historical ROCE is only 12% and has recently increased to 16% due to a leaner cost structure and new offerings which bear a higher margin. I think that this trend will continue in the future and we will see a ROCE of above 30%.
Sum of the parts without growth:
- Services is basically an IT-System house which generates 320 Mio. Euro revenue in 2015:
- 4% sustainable EBIT-Margin
- = ~12.8 Mio. EBIT
- * (1-tc(25%))
- = 9,6 Mio. OE
- Discount rate of 10%
- = ~96 Mio. Euro OE
- Security Appliances for niche markets generate ~70 Mio. Euro revenue in 2015:
- 20% sustainable EBIT-Margin
- = ~14 Mio. EBIT
- * (1-tc(25%))
- = 10,5 Mio. OE
- Discount rate of 10%
- = 105 Mio. Euro OE
If we put those two segments together, we end up with a value without any further growth of 201 Mio. Euro – 11 Mio. Net Debt – 11 Mio. Minority interest = 179 Mio. Euro / 43,8 Mio. Shares outstanding = 4,09 Euro per share
- Smart-Energy Real Option:
- Detail period of 9 years where revenue grows from 65 to 235 and falls back to 90 Mio.
- 9% WACC in detail period
- 10% WACC afterwards
- 3% Perpetual growth rate after 2024
- Marginal Tax rate of 25%
- Sum of DFCFs = 60,7 Mio.
- PV of TV= 94,6 Mio.
- Firm Value = 155,4
- FV/43,8 Mio. Shares = 3,59 Euro per share
If we put those two values together, we end up with a fair value of 7,68 Euro per share which doesn’t account for the potential of further revenue growth of the Security Appliances Segment which could get a really big project from Boeing (S&T already received money for a feasibility study and currently they are negotiating the contract with Boeing). If we factor in the growth of the appliances segment the fair value could easily reach 10 Euros per share, due to favorable economics.
I think the biggest risk is a key man risk. As we have heard from various sources, HN seems to be the only one who is capable to handle all the different unintegrated business. As HN is only 53, I think he will stay CEO for a longer time, min. 7 years. A further risk is competition from bigger competitors in the Smart Energy market. Therefore, I conclude, that the main risk lies in a commoditization of the smart energy business. Another risk are competitors which move into the niches of S&T security appliances. I think that the risk for the appliances market is rather low as we have many different niches with high barriers to entry. Another risk are the minority shareholders, the related accounting and the paid purchase prices. As HN is a majority owner of S&T and it is his core strategy to ‘Buy&Build’ we have to trust him, which I do.
In 1990 S&T AG was founded under the name ‘Gericom AG’ and is corporate in Linz. Gericom was a hardware producer and reseller for PCs, Laptops and TVs. In 2000 the company IPOed. After the IPO the company changed its business model towards a pure reseller of well-known PC brands and an OEM manufacture for the Metro AG. The company was able to generate some money in the early 2000s but struggled afterwards and needed new external financing in the year of 2004. According to IT-insiders the struggling of Gericom was related to their poor quality and high defect rate. In 2007, the ‘Deutsche Schutzvereinigung für Wertpapierbesitz’ ranked the company place 2 of the biggest listed capital destroyers in the DACH area. In July 2008 the share price was only 70 Cents, back from a high of 14 Euros in the year of 2003. In August 2008 Gericom AG was acquired by the Taiwanese company Quanmax, Inc. Quanmax was partly owned by Quanta Computers, Deutsch Bank and Kontron AG, where Hannes Niederhauser (HN) was in the supervisory board. At the 14.08.2008, the former CEO and chairman of Kontron, HN reached the helm of the supervisory board of Gericom AG which was afterwards renamed to Quanmax. Since 28.05.2009 HN is the Member of supervisory board and CEO of Quanmax. In 2010 Quanmax acquired the insolvent online gaming company Funworld AG. In January 2011 Quanmax acquired the software company CBC-X GmbH. CBC-X is a pioneer in the protection of online gambling automates and has over 30 years of experience in the field of infotainment and has currently 40 employees. The acquisition of CBC-X has built the foundations for the ‘infotainment’ Appliances segment. In November 2011, ‘S&T System Integration & Technology AG’ (an Austrian system house company) was acquired by ‘Quanmax’ and merged into it. The acquisition of ‘S&T System Integration & Technology AG’ was financed with stock of ‘Quanmax’ in a ratio of 200:259. ‘S&T System Integration & Technology AG’ has ceased to exist as a company since the merger but the conglomerate has been registered as ‘S&T AG’ (i.e. it changed its name from ‘Quanmax’ to ‘S&T AG’) in 2012. In the year of 2014, S&T acquired a couple of companies in the smart energy market:
- On 29.04.2014 NES acquired Ubitronix system solutions GmbH. Implementing company which also works with ‘Lastschaltgeräte’
- On 6.6.2014, S&T acquired 48% of the holding Affair OOO for EUR 5.87 million from Kontron AG. Affair OOO has a 74.5% stake in its operating subsidiaries, RTSoft.
- 08.2014, S&T acquired 40% of Network Energy Services Corp. (NES), which is the smart grids business of the California-based Echelon Corporation, for EUR 2,5 million.
- 2015, acquired the majority of NES. With this they fully consolidate this in S&T.
Since 2015-now: S&T split out the Smart Energy Appliances out of the ‘normal’ Security Appliances and organized itself into four business units – which is today’s segmentation.
3. Roots of the company & Management
HN has basically bought Quanmax/S&T to transform it with a buy and build strategy into engineering driven security Appliances Company. The security appliances are developed for small niches from engineers and are cross sold via the Systemhouse. As you can see, the new CEO HN has made a number of takeovers to build the company. HN seems to have a strong technical and process oriented mindset. In one call he has described himself as technology crazy. HN states that it is important for him, that his employees are engaged and motivated people who have a drive towards excellence. Just by judging from its recent acquisitions and interviews, I can say that S&T is an engineering / innovation driven company.
Services are the root of S&T and till today clearly the unit which accounts for the biggest chunk of revenues. Recently, this segment was consolidated with the Products segment and afterwards divided into a regional split. The two segment offer the classic IT consulting and implementation service of a system house like Bechtle and Cancom in the Eastern European and DACH region. The DACH segment has a lower profitability due to higher competition from other system houses. Security Appliances produces customer specific security appliances for niche markets such as infotainment and welding robots. Security Appliances are the cash cow of S&T and produce EBIT margins of up to 20% in the field of Infotainment. According to the 2015 H1 Report, the Security appliances achieve an EBITDA-Margin of 19% which makes it to the most profitable segment. Smart Energy Appliances produces and implements Smart Energy/Grid components and software. S&T offers the customers a one stop experience. In the smart energy business, S&T works together with state owned and civil utilities. Major customers are EON, the state own utilities Thauron, Vattenfall and Linz AG. At the moment, this segment is a Star –it has a high market share and is quickly growing. So far the segment is loss making.
4.1. Segmentation by Region
Segmentation as follows:
|Region||Revenue||%of Revenue||CAGR 2014 – 2015||% of EBIT*|
|Rest oft he World||~ 20m||~ 5%||x|
S&T also won a tender for a smart grid project in Puerto Rico, but HN doesn’t know if they will compete again in such a remote area. He thinks that the clear focus of S&T should be on Eastern Europe. According to the 2014 investor presentation 16% of total revenues are generated in Russia which would make it the second biggest market.
4.2. Appliances (‘Security’, 14% of revenue, +20% growth)
4.2.1. Business Description
An ‘appliance’ is an IT solution comprised of hardware and software and created and customized for a single, dedicated purpose. The capabilities have arisen from S&Ts expertise in IT and bolt acquisitions in the field of niche appliances.
Most appliances are cloud-based, which means that S&T maintains a firewall in the cloud and provides the appliances in the field with permanent security updates and a save online environment. The appliances are connected to the cloud and are only working when connected. This dependence enables S&T to sell long-lasting automatically renewing contracts.
4.2.2. Sub-Segmentation by Business Line
The Security appliances segment consist out of three different sub segments:
|Name||% of Revenue||2014 in Mio.||EBIT-Marge||% of EBIT|
According to HN the security appliances will make 70 Million in 2015. The margins are reached when you add back the R&D which is done for the Smart Energy segment. A further important fact is the potential for cross selling by providing a distribution channel to small acquired appliances manufactures. The distribution channel arose from the strong market penetration of S&T as an IT-system house with a direct sales force and many boots on the ground. Today roughly 15% of appliances revenues are generated through the system house. A big part of those revenues are recurring revenues as they are based on an initial hardware purchase by the customer which is bundled with a 3-year maintenance contract. This is the case for the security products of airplanes and welding robots etc. The revenue from the infotainment segment is 100% recurring as S&T gets a monthly subscription fee for each betting automat which is secured by them. The prices range from 100 to 200 Euro per automat and month. And S&T controls 40% of the European Betting machines.
4.2.3. Competition and Moat
The Security segment has a market size of ca. several billion euros but we have to consider each niche on its own which led us to several thousand markets with a market sizes of 10 to 20 million Euro. According to the interview with HN from 2014, the niches are too small for big players and S&T has the advantage to cross sell their products via their system house and cross develop the different appliances. According to HN, every product of the segment appliances is more or less the same Security technology but adapted to a niche. The development of a security solution costs around 100 men-years of R&D (20-30 million Euros), but the adaptation to a new niche costs S&T only 10-15% of the initial outlay. S&T spends roughly 25% of their staff costs into R&D which was 15 Mio. Euro last year. 90% of this are for the two appliances segments. In the security appliances segment are, according to HN, no real competitors. The two big players Microsoft and Checkpoint don’t hurt S&T even contrary to this Microsoft sent Siemens to S&T. In the infotainment software S&T has one competitor from Turkey, which doesn’t hurt S&T according to HN and Booxware, which is the exclusive partner of Tippico.
188.8.131.52. EBIT Margin
The costs for the IT maintenance is fixed as they are maintained via a Cloud. Therefore, this business is super scalable and the EBIT Margin should increase while the segment is growing (excluding startup losses of newly entered businesses). Furthermore, we learned, that S&T is currently generating an EBIT-Margin of around 17% in the security appliances segment. Additionally, we know, that 2 Mio. of R&D is expensed in this segment which is not related to it. The R&D expenditure is for the smart grid security and thus, shouldn’t be a part of the security appliances EBIT-Margin. I assume, that the sustainable EBIT-Margin of the security appliances segment is 20%.
The appliances segment was able to grow by 20% over the last years. As more and more niches are feeling the need of security against hacking, S&T will grow further. Nevertheless, I can’t say, that I’m able to say how strong this growth will be over the next couple of years.
4.2.5. Conclusion on Appliances Segment
S&T has a fast growing small niche market which seems to have a wide moat and can be cross sold via the IT-system House. I see the sustainable EBIT-Margin around 20%.
4.3. Smart Energy Appliances (‘Smart Energy’, 7%, -9% EBIT-Margin)
4.3.1. Business Description
The segment of Smart Energy Appliances is reported for the first time in 2014 and was spun out of the Appliances segment. S&T entered the field on their own in the year of 2013 and via the acquisition of the Linz based Ubitronix GmbH which was later merged into NES and they purchase of Afaire OOO in 2014. At the moment S&T offers a full stop shopping experience which includes the necessary meters (NES), the communication protocol OSGP (NES), the head-end software (S&T) and smart energy solutions (RTSoft).
The segment of Smart Energy has six sub segments:
|Name||% of Revenue||Recurring|
HN told me, in the August call that they will generate 100 million in revenue in the smart energy segment in 2016 of which 35% (35 million Euro) will be recurring revenue. At the moment they spend 25% of revenue (16,5 million Euro) into R&D. When they reduce the Hardware business they will bring the hole segment to 15% EBIT Margin.
Please see the DCF attached, on which I will comment in a seperate post:
4.3.3. Conclusion on Smart Energy segment
According to HN, S&T will not win some tenders in France that’s why he is focused on Eastern Europe which accounts for 25% or 10 billion Euro of the total European market. Furthermore, Eastern Europe accounts for over 50% of the pipeline, the advantage of S&T is that they have already installed SAP for the countries and companies in Eastern Europe, so they have one foot in the door. HN thinks that they will make only 65 million in revenue in the Smart Energy Market in 2015 and that they will make a loss of 1 million. For 2016 he thinks that 100 million are realistic.
4.4. Services (‘Systemhouse’, 79% of revenue)
4.4.1. Segment Description
At the moment S&T is the one of major system house in Eastern Europe. Currently S&T has subsidiaries in 20 different countries and claims to have a market presence for more than 20 years. Please see the picture below:
This segment offers different IT consulting services such as SAP implementation services which is according to HN the ‘foot in the door’ for further cross selling of smart energy appliances.
4.4.2. Segmentation by Revenue Stream
S&T splits its Systemhouse sales as follows:
|Segment||% of 2014 Revenue||EBIT-Margin in %||Comment|
|Consulting||15||1||e.g. Process design|
|Integration services||64||3||e.g. Rollouts|
|Total||100 (220 m EUR)||4|
We know that 50% of revenues are recurring.
Consulting: formulation of migration scenarios when planning replacements of technologies, the designing of private-use cloud environments, the advising on the implementation of ERP systems and the creation of security systems for networks. Integration Services: comprise the wide-ranging implementation and configuration of hardware and software. These services include handling the roll-outs of client computers, POS (point of sales) systems and peripheral devices. In this segment S&T handles the delivery, installation and configuration of hardware and software. Outsourcing: S&T conducts the management of entire IT operations. Such outsourcing projects can entail the provision of managed printing, data center operation, managed desktop and of such related services as maintenance and the stationing of technological support personnel.
HN has the aim to continuously increase the Gross Margin of his company to above 30%, which would be equal to an EBIT-Margin of ~10%. Therefor he tries to switch to higher valued services such as SAP and Smart Energy Consulting. In the future HN wants to convert some of its ERP consulting via consulting into Smart Energy projects.
4.4.3. Competitive Advantage
The high fragmentation of the Eastern European market should enable an over regional player such as S&T AG is, to gain bigger, cross boarder contracts. A further barrier could be the brand recognition and the already established field salesforce. One economy of scale could be an over regional specialist team which can be deployed wherever it is needed.
The IT Systemhouse in mature market like the DACH area grows in line with the GDP. Nevertheless, larger players can grow quicker than the market as the market gets consolidated at the moment. I think that S&Ts Systemhouse will grow in line with the expected GDP growth of the eastern European countries which should be on average 3% over the next couple of years.
I don’t have a personal insight at the moment, therefore I think the margin will be in line with the peers, thus the sustainable EBIT-Margin is 4%.
5. Governance and Management / Shareholders
The shareholder structure looks as follows:
|Shareholder||Comment||% of shares|
|Hannes Niederhauser||CEO, Co-Owner||14.9|
|Kaubauer Asset Management||Value Fund||2.5|
|PEH Wertpapier AG||2.2|
HN holds his stack via the Krtek13 AG and Quanmax Inc. HN owns in total ~6 Mio. Shares.
5.2. CEO Hannes Niederhauser
I have a really good impression of Mr. Niederhauser, he is really friendly and knows his numbers extremely well. He has a clear vision for S&T and always speaks in ‘we’. He describes himself as technology crazy, which I would confirm after background checks.
We heard from different sources that HN is a really good entrepreneur who can handle an unintegrated company, but if he passes on to another manager, S&T has a high potential of failure.
5.2.1. Overall Remuneration
The CEO, Mr. Niederhauser makes:
|Fix||500 EUR per month|
|Bonus||80,000 share options|
This is ridiculously low for a company with this size and underlines that he thinks that this is his company.
6. Key Risks
Due to the highly diversified customer and business base, S&T faces various risk. The risk for S&T are mainly on the basis of the single appliances and should be discussed on their own.
6.1. Competition in the Smart Energy Market
One of the biggest risks is, that well-known competitors such as Siemens enter the Smart-Grid Market and attack the security aspect of it. Until know, HN was smart enough to avoid it and he makes the impression if something like this would happen, he would sell the business to a big company like Siemens.
6.2. Loss of Hannes Niederhauser as CEO
As we have heard from various sources, HN seems to be the only one who is capable to handle all the different unintegrated business. As HN is only 53 I think he will stay CEO for a longer time, at least 7 years.
6.3. Liability for technical failures
I think that the Liabilities for technical failure are huge in the business of S&T, nevertheless I don’t have a clear view on it and have to do further research on it.
6.4. Competitors enter the market
According to our sources, HN is fully aware that he cannot compete with IBM when they would enter the market of Appliances. To the small market sizes and high customization for each customer, I don’t think that a competitor would enter the market. As I have mentioned, the post has already reached a good lenght and I will follow up on the smart energy business in an additional post soon! Please let us know your thoughts!