Mikron is a company that I had on my (passive) radar since my “All Swiss shares” series some years ago (since I passed on it, it made around +100%, so keep this in mind for the rest of the post). It is a Swiss based machinery manufacturer with a market cap of 200 mn CHF and has some connection to SFS (SFS is a client, same Chairman in the past).
Q2 2023 hedge fund letters, conferences and more
These were the main items that motivated me to looks deeper into Mikron this time:
+ currently very (very !!) cheap (P/E 7,5, EV/EBIT 3,5)
+ currently VERY good business momentum (6M 2023: Sales +22%, EBIT +33%)
+ better customer/product mix than in the past
+ Rock solid balance sheet (100 mn CHF cash vs 200 mn CHF market cap)
+ good share price momentum
However some negative things jump out when looking at the history of Mikron:
– volatile business, especially machining (order intake already declined 6M 2023)
– no meaningful service revenues that could stabilize the business
– not very high Returns on capital
– current profitability above historical averages (which are quite low).
So there is clearly a reason why the stock is cheap which is also reflected in the stock Chart: Basically a 15 year sidewards development after a drop post GFC, howver with something like a “mini break out” lately:
Sometimes, companies with such a past can be very good investents if something structurally has changed. There is at least a hint that something has changed. In the “old days” the Machining segment, which caters mostly to the Automobile industry, had more than 50% share in sales and this was very volatile.
However, in the last 9-10 years or so, the Automation segment, which mostly sells to the Pharma industry has gained significance. As we can see below, the Auomotive industry now is only in the single digits:
2013: Automotive: 42%
6M 2023: Automotive: 7%
2013: Pharma: 27%
6M 2023: Pharma 55%
As mentioned Mikron runs two segments:
- Automation, which comproses automated trial testing equipement
- Machining& Tools (cutting, metal working) (2013: 52%, 2022: 38%)
Here are two examples of their products:
These are clearly big machines that need time to build. Mikron therefore has significant invenotry and work in progress item on the balance sheet. However, they receive significant prepayments from cusomers which, in the first 6M of 2023 actually led to negative working capital.
Valuation/Financial KPIs (from Tikr)
What stands out is clearly that at a market cap of 200 mn CHF and net cash of around 100 mn CHF, the company trades at around 7,5x 2023 P/E and 3,5x (!!!!) EV/EBIT. Part of the 2023 profit is a one of 2 mn CHF gain and 20 mn CHF cash inflow due to a sale of an investment property.
The company is clearly “dirt cheap” for a company that has een increasing sales by more than +20% in the first 6M of 2023 and EBIT/operating profit by more than +30%. However, if we look at all the key figures we can see that order intake in the machining segment already showed some weakness:
My main concern is that currently, margins and returns on capital are far above anything that has been achieved over the past 17 years or so as we can see on this TIKR page:
So the “mean reversion” potential is quite significant, unfortunately to the downside. One could argue that maybe due to the lower significance of the machining segment, the downturns look less bad in the past. The Automation segment for instance still broke even in 2020 whereas Machining had a negative EBIT margin of -22%.
Ownership:
41% is owned by the Ammann Group, a privately held company with around 900 mn in sales that manufactures mostly road construction equipment (asphalt mixers). Another 20% is held by rich Swiss individuals (Rudolf Maag, Thomas Matters).
Ammann seems to be involved since the early 90ies and stepped in when Mikron almost went bust in 2003 after a big acquisition spree that backfired. Before the Dotcom bubble burst, Mikron tried to become a big player in TelCo supplies but that ultimately ended in disaster. Ammann seems to be a typical Swiss “patriarch” and has been active in a few other Swiss compaies, such as Implenia. I guess his motivation is not purely financial but also “patriotic”.
Management Incentives:
No return on capital is included in the targets, only order intake and EBIT and to a certain extent freee cashflow. Management only holds a limited amount of shares via their incentive plans, but the positions are increasing. The current CEO has been installed only in 2021 as well as new Supervisory Board members. Overall not bad, but also not great either.
Main issues
Mikron’s production seems to be still mostly in Switzerland, which clearly creates a potential disadvantage due to costs against competitors. Personell costs are around 40% of sales. Even in a good year like 2022, they don’t manage operating margins above 10% and returns on capital of 15% in 2022 are still relatively bad for an industrial company.
In one of the linekd articles above, it was also mentioned, that the Mikron Machines are often very tailored to the needs of the customers and therfore it is much arder to achieve economies of scale. Which explains the low amrgins over the years.
I also think that Mikron is mostly a “late cyclial” company. They get the orders when their customers did well in the past and have money to expand. then it takes some time to manufacture the machines. So Mikron then gets hit some quarters after other players are hit.
As we can see with SFS: They just showed not so good results in the engineered components sector which is a long term customer of Mikron. So SFS might not order that many Mikron machines in the next quarters.
In my opinion the business model of SFS is also more flexible: The can use the machines anywhere in the world to build products also locally, whereas Mikron only seems to be able to manufacture these machines in Switzerland, which is expensive.
It should be mentioned, that at least one sell side analyst is very optimistic about Mikron and thinks that their business has become less volatile. Also in 2020 Mikron seems to have streamlined some units, among them a German unit in Berlin.
No investment despite “Deep Value”
A few years ago, I would happily inevsted into Mikron. The valuation is clearly deep value and there might be a good chance that the stock might go higher. On the other hand, I am looking these days more for longer term, higher quality companies that at least appear to be “low maintenance”.
In Mikron’s case I am not 100% sure if the stock is a good long term investment. The business remains cyclical, relatively low margins and returns on capital with unclear growth opportunities. Management and shareholdes also don’t seem to be optimally incentiviced and aligned with minority shareholders.
Therefore I’ll pass despite the very attractive financial KPIs and also due to some concentration issues, as with SFS and Schaffner, I do have already two Swiss based manufacturing companies in my portfolio. In the current environement, I don’t want to overweight cyclicals that much.
Maybe it could be a good “punt” on a multiple expansion, but currently, I think it is a risky time for punts.
Article by Value and Opportunity.
