Francotyp-Postalia Value InvestingThe Value Investing Conference ValueWeekend 2018 will be held soon. From 21 to 23 September we will meet in Berlin to dedicate a weekend to the exchange on Value Investing. On Saturday, 22 September and Sunday, 23 September, we will work on various value investing topics in an Open Space setting. Our overview on the topics of ValueWeekend 2017 in Stuttgart shows just how diverse this can be. On Friday, 21 September, we will discuss with Jochen Wermuth from Wermuth Asset Management. Before that we will get to know the Berlin company Francotyp-Postalia better. In our blog we would like look at Francotyp-Postalia in advance. We have asked ourselves: How interesting is Francotyp-Postalia for Value Investors? On this page you will find contributions from other (Value) investors to Francotyp-Postalia.

The competition of Francotyp-Postalia

The articles reviewed by us also mention the competitors Neopost from France and Pitney Bowes from the United States. Francotyp-Postalia is the smallest of the three players in the global franking machine market. Its global market share is around 11%. In contrast, Francotyp-Postalia has a market share of approx. 45% in its home market of Germany. The largest player in the market, Pitney Bowes, works primarily with large customers and delivers large machines. French Neopost, on the other hand, is targeting medium-sized companies with its medium-sized machines. Francotyp-Postalia is strongly positioned in the market for small and medium-sized machines for SMEs.

Value investors may also be interested in comparing the stock performance/charts of the three companies:

However, it should be noted that the comparison of the three companies is becoming more and more difficult. All three companies operate in a market that is shrinking to some extent. Therefore, all three companies have been working for some time to position themselves in new markets.

Value Investors and Francotyp-Postalia

Francotyp-Postalia Value Investor
Source: Francotyp-Postalia annual report 2017, page 41

If you take a look in Francotyp-Postalia’s current shareholder list, you will discover that some Value investors are at the top of the shareholder structure. More than 10% are held by Active Ownership Capital, which has been invested in the company since 2012. Klaus Röhrig from the Active Ownership Capital team has been Chairman of the Supervisory Board of Francotyp-Postalia since 2013. He has thus had an influence on the development of the company over the past five years. In addition to Active Ownership, QUAERO Capital from Geneva, which we also list in our overview of value investors from the DACH region, holds over 5% of the company. You can get to know QUAERO’s approach a little better through this interview with Marc Saint John Webb at the Value School and this presentation at the ValueSpain 2018 conference. The Spanish Magallanes also holds over 3% of the company’s shares.

In addition, Cologne-based Scherzer AG, which specialises in investments in German value stocks, and Augsburg-based Value Holdings have also invested in Francotyp-Postalia. Currently, Value Holdings has 2.4% of the Europa Fund in the shares of the Berlin-based company.

Active Ownership on Francotyp-Postalia

Florian Schuhbauer gives a deep insight into the strategy at Francotyp-Postalia in this interview with MOI Global. Unfortunately, the entire article is only available to members. But the short description also is very informative:

Florian views Francotyp as misunderstood, as investors mistakenly believe that (i) paper mail is dead; (ii) franking machines are no longer needed; and (iii) the company cannot keep growing the core business. The reality is that (i) 80+% of companies still use letter mail regularly, and paper production has grown from 130 million tons in 1970 to 440 million tons in 2015; (ii) franking machines in the large and medium mail volume segments are in decline, but the small mail volume segment (up to 200 letters per day) continues to grow at a low single digit rate; and (iii) Francotyp continues to grow revenue in the core business in the low single digits through consistent market share gains.

Florian expects the company to generate EBIT of €7.4 million in 2017, €10.5 million in 2018, and €12.8 million in 2019. The shares recently traded at 3.1x EV to 2017E EBITDA and 5.2x EV to operating FCF. Florian’s firm is the largest shareholder, and Florian’s partner Klaus Roehrig serves as chairman of the board.

Value Investing Blogger and the internet on Francotyp-Postalia

For many, the Wallstreet Online forums are a first port of call for familiarising with German small caps. Francotyp-Postalia can also be found there – and the thread on it has a long debate to offer. The portal Börsengeflüster has also repeatedly reported on the Berlin company. By the way, we recommend you using DeepL to translate the German sources.

We found more articles on Francotyp-Postalia in two Value Investing blogs. First, Hans-Jürgen of Covacoro writes about the Berlin company. But Ben of WertArt Capital has also written articles about the company.

Covacoro

Covacoro has published five articles on Francotyp-Postalia since 2016. In April and May 2016, he presented the company, its products and markets, management and competitors in two articles. He also reported on the Investors’ Day. Covacoro categorises Francotyp-Postalia as an SUV share that could also position itself in exciting future markets:

I think the stock is regarded as a special machine builder, that’s what the “S” stands for. The software and consulting business is currently too small. De-Mail does not make a positive profit contribution, so unfortunately the value of this business area is not priced in.

Furthermore, the parallels with a utility are striking for me: the low share valuation, the high share of recurring sales, the high CAPEX requirement and the problem that the Group’s profitability depends on the depreciation level. That is why the “U” in SUVs stands for utility and emphasizes these aspects.

Last but not least, I see the company as a value share, which is what the “V” stands for. And I don’t have to draw up a detailed cash flow statement, but simply look at EV/EBITDA and Price/Sales. – Translated with DeepL

In 2016 the Covacoro blog takes the Q3 figures as an occasion and the announcement of the ACT strategy as an occasion to give an update. ACT stands for “Attack in Core Business, Follow the Customer and Transform the enlarged business”. As part of ACT, Francotyp-Postalia has set itself clear earnings targets for the coming years:

Francotyp-Postalia Value Investor
Source: Francotyp-Postalia annual report 2017, page 41

Covacoro reports both 2017 and 2018 from the Annual General Meeting. His reports provide information on how the ACT strategy is being implemented. Between 2017 and 2018, it will also be a very dynamic year for shareholders. While the share price in 2017 was still almost € 6, it had almost halved to € 3.05 in 2018.

WertArt Capital

The WertArt Capital Blog has released four English articles about Francotyp-Postalia. The information on the structure of a position published in August 2014 is brief. In contrast, the investment thesis that went online in September 2014 is much longer. The author justifies his investment as follows:

This company is currently in the final stage of a restructuring. The core segment is declining but increasing profitability and a large share of recurring revenues makes high free cash flow generation for an extended period highly likely. Based on my assumptions, the market is valuing the company with a price to free cash flow multiple of 10x. In addition, the company invested in new segments which are currently not generating a profit. However, this might change in the future. Hence, an investor is getting the optionality of additional cash flow generation from these entities for free.

Another article followed in November 2015, announcing an increase in the position to 4% of the total portfolio. The reasons for this are summarised below:

In conclusion, I expect the installed base of FP’s franking machines to keep relatively stable for an extended period of time due to the recent high renewal rate in North America and strong demand in new and existing European markets. Except from a likely decline in demand over the long term, the oligopolistic structure of the industry, a recurring revenue stream, strict regulation and support from local postal companies (e.g. discounts on automatically franked letters) provides for attractive industry characteristics. Hence, I assume that cash flow generation should keep strong after 2016. The other segments (mail services, software solutions and De-Mail) provide optionality.

At the beginning of 2018 a somewhat disappointed contribution follows in which the sale of the position is announced. Ben explains why the sale took place:

From a valuation perspective a 3.5 times EBITDA multiple looks attractive. In my investment case, I assumed that required investments will go down leading to lower D&A and therefore higher EBIT over the years. Therefore, we would also see higher free cash flows and cash return to shareholders. Unfortunately, this has not been the case so far. Cost overruns and continued investment will cap EBIT at EUR 10 m in 2017. Consequently, the company is valued at ten times operating profit (For comparison, shares of competing Neopost can be bought at eight times EBIT). With EUR 4.5 m of free cash flow in 2017, FP trades at a 6% yield. As I do not see much improvement in 2018 as well, this turns out to be a high valuation for this type of company. FP is operating in a declining industry (although they are increasing their market share) and has to carry around the mail services business that might never be generating noteworthy profits in the future but requires substantial resources. I think it is time to move on and to sell the shares.

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