Aalberts 2012 Results Preview

Aalberts (AALB) releases their 2012 figures tomorrow before the open.

Revenues: On the Bloomberg Businessweek website, consensus estimates show revenues expected at EUR 2.0bn (2011: EUR 1.9 bn, H1 2012: 1.0bn). The range of expectations is EUR 2.0 – 2.1bn. Currently my draft preliminary analysis of AALB indicates a revenue of EUR 1.968bn slightly below the forecast range and just a 1.60% rise over 2011.

EPS: On the Bloomberg Businessweek website, consensus estimates show EPS before amortisation (I presume before amortisation as it seems high) of EUR 1.41 (2011: EUR 1.36, H1 2012: 0.72). The range of expectations is EUR 1.37 – 1.55. My draft preliminary analysis of AALB indicates EPS at EUR 1.35, which is slightly below the forecast range as well.

No acquisitions in 2012: Unusually for the company, there were no significant acquisitions made by AALB during the year which should enable investors to glean a better look at the organic progress being made by the business (the pro-forma revenues for its 2011 acquisitions can be seen in the 2011 annual report).

Flow Control (FC) – 70% of sales in 2011: Poor European construction figures indicate that the progress of Flow Control (FC) could be limited, the US could mitigate this effect somewhat. I will be looking for more signs of progress on improving margins in the US as the integration of Conbraco continues. It will be interesting to see if the good progress in district heating, gas, industry and beer and soft drink markets, seen in H1, can continue and offset the challenging residential and commercial markets in several European geographies.

Industrial Services (IS) – 30% of sales in 2011: Industrial Services (IS), which is a primarily European division, could have been impacted quite strongly in H2 2012 as GDP trended downwards. The Q3 trading statement indicated stable but lower volumes in IS and I expect this to have continued to be the case in Q4.

The results will be a good test for the company. As transparency in AALB’s business is limited it will be interesting to see how the company has coped with the European downturn in H2 2012, which will be very useful to assess the company´s prospects going forward.

The document with my draft analysis attached to a previous post can be seen via the following link:

https://docs.google.com/file/d/0B6ESf1-JCd-uanFfTmJhNmY0M00/edit?usp=sharing

Speculative Piece: Potential US heat treatment acquisition targets for Aalberts Industries

From time to time I will write on the blog some random thoughts of mine regarding the companies I aim to cover. These posts will be basically me thinking out loud and writing something on the blog as the rubbish Amsterdam weather keeps me inside. This is the first such piece. These are just my initial thoughts on this subject so could be very wrong!

In 2005 Aalberts Industries (AALB) took over the heat treating company Accurate Brazing Corporation (which had revenues of around USD 5m). The company had 2 service centres in Goffstown (New Hampshire) and in Greenville (South Carolina). The Industrial Services (IS) division of AALB already had a small presence in US heat and surface treatment with Ionic Technologies, also based in Greenville. Accurate Brazing has since opened a location in Manchester (Conneticut).

AALB stated at the time in its press release (14/07/05):

“The acquisition of Accurate Brazing ties in with the strategy of Aalberts Industries to gradually extend its network of service centres for heat and surface treatments, most of which is centred in Europe, to the US by means of strategic takeovers of small and medium-sized specialist firms offering high-grade heat treatment technologies.”

Since then the only other acquisition for IS in the US was of the German/US company IDE which was not active in heat treating. The following graph was included by AALB in the most recent investor presentation for H1 2012, I have just added an annotation to it for extra emphasis that it probably didn’t need.

From the graph it is clear that US exposure for the division still remains minimal with revenues of roughly EUR10m in H1 2012. The CEO of Bodycote, the world’s largest commercial heat treating company, estimates that the total worldwide captive and commercial heat treatment industry is approximately USD 35bn with USD 20bn of this coming from the US. Thus the US would appear to be a logical geographical region for AALB to expand in this area.

So, given that, I am conducting a brief analysis into potential North American takeover targets. I am going to rely heavily on “The Monty Heat Treat News”, an excellent resource for heat treating news. They have compiled a list of their estimates of the largest commercial heat treaters in North America which I will use. You can see their list here: http://www.themonty.com/top10largest.htm

The Monty’s estimates were made for the year 2011, I have tried to update the information where I can. I hope to get time to do a more in-depth analysis into the American market this year. The following are my initial thoughts. What’s clear is that 2012 was a busy year for the American heat treating industry. Bodycote has taken out 2 (or one and a half) of the top 5 in the past year, although the Bodycote CEO has indicated that the company will be growing organically mostly rather than through acquisitions for now. This could provide a window of opportunity for AALB.

Number 1: Bodycote

This would definitely not be a bolt-on acquisition so is ruled out!

Number 2: Bluewater Thermal Solutions

This is an interesting one. In 2011, Bluewater had 17 locations in the US and Canada. It is also based in Greenville where Accurate Brazing Corp and Iconic Technologies have a presence. Bodycote estimated it to be the world’s 5^th largest independent thermal processor with an about 2% market share during their 2011 Capital Markets Day.

In October 2012, Bodycote took over the business of Carolina Commerical Heat Treating (CCHT) from Bluewater. This acquisition comprised 7 of the 17 facilities owned by Bluewater. The cash consideration was USD 68m. In the 12 months to September 2012 this acquired business delivered USD 11.7m EBITDA on USD 34.9m sales. This gives us precedent transaction multiples for heat treating acquisitions in North America. So historical EV/Sales is approximately 1.95x and historical EV/EBITDA is 5.81x.

In the same month, the private investment firm, Aterian Investment Partners completed a carve-out acquisition of Bluewater’s remaining heat treating facilities. Soon after in December, Bluewater completed the acquisition of Southwest Heat Treat and Texas Energy Labs, which provides heat treating and laboratory analytical services. This brings the number of heat treating facilities now owned by Bluewater to 11. I would expect more bolt-on transactions from this company over the next few years.

A very rough calculation of 20% of the USD 20bn heat treating market being outsourced to independents and then Bluewater having 2% market share would imply sales of USD 80m. Taking out the roughly USD 35m of sales from the CCHT transaction, this leaves a company with USD 45m of sales (assuming negligible contribution from the Southwest plant). Using the average precedent transaction multiple (of the CCHT and Metal Improvement Co. transactions – see no. 5) would mean a transaction size of USD 77m. In 2011, AALB spent EUR 123m through 3 acquisitions for its IS division meaning that an acquisition of Bluewater´s remaining operations could be within the company´s range.

Aterian will probably want to exit their investment at some point in the future and an acquisition of this size would make AALB’s North American heat treating activities approximately a third as large as its European operations (assuming these account for roughly 3% global market share). Technology transfer could be possible from Europe to North America and vice-versa, potentially creating additional opportunities to add value. However this would be a transformational transaction for the heat treating activities of AALB rather than a bolt-on so would seem unlikely.

Number 3: Paulo Products

A family owned company with 5 locations in Cleveland (Ohio), Kansas City (Missouri), Murfreeboro (Tennessee), Nashville (Tennessee), St. Louis (Missouri). Aalberts currently does not have heat treating facilities in these states. Paulo Products’ headquarters are in St Louis. A look at their website news appears to show GM and Toyota Boshuku (member of the Toyota Group) as customers. A potential acquisition could bring more focus on the automotive market in AALB’s North American operations (Accurate Brazing Corp. focuses on the aircraft, ground turbine and power generation markets) as well as add a valuable set of locations to help AALB become a true regional player in North America.

Number 4: Al-Fe Heat Treating

Specialised player in aluminium treating, its website claims it is “America’s Largest Commercial Aluminium Heat Treater.” It has 6 locations in Charlotte (North Carolina), Wadsworth (Ohio), Wabash (Indiana), Columbia City (Indiana), Defiance (Ohio) and Saginaw (Michigan). Its headquarters are in Indiana. The company serves aerospace, automotive, military and commercial customers. Al-Fe recently completed a USD 20m capital investment to retool its plant in Defiance, Ohio. An acquisition of Al-Fe could help AALB expand as a niche player across geographies in the US.

Number 5: Metal Improvement Company (heat treatment business of Curtiss –Wright Corp)

Too late as it was taken over by Bodycote in April 2012 for USD 52m. The company had 9 locations in North America and sales of USD 36.5m in 2011. Sales in 2011 were approximately USD 35m, EBIT was approximately USD 7.7m. Historical transaction multiples were therefore approximately EV/Sales 1.49x and EV/EBIT 6.75x. Taking an average of the EV/Sales multiples for the CCHT and Metal Improvement Company transactions gives an EV/Sales transaction multiple of 1.72x for the sector.

Others:

No 6: Atmosphere Annealing is part of Brazilian steel conglomerate Gerdau. It has 4 heat treating locations in North America.

No 7: Woodworth Heat Treating based in Michigan. 5 US locations (including affiliate RMT Woodworth) with an additional location in Michigan as well as one in Mexico becoming operational in 2013, bringing the total number of locations to 7. Mainly serves the automotive market. I am not sure if AALB would try to develop a presence in Mexico before gaining more traction in North America. Woodworth has a partial list of current customers here: http://www.woodworthheattreat.com/company_history.aspx

No 8: Solar Atmoshperes. Heat treating is the primary business with sales of approximately USD 25m. The company states on its website that it has 3 plants and serves over 18 industries. The plants are in Pennsylvania (2) and California. The other 2 divisions build vacuum furnaces and, among other things, power supplies for vacuum furnaces.  From what I can see AALB has not expressed an interest in building vacuum furnaces but with other branches of its business it has wanted to provide complete package solutions to customers. However would this extend to servicing the captive market as well as conducting commercial heat treating operations? Using the average EV/Sales transaction multiple for the Solar Atmospheres heat treating business would give a transaction size of USD 43m.

Conclusion

I think I should have conducted this exercise a year or two ago as Bodycote has been very active in this space in 2012. I have only briefly mentioned 8 companies with heat treating operations in the US, there are many more smaller ones. With its strong cash generation, AALB could easily target one of the smaller companies. I would think that if this was the case it would be to acquire a specific technology that it does not currently possess. I hypothesise then that 2 processes would occur. First, the acquired technology could be shared with AALB’s European subsidiaries to enhance the service offerings in Europe. Secondly the US subsidiary could be used as a platform for more bolt-on acquisitions as well as AALB providing the capital investment and technical know-how to broaden the service offering of the new US subsidiary.

I look forward to looking into this topic in more depth later in the year.

1st Draft with Appendices Included

I have now put the appendices in the 18^th February draft to make it more complete.

I also took the capex down to decrease linearly from 2013 to 2017. By 2017, I have modelled no more acquisitions to be made by the company and capex will be equivalent to D&A. As a result the figures have changed a little but the rating is still a hold (target price is now 16.79).

Here's the link to the updated document:

https://docs.google.com/file/d/0B6ESf1-JCd-uanFfTmJhNmY0M00/edit?usp=sharing

H1 2013 Calendar

Here’s a list of interesting upcoming dates in H1 2013 for the companies I am aiming to cover, I will update these over time:

Uponor’s 2012 annual results have already been published on 12^th February.

February

26           Aalberts              2012 annual results announced (before start of trading)

27           Bodycote            2012 annual results

March

12           Geberit               2012 annual results

14           Aalberts              2012 annual report published

18           Uponor               AGM

April

4             Geberit              AGM

24           Aalberts             Q1 13 trading update

24           Bodycote           AGM

30           Geberit              Q1 13 trading update

1st Post and Work I've Done So Far

Hi!

I'm trying to teach myself how to conduct equity research and eventually hope to achieve a decent level – so any constructive comments are welcome.

I selected companies to cover because when looking at some financial news I noticed the mid-cap Dutch company Aalberts Industries was being covered at a local level. Given that it is a multinational (its largest market is the US) I didn't think this made sense. So I am attempting to cover it as well as it's peers Bodycote (UK), Geberit (CH) and Uponor (FI) and in the process teach myself how to perform equity research. I hope by the H1 2013 results later this year I will be sufficiently knowledgeable about the sectors and companies to write some good stuff.

At the end of this post is my work in progress so far on Aalberts and is an extremely rough draft. There are several sections which need to be formatted and put into the appendices. There are also undoubtedly some errors which will need to be taken out.

Given recent indicators from Uponor 2012 results and Geberit´s initial press release on 2012´s results which show recovery in the US as well as some positive signs in Europe, it may be that my 2012 revenue estimate for Aalberts is on the low side.

I still need to conduct a comp analysis and I am not settled on several key assumptions but it’s a beginning. I have to work a lot on the style and decide on more information to include and exclude for an eventual attempt at an initiating coverage report.

I have found Aalberts a difficult company to understand as it is exposed to so many industries and markets without, in my opinion, too much transparency. It’s because of this I see it as a good challenge.

A lot needs to be improved and I look forward to making it better.

My approach so far has yielded a target price of EUR 16.80 with the close on 18^th February being 16.46, thus I am provisionally rating Aalberts a hold.

Disclaimer: As already mentioned in the about section of this blog I do not hold any shares of companies and this should not be used for investment purposes.

Here´s the link to my work in progress: https://docs.google.com/file/d/0B6ESf1-JCd-uSzZBX1pTNlhKLUE/edit?usp=sharing