Inission AB – When management matters – Post Q3 2017

Inission AB analysis: The Swedish industry electronics manufacturer Inission AB yields over 20 % annualized returns to a long-term owner at current market prices (SEK 40.8 per share at 17.11.2017), not counting in any value from potential value creating acquisitions, assuming the current operations to be viable and run with a reasonable utilization rate.

Hidden value:

  • Goodwill amortizations from previous acquisitions of 1.12 per quarter will be deducted before the EBIT for 5.4 more quarters (6.026m capitalized post Q3 2017).  This is a pure non-replaceable accounting figure that will distort the company’s earnings and soon be corrected
  • Factory optimizing and ERP process taking SEK 4m (announced in Q2 2017 report) extra costs that will not recur, post 2017
  • Post the latest acquisitions, Inission has diluted the margin in short term, but doubled the revenue potential to c. SEK 1 200m (management estimate), which, with the historically proven margins of c. 6 % (company target at 8 %) from Inission and peers, quadruples Inission’s earnings potential compared to IPO levels at 2015
  • Strong, proven and heavily incentivized founder/management/owners, with clear focus and capabilities to continue growing both organically and via acquisitions

Potential pitfalls:

  • Potential problems in integration process of the factories in Sweden
  • Sharp drop in economic activity in Sweden (partially materialized in the Swedish housing market)
  • Major shareholders acting against minor shareholder’s best (would feel this to be highly unlikely, as I personally feel very strongly for the management, and they have created a track record of showing moderate expectations and constantly overdelivering in an honesty and reliable way)
  • Small size, low liquidity and lack of investor interest in short to medium time

Key multiples:

  • ttm P / E adj.:                                              196m / 21m       = 9.2
  • ttm EV / EBIT adj.:                                     334m / 30m       = 11.2
  • Normalized (2018e) EV / EBIT:               280m / 60m        = 4.7
  • Normalized (2018e) P / E:                        196m / 47m       = 4.2

 

  • Net debt: 30.9m + 70m + 3.5m + 22.6m + 86m – 15.2m – 60m = 137.8m
  • EV: 137.8m + SEK 40.8 * 4.8m = 333.6m

Inission AB operates in a business space that is constantly under pressure to lower prices and deliver higher quality. At the first glance it looks like everything but an interesting long term investment. However, as the manager owners of the company do illustrate, strong local midsize operators can have viable and profitable businesses when developing deep connections with their customers. Interestingly, the mature business space is filled of founder operated small players that are looking for someone to continue the operations as the founder is looking to retire. This allows a fertile ground for an enterprising investor who has the will and skills to consolidate the market. This is exactly what the founders and main owners of Inission AB have successfully done.

In Inission, it all comes to the management, Fredrik Berghel (CEO) and Olle Hulteberg (Head of Marketing) both owning 36.7 % of the company, CEO Berghel having nominal edge in control with 2 shares more than Mr Hulteberg). The duo is a master of change management and they have conducted multiple successful turnarounds from a lackluster business to a lean operator within the industrial electronics manufacturer space.

Later, in 2015 the board of Inission has gained additional strength, as the founder of recently (2016) listed THQ Nordic, investor and entrepreneur Lars Wingefors, became a significant shareholder and a board member with 10 percent stake in the company.

Inission operates and acquires small- and medium sized, well run local companies. Berghell and Hultenberg have found that large size and generalist focus in business usually destroys the profitability in such a competitive business, and they thus continue to run as local and independent businesses, just under the Inission brand and help from the top management in terms of lean and efficient operations.

The acquisitions are most often natural and very friendly, natural generational shifts where the seller finds a good home to his life’s work. Inission started by acquiring lackluster turnarounds such as Incap in Finland, but later has moved more and more towards already better run operations such as Onrox and SKEAB in Sweden, as such are available in the Nordics and are significantly less time consuming for the top management.

Inission has sales of approximately SEK 706 million, ttm Q3 2017, and the company targets 8 percent operating margin, which it has shown to be able to deliver before the latest sales doubling acquisition of Onrox and SKEAB in 2016, that were break even in EBIT. Additional support for the strong capabilities in turning businesses to profitability arises from the recently exited Finnish Incap Oyj, that was restructured and turned highly profitable in few years, now being able to show double digit operating margins.

Naturally, there will be stronger and weaker years in the business, and the utilization rate in the factories drives the profitability. From the historical levels, I assume the Inission to be able to deliver 6 percent operating margins over the business cycle. This would indicate an operating profit of SEK 42 million with current sales level. I assume c. 80 % utilization of the full potential revenue level of SEK 1.2 billion, ending at c. SEK 1.0 billion. Assuming 6 percent margin on SEK 1.0 billion brings SEK 60 million in EBIT. Without further growth prospects, at 10 % WACC, the operations would be worth SEK 600 million. Paying out the net debt of SEK 138 million (Q3 2017) leaves SEK 462 million for equity holders, which is 2.4 times the current valuation, or a capital yield of c. 18 %.

 

Related articles on Inission AB:

Redeye analysis on Inission from Q3 2016 – Swedish

Huntingvalue.com – Inission analysis – late 2015

Inission AB Q3 2017 report – Swedish

 

Disclaimer: This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation.  This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author’s independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do hold a material investment in the issuer’s securities.

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