IMPORTANT. Please refer to the last page of this report for “Important disclosures” and analyst(s) certifications. alsterresearch.com This research is the product of AlsterResearch, which is authorized and regulated by the BaFin in Germany. Vossloh AG Germany | Industrial Goods & Services | MCap EUR 804.4m 21 September 2021 INITIATION Re-rating offers attractive entry opportunity; Initiate with BUY What’s it all about? We initiate coverage of Vossloh AG with a BUY recommendation and a PT of EUR 58.00 offering an upside potential of 27% after the stock has re-rated by nearly 10% since beginning of Sept. In the last 6 years, the Germany-based rail infrastructure company has undertaken a massive reorganization programme including the divestment of non-core rail vehicles (2015), electrical systems (2017) as well as its locomotive business (2020). With the acquired tie technology business (2017), Vossloh now focusses on the core rail infrastructure market, which we believe should allow for healthy top- and bottom-line growth in the future. An attractive valuation (8x EV/EBITDA 2022E) for a resilient and market leading business model coupled with an attractive ESG rating (Leeway score of 73/100), makes Vossloh an attractive BUYING opportunity. BUY (INITIATION) Target price EUR 58.00 (none) Current price EUR 45.80 Up/downside 26.6% MAIN AUTHOR Thomas Wissler [email protected]+49 40 309 293-58
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IMPORTANT. Please refer to the last page of this report for “Important disclosures” and analyst(s) certifications.
alsterresearch.com This research is the product of AlsterResearch, which is authorized and regulated by the BaFin in Germany.
Re-rating offers attractive entry opportunity; Initiate with BUY
What’s it all about?
We initiate coverage of Vossloh AG with a BUY recommendation and a PT of EUR 58.00 offering an upside potential of 27% after the stock has re-rated by nearly 10% since beginning of Sept. In the last 6 years, the Germany-based rail infrastructure company has undertaken a massive reorganization programme including the divestment of non-core rail vehicles (2015), electrical systems (2017) as well as its locomotive business (2020). With the acquired tie technology business (2017), Vossloh now focusses on the core rail infrastructure market, which we believe should allow for healthy top- and bottom-line growth in the future. An attractive valuation (8x EV/EBITDA 2022E) for a resilient and market leading business model coupled with an attractive ESG rating (Leeway score of 73/100), makes Vossloh an attractive BUYING opportunity.
Re-rating offers attractive entry opportunity; Initiate with BUY Between 2014 and 2020, a spree of divestments (rail vehicles, electrical systems and locomotives) as well as a bolt-on acquisition of tie technologies (2017) has led to a complete repositioning of the 133 years old Vossloh AG. In fact, as of today, the new Vossloh is a pure play railway infrastructure provider capturing market leading positions in key components and systems as well as a global market presence with superior customer access (mainly state-owned corporations).
This unique positioning is embedded in a market that enjoys secular growth as global megatrends such as increasing urbanization and globalization foster the need for more and - equally important – environmentally friendly transportation. Consequently, a shift to rail with corresponding investments in the existing and expansion of new rail tracks is inevitable in our view. For Vossloh, all this is likely to lead to steady demand from its global customer base (eAR CAGR 2020-2023E of 4.6%). In addition, given that growing traffic density is likely to make track availability a key success factor, Vossloh looks set to capture an ever-increasing share of sales from recurring maintenance and repair, which already stands at a high 80%. In our view, this clearly increases visibility for Vossloh’s sales and earnings forecasts. With regards to the latter, Vossloh guides 4-5% mid-term sales growth with EBIT margins set to further improve by some 400bp – from 6% in 2020 to c. 10% in 2024 (eAR) and beyond.
The recent re-rating of the stock (-10% since beg. of Sept.) therefore provides an attractive entry point for investors who want to own a hidden champion that benefits from secular growth trends. An attractive ESG rating (Leeway score of 73/100), coupled with an undemanding EV/EBITDA of 8x 2022E, therefore makes Vossloh an attractive BUYING opportunity, in our view. On top, a healthy dividend yield of 2%+ further appeals to the equity story. Hence, we are initiating coverage with a BUY recommendation and a PT of EUR 58.00, offering an upside potential of 27%.
Key share data Number of shares: (in m pcs) 17.56 Book value per share: (in EUR) 22.69 Ø trading volume: (12 months) 22,000 Major shareholders KB Holding GmbH 50.1% Franklin Mutual Advisers 5.0%
Free Float 44.9%
Company description Vossloh AG is a rail infrastructure company, offering a portfolio of hardware and services such as fastening systems, concrete sleepers, switches & crossings as well as rail services. The company has an expansive manufacturing footprint with c. 35 sites globally
Vossloh is a technology company that provides a comprehensive range of hardware products and services for development and maintenance of rail infrastructure. It develops and markets high-performance rail fastening systems, concrete ties, crossing panels, signaling products, and switch systems. It also provides installation and maintenance services throughout the lifecycle of tracks, ranging from rail commissioning, welding, milling, transporting long rails, providing preventive care of tracks and switches, and replacing/recycling. While the products and services are provided on an industrial scale, Vossloh also customizes these products based on individual projects. The Germany-based Vossloh operates through its 80 group companies in c. 30 countries, has over 35 production sites and sells in more than 85 countries.
Vossloh operates through three business segments: i) Core Components (43% of total revenues in 2020, involves development and large-scale manufacture of rail fastening systems and concrete ties), ii) Customized Modules (46%, involves development, installation and maintenance of customised rail modules, switch systems, crossings, and related products), and iii) Lifecycle Solutions (12%, provides a comprehensive range of corrective and preventive services for rails and switches, welding services, and switch logistics).
The management board consists of three key persons: Oliver Schuster has been serving as chief executive officer and chairman of Vossloh since October 2019. He previously served as chief financial officer (CFO) of Vossloh. Prior to that, he was a member of the executive board of SKW Stahl-Metallurgie Holding AG and held various senior management roles in Infineon Technologies AG.
Dr. Thomas Triska was appointed CFO in November 2020. He joined Vossloh in 2009 and held many management positions, including head ofcorporate controlling, head of corporate development, head of corporate communications and director of finance.
Jan Furnivall has been the group’s chief operating officer since November 2020. He joined Vossloh in 2015 and has served in the roles of general counsel, chief compliance officer and head of corporate strategy.
Vossloh is majority owned by KB Holding GmbH – an investment vehicle of Hermann Thiele who recently passed away. Besides the 50.1% stake in Vossloh, KB Holding also holds c. 95% of the stake in Knorr Bremse, another Germany-listed company which is the world's leading manufacturer of braking systems and a leading supplier of safety-critical sub-systems for the railroad industry. “KB” actually stands for “Knorr Bremse”. Apart from that, the remainder of the shares are considered free float with Franklin Mutual being the only larger investor with a c. 5% stake. The total number of shares outstanding are approx.. 17.56m (end of 2020).
The majority of Vossloh’s customers are public sector companies, as rail transport in most countries is largely state owned and fuelled by government budgets, hence translating to low customer risk. Its customers also include private railway companies, network operators, and municipal and regional transport companies. The group has a good degree of geographical diversification, with Europe (55% of total revenues in 2020) contributing the highest, followed by Asia (17%), the Americas (15%), Australia (11%), and Africa (2%). Although potential customers are limited, Vossloh benefits from relatively non-cyclical demand for its products, and its markets are characterised by long-term investments and a high level of necessary maintenance spending.
The majority of the group’s revenues (c. 85%) are driven by replacement and maintenance of existing infrastructure, providing high revenue visibility.
Europe (ex domestic) 444.8 422.4 401.8 426.3 442.5 459.3
The Americas 159.5 187.6 127.3 135.1 140.2 145.5
Asia 132.2 149.7 151.4 160.6 166.7 173.1
Rest of World 42.8 74.9 115.0 122.0 126.7 131.5
Sales 865.0 916.4 869.7 922.8 957.8 994.2
Source: Company data; AlsterResearch
Competition
Vossloh is one of the leading rail infrastructure providers in the world. It is the market leader globally in track fasteners and switch systems and a leading manufacturer of concrete ties in North America and Australia. Around 70% of rail tracks in Europe use Vossloh fastening systems, and the group has an unparalleled share of 70% in the US’ installed concrete tie base and a 75% share in deliveries of new rails in Germany. Furthermore, it has a niche position in preventive rail maintenance, backed by its unique high-speed grinding technology.
While there are multiple players in the rail infrastructure space, Vossloh’s 135+ year track record, comprehensive range of products and services, expansive manufacturing footprint in c. 35 sites globally, local production, and sales presence ensuring customer proximity and strong research and development capabilities (which is helping push digital-based products and services) have acted in its favor.
Suppliers
Vossloh has rigorous selection criteria for its suppliers, who, existing and potential, are regularly assessed for their ability to fulfil expected quality standards (mainly on their ability to comply with applicable regulatory and statutory requirements) and timeliness of delivery. The group awards contracts only to companies on the list of approved suppliers. Furthermore, Vossloh has established long-term priority supply agreements and is increasing vertical integration in certain areas to minimize procurement-related risks.
Vossloh operates in the defensive rail infrastructure market, where investments are made on a long-term basis and are typically fueled by government budgets for public/mass transport. According to Union des Industries Ferroviaires Européennes (UNIFE), the rail technology market is expected to post a CAGR of 2.3% through 2023-2025 (vs the average volume of 2017-2019), with an estimated annual investments of EUR 177bn per annum, with the majority of business coming from Western Europe and NAFTA countries, where Vossloh has a strong presence.
Globally, rail technology has been witnessing steady growth, riding on favorable megatrends such as population growth, urbanization, globalization, and a resultant increase in international trade flows, in addition to rising demand for an environmentally sustainable and cost-efficient mode of transport. The expectant rise in rail traffic would not only be supported by expansions in network infrastructure, but more so by diverting substantial traffic on existing tracks. This is set to accentuate the use of automated train control systems and smart track maintenance solutions. Vossloh’s unique proposition as a comprehensive provider of track-related products and services (with robust artificial intelligence/analytics-backed predictive and condition-based maintenance capabilities) and its steady investments in digital innovation places it at a sweet spot to tap these secular tailwinds.
Over 2014-2020, Vossloh undertook a series of divestments of non-core businesses (disposed locomotives, electrical systems, and rail vehicles) to reposition itself as a pure-play railway infrastructure provider. As a part of it current strategic priorities, the group intends to strengthen its existing business by increasing sales concentration in selected markets, expanding geographical footprint of its services segment, and focusing on digitalization and sustainable reduction in production costs.
Through these initiatives, Vossloh targets to achieve average annual sales growth of 4%-5% over the medium term (ahead of the current forecast for the industry), and deliver an EBITDA margin of 16% and an EBIT margin of 10% over the long term (vs 14.2% and 8.4% respectively in 2020).
Below shows Vossloh’s growth and earnings history as well as out 2021-2023E forecasts. We believe that the medium EBIT margin will not be achieved before 2024E. Nonetheless, CAGR growth is modelled at 4.6%, which however reflects some catch-up from Covid-19 related slump in sales in 2020 (-5.1%).
The DCF model results in a fair value of EUR 57.67 per share: Top-line growth: We expect Vossloh AG to continue benefitting from structural growth. Hence our growth estimates for 2021-28E is in the range of 3.1% p.a. The long-term growth rate is set at 2.0%.
EBIT margins. As of 2024E, we model 10% EBIT margins, which we believe are defendable in the long run. Consequently, we have used the 10% margin also in our terminal value calculation.
WACC. The averaged 1-, 3- and 5-year historical equity beta is calculated as 0.81. Unleverering and correcting for mean reversion yields an asset beta of 0.72. Combined with a risk-free rate of 2.0% and an equity risk premium of 6.0% this yields cost of equity of 9.5%. With pre-tax cost of borrowing at 5.0%, a tax rate of 25.0% and target debt/equity of 1.0 this results in a long-term WACC of 6.6%.
Due to the fact that companies rarely bear sufficient resemblance to peers in terms of geographical exposure, size or competitive strength and in order to adjust for the pitfalls of weak long-term visibility, an Adjusted Free Cash Flow analysis (Adjusted FCF) has been conducted. The adjusted Free Cash Flow Yield results in a fair value between EUR 37.59 per share based on 2021E and 71.56 EUR per share on 2025E estimates. We value Vossloh AG using a DCF based fair value approach, which best is reflected using our adj. FCF yield 2023E. The main driver of this model is the level of return available to a controlling investor, influenced by the cost of that investors’ capital (opportunity costs) and the purchase price – in this case the enterprise value of the company. Here, the adjusted FCF yield is used as a proxy for the required return and is defined as EBITDA less minority interest, taxes and investments required to maintain existing assets (maintenance capex).
Fair Market Cap 660.3 831.9 1,031.9 1,140.6 1,257.0
No. of shares (million) 17.6 17.6 17.6 17.6 17.6
Fair value per share in EUR 37.59 47.36 58.75 64.94 71.56 Premium (-) / discount (+) -17.9% 3.4% 28.3% 41.8% 56.3%
Sensitivity analysis fair value
Adjusted hurdle rate
3.5% 66.1 79.9 96.0 103.9 112.4
4.5% 48.7 60.0 73.2 80.1 87.4
5.5% 37.6 47.4 58.7 64.9 71.6
6.5% 29.9 38.6 48.7 54.4 60.6
7.5% 24.3 32.2 41.4 46.7 52.5
Source: Company data; AlsterResearch
Simply put, the model assumes that investors require companies to generate a minimum return on the investor’s purchase price. The required after-tax return equals the model’s hurdle rate of 6.0%. Anything less suggests the stock is expensive; anything more suggests the stock is cheap. ESG adjustments might be applicable, based on the overall Leeway ESG Score. A high score indicates high awareness for environmental, social or governance issues and thus might lower the overall risk an investment in the company might carry. A low score on the contrary might increase the risk of an investment and might therefore trigger a higher required hurdle rate.
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