*** Plutos – Switzerland Fund Update *** R&S Group – 'a match made in heaven' *** Rieter wants to reduce cyclicality ***
The Plutos Switzerland Fund fell by around 7% in a month marked by nervousness, higher interest rates and many guidance adjustments, while the SPI Small/Mid Cap Index lost 3.75%.
The bond markets do not believe in a soft landing and apparently have little confidence in the Fed. There is no other explanation for the rise in the 10-year Treasury yield to 4.25%. This is despite the fact that the American economic, labor market and inflation data are pointing in the right direction. And this is not only the case in the USA, but also surprisingly in the Eurozone, where GDP increased by 0.2% against expectations, and in China, where the stimulus package had a positive effect on the PMIs - they were back above 50 points. Now, with the US presidential election, another decisive decision is looming.
More and more Swiss companies are having to cut back on their assumptions for the second half of 2024, which until recently were still promising - too often there are still no orders, customers are cautious or consumer behavior continues to influence sales development. The list of companies that revised their guidance downwards with the Q324 publications is long. Of course, this also led to a large number of rating changes by analysts - some of which were extremely cautious estimate adjustments. The anomaly of large-cap outperformance compared to small/mid caps, which has now lasted for more than three years, was confirmed again in October, with the SMI losing significantly less than the broader SPI. We are nevertheless sticking to our assumptions and see even more potential in Swiss small/mid cap companies than before.
In this environment, only the most stable equity stories could find buyers. These included Sandoz, where the Q3 results and outlook confirmed our assumptions. Accelleron, Holcim and the R&S Group were able to gain significantly despite a miserable stock market sentiment. Accelleron We are not surprised by the renewed momentum, as the Baden-based company is an ideal investment, especially in turbulent stock market phases.
The way food is Cembra Money Bank, DocMorris, Temenos and Lonza were able to break away from the negative trend, albeit only marginally.
The reason for the clearly negative fund performance is the values ams OSRAM, Pierer Mobility, GAM, Straumann, VAT to search:
Despite good iPhone 16 indications, ams OSRAM among the increasingly worrying headlines from the German automotive industry - around 50% of sales are generated in the automotive sector. The upcoming Q324 results and outlook will provide more clarity on November 7, 2024. Pierer Mobility was brutally punished due to a harsh profit warning – the motorcycle manufacturer corrected around 50%. An exaggeratedly violent reaction that prompted us to increase the previously small position slightly. GAM the details of the capital increase were announced and the non-tradable subscription right was sold, which explains the lower price. Straumann, an undisputed quality champion among Swiss companies, delivered strong sales growth for Q324 within expectations, the guidance was confirmed - but the market is criticizing the weaker US growth. We saw the same price reaction after the H124 figures - and then increased significantly. We will use the attractive price level to increase the position. VAT suffered more from the pressure on tech stocks than Comet – both stocks will undoubtedly benefit from a renewed semi-cycle, which, however, is taking longer than expected to materialise.
The Plutos Switzerland Fund acquired three new positions in October:
Adecco: The recruitment agency has once again demonstrated its operational performance with its H124 results. Strong market share gains, solid cost management compared to the competition, the moderate decline in sales and the once again impressive cost cuts speak for the company. The early-cyclical company will benefit from a soft landing. YTD it has lost around 34% in value. The valuation and the attractive dividend of over 9% speak for the value.
Bucher offers a solid long-term industrial package with leading market shares in most sectors, attractive free cash flows and healthy double-digit ROCEs year after year. Selective, value-enhancing bolt-on deals support the medium-term equity story. The current headwind continues to come from the European agricultural market and from industrial activities. The valuation compared to other Swiss industrial stocks is favorable.
Schweiter, a global leader in core materials for wind turbine blades and in composite panels for architecture and display applications, held an investor day on September 24, 2024 - a first in the company's communications. Schweiter has set itself a medium-term EBIT target of 7-9% and a ROIC target of 9-11% and will pursue a shareholder-friendly dividend policy. We assume that Schweiter has achieved the turnaround and that the medium-term EBIT targets can be achieved with the Accelerate program - this will also have a positive effect on the share price. Valuation: P/E 13.5x, EV/EBITDA 5.9x 25e, dividend estimate 25e 4.8%.
“If you're going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it.”
Charlie Munger, American lawyer, investor, manager, billionaire and patron, Vice Chairman of Berkshire Hathaway (1924-2023)
R&S Group – 'a match made in heaven'
The shares of the Sissach-based transformer manufacturer R&S Group are among the great success stories of the Swiss stock market year 2024: with a performance of over 120%, investors have so far been rewarded for their commitment.
With a few exceptions, including the Plutos-Schweiz Fund, the securities are still represented in a few Swiss small/mid cap funds. However, the more than 60 participants at the first investor day testify to the great interest in the company - attention that the R&S Group has well earned.
The focus of the first Capital Market Day was clearly on the recent acquisition of Irish company Kyte Powertech: a company that manufactures transformers with comparatively higher MVA (megavolt-amperes) and, as market leader, offers access to key markets in Ireland (80% market share), the UK (50% market share), Scotland, France, Belgium and Holland (top 3), thus representing an ideal product and geographic expansion for the R&S Group. CEO Markus Lässer, CFO Matthias Weibel, Kyte Powertech MD Stephanie Leonard and CSO Ulrich Voss explained in detail why this purchase is complementary, promising and intelligent on many levels.
In addition, the outlook for the R&S Group was confirmed, with the exception of a marginal adjustment to the FY24 and medium-term FCF margin. This adjustment is understandable, as R&S is investing in its own growth and that of Kyte Powertech.
An important note: Since goodwill is calculated against equity, equity could be negative in FY24. The 2024 net profit will be decisive for this - by the end of 2025 the equity ratio will be positive again.
The underlying drivers of the transformer business are obviously the same for Kyte Powertech as for the R&S Group: the decarbonization and decentralization of energy generation and the modernization of an outdated grid, the requirements of which are constantly increasing due to increasing new uses. Thousands of transformers will have to be replaced in the next few years. New applications include, for example, industrial and transport applications, port electrification (ship-to-shore), since ships in the port may only be operated electrically and no longer thermally according to an EU directive, or data centers. Fun fact: a Chat GPT request needs 10x as much energy as a Google request. Data centers have volatile load requirements and require specific transformer characteristics.
The presentation of Kyte by Stephanie Leonard, Managing Director, left a very strong impression on me: customers value Kyte for the rapid production of tailor-made products, the entire manufacturing process of which is located in Cavan, Ireland, with an annual capacity of 6500 MVA. Kyte is relevant to the town of 15 inhabitants and 000 employees and maintains this relationship. Since the previous owner (private equity) was looking for a buyer, it was extremely important for Stephanie to achieve a strategic fit - she found this with R&S Group.
Sustainability is also important for Kyte PT: awarded an Ecovadis Sustainablility Rating Silver Award (Top 15%) and Scope 1, 2 & 3 certified, they have already achieved 'carbon zero' in 2023 and have reduced their carbon footprint by 2009% since 78. Kyte also has over 20 designs in their Design Library.
The corporate culture also seems to fit: culture and leadership are always at the center of management, the chemistry of the connection at all levels - without people it doesn't work.
The technology exchange, especially in software & engineering, is handled very openly: if one party does something better or smarter, it will be adopted. This will help both companies enormously in the development of products and markets. The Kyte Powertech brand will remain.
CEO Markus Lässer decided not to comment on cost synergies: these were identified and were being exploited in terms of purchasing and production, but were not communicated - the reason for the takeover was not primarily to achieve cost synergies.
There are still no strategic plans to expand into the USA, as the opportunities in Europe are still very large. Chinese producers play a very limited or no role: Transformers are a local market, and sustainability also plays a major role.
My personal opinion: The R&S Group has had a brilliant first year on the stock market, but I still see a lot more potential. The individual drivers are not one-hit wonders, and with Kyte Powertech you can make much better use of them: with products you know, in markets you don't know, and with products you know but don't offer, in markets you do know. The geographic mix will be much broader, planning will be better supported and sales will be diversified. It will be exciting to see how these advantages are implemented in the future. The R&S Group will remain an integral part of the Plutos-Switzerland Fund.
Rieter wants to reduce cyclicality
The Plutos-Switzerland Fund held a position in Rieter from October 2022 to the middle of this year and achieved a performance of around 20% during this time. The reason for selling the stock was purely fund-specific: we wanted to reduce our cyclical exposure.
And it was precisely this cyclicality that was the focus of Rieter’s investor day – it is to be reduced with a higher service and components share.
Rieter is by far the largest global manufacturer of spinning machines. The Winterthur-based company, founded in 1795, is the dominant market leader in both machines and systems and components. With intelligently designed solutions, they offer spinning mill operators more efficient, automated solutions. This is all the more important as spinning mill margins are thin: around 65% goes to purchasing raw materials, 15% to energy, 10% to personnel costs, machines and service are only likely to be marginally lower. There is not much left over. It is also becoming increasingly challenging to find skilled workers or even unqualified people who want to carry out repetitive work in a loud, dusty and hot working environment. Sustainability requirements are not getting any easier either. The only solution can be automation, in which maintenance and digitalization will play a greater role.
There are around 272 million spindles in use worldwide. The largest textile manufacturing markets are China with 96 million, the Asian markets with 73 million, India with 63 million, Turkey with 14 million and 26 million are used in the rest of the world. Rieter is of course well represented in all of these markets with its machines and systems. But this is not (yet) true when it comes to service or after sales: Only in India and the rest of the world has Rieter probably reached around 50% of its potential. In the other destinations, it is probably no more than a few percent.
Before his appointment as Rieter CEO, CEO Thomas Oetterli was entrusted with the same responsibility at Schindler (elevators). And in the elevator business, service and after sales are a very important part of sales. And so it is not surprising that Rieter is now tackling this untapped potential, because the installed base would probably have made it possible to reduce cyclical volatility here long ago. CFO Oliver Streuli was able to clearly demonstrate how after sales with a 10% standard deviation and components with a 15% standard deviation have a dampening effect on the 30% standard deviation of the machines and systems business. In the medium term, a 50/50 split is to be achieved - makes a lot of sense.
It also assumes three scenario analyses over the cycle: a low scenario with sales of around CHF 1 billion and an EBIT margin of 0-4%, a mid scenario of around CHF 1.3 billion with an EBIT margin of 4-8% and a high scenario of around CHF 1.6 billion with an EBIT margin of 8-12%. Based on capital costs of 10%, these would be exceeded in the two mid and high scenarios and shareholder value would be created. In a low scenario, cost discipline should mean that margins are no longer affected so badly.
So how can the potential in the after-sales and service business be better exploited in the future? On the one hand, there will certainly be a reduction in the number of Rieter agents, i.e. independent representatives in the respective country. They are primarily interested in the large machine orders and are probably incentivized as such. The smaller service or after-sales sales are of little interest. Rieter will therefore deploy its own employees locally, because in order to support the customer promptly and competently with a problem, the service must be located locally and a separate local sales/service organization must be active. A small example of the status quo: the after-sales/service manager for the second largest market is based in Winterthur - not ideal. This will change at the beginning of 2025. Other key points are faster delivery of spare parts, digitalization through a web shop and service level agreements, which were not previously standard.
On the other hand, this will also have a positive effect on net working capital. What is ordered is produced. The market does not pay for excess capacity and so capacity will certainly be reduced, which should not have a negative impact on market share. Slightly higher prices, longer delivery times or a priority regulation in production could be the effects of this. The implementation of the strategy adjustment has already begun.
My personal opinion: Both CEO Thomas Oetterli and CFO Oliver Streuli were able to clearly explain the benefits that the changes mentioned above would bring. Rieter is a trustworthy, valued partner of spinning mills all over the world - perhaps a little more expensive, but certainly a little smarter. What kept going through my mind during the presentation, however, was: why didn't this decision come sooner? And by that I don't mean the current management, but the previous people in charge. The new plans are not rocket science and can certainly be implemented given Rieter's market dominance. So I am pretty sure that we will see a different Rieter in two to three years. For now, however, we will stay on the sidelines to observe developments.
Best regards,
Stephan
