SIXGF - Sixt SE: A Family Company In The Fast Lane

2023-06-05 19:35:03 ET

Summary

• Solid organic growth through expansion into new markets.
• Decisive unique selling points over competitors.
• Strong margins due to premium strategy and pricing power.
• Very good long-term prospects due to early recognition of trends by management.
• There is a slight overvaluation, but there could be investment opportunities in the short term.

Stock Analysis: Sixt SE

Sixt SE ( SIXGF ) is one of the leading providers of mobility services and has been able to achieve solid growth with returns above the market average in the past and hold its position against its numerous competitors. In this stock analysis, we take a close look at the company's key framework data and see what influence they could have on the company's future development. In addition, we consider whether it would make sense to invest at the current price.

Overview

SIXGF is a German company operating in the mobility sector. The core business and largest segment of the company is the rental of high quality cars (Sixt-Rent) to private customers and companies. At the same time, however, other segments such as a subscription model for cars (Sixt+), a truck rental segment (Sixt-Truck), a car sharing segment (Sixt Share) and a transfer service (Sixt Ride) are also offered.

Customers are served by local service points, especially at high-traffic locations such as airports and train stations, as well as by the SIXT-developed app "ONE", which combines all of the company's services. The company's focus is on a premium strategy that aims to offer high-quality and luxurious vehicles.

The company offers its services in over 100 countries worldwide, with Europe and Germany in particular as well as North America representing the core markets.

It should be noted that the SIXGF share is available in two different classes: The ordinary share as well as the preference share. Both are tradable on the stock exchange.

SIXGF is jointly managed by the brothers Konstantin and Alexander Sixt in the third generation of the family. The Sixt family also holds 58% of the voting shares (ordinary stock) in the company and thus has control over decisions in the company. Above all, the "skin in the game" effect is interesting and advantageous because the company management thus always has an interest in the long-term positive development of the company and makes its decisions accordingly.

Overall, the mobility sector is undergoing change, driven by digitalization, e-mobility and urbanization. These developments pose numerous challenges for companies in the mobility sector. In the following chapters, we take a look at whether SIXGF is up to the challenges, if the prospects for the company are promising, and if an investment in SIXGF would be worthwhile from my point of view.

Growth

The year 2022 represented a record year for SIXGF. Among other things, revenues increased by 34% year-on-year to 3.07 billion euros. This growth is primarily organic and can be attributed to increased mobility in the post-Corona period, in addition to local expansion into new markets. The growth is underlined, among other things, by more than 1100 new employees and an increase in the vehicle fleet of over 10% to 138,400 vehicles. But let's take a closer look together at the reasons for the growth and the growth prospects for the coming years.

The global car rental market currently has a market size of approximately 92 billion USD and is expected to reach a size of 139 billion USD by 2027 . This corresponds to annual growth of over 7%. SIXGF's goal is to significantly exceed this growth and, in particular, to grow organically faster than the market.

Growth is to be achieved through regional expansion. The aim is to enter new markets worldwide and expand existing ones. There is a lot of potential through the expansion of the station network in profitable markets such as the US or Western Europe or the entry into growth markets. At present, SIXGF operates in thirteen countries. At the same time, it works with franchisees in less profitable and riskier markets, so that the SIXT brand is represented in over 100 countries in total. Overall, the foreign share of sales could thus be increased from 28% in 2008 to 71% in 2022 , which speaks for a successful internationalization of the company.

As already mentioned, organic growth is the focus of SIXGF's growth strategy. In recent years, for example, expansion into the US market has been a particular priority. The aim there is to build up a network of rental car stations at the country's largest airports. As a result of the ongoing expansion in the US market, revenues there increased significantly in 2022 (+55.3% y/y) and now account for 29.6% of consolidated revenues. At the same time, SIXGF's market share in the US is currently only 3%, so there is still a lot of growth potential.

Growth was also recorded in the German and European markets. This can be attributed to the expansion of the station network and the addition of further mobility services.

The expansion of further mobility services plays also a key role in SIXGF's growth strategy. In the Corona period, for example, the Van & Truck segment was strengthened through an acquisition of Dorset Rentals and the Van & Truck division of the GAP Group. Furthermore, investments were made in the development of a subscription model for car rental called "Sixt+" and also an own car sharing service was established. These areas are not of great importance compared to the car rental segment at the present time, but they represent potential growth drivers for the future.

For 2023, the target is to achieve sales growth of 10 to 25%. This is to be achieved in particular by entering the Canadian market and expanding the station network in the US. The Q1 report presented a few weeks ago confirmed the growth targets set for 2023. Furthermore, the company managed to expand its vehicle fleet by 19% compared to the previous year and to grow above market average in all regions. But what about the long-term growth of the company?

The Sixt family thinks very long-term and manages its company accordingly. Therefore, high investments in digitalization, new growth areas such as Sixt+, electromobility and the expansion of the station network are planned. These investments are intended in particular to address future trends such as shared mobility and urbanization. Furthermore, the share of electric vehicles is to be increased from currently 14% of the total vehicle fleet to up to 70-90% by 2030. This will go hand in hand with the development of its own charging infrastructure at SIXGF's stations. At the same time, expansion in profitable markets such as Europe and North America is planned to proceed in the long term to achieve profit growth above the market average (7%).

Management seems to have recognized the challenges of the future and to make long-term investments in line with growth trends. For this reason, a growth trend can be expected in the coming period.

Cycle

When considering growth, the dependence of SIXGF on the development of the economy should not be left out. In particular, companies, businesspeople and vacation travelers are among SIXGF's main target group. In previous times of crisis, it quickly became clear that in economically weaker years, customers try to reduce their spending on mobility. SIXGF counters this in two ways: First, it tries to conclude long-term contracts with customers for the use of vehicles. In this way, customers receive better conditions and SIXGF can plan better. Secondly, SIXGF has concluded flexible leasing agreements and buy-back clauses with car manufacturers. As a result, in times of crisis and the resulting lower demand, the vehicle fleet can be downsized by returning leased vehicles to the manufacturers and taking advantage of buyback clauses. This option was successfully used during the Corona crisis to respond quickly to low demand and significantly reduce costs.

Overall, SIXGF is therefore a cyclical company that is directly linked to the economic development of the respective country. In particular, the willingness of customers to use high-quality mobility solutions and the associated willingness to pay is of importance. However, the management of SIXGF is aware of this dependency, so that the risk has been reduced in the past by taking appropriate precautions.

After all, it is important how quickly a company can recover after surviving a crisis. It quickly becomes clear that SIXGF was able to reverse the revenue decline from the Corona period very fast because it was able to respond quite promptly to the increasing demand for mobility solutions through precautions taken and investments made.

In summary, it can be said that SIXGF is dependent on the cyclical developments of an economy in the short term, but that is not a problem for the development of the company in the medium to long term.

Stability

The market for mobility is undergoing a transformation due to various trends, which brings risks for companies. In addition, there is always the risk of crises, as it was the case, for example, with the financial crisis or the Corona crisis. For this reason, it is important to look at the stability of SIXGF.

First, it can be noted that SIXGF's largest expenses are directly related to the vehicle fleet. They include expenses for leasing, maintenance, and insurance of the vehicle fleet, among others. In the event of a decline in demand, these costs would continue to be incurred, which SIXGF has identified as a risk factor. For this reason, flexible contracts have been agreed with the vehicle manufacturers, which allow a short-term reduction of the vehicle fleet in order to be able to react quickly to drops in demand. According to SIXGF's CEOs, 70% of costs are variable and can be reduced in under six months.

A look at SIXGF's balance sheet shows a solid equity ratio of around 35%, which has increased significantly over the last few years and is also well above the competitors. In this way, there is room to manage through possible crises and sufficient capital is available to make forward-looking investments in growth, digitalization and electromobility, among other things.

Based on the table, SIXGF balance sheet is much more solid compared to the competitors. Thus, the difficulties of the competition quickly became apparent, especially during the Corona crisis. The Hertz Corporation had to file for bankruptcy in 2020 and Europcar had to carry out a substantial capital increase, among other things.

SIXGF's gearing is around 25%, so this also suggests a solid balance sheet and further scope for financing growth with debt capital.

At the same time, however, it should not be ignored that promissory note loans and bonds will have to be repaid in the next three years, which could be a burden for the company and require refinancing at worse conditions.

Overall, SIXGF is a solidly financed company that can react quickly to potential risks and opportunities and should be able to finance growth.

Profitability

The profitability of SIXGF's operational business is determined by the prices to be achieved for the rental of vehicles and the related expenses. The fact that SIXGF operates in the premium segment and additionally often has good spots such as airports for its rental stations gives the company good pricing power. On the expense side, profitability is favored by long-term but flexible contracts with vehicle manufacturers.

At the current time, pricing power for rental vehicle providers is particularly high due to the chip shortage and associated supply bottlenecks for new vehicles. This trend is favoring SIXGF's profitability. However, the situation is expected to normalize over the course of the year, increasing price competition among rental vehicle providers.

Looking at profitability based on SIXGF's EBIT margin over time, an average margin of around 15% has been achieved over the last 10 years. By focusing on the premium segment, the margin could even be improved significantly in recent years. Also, in relation to the peer group, SIXGF has achieved a well above average EBIT margin over the last 10 years.

A look at SIXGF's return on equity over the last 10 years (16% on average) shows that the company has managed to operate profitably over the long term, to grow steadily and to achieve significantly higher profitability than comparable companies in the same segment.

Furthermore, SIXGF is currently investing heavily due to its growth strategy. In 2023, for example, around 3.8 billion euros were invested in the vehicle fleet, resulting in a negative free cash flow. The company's management has announced that investments will also remain high in the coming years.

Competition

The market for mobility solutions, and especially for car rental, is highly fragmented. There are a number of large players as well as a large number of small local players. SIXGF is currently the world's fourth-largest provider of rental vehicles in terms of revenue.

Crucial for the future success of SIXGF is to be able to prevail against the numerous and partly significantly larger competitors. For this, unique selling propositions or a clear moat are required.

SIXGF has several unique selling propositions here, which clearly differentiate the company from the competition. On the one hand, SIXGF pursues a clear premium strategy. In 2022, for example, around 57% of the 138,000-vehicle fleet could be allocated to the premium segment. The aim here is to rent out almost new and high-quality vehicles to business customers and private individuals. The focus here is on the driving experience and high quality of service. The premium strategy means that customers are less price-sensitive, and the company is not in direct pricing competition with other companies that want to attract customers with the most affordable offers possible, but lower-quality rental vehicles. This effect is also reflected in the higher margins compared to the competition.

Another important aspect of the premium strategy is the digital platform "ONE" developed by SIXGF. This platform contains all SIXGF's services and makes it easier for customers to book rental cars. This platform is an important cornerstone for SIXGF's future services and in its form represents a clear unique selling point compared to the competition.

A central point of SIXGF's competitive strategy is the opening of its own rental stations at special locations, which represent a toll bridge, especially compared to smaller competitors. Preferred locations are e.g., airports and train stations to be most easily and quickly accessible for potential customers. Conveniently, the preferred vehicle can be booked in advance via the ONE app and subsequently picked up directly at the airport upon one's arrival. In recent years, for example, stations have already been opened at 38 of the country's 50 largest airports as part of the company's expansion in the United States. In this way, business travelers arriving at the airport do not have to deal with public transportation or other transportation options but can use the ONE app to reserve their desired vehicle already when booking their flight, which will then be ready for them at the airport at the time of their arrival.

To further enhance their locations in the coming years, the "Sixt Charge" service is to be built, with over 400,000 charging points being set up at their own stations, which can be accessed and used via the ONE app.

Other competitors include mass transit systems such as trains. Here, SIXGF distinguishes itself by the convenience as well as the flexibility made possible for customers. The simplicity and accessibility of the ONE app, which can be used worldwide, also contributes to an advantage over public transportation. Potential customers who want to use public transport without local knowledge would first have to get to know the ticketing system as well as the route. Therefore SIXGF offers a more straightforward and simpler solution.

Overall, SIXGF has several clear unique selling points compared to its competitors, which should enable it to grow faster than the market in the future and to further increase margins at existing locations. Here, the long-term orientation of the company, in particular, plays a decisive role, as trends such as digitalization, electromobility, etc. can be focused on at an early stage to be one step ahead of the competition here in the future.

Dividend

SIXGF regards the dividend as an important way of enabling its shareholders to participate in the success of the company. However, the management also focuses on the long-term development of SIXGF. Thus, among other things, dividend payments were suspended in the Corona crisis years 2019 and 2020 in order to strengthen the capital structure. On the other hand, shareholders will participate particularly strongly in the success of the company in strong years. For example, a special dividend of 2 euros was paid out for 2022 in addition to the dividend of 4.13 euros. On average over the last 10 years, the dividend yield, excluding the Corona years (2019 and 2020), is around 3%.

The growth of the dividend is strongly linked to the profit development of SIXGF and amounts to around 15% p.a. adjusted for any special effects of the last 10 years. However, the strongly fluctuating growth of the dividend should be taken into account and the fact that the dividend can be quickly reduced in weaker years.

The average payout ratio in recent years has been around 50%, so there is some growth potential for the dividend. At the same time, I look at the dividend critically, as the growth potential and the associated investments are high and, in my view, the funds should be invested in the future of the company.

Valuation

I have valued SIXGF based on the equity method. In my view, this valuation method is particularly suitable for growing companies that are subject to a certain cyclicality. My assumptions included an average return on equity of 16%, a dividend payout ratio of 50% and an equity growth rate of 10%. I made my assumptions based on the past, statements on the future by the management and market studies on the market development. Based on these assumptions, I have calculated a fair price of 96.50 euros per share. Furthermore, to validate my calculation, I performed a fair value calculation based on the DCF model and obtained a value of 98.80 euros per share.

Based on these two valuation models, I see a slight overvaluation of SIXGF. However, it is not a significant overvaluation, so that either the adjustment of the forecasts or a weak phase of the price could be used for an entry.

Summary

In my view, SIXGF is a very solid family business, which is managed by the founding family with great foresight and always with a view to the long-term future of the company. Both the growth and the returns are convincing, which is underlined by the presented competitive advantages of SIXGF. At the same time, SIXGF has a solid balance sheet, which allows future investments in growth and reduces the risk in case of a crisis. Furthermore, in my view, the company is only slightly overvalued at the current time, so that entry opportunities could arise in the near future. Based on the above reasons, I believe that SIXGF is a company that could be particularly interesting for long-term investors.

For further details see: