2023-11-14 10:00:09 ET
Summary
- Bechtle provides IT services in Germany and Europe.
- The company has a strong brand within its market.
- The management expects to compound revenues at 7% until 2030.
- The stock looks to be fairly priced.
Bechtle AG (BECTY)(BHTLF) is a German IT services provider with operations throughout Europe. The family business is a household brand in Germany and is ambitious to expand. Over the last decade, the company returned over 19% yearly for shareholders. Let's see if the future could look as bright.
The business
Bechtle operates in over 100 nations, but the bulk of the business is in Germany, with 62% of sales as of FY22. It is segmented into two segments: IT System House & Managed Services, with around 2/3 of sales and IT E-Commerce, with about/3 of sales.
Bechtle is riding the digitalization trend. Based on the recent Digital Economy and Society Index by the European Commission , Germany is pretty average and ranks 13th in the EU while being the largest economic power. This showcases the opportunity for companies like Bechtle within Germany and the broader European economy.
Bechtle aims to be a One-stop Shop for all digital needs, with more than 85 system houses and e-commerce companies close to its customers. This includes selling hardware and software solutions to IT strategy consulting, application solutions, project planning and roll-out, system integration, maintenance, SaaS models and training, as well as providing cloud and managed services and complete operations for a customer's IT. The e-commerce segment offers hardware, standard software and logistics services. With its vast history and 70,000 customers, Bechtle is a household name with a strong European brand.
Bechtle is a family business, with the Schick Family owning 35% of the shares outstanding and with a long-term focus, adding stability to the stock. Eventually, these shares will flow into a foundation so that the anchor shareholder will remain in the business for a very long time.
Vision 2030
Vision 2030 is the fourth iteration of the company's long-term guidance and target. Introduced in 2018, it has four goals:
- Growth and Foresight underpin our success.
- We aspire to lead the market.
- 10 billion euros in revenues
- 5% EBT margin
While the first two parts aren't too specific, we have a target of 10 billion revenue in 2030, compared to 6.3 billion € right now, representing a modest 7% CAGR and a 5% EBT margin target. The group has stayed above 5% EBT margins for all but Q1 2021 in recent history. In my opinion, previous Visions had a better definition with goals that could be verified better, like ranking as Europe's top IT e-commerce provider instead of We aspire to lead the market. Let's review the past growth and margins and compare it to Vision 2030.
Impressive past growth
Bechtle has an impressive growth history with 12% average revenue per share, 15% EPS and 38% FCF per share growth. While revenue and EPS rose rather consistently, cash flows were much more volatile due to CapEx and working capital volatility, especially after the pandemic wreaked havoc on the supply chain. The Vision 2030 target of 7% revenue CAGR represents a large deceleration and could be a conservative estimate from management.
A low-margin business
Bechtle is a low-margin business with a gross margin of just 17%, comparable to distribution businesses. We can see that the margins were relatively stable for a year until the pandemic resulted in explosive operating leverage in all parts of the margin structure. They are stabilizing at a new plateau while they have come down a little from the peak. The 5% EBT margin target should be easily maintained, but I wouldn't expect much more operating leverage.
Q3 2023 earnings
Bechtle recently released its Q3 2023 earnings . The company missed revenue by around 5% with just 1% growth to 1.479 million Euros. Growth was coming from the IT System House & Managed Services segment (+5.8%), while E-Commerce contracted 7.5%. They were able to raise margins and drive 7.8% EBIT growth, driven by the strong IT System House & Managed Services segment. IT-Ecommerce also managed to raise margins, but due to declining revenues saw a 3.3% decline in EBIT. Operating cash flow saw a meaningful turnaround going from -28.3 million to +125.3 million, driven in part by changes in net working capital. Bechtle also highlighted its talent development, where they added 299 trainees and university students to a total of 865 people in training at the group, compared to 14,840 total employees. Bechtle also confirmed the guidance, acknowledged the challenging macro, but also stated that they see a noticeable upswing in incoming orders.
Valuation
I'm using an Inverse DCF model to value Bechtle and will also look at historic multiples.
We can see that Bechtle had seen a dramatic multiple expansion during the pandemic, fueled by the market's euphoria. Now, the multiple has compressed back to pre-pandemic levels and is slightly below the 10-year median value.
Using an inverse DCF model with a 10% discount rate, we can see that the business looks fairly valued on an FCF basis. The price implies 8% growth for the next five, followed by 6% growth for the following five years. Considering the 7% revenue growth guidance, which could be conservative, this looks like a good deal. We need to remember that a lot of the FCF recovery was due to changes in Net Working Capital, particularly inventories. I also assumed that 1/3 of CapEx is for growth because Bechtle is expanding its footprint all over Europe.
Risks
A key risk to the business is the European macro environment, especially Germany, with 62% of revenue share. Investors also should monitor the development of its acquisitions. Bechtle frequently acquires businesses and spends an average of 55 million € a year on cash acquisition, rising sharply over the year. This has also resulted in a large goodwill, which represents 1/3 of total assets. While they have a good track record of integrating these deals, it does represent a risk.
Conclusion
To summarize, Bechtle is a quality European business with a consistent ROIC of over 10% (keep in mind that 1/3 of total capital is goodwill from acquisitions), operating in a growing market. The company has a history of profitable growth and is likely to continue on this journey due to its good positioning in the European market with its strong brand. I was debating whether or not to put a buy rating, but I decided to go with a hold : While Bechtle is a high-quality business, I'd like to see a margin of safety and it needs to be seen if FCF generation is sustainable or if the NWC changes were a boost this year and we'll see it revert closer to my owner earnings numbers.
For further details see:
A Hidden German Champion: Bechtle AG