German SDax shares part 3

from Energiekontor to HOCHTIEF

Energiekontor (Mcap 1,26 Mrd. EUR)

Energiekontor is in the renewable energy business and constructs wind- and solar-parks in Germany, the UK, Portugal and the US. Since foundation of the company in 1990 they installed more than 1 Gigawatt in capacity and built more than 130 wind-parks and 12 solar parks. They keep around 50% of their projects in their own portfolio and sell 50% to investors. That is quite a smart strategy, because it leads to steady cashflows from their own portfolio and healthy profits from sales, especially in the last few years when demand for wind- and solar parks was very high. Energiekontor is the stock I wish I had discovered 5 years ago. In hindsight everything looks so obvious, they are in a growing market with longterm tailwinds, the company is founder-led and long-term oriented, the founders hold around 50% of the shares. They have a track record of good execution and their project pipeline is the most extensive in the company’s history. This is clearly a stock for the next decade that I will investigate further. The P/E TTM is 32, so not a screaming buy at the moment I think.

But hey, what a great company and success story, the world needs more companies like that! I will watch it.

Fielmann AG (Mcap 2,70 Mrd. EUR)

Talking of success stories. If you have ever visited a german city, it is very likely that you walked by a Fielmann store. The company is the biggest provider of glasses, eyewear, contact lenses and hearing aids in Europe. The company was founded in 1972 when Günther Fielmann opened his first store in Cuxhaven, a small northern german city. This living legend of an entrepreneur nearly single-handedly grew a one store business into a billion dollar company with nearly 1000 outlets. The founder in action:

The numbers are mind boggling: In Germany, Fielmann operates 610 stores (just 5% of all optician stores) but takes home 50% market share of items sold and 20% market share of revenues made.

How is that possible? Have you ever heard of the concept “scale economies shared” by Nick Sleep? I think Fielmann is a good example here. The optician business is traditionally very fragmented with many small owner-operated stores serving a local market. In the 80s, Fielmann started to transform the market, lowering prices for consumers with low priced own-branded glasses, improving service quality, increasing capacity and building a “value for money” brand with heavy advertising. Fielmann steadily takes market share and expands into adjacent areas like hearing aids. The founder stepped down in 2019 and his son, Marc Fielmann took over. Marc seems to be a good leader and a dedicated person, here is a video interview in english that I can recommend.

Interestingly, the stock price is down, even compared to the covid-lows. One reason imo is, that Fielmann had a reputation of a “never sell” stock and was simply overvalued 5 years ago. Another reason is in the numbers. If you look at the income statement, revenues were growing steadily at around 5% each year in the last 10 years, but net income is more or less flat. The operating margin decreased from 18% in 2016 to 12% TTM. And wage inflation is coming…

Obviously, Marc Fielmann needs to adapt the Fielmann-flywheel to the modern times, but I am optimistic. They invest heavily in their online channel, probably as a reaction to their aggressive new online-competitor Mr. Spex. I think their main business will continue to be brick and mortar - you really need a specialist if you want to get a decent glass or hearing aid. Mr. Spex is a threat (the first in decades), but manageable, since this upstart is still losing money and this will be a problem at some point in the future. Additionally, according to online reviews, Fielmann’s quality is superior to Mr. Spex’s. Maybe Mr. Spex picked the wrong guy? I would not be surprised if Fielmann took them over/under.

The hearing-aid market is a huge opportunity and optionality. The P/E TTM of around 20 seems fair for this high quality company with a super solid balance sheet and long term mindset. The family controls more than 70% of the shares. The dividend is at 5%, but keep in mind the current payout ratio is 90% of FCF, so maybe not sustainable. If they can increase operating margins again, this could be a good long-term investment.

I will watch this stock because I am curious how this plays out, could be a good “buy the glitch” situation.

flatexDEGIRO (Mcap 979,59 Mio. EUR)

Flatexdegiro AG is a german online broker and FinTech. Their main business is online brokerage. They have a very shiny investor presentation full of buzzwords (e.g. crypto) and ambitious goals. They “adjust” the numbers, fortunately still a rarity in german companies. I really could not understand why they are special and get to the bottom of their business and competitive advantage. In the end, online brokerage is a commodity, or am I missing something?

I think they are a good employer since they seem to have a nice incentive plan, but investment-wise a pass for me.

GFT (Mcap 881,92 Mio. EUR)

Buckle up for GFT! This stock is a rarity, since you could have had the ten-bagger twice in 10 years. What a rollercoaster ride of a price chart! The buy and hold investor needed nerves of steel.

The company is an IT service provider for finance, insurance and industrial companies. Revenue tripled in the last 10 years but operating margins are volatile, bouncing around between 4% and 9%. Margins and stock price are near their highs and I have no idea how sustainable the margins are. There seems to be some cyclicality in the business and I fear the ten-bagger in reverse. There are better opportunities in the current market imo.

I will pass.

Grand City Properties (Mcap 1,59 Mrd. EUR)

The next real estate company is Grand City Properties and I had never heard of them before. They have a big portfolio of 60.000+ apartments in Germany and London. The company looks cheap at first glance, the shares trade at a P/E TTM of under 3 (due to a re-valuation of assets, those real estate companies are lucky bags…) and book value per share is 32 EUR with shares trading at around 9 EUR. Dividend yield is 8%. Looks too good to be true at first glance. They are well aware that the market focus shifted from “how to grow assets” to “how to survive rising interest rates” and address the issue quite frankly in their investor presentation:

Looks like they are safe until 2025, but who knows how high interest rates will be in 2026 - 2028 when the lion’s share of their debt needs to be refinanced? What about modernizations? What about loss of rent payments due to a recession? What about political influence like a rent cap? Is all this reflected in the share price? I really don’t know all the answers but I think this is one of the more interesting real estate companies, since their debt seems manageable and residential real estate should suffer less in a recession than commercial real estate.

But since I am not an expert on real estate and can’t watch them all, this one goes into the too hard pile for now.

GRENKE (Mcap 971,76 Mio. EUR)

Grenke is a financial service company that is active in Germany, France and Italy. It operates through three segments: Leasing, Banking, and Factoring. They target small and medium sized businesses. The company is a fallen angel since the Grenke stock had a very good reputation in Germany until the shortseller Fraser Perring published a negative report in 2020 that led to the collapse of the stock. It initially lost about 50%, never recovered and is now down 80% from previous highs.

The allegations were quite severe. At some point, even the cash balances were questioned. Some thought this would be the next Wirecard. GRENKE managed to disprove all severe allegations (the cash was there), but some issues with corporate governance and compliance needed to be resolved. All in all a mixed bag. They made a fresh start, a new CEO is in place, he installed a risk officer and as far as I can see, they are serious about internal change.

Some value investors that I respect are shareholders, e.g. Rob Vinall or the TGV Rubicon Stockpicker Fund. Although the business suffered in the last 2 years, management has ambitious goals: The plan is to double revenue and net profit from 2021 to 2024. P/E TTM is under 10.

Could be a nice turnaround story! I will watch them.

Hamborner REIT (Mcap 589,74 Mio. EUR)

Hamborner REIT is a german real estate company that specializes in commercial real estate, mainly office space and retail space. The company has a long history, IPO was in 1954. It is now a typical REIT for dividend investors that pays out 90% of net income to investors. The stock is down a lot. Interest rate increases, work from home trends and a possible dividend cut are feared. I do not feel very confident about the business, so I will pass.

Heidelberger Druckmaschinen (Mcap 409,03 Mio. EUR)

This stock is not for the faint hearted, it was a turnaround 15 years ago, never turned around, but is still around! The company is a market leader for offset printing machines, but this market is shrinking since digital print and digital media are on the rise. I am not that familiar with the latest turnaround narrative, but somehow I am not so sure that this company is a sound investment. I will pass.

HENSOLDT (Mcap 2,54 Mrd. EUR)

I had never heard of Hensoldt before the outbreak of the war in Ukraine. They are in the “detect and protect” business and manufacture all kinds of radars, optical systems, jammers for the military and governments. The website and their product categories are really interesting! It reads like a James Bond’s Mister Q shopping list: e.g. “disrupt - deny - degrade - deceive”.

I think demand for their products will continue to rise, for obvious reasons. I am personally not a “no defense stock” investor per se - democracies need these products to defend themselves. But from an investment perspective, the problem is that the company sells to very few customers (governments) and they will have bargaining power, so high margins will probably be unsustainable. Operating margins were at 2% in 2018 and are now at 9% - will they go up or down from here? I have no idea. Rheinmetall is another example of a defense stock with world class products and low margins. These stocks were obviously a very good hedge at the beginning of the war, but I do not see a lot of upside from here.

I will pass.

HOCHTIEF (Mcap 3,91 Mrd. EUR)

Hochtief is an international construction company with a long history. The roots go back as far as 1873, the german “Gründerzeit” after the french/german war in 1870/71. Even company history can be a good reminder that we need the european union more than ever!

Since then, the company has evolved a lot and is now a very international company (95% of revenue outside of Germany) with a spanish majority shareholder. They focus on big infrastructure projects. My father was a civil engineer and that is why I know that the construction industry is a tough place to make a living. It is very cyclical, you have many risks like cost overruns, payment defaults, cost inflation etc. The stock price is declining since 2017. Nevertheless, it looks like a solid company with a good balance sheet and a nice dividend.

But I will pass.

Thanks for reading, this is not investment advice, do your own research, make your own decisions. Remember Elvis, only fools rush in!

To be continued.