Description

How would YOU like to short the following chart without a hard catalyst?

What is Indutrade?

• Well-run roll up of ~200 small, independently managed, mostly-industrial, GDP-type businesses.  

• Very few, if any, synergies are realized on deals (other than sharing best practices during CEO powwows).  INDT follows the Buffett model of acquisitions, whereby sellers seek INDT as a preferred buyer (desired independence, maintaining employee commitments, etc.).  CFO: “Sellers choose us because they can come back to their local pub in 10 years and look people in the eyes because they still have their jobs.”

• Generally good underlying businesses.

• Believe HP Valves is their largest underlying business in terms of sales (~EUR 100mm/revs) as it has grown through acquisitions itself

• Market cap: SEK 19.4B, EV: SEK 22.5B

• 1.85x trailing P/S

• 21x 2016 consensus earnings

• Dividend yield of <2% with GC rate cost to borrow (~3% SI)

• Some organic growth in aggregate, but INDT is much more an inorganic growth story going forward

Short thesis in a nutshell

• The company’s business model is to acquire tiny businesses (SEK 30-100 annual revs) for between 4-8x earnings where they’re the only bidder.  Again, the company achieves little to no hard synergies with its targets—these are well run businesses that continue to operate independently—yet the stock trades at 21x 2016 consensus earnings.

• Eventually the law of large numbers should catch up to the company.  Tiny acquisitons won’t move the needle at some point, and if they chase larger targets, they won’t be able to buy at 4-8x earnings.

Why now? 

• Admittedly this is a valuation short, but I do think growth expectations are too high.  Brexit could be the catalyst that finally highlights the bid ask spread.

• Consensus 2018 topline is 17.2% above LTM 3/31/16 levels.   Consensus 2018 EPS is 27.7% above LTM 3/31/16 levels.

• Pro-forma for recent deals, UK is about 10% of underlying sales.   GBP issues and UK economy issues could cause organic growth hiccups on a 21x P/E stock.

• For reference 2015 saw organic order intake of +4% and organic sales of +9%.

• Management acknowledges that organic growth is hard to come by in today’s environment.

• The UK has become a more important source of deals in recent years.  While some might suspect that a recession will lead to reduced acquisition multiples, I believe it will lead to a dearth of willing sellers.  Could cause issues on acquisition-lead growth.

• 90% of sales are in Europe.  Will general post-Brexit European economic malaise affect INDT’s underlying businesses?

• 29% of sales are in Sweden.  Sweden has enormous immigrant issues.  What’s keeping Sweden in the EU?

Catalyst

Brexit affects company's growth trajectory and the market pays attention.