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GEA SA – All roads lead to Grenoble and 50%+ Upside

“Specific, known catalysts are not necessary. Sheer, outrageous value is enough.”

Dr. Michael J. Burry

“The concept of owning a toll – whether it is a bridge, a road, a railway or some other monopoly infrastructure asset – is appealing because generally there is no other alternative, which forces people to pay the toll.”

Warren Buffett

Executive Summary

  • Grenobloise d’Electronique et d’Automatismes SA, (“GEA,” or the “Company”; ticker: GEA) is one of the most compelling investment opportunities in public equity markets at present, offering approx. 50% -80% upside from the current share price, with estimated downside risk of just 10%
  • An investment in GEA common stock therefore has a highly asymmetric risk/return profile, with  potential upside being a multiple of 5x – 8x the downside risk
  • Intrinsic value is conservatively estimated to be approx.  €153m – €183m versus  the current market cap of €101m
  • GEA has zero debt and €55m of excess cash, implying that majority of the upside is in cash today on the Company’s balance sheet, ensuring a significant margin of safety
  • As French small-cap company, GEA is significantly undervalued primarily due to it being virtually unknown by the investment community, as it not covered by any investment houses and management do not meet with or hold calls with analysts
  • GEA is a very high quality business with competent and honest management, consistently high returns on capital, strong cash generation, favourable business prospects, clear competitive advantages and an impressive long-term track record of financial performance
  • Catalyst to realisation of intrinsic value is a buy-out by a private equity or strategic trade buyer, or a re-rating of the common stock following its “discovery” by the investment community given its excellent investment characteristics
  • Given its quality, GEA is a Buffett-type business trading for a Benjamin Graham-like price – the current share price implies that the common stock is trading at two-thirds of its conservatively estimated intrinsic value

Company Background & Business Overview

GEA is a France-based company engaged in the design and manufacture of toll collection and monitoring systems for motorways and car-parks. GEA SA has installed toll payment collection systems in over 34 countries worldwide across Europe, North Africa, the Middle East and the Americas.

GEA is headquartered in Meylan, France and is listed on the NYSE Euronext Paris, Compartment C for small cap companies (market capitalisations of less than €150 million).

The Company was founded by Serge Zaslavoglou in 1970, who led the Company to its IPO in 1994. He retired from day-to-day management in 2007, but remains involved as Chairman of the Supervisory Board of the Company. His sons, Alexis and Grigori Zaslavoglou have led the Company since his retirement; Alexis Zaslavoglou is Research and Development Director and Chairman of the Managing Board, while Grigori Zaslavoglou is Managing Director and Company Secretary.

Ownership

The Zaslavoglou family control the Company, holding 38% of the ordinary share capital, and 54% of the voting rights.

Ownership Table

Source: 2012/2013 Annual Report; http://www.euronext.com Company profile

Ordinary shares initially carry one vote per share, however shares held for more than four years become entitled to a double voting right.

Eximium SAS, a French industrial plastics business, built a 15.2% shareholding in GEA during 2013, and is the second largest shareholder group after the Zaslavoglou family.

Key Markets

GEA’s core business is toll collection systems design, manufacture and maintenance. GEA is the market leader in France, with all French motorway companies using GEA equipment. More than 85% of toll lanes on French motorways operate GEA manufactured electronic toll systems, and France has the eighth largest motorway network in the world, and the largest in Europe at 1.02 million kilometres (Source: http://www.roadtraffic-technology.com, January 2014). GEA also provides turnkey parking revenue collection systems to major French car park operators such as Vinci Park, Saemes, Lyon Airport, Omniparc, Sepadef and a significant number of local authorities across France.

GEA Motorway and Car Park toll installations

GEA En France

Source: http://www.gea.fr

In France, the motorway network known as the “autoroute” system is operated by private sector companies under concession contracts with the French government. The road infrastructure itself is owned by the state, but the operation of the motorways, including tolls is managed and controlled by concession companies that are today divisions of larger infrastructure construction companies.

The French government commenced the privatisation of motorways in the 1970’s, and intensified this in 2000, with the privatisation of previously state-owned entities such as ASF, APRR and SANEF.

Concessions are contracts by which the French state grants authority to “concessionaire” companies to assume all responsibilities for the financing, construction and operation of the motorways. Originally, the length of these concession contracts was fixed at 35 years, but after several rounds of reform and privatization, the concession terms were extended to between 2028 and 2032 for most concession companies. For new concessions granted after 2001, the length is variable and can range from 50 to 70 years. At the end of the concession term, the concession assets are handed over to the concession companies. (Source: http://www.asecap.com)

Today, the largest motorway concessionaires or operators in France are owned by 3 of the largest, publicly listed infrastructure construction groups in Europe  – Vinci SA, Eiffage SA and Abertis:

Concessions In France

GEA is a supplier to all of the concession operators in France, each of whom also have motorway assets outside of France. There are more than 10,000 GEA motorway lane systems in operation worldwide, and the Company has toll installations in more than 34 countries:

  • Europe (Austria, Belarus, Belgium, Croatia, Denmark, France, Greece, Hungary, Italy, Netherlands, Portugal, Poland, Russia, Spain, Sweden, Turkey and United Kingdom)
  • Asia (China, India, Kazakhstan, Korea, Malaysia, Philippines and Thailand)
  • Middle East (Bahrain, Egypt and Saudi Arabia)
  • North Africa (Ivory Coast, Morocco and Tunisia)
  • Central America (Guatemala, Mexico)
  • South America (Brazil)
  • The Caribbean Islands (Jamaica)

With regard to car park access and toll systems, since 2001 GEA has been a supplier to the Vinci SA group, the world’s largest car park operator, operating more than 2,600 car parks in 13 countries.

GEA dans le monde

Source: http://www.gea.fr

Competition

As noted above, GEA is the market leader in France. The Company’s  main competitors in France and Europe are:

  • Thales Group (France; Ticker; HO)
  • CS Communications & Systèmes  (France; Ticker: SX)
  • Kapsch TrafficCom AG (Austria; Ticker: KTCG)
  • Q-Free ASA (Norway; Ticker: QFR)
  • MultiToll Solutions SAS (France; Privately held)
  • SICE (Spain; Privately held)

The table below provides an overview of GEA’s publicly listed competitors:

GEA competitors

Business Model

Product Offering

GEA designs, develops, manufactures, integrates, installs and maintains a full range of electronic motorway toll equipment, including central computer systems, plaza computer systems, manual or automatic entry and exit lanes for accepting payment (cash, currency, magnetic cards, bank cards, smart cards, subscriptions and electronic toll collection). The diagram below outlines a typical electronic motorway toll systems produced by GEA:

channelled toll system

Source: http://www.gea.fr

Electronic toll terminals manage a range of toll lane operations including:

  • automatic vehicle classification systems
  • traffic signals
  • vehicle barriers
  • electronic tolling antennas

Additionally, transaction data and traffic information are collected in real time and stored centrally and are accessible via computer networks.

GEA’s value proposition is the delivery of financial and technical efficiencies to motorway toll operators by:

  • Prevention of motor toll fraud (vehicle scanning, recording and identification)
  • Management of motorway toll money flow
  • Toll transaction processing across all payment methods (cash, credit cards, payment cards etc.)
  • Recording and generation of traffic statistics
  • Facilitation of enhanced traffic flow via reduced tolling time, lane congestion, and the free flow of traffic via automated toll collection

Free-flow or open road toll collection has become an important development in reducing traffic congestion, while facilitating efficient toll collection. GEA has developed its own electronic toll systems using Dedicated Short Range Communication System (DSRC) technology, which comprise road-side antennas and on-board units (OBU) or tags fitted to vehicles, which are then scanned by overhead or road-side antennae, as illustrated in the diagram below:

Free Flow system

Source: http://www.gea.fr

In France, all major motorway operators use DSRC technology, and GEA is an established supplier of free flow electronic toll equipment. In 2012, GEA OBUs were selected for deployment on the networks of the major motorway operators, including the Vinci SA, Eiffage SA and SANEF. Additionally, from 2013, heavy vehicles in France are required to pay tolls for using national roads and smaller departmental roads, as part of the Exotaxe project. GEA was selected in 2012 to supply the roadside antennas for this project.

The value proposition from the delivery of the above efficiencies is significant in the context of total motorway toll revenue of more than €8.8 billion in France in 2013, from approx. 1.4 billion transactions (of which approx. 632 million were via electronic toll collection).

Revenue Model

GEA supplies toll collection systems (hardware and software) to motorway and car-parking developers and operators under contracts that typically span multiyear terms. Essentially, GEA is engaged as a subcontractor to the motorway concessionaires or operators, designing, manufacturing and installing toll systems for specific motorway projects.

As a contracting business, subsequent years’ revenue is contracted and therefore GEA’s order book tends to serve as a reasonably reliable leading indicator of subsequent years’ revenue generation:

revenue v order book

Source: Company Annual Reports; IndependentValue analysis

In the chart above, the revenue is lagged by one year against the order book, with the 2004 order book value plotted against the2005 annual reported revenue. Management reported an order book value of €59m at FY13 year-end (30 September), indicating FY14 revenue of approx. €56m based on historical ratio of annual revenue to preceding years order book.

The historical track record and the contracted nature of revenues indicate that the business is predictable in nature. Typically, export contracts are invoiced when the work is accepted by the customer and after the customer has given indicated approval for payment. For other contracts, invoicing is on a milestone basis according to the stage of project progress and contracted terms. As a result working capital tends to fluctuate significantly on a year-to-year basis, depending on timing of invoicing and payment. This has historically resulted in a variance between EBIT and free cash flow annually, however it is important to note that over 3 year periods (typical term of GEA contract), EBIT and cash generation generally equalises:

EBIT-FCF-Cash balance

Source: Company Annual Reports; IndependentValue analysis

GEA’s revenue is indirectly tied to public infrastructure spending both domestically and in its overseas markets, via the motorway construction and renewal projects undertaken by its customers. While recently reported results indicate a slowdown in the pace of motorway toll programmes and installations in France, GEA has focused on winning new contracts in overseas markets to offset domestic revenue declines (see Current Position section below).

Revenue by Segment

Revenue by segment

Source: Company Annual Reports; IndependentValue analysis

GEA generates revenue primarily from the sale of toll road collection systems (95.5%), with the balance generated from maintenance and other services (4.5%).

Maintenance service revenues generally relate to maintenance of both hardware and software at toll installations sold to motorway and car park operators.

Revenue by Geography

revenue by geography

Source: Company Annual Reports; IndependentValue analysis

France has historically accounted for the majority of the Company’s revenue generation, representing 73 or approx. €55m in FY13. However, since 2008, international orders have increased from approx. 15% of total orders to 41%, with international orders averaging 37% of the total order book since then:

Order book mix - France vs International

Source: Company Annual Reports; IndependentValue analysis 

Customers

GEA’s customers include all of the major French motorway developers and concession companies, including Vinci SA, the world’s largest integrated motorway concession/construction group, Eiffage SA, SANEF, and the Bouygues Group, a construction and infrastructure conglomerate that also has concessions interest.

GEA has long-standing relationships with these entities, and is a preferred supplier of toll equipment to them. This gives GEA a competitive advantage, ensuring repeat business via maintenance and upgrade contracts, as well as the opportunity to leverage these relationships to supply toll equipment to these operators as they build new projects in high growth foreign markets such as Africa and South America. Over the last 5 years, GEA has significantly increased its export revenues to foreign markets, consistently winning these contracts based on its track record in France, and its relationships with its motorway construction and concession customers.

Current Position & Outlook

Share Price chart - euronext

Source: http://www.euronext.com

GEA stock is up approx. 7.5% in the year-to-date.

The Company recently released H1 FY14 results for the 6 months to 31 March 2014, reporting:

  • Overall 25% decline in sales versus the same period in FY13, driven by a YoY 52% decline in domestic revenue, offset by a 38% increase in overseas revenue
  • According to management, the YoY deterioration was attributable to a sharp slowdown in the pace of toll automation programmes in France, a trend previously articulated by management at FY13 year-end in September 2013
  • Management’s response to this has been to continue to win multi-year contracts with key customers such as Vinci SA, while also focusing efforts towards overseas revenue generation to offset domestic weakness, winning contracts in Kazakhstan, Bangladesh, Ivory Coast and Brazil among others.
  • Notable contract highlights and wins announced by the Company during FY13 and H1 FY14:
    • Provision and renewal of toll equipment for all major motorway companies in France, including for all the Vinci SA motorway companies (ASF, Cofiroute, Escota), Eiffage and SANEF
    • Signing of 3 Year contracts with Eiffage (hardware and software deal) and Vinci SA (aerial toll equipment) during FY13
    • Signing of major 6 year strategic agreement with Vinci SA for the provision  of toll equipment for all of its motorway companies (ASF, Cofiroute, Escota, Arcour) in France
    • Ongoing delivery of contracts in Croatia, Russia, Mexico, Brazil and China during H1 FY14, relating to new contract wins during FY13
    • Ongoing delivery on strategic agreement with Bouygues Group to provide toll equipment to specific project in Ivory Coast
    • Completion of first project(free flow toll) in Kazakhstan during H1 FY14
    • Commissioning of first project in Bangladesh during H1 FY14
    • New contracts signed in Brazil and Morocco
    • Additional contract with Aeroports de Lyon for Lyon Airport car park toll equipment
  • As at the end of H1 FY14, GEA’s order book was €47m, of which 44% related to overseas contracts, versus €57m at the end of H1 FY13 (a 17.5% YoY decline in order book value)

The announcement of the H1 FY14 results led to approx. 3% decline in stock price on 30 May 2014.

Current valuation based on share price at time of writing is a market cap of approx. €101m, which implies an EV/EBIT multiple of 2x FY13 EBIT, and 3x estimated FY14 EBIT, reflecting current year deterioration in France toll equipment revenues.

Financial Summary & Historic Track Record

GEA has an excellent financial performance track record over the last 10 years:

10 Yr financial track record

Source: Company Annual Reports; IndependentValue analysis

Highlights over the 10 year period from 2004 – 2013:

  • Revenue CAGR of 7% ; EBIT CAGR of 27.3%
  • Significant cash generation – cash balance has increased at CAGR of 26.1% from €7.3m to approx. €60m, while annual free cash flow has increased at CAGR of 31.8%;
  • GEA is extremely well capitalised – cash is the Company’s largest asset on its balance sheet, at 65% of total assets, while management have employed virtually no debt over the 10 year period
  • Net book value has grown at CAGR of 15%
  • ROIC (measured on EBIT/Invested Capital basis) has averaged 26%, and averaged 45% over last 5 years from 2009 – 2013
  • GEA experienced a challenging 2005 and 2006, with operating profit declining and turning negative in 2006, due to increased R&D costs associated with a specific contract for APRR (Eiffage SA), and the commencement of a number of significant multi-year French contracts, which front-loaded significant upfront costs, with revenue not recognisable until subsequent years. Notably, the operating loss incurred 2006 is the only time GEA has incurred a loss in the last 24 years.
  • Management achieved a turnaround in 2007, with the investment in R&D and undertaking of significant news contracts in 2006 bearing fruit as revenue relating to these contracts became realisable, allowing GEA to become the market leader in France and returning the business to profitability. Additionally, operational efficiencies arising from a plant rationalisation during the year helped to dramatically improve margins
  • 2008 was an the inflection point for the business, with operating margins nearly doubling over 2007, attributable to the investments in R&D and new contracts in 2006 and 2007 continuing to generate revenues without , while the geographic mix of revenues shifted significantly, with international export contracts accounting for 41% of total revenues, compared with just 15% previously; export contracts are important as they higher margin than domestic contracts, thereby driving an significant improvement in EBIT:

Order book vs ebit margin

Source: Company Annual Reports; IndependentValue analysis

Since 2009, the Company has continued to win significant export contracts, which has allowed the Company to maintain its pre-2008 operating margin levels, as it continues to win new export contracts in markets such as Mexico, Brazil and other developing economies.

A summary of 10 year financial statements, KPI’s and valuation metrics is provided below:

10 Yr financial summary & KPIs table

Source: Company Annual Reports; IndependentValue analysis

Investment Thesis

At its current share price, I believe GEA offers one of the most compelling investment opportunities in public equity markets. I believe there is significant upside to current equity value, with limited downside risk to capital. The following 6 key considerations underpin my investment thesis:

1. Management Team

I assess management’s competence under the following criteria:

  • Performance Track Record
  • Remuneration & Shareholding
  • Capital Allocation & Shareholder Value Creation

Performance Track Record

GEA is majority owned and managed by the Zaslavoglou family, who have proven to be competent and honest managers of the business and stewards of shareholder capital. The track record of delivering consistent revenue and earnings growth with no debt which achieving high returns on capital (10 year average of 26%) is evidence of this.

As noted above, GEA reported declining and negative EBIT in 2005 and 2006, due to the commercial investments required to grow future revenues, which negatively impacted performance in the short-term. This brief period of negative performance was not indicative of bad management or a flawed business model however; it reflected management’s decision to invest in R&D and bear upfront costs in the short-term to enhance the longer term revenues and earnings power of the business. This proved to the correct decision by management, with the business delivering consistent growth and rising returns on invested capital since then.

The achievement of this turnaround, followed by consistently high returns on capital in excess of average market rates of return, without any leverage, is clear evidence that management are highly competent business people.

Remuneration & Shareholding

Being majority owned and managed by a single shareholder family, and not widely followed by investment banks or research firms, one might expect a to see a certain level of lifestyle costs in a company like GEA. However an analysis of the remuneration levels for FY13 (notably GEA’s most successful year since it was founded in terms of revenues and profitability), total remuneration appears modest, at approx. 1% of revenue for the entire board of directors:

Board Remuneration

Notably, 50% of executive management’s (Alexis and Grigori Zaslavoglou) total remuneration is contingent on performance, while their base salaries seem modest for a €100m market cap business generating revenues of €70m-plus on average over the preceding 3 years. Similarly, the profile for remuneration is similar over the preceding 10 year period.

Despite the Company being subject to very little external shareholder scrutiny due to its relative obscurity and lack of coverage within the investment community, the Zaslavoglou family have remunerated themselves modestly, despite controlling the Company. Additionally, the Company has also paid a rising dividend to shareholders since the turnaround in 2007. On this evidence, management’s conduct indicates that their interests are aligned with fellow shareholders.

Capital Allocation & Shareholder Value Creation

Returns on capital are perhaps the best indicator of management’s competence, and capital allocation is the activity that drives return on capital. Management’s track record has been the achievement of consistently high returns on invested capital (management have not employed any leverage in the preceding 10 year period):

ROIC & ROE

Source: Company Annual Reports; IndependentValue analysis

ROIC (EBIT/Invested Capital) has averaged 45% over the previous 5 years, while ROE has averaged 29% over the same period – clear evidence of management’s effectiveness in managing the business.

One point to note on capital allocation is management’s insistence on maintaining a significant and growing cash balance:

cash balance vs assets

Source: Company Annual Reports; IndependentValue analysis

At FY13 year-end, cash of €59m represented 65% of GEA’s total assets. Since the 2007 turnaround  net working capital (NWC) excluding cash has averaged €2.5m, peaking at €9.9m in FY12, due to a number of significant contracts in progress and invoiced at the year-end. Taking the historical peak NWC requirement of €9.9m, this implies that conservatively approx. €50m of GEA’s cash balance is excess cash.

Why is management retaining seemingly excessive levels of cash, and does this constitute a poor allocation decision?

Before answering this question it is worth noting that GEA’s business has a low capital intensity, with capex averaging 0.5% of annual revenues, or just €363k in absolute terms since 2007. A key area of expenditure to maintain and grow the current level of operations is R&D, with R&D spend primarily comprising salary costs for engineering staff. R&D-related expenditure typically ranges from €1m – €2m annually. Innovation and development of new tolling equipment are key for maintaining and growing the Company’s product offering. According to management, a new ETC tag requires approx. 18 months and €1m investment to develop, and as outlined above, the allocation of capital to R&D was critical to achieving the subsequent growth trajectory from 2007 onwards.

Management have indicated that ensuring the Company’s financial independence is fundamental to the business’ future prospects, with adequate resources required for business development and technical investment. In terms of business development, the focus is on increasing export revenues in new, overseas markets. On the technical side, new ETC systems are seen as the main growth driver for the business in the future.  These two elements appear to be the primary reasons for management retaining so much cash.

Overall, the track record of consistently high returns on capital combined with the steadily rising cash balance clearly indicates that the business generates more cash than is required for re-investment in operations, even allowing for R&D. While revenues have grown at a CAGR of 6.5% over the 10 year period from FY04 – FY13, free cash flow and cash balance has increased at a CAGR of approx. 19%.

Management have acted to return some of the cash generated to shareholders via a dividend and share buy-back programme. The dividend yield has averaged 4% (current yield also 4%) over the previous 10 years, and has grown at a 20% CAGR since FY07.

With regard to share buy-backs, management proposed a share repurchase programme at the AGM on 31 March of this year, to repurchase of up to 10% of the GEA’s share capital (119,127 shares at up to maximum price per share of €120, with the programme capped at €7.2m, lasting to year-end 30 September 2015.

While the dividend and buy-back initiatives to return cash to shareholders (which include management) are shareholder-friendly actions, there is a clear argument for returning further cash to shareholders. The significant level of cash retained clearly exceeds capex and R&D requirements. To date however, there has been no indication that management might consider a special distribution to shareholders.

The final assessment of management’s competence is the “Buffett Test” outlined by Warren Buffett in his 1984 letter to Berkshire Hathaway shareholders, which advised “that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.”

So how does GEA’s management score with regard to this test?

Market cap vs. RE

Over the 10 year period from FY04 – FY13, €1 retained by GEA’s management has produced €1.92 in equity market value, a 92% return. On this evidence, GEA management have done an excellent job with regard to generating value for shareholders, of which they themselves are the most significant group.

2. Historic Financial Performance

As outlined above, GEA has an impressive track record in terms of financial performance. While past performance can never be relied upon as an indicator of future performance, a track record showing consistently rising earnings, high operating margins and sustained, high returns on capital with little leverage are evidence of an excellent business. For any business, such a track record when combined with positive future prospects usually makes for an excellent investment opportunity.

GEA’s impressive track record in the context of it being a small, specialist supplier to large cap international infrastructure companies indicates that it has established itself as a highly effective niche operator with valuable commercial relationships. This suggests a competitive advantage for GEA, and a barrier to entry for competitors.

3. Future Business Prospects:

GEA is a preferred supplier to the infrastructure sector, specifically motorway developers and operators. Its customers comprise many of the largest motorway operators in Europe, who in turn have assets and operations in foreign, developing markets where there is a significant requirement for road infrastructure development. As such, the primary drivers of GEA’s future prospects are:

  • Continued road infrastructure spending in France
  • Winning of new export contracts in foreign markets, particularly developing economies

With regard to its domestic market, GEA’s prospects are tied to the construction of new tolled motorways, and the upgrade and replacement of existing motorway toll installations. While government spending on capital projects in Europe is limited at present due to ongoing economic challenges and austerity measures, there are positive signs for road infrastructure spending.

Vinci SA, a key customer of GEA, recently forecasted significant spending in the coming years. At the end of 2013, Vinci Autoroutes reported it is in discussions with the French government to invest approx. €2 billion in a motorway stimulus plan for France. Vinci reported a structural increase in traffic, and higher utilisation rates of sections of motorway in France. This trend, combined with the effect of contractual toll increases on Vinci-operated motorways means that toll revenues will rise. This will in turn prompt increased investment in motorway infrastructure, to widen and modernise networks.

Similarly, Eiffage SA reported in Q1 FY14 that it expects a continued recovery in Europe, and is seeking to grow revenues in Africa, where it has won several contracts. Future investment by Eiffage in Africa could make the company a key player in a developing market in need of large infrastructure investments. As a key supplier to both Vinci and Eiffage, such developments are positive for GEA.

Beyond France, GEA’s numerous contract wins to provide toll equipment to higher growth export markets such as Mexico, Kazakhstan and Ivory Coast are extremely positive. As export contracts are typically higher margin, and a significant proportion of GEA’s revenues are now generated from overseas contracts (41% of order book at the end of FY13), this should result in significant earnings growth and cash-flow generation.

More generally, a key driver in improving motorway infrastructure is the continued need to improve traffic flow, resulting in the increased installation of free flow electronic toll systems. GEA should benefit from this trend as free flow systems have been an area of particular R&D focus by management.

Upon consideration of these trends and facts, GEA’s future prospects appear very positive.

4. Attractive Economics

GEA’s business model possesses highly attractive economics in three respects:

  • Revenue Model
  • Installed Base & Product Life-Cycle
  • Technology Component of Product Offering

Revenue Model

GEA’s revenues are generated from multi-year contracts with large motorway and car-park operators. As such, a significant proportion of the Company’s revenues are contracted, therefore giving high visibility to future earnings, as demonstrated by the high correlation between the order book and subsequent year’s revenue analysis outlined above. Revenues and earnings are therefore predictable.

Installed Base & Product Life-Cycle

GEA has an extensive installed base of toll equipment in France, and a growing installed base overseas. This installed base combined with its status as preferred supplier to concession operators also builds on the predictability of its contracted revenue model. According to management, updating of existing toll equipment and systems is required every 3-5 years, with new installations of the next generation equipment usually needed every 10 years. This life cycle means that GEA is able to maintain its existing level of operations through its extensive installed base and customer relationships, which generate cash flow to further expand into export markets.

GEA also earns maintenance revenues on its installed base. While this represents a small proportion of revenues (c. 5%), as it is the dominant supplier of electronic toll equipment in its huge domestic market, this generates stable recurring revenues. Furthermore, as it grows its installed base in export markets, this should generate further growth in recurring revenues.

Technology Component of Product Offering

A key component of GEA’s product offering and value proposition is the software component of its electronic toll systems. This provides traffic data and vehicle statistics as well as transaction data and payment processing, and as such, offers a higher value information product for motorway toll operators, compared with traditional mechanical toll equipment. It is this software/information component of its offering that allows the Company to earn impressive operating margins and returns on capital.

In summary, GEA occupies a highly niche segment within the road infrastructure space, and possesses a business model with extremely attractive economics from an investment perspective. GEA is effectively a highly attractive play on the infrastructure sector, offering the stability and predictability one would expect from conventional infrastructure investments, with the high margins and returns on capital of a technology enterprise. Motorways and car-parks are long-term, near-permanent assets which are unlikely to change over time, and are not subject to obsolescence or disruption in the same way most industries and business models are.

5. Competitive Advantages

I believe GEA has 2 distinct competitive advantages:

  • Customer Network
  • Installed Base

Customer Network 

Firstly, it has long-standing supplier relationships to dominant motorway construction and operating companies, who will continue to upgrade existing motorways and build new road infrastructure domestically and internationally. GEA’s status a trusted supplier to these businesses should ensure that it continues to win valuable mult-year contracts at similar margins. The motorway concession divisions of Vinci and Eiffage are monopoly-like businesses that earn operating margins of approx. 40%. Therefore, GEA’s own pricing is unlikely to be at risk of being squeezed by its customers. Therefore, GEA’s recent EBIT margins of 20%+ should be sustainable into the future, particularly as it continues to win higher margin export contracts.

Installed Base

GEA’s extensive installed base means that it has a huge network of existing installations that will require maintenance, upgrade and replacement over the product life cycle.

Both these aspects of GEA’s business were developed by management over an extended period of time. The fostering of relationships with large-scale customers and securing of contracts required time and resources to build operations to their present scale.  These are therefore extremely difficult to replicate, and are a barrier to entry for competitors. As such, GEA has significant competitive advantages as a specialist supplier to the major motorway operators.

6. Compelling Valuation

The final consideration in my investment thesis for GEA is its valuation. At its current share price, GEA has a market capitalisation of €101m, but an enterprise value of just €41m, reflecting the €59m of cash on the Company’s balance sheet. With EBIT of €22m reported for FY13, this implies an EV/EBIT multiple of just 1.9x.

Accepting that FY13 was an exceptional year in terms of EBIT and free cash flow due to the timing of completion of a number of significant contracts, it is more conservative to assess valuation on its current year performance. I conservatively estimate that EBIT for FY14 will be in the region of €12m, implying a current EV/EBIT multiple of 3.4x. In absolute terms, for such a consistently profitable and well managed business, this appears too low.

The EV/EBIT multiple is the most appropriate valuation methodology for a business like GEA for the following reasons:

  • While the steady build-up of cash on the Company’s balance sheet clearly demonstrates GEA’s cash generating ability, given the multi-year contract nature of revenues, annual free cash flow can be volatile, depending on the recognition of revenue in accordance with contract milestones and the consequent fluctuations in working capital; as such, EBIT is the best approximation of normalised earnings power. An analysis of historic share price performance versus EBIT and FCF for GEA indicates that EBIT has the “best fit” as the key driver of the share price, with FCF clearly much more volatile over short time horizons:

Share price vs EBIT & FCF

Source: Company Annual Reports; IndependentValue analysis

  • Although GEA does not employ any debt, it holds significant cash on its balance sheet, which should be factored into an appraisal of the entire business; furthermore, its comparable peer companies have varying capital structures, therefore enterprise value is more appropriate than market capitalisation in assessing the value of the Company

To put GEA’s current valuation in context, GEA’s historic EV/EBIT valuation range is as follows:

Historic EV-EBIT multiple

Source: Company Annual Reports; IndependentValue analysis

GEA’s 10 year average EV/EBIT multiple is just 2.9x, and has averaged just 1.6x during the more stable period of operations from FY09 – FY13. Prior to the 2007 turnaround, EBIT was volatile, which distorted the multiple (additionally, GEA had a negative enterprise value in 2008 due to significant increase in cash generation). GEA’s current valuation level is in line with that of this recent, more stable period.

Providing further context, the most directly comparable publicly quoted peer companies are presently trading at an average EV/EBIT multiple of approx. 11x:

Peer EV-EBIT multiples

Source: Bloomberg; IndependentValue analysis

For the above analysis, I have identified Thales SA (HO), CS Communications & Systèmes (SX) and Kapsch TrafficCom AG (KTCG) as the most directly comparable peer companies for GEA. The discount attributed by the market to GEA appears striking when one compares the Company’s fundamental performance to this peer group:

GEA vs competitors margins & ROIC

The above analysis clearly illustrates GEA’s superior fundamentals compared to its peer group, in terms of operating margins and returns on invested capital. In light of GEA’s superior financial performance, its present valuation appears all the more anomalous.

This analysis begs the question – why is GEA so cheap? I believe it’s extremely low valuation is due to the following factors:

  • Obscurity: GEA is an unknown small cap company, with no institutional investment coverage, and a niche operator in an unglamorous industry. Furthermore, GEA has no need of credit facilities given its cash balance, and therefore has very little engagement with capital markets generally, which compounds its anonymity.
  • It is essentially a family owned and managed business with a public listing, which may not appeal to potential investors, who might fear that the owner-managers may not always act in the best interests of all shareholders
  • which does not seem necessary given that it is effectively over-capitalised
  • The business is overcapitalised, with a very significant cash balance built up and retained by conservative owner-managers. As outlined above, it could be argued that the level of cash retained is surplus to operational requirements and should be distributed to shareholders instead. Investors may therefore deem this holding of cash as an inefficient allocation of capital, and so have penalised management for this by discounting the valuation of the Company

In summary, considering GEA’s obvious quality and appealing investment characteristics, it is simply too cheap at 3x projected EBIT for FY14.

To recap, my investment thesis for GEA may be summarised as follows:

  • Highly competent management team
  • Excellent historical financial performance – long-term track record
  • Favourable business prospects
  • Attractive economics of business model
  • Clear and durable competitive advantages
  • Compelling absolute and relative valuation

Catalysts

In light of the above analysis, a business may remain cheap no matter how compelling an investment thesis may be; after all GEA has traded at an average EV/EBIT multiple of just 1.6x over the last 5 years – why should this change?

I believe there are two clear catalysts that could result in a significant re-rating of GEA’s common stock and a realisation of intrinsic value in the medium term:

  • Acquisition Target
  • Valuation

Acquisition Target

GEA is a high return, cash generative family-run business with no debt, which has been persistently undervalued by the market, making it a clear candidate for a private equity buy-out.

The founder of the Company, Serges Zaslavoglou is now in his 70’s, and while he sons have managed operations since 2007, at some point the family may wish to exit the business, or monetize their undervalued shareholding by selling the Company. The business has all the essential financial characteristics that a private equity acquirer would seek – highly cash generative, no debt, predictability, strong margins, and consistently high returns on capital all mean that GEA would make a suitable LBO candidate. Additionally the backing of a private equity firm would also allow the business to achieve management’s growth ambitions in export markets without the need to maintain the excess cash currently on the balance sheet.

Similarly, a trade buyer could also be a strategic acquirer of GEA.  Large customers such as Vinci SA and Eiffage SA operate high margin motorway concessions businesses, but the majority of their operations are in their lower margin and capital intensive infrastructure construction divisions. Acquiring a business like GEA would allow them to vertically integrate in both their motorway concession and construction businesses. The concessions business would benefit from the integration of functionalities such as transaction processing and traffic data systems for example, while the construction business would benefit from the integration of equipment design and installation. Synergies could therefore be achieved in both segments by having GEA’s niche offering in-house rather than as an outsourced supplier. Furthermore, as GEA’s customers such as Eiffage, Bouygues Group and others win contracts in developing markets such as Senegal and Ivory Coast, having GEA in-house may allow better co-ordination on project planning in less familiar, more challenging markets, driving further efficiencies.

Both private equity firms and corporate buyers continue to seek out assets as a means to overcome the present low-growth environment, particularly in Europe. Given the favourable lending conditions and large cash resources available to both groups at present, I believe the likelihood of GEA being identified as an acquisition target is high.

Notably, Eximium SAS, a French industrial plastics business, built up a 15.2% shareholding in GEA during the second of half of FY13, and while to date it has indicated it does not intend to acquire GEA outright, it may be a potential acquirer in the future.

Another potential buy-out scenario that could catalyse value for shareholders could be a management take-private, given the persistent undervaluation of the business by the market. As with an LBO, cost-savings could be made from less regulatory oversight and financial reporting obligations if the Company delisted. However, this scenario would be less appealing than a sale to a private equity or trade buyer for other (non-Zaslavoglou family) shareholders, as although a management take-private may realise a 20%-30% premium on the current share price, this would still undervalue the business, relative to peer companies valuations. With the Zaslavoglou family controlling the majority of the Company and voting rights, an alliance with Eximium could force a take private at a still-low valuation, leaving unrealised value behind for other shareholders.

Valuation

I believe the primary reason that GEA is so undervalued by the market is simply that it is not followed by the investment community, and is therefore unknown to most investors. Exane BNP Paribas is the Company’s broker; however GEA is not covered by any investment banks or research firms. Furthermore, management does not appear to have any interest in promoting their business via investor days or roadshows, and does not meet or hold calls with analysts.  Instead, the preference has been to focus on running the business, without the distraction of promoting the Company’s stock to brokers. Given that management are the majority owners of the business, this lack of engagement with the investment community has not been an issue or source of discontent among other shareholders – the Zaslavoglou family have been free to concentrate on growing GEA without having to cater to the wants of investors as most public companies are obliged to. In this sense, GEA’s public listing appears somewhat irrelevant – GEA resembles a private, family-run and owned company but happens to have a public listing without an ostensible need for one.

This listing was originally undertaken to provide access to growth capital to expand the business outside of France. However, given the extent of overcapitalisation with €50m-plus of excess cash on the Company’s balance sheet, it simply has had no need to access capital markets at all. As noted above, the lack of engagement with investors and capital markets is has resulted in the Company remain undiscovered to date.

However, I contend that a business of GEA’s quality and prospects cannot remain undiscovered indefinitely – the valuation is simply too compelling for this to persist. What will cause GEA to be discovered by the market? Its excellent track record and sheer value at current prices should lead to its discovery by investors.

I expect the above investment catalysts to drive a realisation of intrinsic value within a time frame of 1-3 years.

Valuation Analysis

At the current share price of €84.33, GEA has a total market capitalisation of approx. €101m at the time of writing. I conservatively estimate an intrinsic value range of €153m – €183m, or €128 – €183 per share, with a downside risk of just 9% from the current share price under a worst case scenario for the business.

Earnings Projections

To determine intrinsic value, I estimate a range of normalised earnings (using the EBIT metric) for the business in 2 steps as follows:

  • Estimate FY14 EBIT
  • Estimate normalised earnings (EBIT) beyond FY14

My analysis indicates a estimate normalised earnings range of €12.3m – €16.1m as follows:

FY14 Projections

The above analysis assumes the following:

  1. FY14 projected EBIT is determined using 3 analytical scenarios for FY14 revenue:
    • Application of historic Revenue/Order Book ratio (96.5%) to order book for FY14 as disclosed in FY13 Annual Report
    • Annualising of H1 FY14 revenues as reported by Company in half-year update on 28 May 2014
    • Extrapolation of actual YoY decline in revenue from H1 FY13 vs. H1 FY14 (-25%) to FY13 annual revenue, to estimate implied FY14 annual revenue
  2. Average EBIT margin achieved by GEA from FY09 – FY12 of 21.8% is deemed representative of normalised EBIT margin; FY13 margin of 29.3% was exceptional due to a number of specific contracts completed, and margin at this level is assumed as not sustainable
  3. Normalised margin of 21.8% applied to implied revenue estimate under each of the three scenarios  for FY14, resulting in projected EBIT of €12.3m for FY14, being the simple average of EBIT estimates under each revenue scenario
  4. Longer-term normalised earnings power is estimated based on 10 year average ROIC (calculated as EBIT/Invested Capital) for GEA of 26%; ROIC is applied to opening invested capital balance for FY14 of €61.1m, resulting in estimated normalised EBIT of  €16.1m
  5. A sense-check of these EBIT estimates indicates that both appear reasonable in the context of GEA’s historic track-record post the FY07 turnaround of the business:

Projected EBIT sense check

Source: IndependentValue analysis

On the basis of the above analysis, both the FY14 projected EBIT and long-term normalised EBIT estimates appear conservative in light of the historic track record, with both metrics being within the EBIT range achieved by the Company over the 5 year period from FY09 – FY13 (average EBIT during this period was €15.8m). Furthermore, projected FY14 and normalised EBIT estimates appear very conservative with regard to the Company’s future prospects, and do not reflect potential upside from the growth potential of the business, in the context of both recent trajectory (5 Year EBIT CAGR from FY09 – FY13 was 18.7%) and management’s objective of continuing to win new, higher margin export contracts.

Intrinsic Valuation Analysis

Before presenting my intrinsic value analysis for GEA, it is useful to consider the Company’s historic and current valuation:

Current valuation analysis

Current valuation on EV/EBIT metric is 1.9x trailing (FY13) EBIT, and 3.4x FY14 projected EBIT of €12.3m as outlined above. The average EV/EBIT multiple for GEA over the 10 year period from FY04 – FY13 is 2.9x.

My intrinsic valuation analysis for the Company considers Worst, Base and Best case scenarios, defined as follows:

  • Worst Case – Company’s earnings (EBIT) for FY14 decline YoY by 44% in line with management’s recent H1 FY14 trading update, and future earnings are assumed to remain at this level; Company remains “undiscovered,” and on this basis continues to trade in line with historic valuation range
  • Base Case – FY14 projected EBIT estimate is assumed to be representative of normalised earnings, but Company is “discovered” by the market and/or an acquirer, resulting in a re-rating of the stock, and/or buy-out of the Company
  • Best Case – Assumes normalised earnings power approximates long-term ROIC on current invested capital base and Company is “discovered” by the market and/or an acquirer, resulting in a re-rating and/or buy-out of the Company

Results of intrinsic valuation analysis under each scenario is as follows:

Intrinsic Value analysis

Assumptions & Analysis:

General:

  • Debt of €6k relates to short-term loan on balance sheet as at 31 March 2014, as per managements H1 FY14 trading update
  • Assumed normalised working capital requirement of €4.9m, being average net investment in working capital pre-FY13 (FY13 NWC of €140k excluded as reflected exceptional reduction in working capital levels following completion of specific contracts)
  • Cash of €59.4m on balance sheet as at 31 March 2014, as per managements H1 FY14 trading update, implying excess cash of €54.5m

Worst Case Scenario:

  • EV/EBIT multiple of 3.0x based on historic 10 year average EV/EBIT multiple for GEA (2.9x)
  • Resulting equity value is €91.5m or €76.52 per share, implying 9% downside to current price

Base Case Scenario:

  • Assumes FY14 projected EBIT of €12.3m is representative of normalised earnings
  • EV/EBIT multiple of 8.0x based on following:
    • multiple that a private equity investor or trade buyer would be willing to pay in a buy-out of the Company
    • Average EV/EBIT multiple for comparable public quoted peer companies is 10.9x; for a non-buy-out scenario, where GEA remains public but is “discovered” by the market, I discount this to 8x to reflect fact that GEA is a relatively illiquid, small cap company that is controlled by family-owners via a majority shareholding
  • Resulting equity value is €153m or €128.12 per share, implying  52% upside to current price

Best Case Scenario:

  • Assumed EBIT of €16.1m approximates normalised earnings power for the business, based on historic ROIC
  • EV/EBIT multiple of 8.0x based on assumptions as outlined under Base Case
  • Resulting equity value is €183m or €153.09, implying 82% upside to current price

Using very conservative assumptions, the above analysis indicates very little downside from GEA’s current share price (just 9%), with significant potential upside.

Additionally, it is worth noting that management’s recent buy-back programme announced at the AGM set a price of €120 to repurchase of up to 10% of the GEA’s share capital, implying a market cap of €143m (upside of 42% from current market cap). This potentially indicates management’s own assessment of fair value for the Company, and sets a floor valuation for any potential buy-out. A share price of €120 implies an EV/EBIT multiple of approx. 7x based on FY14 projected EBIT. It is therefore likely that any acquirer would have to pay a multiple in excess of 7x to buy-out GEA, which further supports my 8.0x multiple under Base and Best Cases.

Valuation Conclusion:

GEA offers a highly asymmetric risk/reward profile, with the significant potential upside being a multiple of the downside risk, at 5.6x and 8.8x under Base and Best case scenarios respectively.

Under my Base Case scenario, estimated intrinsic value of €153m implies 53% upside from current market cap of €101m, indicating that GEA is currently trading at two-thirds of its conservatively estimated intrinsic value. An investment in GEA therefore carries a considerable margin of safety, with limited risk of permanent capital impairment.

Furthermore, it is worth noting that this 53% upside under the Base Case analysis is effectively sitting in cash today on GEA’s balance sheet, by virtue of the €54.5m in excess cash built up by management but not required for operations. I cannot imagine a more robust margin of safety than this.

GEA is effectively a “Buffett” stock trading at a “Benjamin Graham” price– a business with favourable prospects and attractive economics, consistently high returns on capital with no debt, highly cash generative operations with predictable earnings, a durable competitive advantage as a niche supplier in its field, and run by conservative, competent management who are also co-owners – all priced at just two thirds of its intrinsic value.

On this basis I believe GEA is the most compelling investment opportunity in public equity markets at present and conclude it is a high conviction buy.

Risks

Risk Risk Mitigant
Protracted decline in road infrastructure spending in France, resulting in declining revenues Vinci SA and other key customers forecasting significant future motorway spend; ongoing maintenance of extensive network of existing tolls will be required; additionally, significant growth opportunities in developing economies such as Kazakhstan and Ivory Coast should offset any near-term French weakness
Entry of New Competitors GEA is market leader with established preferred supplier status with leading motorway operators in France – these relationships would be difficult for a new competitor to replicate and likely require years of gradual business development to achieve. Additionally, GEA benefits from an already large and extensive installed base of toll equipment,  something any new competitor would need years to replicate
Loss of key contracts Unlikely, as multiyear contracts in place with large motorway concession operators/developers, and GEA has long-standing relationships with these entities
Concentration of voting rights with owner/managers, and owner/managers not acting in best interest of all ordinary shareholders Management interests aligned with all shareholders – salaries are reasonable, and the business does not appear to be run like a lifestyle business by owner-managers; significant element of executive management remuneration is performance based, and there are no share issuance programmes to management. All this indicates management are responsible owners and stewards of shareholder capital
Misallocation of capital Management track record to date has been excellent with 10 year average ROIC of 26%; while significant excess cash does not appear to be most efficient use of capital, the likelihood of management squandering this on low or negative return projects is extremely low. An element of this cash may be used to fund further overseas expansion, earning higher EBIT margins. In time, management could decide to make special distribution to shareholders if it cannot be deployed effectively.
Small capitalisation company, with illiquid common stock – free float of approx.  558k shares, and average daily volume of approx. 1,700 shares GEA is a medium term investment and as such short-term fluctuations are not relevant to my investment thesis; any downside volatility arising from small free float would offer opportunity to add common stock at favourable prices
Valuation never realised – remains “undiscovered” I believe this is unlikely – GEA is a highly attractive takeover target with excellent financial performance and track record. I believe this is a high probability that GEA will become a target for acquisition and/or becomerecognised by market within next 1-3 years; Eximium (15% strategic shareholder), PE or other strategic trade buyer looking to vertically integrate motorway construction/concession business are most likely potential acquirers

 

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Discussion

7 thoughts on “GEA SA – All roads lead to Grenoble and 50%+ Upside

  1. Really excellent analysis, many thanks for sharing it with us.
    I agree with most of what you are saying, except the following points:
    1) GEA technology is based on “closed road systems” and there is limited evidence they have any experience and know-how in more “open toll” systems (like congestion charges, or truck toll), which required GNSS technology. So GEA is really focused on “closed road”, and misses out on the large Free Flow market
    2) I am a little less optimistic for FY 2014. I see revenues at approximately €52M, and Ebit at €6.5M. This is a major difference compared to your analysis. I hold the gross margin at 45% (reflecting a higher export % with lower moargins than France). However, I am keeping wages constant: I really don’t see this family owned business laying people off… and that’s a full €14.5M, hence my Ebit at €6.5M (12.5% margin)
    This makes the current valuation somewhat less attractive at EV/Ebitda of 5.5x, which is way above the historical average of 2.1x. This would be ok with a normal balance sheet, but with so much cash yielding nothing, I estimate FY 2014 P/E at 21.7x (kinda pricey?)
    3) I think the family is too conversative in a market that is moving relatively quickly away from “Closed Roads” to Free Flow. With so much cash, why did they let Sanef buy CS ITS, a free flow specialist?
    4) I suspect the main reason for so much cash on the balance sheet is the wealth tax. This is probably a somewhat alien concept to you (lucky you!), but to make it short, the Zass family would pay 1.5% tax on their cash every year if it was not in the company, so they have no incentive to let it get out. I personnaly think the tax authorities could recharacterize the cash as “excess cash”, but who knows when this could happen.
    In conclusion, I agree with your fundamental analysis, I have a different view on FY 2014, and therefore I think the stock will correct with FY2014 numbers in 6 months or so.

    Finaly, I am not sure about the future revenue level (2015-2016). I have seem all your good arguments, on the other hand it could be that the French market for closed roads has finished an equipement renewal phase and will purchase less going forward.

    Posted by Stelaris Capital | June 26, 2014, 1:28 pm
    • Many thanks for your comments – apologies for the delay in responding but I’ve been tied up with various commitments. I have just posted an update on GEA – please see my latest post on this blog at:

      https://independentvalue.wordpress.com/2014/08/04/gea-update-a-road-less-travelled-but-one-worth-taking/

      I believe my latest post on GEA addresses most of the points you’ve raised.

      Regarding your comment on GNSS technology and GEA not offering it, I’ve spoken with management and understand that the GNSS technology is really just a chip that any toll system provider can buy and integrate into their own systems. To date, management have informed me that none of GEA’s customers have requested this offering from them, but should they do so, GEA will have the capability to integrate and offer.

      Regarding your comment that without GNSS, GEA misses out on the large free-flow market I do not believe this is correct – DSRC technology used by GEA allows open tolling. I do not see how you view GEA as a closed road tolling provider only. Perhaps you could offer a more detailed explanation of your understanding around this?

      Thanks for reading and hope you find my response and latest post interesting.

      Best regards,

      IV.

      Posted by independentvalue | August 4, 2014, 11:56 pm
      • Thank you for your anwers, I am just returning from vacation, so my turn to apologize for the delay…. I read your other post, which is as always very interesting and detailed. I will just post my view on technology here, and the rest on your more recent post.

        There are 3 main technologies that I can identify in ETC: DSCR, GNSS and ALPR.

        1) GEA had a technology partnership with Thales to develop DSRC technology in the past, and they were selling badges (badges sales reported until 2008, probably stopped in 2010/11). That partnership is long gone, and now Q Free and Kapsch have 100% of the French DSCR badge market. So GEA is left with antennas, which are a commodity now and don’t cost much. Can they catch up? Maybe but you need large volumes to amortize the development cost, and the market does not need 3 players at the moment. It’s not that easy either: Q Free had problems developing its latest DSRC badge (annual report).

        2) GNSS is GPS-based (http://en.wikipedia.org/wiki/GNSS_road_pricing) often combined with DSRC and ANPR (Automatic Number Plate Recognition) for enforcement. GEA has, to my knowledge, nothing in GNSS, and, contrary to my initial belief, did almost nothing on Ecomouv (French truck toll, awarded to competitor Autostrade Tech in partnership with….. Thalès and Kapsch!). GNSS is used by all truck toll systems currently in operations in Europe. I really don’t believe that “GNSS technology is really just a chip that any toll system provider can buy and integrate into their own systems”. A GNSS badge costs €150, a DSRC badge costs €20. Kapsch spends about €60M in R&D every year, or 11% of sales. GEA cannot develop a DSRC badge, so I believe GNSS is even further away.

        3) Contrary to Kapsch and Q Free, GEA is totally absent from ANPR. So, I believe they are a marginal player (antennas) in DSRC, and not a player at all in GNSS and ANPR, hence my conviction that they are not tooled to effectively compete in the Free Flow market, which is where I believe the future is.

        Contrary to Kapsch and Q Free, GEA does not have the in house DSRC / GNSS / ALPR technology and therefore would need to integrate competitors’ hardware if they were to do a free flow system. There were essentially out of the only free flow project in their home market, Ecomouv (which was maybe not so bad given where that project is right now!). I have not seen GEA bidding / doing any significant Free Flow project. Kazakhstan was a some sort of a hybrid system where you pay at a toll plaza when you exit the highway. Please let me know if you can find one, I would be very interested.

        Posted by Stelaris Capital | September 3, 2014, 6:46 pm
  2. Wow. Extremely comprehensive analysis. Thank you.

    I have a question about the Buffet-test. How did you calculate the incremental market value generated by retained earnings? Did you multiply retained earnings with the Price-Book ratio? In this case, the average number you present (1.92) is then some average of PB ratios over time?

    Posted by Lupo Lupus | August 30, 2014, 2:55 am

Trackbacks/Pingbacks

  1. Pingback: The Second Investment | Independent Value - June 10, 2014

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