Made in Germany Special Report
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Deutsche Bank Markets Research Europe Periodical Date Germany 9 April 2013 Made in Germany Special Report Lars Slomka, DVFA Jan Rabe Strategist Strategist German SMEs: Investing in the sweet- (+49) 69 910-31942 (+49) 69 910-31813 spot of corporate Germany [email protected] [email protected] Benjamin Kohnke Uwe Schupp, CFA The purpose of this report is to help investors navigate the German small and Research Analyst Research Analyst medium-sized enterprise (SME) equity universe under Deutsche Bank (+49) 69 910-31943 (+49) 69 910-31955 coverage, with a market capitalisation up to E5bn. The investment case for [email protected] [email protected] German SMEs is highly attractive, in our view, and we recommend Compugroup, Duerr, LEG, MorphoSys, Schaltbau AG, Tom Tailor and United Value added growth among EU SMEs (2008-11) Internet as our key picks. We also screen German SMEs for investable themes and further highlight CTS Eventim, Draegerwerk AG, GEA and Wincor Nixdorf. Investment case: trends appear and vanish, but values persist (1) The structural case: Ten years ago, Germany was considered the “sick man of Europe”. Its economy was mired in recession, while the rest of Europe was recovering; its unemployment rate was higher than the Euro area average and was violating the European budget rules by running excessive deficits. A decade later, Germany is considered a role model for everyone else. One of the key strengths of the German economy is the significant economic value added by small and mid-cap enterprises (SMEs). The majority are family-owned, are often characterised by their concentration on profitable niche market segments or premium segments of mass markets, their technology-based product leadership as well as their close customer relationships. This profile helps them avoid head-to-head competition with global giants. (2) The fundamental case: Our analysis reveals that overall, German SMEs have a sounder financial base than their European peers, with less leverage, higher net interest cover and lower dependence on external financing. In addition, German SMEs generate higher returns on capital, despite a significantly lower level of investments in fixed assets, pointing towards higher capital efficiency. This combination of elements has enabled German SMEs to recover much more strongly from the 2008/09 economic downturn than most European SME peers (see top-right chart). A stronger top-line and more robust operating margins among German SMEs relative to European (ex Germany) peers translated into a superior EPS growth profile over the past decade, and we expect this trend to continue, in line with our analysts’ bottom-up estimates. German SMEs in aggregate trade at a 2014E P/E of 13.8x vs. European (ex Germany) peers at 12.2x – a discount to the 10-year structural premium (see pages 06-17). Investable screens: German SMEs reflected in a broad range of vantage points We focus on key investment themes, looking at German SMEs with a focus on family businesses, exporters, momentum plays and regional exposure. We have also prepared screens that could be of special interest to conservative, style and income investors (see pages 41-49). Due to the heterogeneous composition of Source: European Commission, Deutsche Bank individual business models within these themes, we recommend approaching them via selective stock-picking and highlight Buy-rated stocks with an intact German SME key picks business case and significant upside implied by our analysts target prices. In Price & DB Recommendation this regard, our top-down picks CTS Eventim, Draegerwerk AG, GEA and Wincor Nixdorf appear frequently and should be considered by investors interested in German SMEs (see Figure 1 on page 05 in the executive summary). Mcap Price TP Upside Company name Rec. (EUR bn) (EUR) (EUR) (%) Our key picks among German SMEs: “The Magnificent Seven” We provide an overview of the most important sectors among German listed Compugroup Buy 853 17.0 23.0 35 SMEs, i.e. Automobiles & Parts, Consumer & Retail, Mechanical Engineering, Duerr Buy 1,366 78.9 95.0 20 LEG Buy 2,148 40.6 48.5 20 Pharma & HC/Biotech, Real Estate and TMT (Technology, Media and Telcos) Morphosys Buy 714 31.0 43.0 39 (see pages 34-40). Our key bottom-up picks, which we believe are well Schaltbau Holding Buy 194 31.5 38.0 21 positioned to outperform the broader market, are: Compugroup, Duerr, LEG, Tom Tailor Buy 379 17.2 19.0 10 MorphoSys, Schaltbau AG, Tom Tailor and United Internet (see bottom right United Internet Buy 3,753 19.4 22.0 14 table and pages 19-33 for details). The basket offers 20% upside potential from current price levels and trades at a discount to the German SME universe based Source: Datastream, Deutsche Bank Estimates on average (median) 2014E P/E of 10.8x (10.1x). ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. 9 April 2013 Made in Germany Special Report Table Of Contents Executive summary .......................................................................... 3 Key findings ............................................................................................................................ 3 1 Introduction: trends appear and vanish, but values persist ...... 6 1.1 German SMEs: investing in the corporate sweet-spot ..................................................... 6 1.2 German SMEs’ innovation-driven competitiveness stands out in European comparison . 8 1.3 Technology and knowledge-intensity enable German SMEs to over-proportionally grow value-added ahead of European peers .................................................................................. 12 1.4 Financial structure and refinancing of German SMEs in European comparison: disarming a critical argument ................................................................................................................ 14 1.5 P&L review: superior EPS strength comes at a premium ............................................... 17 2 How to approach it ..................................................................... 19 2.1 German SME top picks: Our preferred Buy ideas ........................................................... 19 2.2 German SME sector focus: identifying the most relevant spots .................................... 34 2.3 Investable themes (top-down screenings) ...................................................................... 41 Appendix A ..................................................................................... 50 Market data chart book ......................................................................................................... 50 A.1 Key economic indicators ................................................................................................ 51 A.2 Performance ................................................................................................................... 52 A.3 Earnings .......................................................................................................................... 53 A.4 Consensus recommendation momentum ...................................................................... 54 A.5 Directors’ Dealings ......................................................................................................... 55 A.6 Traditional valuation ........................................................................................................ 56 A.7 Index agglomerations ..................................................................................................... 58 Appendix B ..................................................................................... 60 Q1 2013 reporting calendar .................................................................................................. 60 Appendix C ..................................................................................... 65 Companies mentioned list .................................................................................................... 65 Page 2 Deutsche Bank AG/London 9 April 2013 Made in Germany Special Report Executive summary Key findings The purpose of this report is to help investors navigate the German small and medium- sized enterprise (SME) equity universe under Deutsche Bank coverage, with a market capitalisation up to E5bn. Key elements of the report include a detailed investment case, stock ideas as well as investable themes and screenings. 1) German SMEs at the vanguard of innovation-driven businesses in Europe: Backed by a high share of the technology-intensive labour force, German SMEs tend to be the most innovative in Europe and enable the German economy to stand out in an international comparison. Characteristics attributable to listed German SMEs can be derived from “Mittelstand” companies, which are known for their concentration on profitable niche market segments and/or the premium segments of mass markets, their technology-based product leadership and their close customer relationships. Their long- term strategic business orientation supports the identification of these niches, thereby enabling the overall