Mike Kruger of MPK Partners presented his investment thesis on Ströer SE & Co KGaA (Germany: SAX) at Best Ideas 2023.

Thesis summary:

Ströer is the sixth-largest out-of-home (OOH) advertising company in the world. The stock sits near the bottom of comps as measured by forward EV/EBITDA multiples (7.2x) and FCF yields (8%). This does not make sense, and the shares are cheaper than implied by the headline multiples.

It is true that German market multiples are lower than those in the U.S., but this does not fully explain it. Ströer is a family-controlled business, they take the long view, performance has been very good, and they return lots of capital via dividends and buybacks. The company is a bit unusual given that about one-third of FCF comes from non-OOH business, mostly related to online advertising. There are many synergies with OOH and overall, these are growing mid-to-high-single-digits, with ~25% EBITDA margins and high FCF conversion since they are capital-light.

Ströer sold off more than peers in 2022, and Mike suspects the reason is due to technical selling pressure from Deutsche Telekom exiting its stake. Recession fears have investors worrying about ad budgets, but Ströer’s earnings declined far less during Covid than every peer except Lamar. This was due in part to their online segment, but also to a high mix of private leases and local advertisers.

FCF per share is set to grow much faster than peers, as the company is converting billboards to digital at an accelerating pace. Digital billboards are far more profitable. Germany began this process later than other countries, and there is a seven-year runway of growth ahead. Ströer has around 90% of the best locations locked-up, LED display prices are only going lower, and they should have no trouble funding this capex internally, even during a recession.

Last but certainly not least, Ströer has a couple of non-core assets that are only ~5% of earnings today, yet are arguably worth almost two-thirds of the current market cap, which would imply a 4.2x forward EBITDA multiple on the rest of the business — crazy when you consider that lower-quality peers like JCDecaux and Clear Channel Outdoor are priced in the low-to-mid teens. These assets are Asambeauty, which sells its own brand of beauty products (mostly) online, and Statista, a web-based portal for all manner of statistics. These are growing in the mid-to-high 20% range, with mature margins of ~20% and 35% respectively. Each will be sold or spun-out, likely in 2024 or 2025.

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About the instructor:

Mike Kruger’s first investment experience was watching his shares of Berkshire Hathaway get cut in half during the tech-mania of the late 1990’s. But he didn’t panic, and today manages a global focused value portfolio of equities and distressed debt in New York City. He previously worked as a former equity and credit analyst at Promethean Asset Management LLC in NYC, and prior to that as a high-yield credit analyst at Liberty Mutual in Boston. He holds a Bachelor’s degree from the College of Arts and Sciences at Cornell University.

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