PNE Wind and Francotyp-Postalia: Misunderstood and Neglected

Florian Schuhbauer presented his in-depth investment theses on PNE Wind (Germany: PNE3) and Francotyp-Postalia (Germany: FPH) at European Investing Summit 2017.

Florian’s firm, Active Ownership Capital, is the second-largest shareholder of PNE Wind and the largest shareholder of Francotyp-Postalia, including board membership at both companies. In accordance with the firm’s investment approach, Florian is actively working with management to drive value creation and results for shareholders.

PNE WIND is a leading wind farm developer, realizing and operating wind parks in Germany and abroad, both onshore (pipeline with nominal capacity of ~4,700 MW) and offshore (pipeline with nominal capacity of ~5,000 MW). It also provides operational management services, including commercial and technical operations management for ~1,500 MW. In energy production, PNE derives income from minority shares in wind parks. The company is active in fourteen countries and has 380+ employees. PNE recently sold 80% of a 142 MW portfolio of own wind parks to Allianz for ~€330 million (cash consideration of €103 million).

PNE has been “uninvestable” for most institutional investors due to a messy governance situation, bad track record in creating value for shareholders, and perceived share overhang. However, this is changing as Florian and other shareholders succeeded in replacing management and aligning the board with the new strategy for the business. The new CEO, Markus Lesser, is an experienced industry veteran who is operationally focused and can roll up his sleeves. Investors may be overly focused on operational headwinds, including the introduction of a tender process in Germany in 2017, which has led to substantially lower kw/h prices for wind. There has also been unfair competition from Bürgerwindparks, and the future regulatory regime is unclear as Germany transitions to a new governing coalition.

On the positive side, (i) corporate governance has improved, as three of six supervisory board members, including the chairman, changed at the annual meeting in 2017; (ii) small players are likely to be put out of business due to a lack of scale, such that small service portfolios may be acquired at distressed prices; (iii) the levelized cost of energy may fall by another 30+% in the coming years, driven by turbine efficiencies and reduced production costs; (iv) substantial cost improvement potential may be unlocked by PNE in both capex and opex (purchasing and standardization); and (v) continued low interest rates and abundant financing support the business turnaround. Florian believes that investors substantially underestimate the earnings power of PNE due to the volatile nature of the business.

The shares recently traded at five-year average EV/EBIT of 5.4x and P/E ratio of 8.6, a substantial discount to peers. Florian expects PNE to generate similar average EBIT over the next five years (€30-35 million annually), but with a higher share of recurring earnings.

FRANCOTYP-POSTALIA (Germany: FPH) is a leading franking machine manufacturer, with global market share of 10% and 45% market share in its home market, Germany. Francotyp has an installed base of ~260,000 machines, of which ~100,000 are in Germany. Other key markets include the U.S., UK, France, Netherlands, Sweden, Austria, and Switzerland. Fourth-fifths of revenue is recurring, and barriers to entry are high due to postal regulation.

Florian views Francotyp as misunderstood, as investors mistakenly believe that (i) paper mail is dead; (ii) franking machines are no longer needed; and (iii) the company cannot keep growing the core business. The reality is that (i) 80+% of companies still use letter mail regularly, and paper production has grown from 130 million tons in 1970 to 440 million tons in 2015; (ii) franking machines in the large and medium mail volume segments are in decline, but the small mail volume segment (up to 200 letters per day) continues to grow at a low single digit rate; and (iii) Francotyp continues to grow revenue in the core business in the low single digits through consistent market share gains.

Florian expects the company to generate EBIT of €7.4 million in 2017, €10.5 million in 2018, and €12.8 million in 2019. The shares recently traded at 3.1x EV to 2017E EBITDA and 5.2x EV to operating FCF. Florian’s firm is the largest shareholder, and Florian’s partner Klaus Roehrig serves as chairman of the board.

About the instructor:

Florian Schuhbauer serves as managing partner of Active Ownership Capital. He has a strong track record of value creation in public companies. Before starting Active Ownership Capital in 2014, Florian was Partner at Triton Partners since 2010. Previously, Florian held top investment management and business operational positions at AVI/General Capital Group (Partner/Portfolio Manager), Deutsche Post World Net & DHL Global Mail (CFO & Executive VP), Newtron AG (Director Corporate Finance & Investor Relations) and Dresdner Bank / Dresdner Kleinwort Benson. At Active Ownership Fund, Florian is focused on making significant minority investments in a limited number of undervalued small and midcap companies in Northern Europe in order to increase their value through operational, strategic and governance improvements.

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