Investment Thesis of Sebino SpA (SEB).
Sebino SpA, founded in Bergamo in 1979, is an Italian company active in the design, development and installation of fire and security systems. The Company integrates these activities with a 24/7 Remote Control and Maintenance Room service of technological parameters, managed by an external provider.
The company also owns a 100% stake in Sebino Fire Protection and Detection "Sebino Romania", which specialises in the design and construction of fire protection systems in Romania and neighbouring countries. In addition, Sebino Service Srl (ex Riccardi Srl) specialises in the maintenance of security and fire prevention systems, a high-margin segment which still accounts for a low percentage of the company's annual sales.
In 1979 Marcó Cadei, Gianluigi Mussinelli's cousin and current CEO of the company, founded Sebino Srl, a company specialised in the development, design and installation of fire protection systems for industrial and civil buildings.
In 2009, the Company started its internationalisation process by establishing a subsidiary in Romania called Sebino Fire Protection (Romania), with the aim of developing the business in Eastern Europe. To date, the Company has two offices in Romania: one in Bucharest and one in Timisoara.
In 2014, the Company started its external expansion process through the acquisition of Protector Impianti Antincendio SaS with the aim of strengthening the Company's know-how in the fire extinguishing sector and, in particular, maintenance activities.
In 2016, the external growth process was consolidated with the acquisition of SBS Security System Srl, in order to expand its market share in the segment. security.
In 2018, the Company also completed the acquisition of 50% of the shares held by Leo Holding in Sebino Romania, becoming its sole shareholder.
In 2020, Sebino SpA starts trading on the Italian stock exchange, with the aim of finding financial resources to accelerate its growth and development path.
In addition, in the same year, Sebino SpA completes the acquisition of the entire business managed by the company Riccardi Srl, a historical company that has been operating for over 30 years in the maintenance of fire-fighting systems and equipment. Following the acquisition, it changes its name to Sebino Service Srl.
Finally, although not part of the company's history, I would like to point out as an important event the Covid 19 pandemic and how it affected the business mainly between March and April 2020.
The biggest impact on the Company was the stoppage of ongoing works for the installation of fire prevention systems. Maintenance activities continued regularly throughout the month of April and commercial and administrative activities, for their part, continued in telework, thanks to their structural flexibility in terms of installation costs, mainly carried out by external installers.
1.2 Business lines
Business unit dedicated to the design, construction and testing of fire-fighting systems, through the following range of products:
Water mist systems.
Automatic Co2 systems.
The process followed by the company is detailed below.
Source: Sebino SpA
It should be noted that production is almost entirely outsourced, with a strong prefabrication system based on digital design shared directly with the supplier, which ultimately allows to shorten the on-site installation time.
The Company performs in-house only a few key critical productions such as: threading without material removal, which allows for a mechanically stronger and more reliable product; calendering of some tubes, to meet individual customer needs and reduce the risk of leakage. Meanwhile, they subcontract the purchase of products, including prefabricated pipes, sprinklers, pumps and water reservoirs. The products manufactured by the suppliers arrive directly at the project implementation site, which is mostly carried out by external fitters.
The final phase of the process is represented by "Testing and Training", an area related to the team in charge of plant management. This phase is carried out by Sebino's specialised team. The whole project has a variable duration, generally between 3 and 12 months, depending on the complexity.
Unit dedicated to the Design and Installation of Tailor-Made surveillance systems, suitable for different customer needs in terms of systems and components. The company's product range includes:
The average duration of projects in this business unit is one month.
Business unit dedicated to the ordinary and extraordinary maintenance of fire and security systems, in order to guarantee their correct operation and to intervene promptly in the event of sudden system failures. The Company offers a monitoring service of technological parameters through a Control Room, which guarantees high safety standards with a 24/7 service.
The frequency of interventions, in the case of fire protection, is imposed by specific regulations characterised by a different periodicity (up to 6 months). On the other hand, in the case of routine maintenance of security systems, there is no obligation set out by regulation.
Together with a partner, the Group has developed a platform for technological plant control signals via a control room, which allows the operator to visualise anomalies in real time and to act directly on the systems.
The service includes the centralisation of the installations provided to the customer, so that an operator can manage each anomaly by reading graphic maps that reproduce the position and type of each installed component.
In the area of extraordinary maintenance (fire and security systems), the Company guarantees 24/7 availability through operators who organise interventions according to the problems and emergencies indicated by customers. To achieve this goal, Sebino Antincendio has vans equipped with operational equipment and common spare parts to carry out the interventions.
1.3. Evolution of Revenues by Business Line
Source: Sebino, own elaboration.
In terms of revenues generated, the main line of business is the "Fire" line, with a share equal to 83% of the total. Next, the Security and Service lines generated a 6% and 11% share respectively of total revenues (I would like to emphasise that this service segment produces recurring revenues from the maintenance of its previous installations).
In terms of the annual variation of the revenues of each segment since 2017, we find:
1. BU Fire: Revenues in 2017 were 26 million and increased to 33.02 million in 2018, an increase in annual terms of 27%. As for 2019, revenues stood at 36.50 million, up 11% Y/Y.
Finally, in 2020, revenue from the company's Fire unit reported organic revenue of 40.58 million, up 10% Y/Y.
In the market analysis, I will assess and justify the outlook for this segment going forward on an extended basis, however, I advance that a CAGR of 7.6% is expected through 2024. This, together with the historical development of the company and its prospects, leads to the conclusion that a growth of around 8-10% is very likely for the next 5 years.
2. BU Security: the revenues of the security segment were in 2017 1.86 million, increasing in 2018 by 14% Y/Y to 2.11 million. During 2019 this revenue slowed down, reaching sales of 2 million. The company stated (2019 annual report) that this stagnation was mainly due to a greater difficulty in commercial and dimensional development, which was corrected in the following year, where the better balance between both business lines: the core business and the security business can be highlighted. The company achieved cross-sales in almost 50% of the "Fire" orders.
In 2020, organic revenues of this business unit stood at 3.1 million, 55% Y/Y. Finally, as with the "Fire" segment, a positive total compound annual growth rate of around 10.3% is expected in the sector in the coming years.
3. BU Service: The Service segment is the company's most profitable segment and the one on which the company wants to continue to focus. This is demonstrated by the recent acquisition of the entire business managed by the company Riccardi SRL of Casale Monferrato (AL), a historic company operating in the market for the maintenance of fire protection systems and equipment, with offices also in Veneto, Sardinia and Lazio.
In 2017 revenue was 0.77 million, remaining virtually unchanged in 2018 where revenue of 0.72 million was recorded. From 2019 onwards, there is a notable momentum of the company seeking to boost this business unit, reaching €1.15 million, which is 60% Y/Y. The year 2020 affected by the integration, revenues were 5.37 million, a large part as mentioned inorganic by M & A operations.
Finally, to conclude this section, the following table groups the revenues by category of activity and shows that the contribution of Sebino Romania to the total revenues was 13.2%.
Source: Sebino, own elaboration
1.4. EBITDA Margin Evolution by business line
As can be seen in the graph extracted from the company's reports, Sebino's growth lies not only in its ability to generate revenue, but also in its potential to increase its EBITDA margin from 8% in 2016 to 23% today. This is mainly due to:
The lower incidence of fixed costs, the main effect of the increase in turnover through the development of economies of scale.
Decreasing trend in the costs of raw materials and semi-finished products.
Costs of services and outsourcing, compared to the value of operational production, which decreased from 70.87% to 62.23%.
Agreements signed with the main suppliers.
The service segment is the one with the highest EBITDA margins with 27.3% in 2019. For 2020 this margin was slightly reduced by the integration of Riccardi, where margins were lower than Sebino alone. So it is to be expected that after synergies the 2019 margins will be reached again and even exceeded.
The second largest segment in terms of EBITDA margins is security with margins close to 27.5% in 2020.
Finally, the Fire unit, the company's core business, achieved EBITDA margins of 14.9% in 2019 and around 18.5% in 2020.
Note: EBITDA adjustments are attributable to non-recurring items, revenue and EBITDA margin projections are analysed in the section (Business Plan).
1.5. Main customers
In this section, we will learn about the company's main customers and what weighting on revenues the top 5 and 10 customers represent.
Sebino's main customers include both the main contractor and multinationals operating in various sectors (logistics, chemical industry, food, fashion and luxury). In particular, the Company interacts with intermediaries who then work for a wide range of end customers, including some important multinationals, such as: Decathlon, Amazon, Lamborghini, Zalando and Michelin on the Italian market, Pirelli, Ikea and, since 2020, Mercedes-Benz on the Romanian market.
These customers, as can be seen, are large companies that tend to generate a large volume of orders, which is why around 75% of the company's revenue is distributed among the top 5 customers and around 87% among 10 customers.
It may seem that the company has its orders highly concentrated in a few companies but, as I have pointed out, these are customers who generate large orders and who, because of their year after year relationship with Sebino, see the company as an essential part of the development of fire and security systems.
1.6. Shareholders and Management Team
The share capital of Sebino SpA amounts to 1,337,276.9 euros, consisting of 13,372,769 ordinary shares, with no par value. The following table illustrates the composition of the shareholding structure:
Source: Sebino, own elaboration
The main shareholder, Nexus I. srl (45.59%), is 100% owned by Leo Holding, a Swiss company active since 2001 with diversified activities headed by Mr. Gianluigi Mussinelli 100%. In addition, Gianluigi holds the position of Chief Executive Officer of the Company, who from 2000 to 2005 held the position of Regional Manager Elaspan EMEA and South Asia at Dupont Invista SaRL in Milan, later, for the same company, he was commercial director of Lycra EMEA and South Asia. He then worked as an external consultant at Lycra EMEA and South Asia.
The Cadei family, founder with Marco Cadei, of Sebino Antiincendio in 1982, owns 36.12% of the shares, equally divided between Elena Cadei, Giacomina Cadei, Lucia Cadei and Maria Luisa Cadei. Sisters of the founder Marco and cousins of Gianluigi Mussinelli. This part of the shareholding has no operational functions in Sebino SpA.
Giovanni Romagnoni (4.3%), holds the position of Chief Financial Officer and Investor Rapporteur of the Company. From 1990-1999 he held the position of CFO at Fininvest, from 2005 to 2007 he held the position of Group Treasurer at FIAMM SpA, then he was CFO of the Fini Group of Modena from 2008 to 2010. From 2010 to 2013 he was manager of Ivri SpA and since 2015 he has held the position of CFO of Eredi Gnutti Metalli SpA.
Analysing the current distribution of the company's shareholding, we can observe an aligned management team, with a broad professional background and incentive within the company, or as Warren Buffet would say, a management team attributable to the term "skin in the game''.
1.7. Price Evolution
Source: Google Finance
Since its IPO, Sebino SpA has generated a lot of value for its shareholders, achieving a cumulative return of 159.09% in only 15 months. This return may be attributable to the limited analyst monitoring of this type of small-cap companies. In which market inefficiencies occur, resulting in attractive valuations.
2. Market Analysis
This section will be divided into two parts, on the one hand I will analyse the overall market expectations for the fire sector and then for the security sector.
As far as the maintenance segment is concerned, growth will be a consequence of the previous segments and their good coordination and strategy.
2.1. Fire Protection Market
Source: Sebino, Reportlinker
The global fire systems market was valued at $57.3 billion in 2018 and this is expected to grow at a CAGR (2018; 2024) of 7.6% to reach $88.9 billion by 2024. The key growth drivers of the market are:
Stricter government regulations.
Modernisation of building and construction technology.
Development of wireless technology for fire systems.
Construction of new buildings requiring protection systems.
High reputational and criminal risks in cases of accidents and plant non-compliance.
Most of the global turnover comes from the North American market, which generates around 35% of total revenues. This is followed by Europe and Asia, which respectively generate 25% and 22% of the total.
On the other hand, the fire suppression system is mainly used in the commercial sector with 45% of sales, followed by the industrial sector with 35% and finally the residential sector with 20% of sales.
The maintenance and service segment is directly linked to the fire protection market, as current regulations require routine checks within the well-defined time frames of the plant.
2.2. Security Market
Source: Sebino, Reportlinker
The global security systems market, valued at $84.5 billion in 2018, is expected to reach $151.5 billion by 2024 at a CAGR (2018; 2024) of 10.3% growth primarily driven by the North America market, which is expected to reach a market value of $53.1 billion by 2024.
The key global growth drivers are:
Resulting government regulations.
Increasing number of infrastructure around the world, which has resulted in higher demand for security systems.
Increased use of cameras in various locations, such as airports, train stations and ports, for security reasons.
2.3. Competitive Advantages of Sebino SpA
Customer loyalty: the company has an extensive reputation in the sector, thanks to the years of experience it has accumulated. This has resulted in Sebino's main clients being leading companies in different sectors with recurring orders due to the volume of new work they are developing, a clear example being companies such as Amazon and the automotive sector. On the other hand, Sebino supports its clients in all phases of the process, even when some of these are developed in foreign markets.
Ability to acquire and integrate companies efficiently: Sebino's management team has demonstrated the ability to execute M & A transactions that add value for the company, achieving good synergies and quickly optimising the acquired companies.
Alignment between all business units: sales of the company's "Fire" segment are complemented by 50% cross-sales from the security unit. This provides a competitive advantage for Sebino, as the sector is quite fragmented and if they manage to unify services they will be able to deal with larger and more complex orders.
Subcontracting of production activity: Sebino, as I have explained throughout this thesis, subcontracts a large part of its production activity, which is why it has agreements with its suppliers, which allows for flexibility in its processes, focusing Sebino's efforts on technological advances and investments in I+D.
2.4. Main Risks of Investing in the Company
Market liquidity: Sebino has a capitalisation of 90.848.880 million euros at the time of this thesis, being the average trading volume quite low, so the company is illiquid and can present larger oscillations in periods of high volumes. On the other hand, with the current volume and capitalisation, the possibility of entry of investment funds is low.
Bargaining power and dependence on the Italian market: Sebino's bargaining power remains limited vis-à-vis large customers, and turnover depends mainly on the start-up of new projects, mostly in the Italian market.
M & A risks: the company, as I have mentioned, owes much of its growth to acquisitions of other companies, which are integrated into the group and optimised, however, this type of activity always presents a latent risk that must be taken into consideration.
3. Business Plan
In this section, I will set out my estimates for the period 2021-2025 in order to project the company's financial statements and derive the intrinsic value of the company.
3.1. Estimates 2021 - 2025
For the coming years, I expect an increase in production slightly above the industry average (7.6% for the "Fire" segment and 10.3% in "Security"). Regarding the service unit's revenues, I expect growth in line with the other business lines and an increased ability to contribute recurring revenues to the company.
Because of this, I have decided to project the company's financial statements in two different scenarios, which I will call from now on "Normal Scenario" and "Unfavourable Scenario".
Revenues will increase by 11% p.a. until 2025, resulting from a higher market share, which in 2020 for the core fire business was around 30% in Italy.
The EBITDA margin, which has increased significantly from 8% in 2016 to 22.8% in 2020, I estimate that it can be maintained for the coming years, due to a lower incidence of fixed costs and economies of scale. I estimate that the EBITDA margin can increase to 23.25% in 2025.
Sebino's debt is as follows, long-term debt of 9.24 million, short-term debt of 0.92 million, and cash on hand of 11.8 million euros. In other words, net cash of €1.64m and with expectations of continuing to increase year on year.
In the coming months, if the company continues on its path of carrying out M&A operations, it could use available cash in addition to financial debt, so in this scenario we will maintain financial expenses in line with recent years.
The EBITDA to FCF conversion has been 45% in 2020 and could increase to 50% in 2025.
For the calculation of the EBIT margin, it is important to note that in recent years the company has implemented a system of staff incentives through a social welfare fund, with an annual provision proportional to the net profit for the year.
In terms of Capex, I expect investments mainly related to equipment and R&D for the security business unit and related software and ISO-type certifications. At the expansion level, the company maintains its vision to continue M&A operations.
Dividend payments can continue to be maintained at around 50% of profits generated.
In this scenario, the aspects that will change in my model will be revenue growth and EBITDA margins. In addition, the interest payment tends to 0 because the company would not need to take on debt.
Revenues will grow by 8.5% per year until 2025, assuming that the company's market share remains the same or decreases slightly and revenues follow the expected market line.
EBITDA margin, to be conservative, I will consider that they cannot remain at around 23% and instead remain in a range of around 19-21%.
3.2. 2021-2025 Projections
3.3. Valuation by Multiples
Sebino's comparable companies are listed below, all of which are larger capitalisation companies, therefore a discount for illiquidity will be applied when applying multiples to obtain the intrinsic value.
Marlowe PLC (UK) is a UK leader in specialist services that ensure safety and compliance, while the company manages specific risks for companies. It focuses on: health and safety, labour and employment compliance, fire safety, water safety, water treatment, air quality and environmental services. Marlowe currently services over 15% of the UK's commercial premises.
The Per Forward of this company is very demanding at present (above 50x), due to a very high revenue forecast, which has not yet materialised in the company's profits. Because of this, it seems more prudent to use the EV / EBITDA in this company, which would trade at 2021 at about 16x and a historical average of 15x.
Johnson Controls International Plc (USA) is actively involved in supplying a wide range of products. The Company's services include: fire systems, security, HVAC, energy solutions. They deal with: large commercial buildings, retail, industrial buildings, small businesses and residences. The company was founded in 1885 and is based in Cork, Ireland.
The company currently trades at a Per Forward 2021 of 28x, with a historical average of 23x.
The 2021 EV/EBITDA multiple is trading at 16x, with a historical average of 12x.
ADT Inc. (US) provides security, interactive and commercial home automation and related monitoring services. It offers a range of burglar, video, access control, fire and smoke alarm, and medical alarm solutions for residential, commercial, and multi-site customers. The company was founded in May 2015 and is headquartered in Boca Raton, Florida.
ADT, a lower quality company than those named above, its revenues have slowed in recent years, so earnings have contracted to a slightly negative level, the company trades at EV/EBITDA 2021 of 7.3x its historical average of 7x.
Due to the above data, I estimate an average of 12x EV/EBITDA in the sector, however as I mentioned Sebino is a company with very low liquidity in the market, so I will apply a discount on the multiple of 25% in the normal scenario and 30% in the unfavourable scenario, resulting in multiples of 9x and 8x times respectively. Sebino currently trades at 8x EV/EBITDA in 2020.
Regarding the P/E ratio, being prudent I will apply a multiple of 15x in the normal scenario and 12x in the unfavourable scenario.
Valuation of Sebino SpA by Scenarios
* Figures in M€ except (EPS)
** At the time of this valuation, Sebino was trading at EUR 6,84.
* FCF calculated from:
After analysing Sebino in depth, I can affirm that we are facing a high quality company, with a remarkable leadership position in Italy and with good projections for Romania, in addition the company has an aligned management team, which provides greater peace of mind for shareholders.
The company's sales have increased organically by slightly more than 10% Y/Y, but with a soaring EBITDA margin in recent years, highlighting the company's strategy of seeking good acquisitions, integrating and optimising them efficiently, leading to an increasing positioning of the company in this rather fragmented market.
The services unit presents recurring income for the company and with very high margins, however it still does not represent a notable percentage of sales, we will have to closely follow the evolution of this unit and the strategies that the company follows to enhance its development.
Regarding the valuation, I believe that both scenarios provide value for the shareholder, where in a normal scenario where double digit annualised returns can be obtained.
* The Investment Thesis of Sebino SpA, was published on this website on 09/05/2021, and in case of needing an update For publications of company results or notable events in the sector, a direct link will be left at the end of this thesis.
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