May 16, 2021

Is Muehlan hiding a promising renewable energy treasure?

Even inveterate fans of German small caps are not necessarily familiar with the Muehlhan Group (XTRA: M4N). First of all, the market cap of ca. 50m EUR is not only tiny but also limited in liquidity, as more than 50% of the shares are still held by related parties of the founder Wulf-Dieter Greverath and the current management. In addition, as a cyclical industrial services provider, the company is not a safe bet for e.g. dividend investors. Moreover, a significant part of the business is related to the oil & gas business (especially offshore), which is why the share was excluded from the outset by many - be it for ESG criteria or fear of the volatility of the oil price. However, that is something that is changing right now and hence I decided to dive a little deeper into the business... 

Why bother?

As mentioned before, Muehlhan is currently shifting some priorities. In fact, the company came out on January 27, 2021 with a press release stating that they are planning to sell the oil and gas activities and that they have already mandated an investment bank. While the timing to sell such assets might not be perfect right now, it could definitely be worse in the last 12 months. Here's the full press release:

Hamburg, January 27, 2021—As part of a strategic review of its business segments, the Muehlhan Group (Muehlhan AG; Open Market; ISIN DE000A0KD0F7) is planning to sell its oil and gas activities. In the future, the company will focus exclusively on business segments in which the Group holds a market-leading position. This includes the offshore wind power segment, which is experiencing dynamic growth, the vessel market and the infrastructure business. Muehlhan will use the resources freed up by the sale to further expand its market position in these areas. [...]

After reading the press release for a second time, I tumbled about the last sentence. What, if that is more than just a general phrase? Let's have a closer look at the business operations of Muehlhan.

Muehlhan - The Business 

In general, the Hamburg-based industrial service provider does everything related to corrosion protection, fire protection, hot and cold insulation, access technology, steel construction, and scaffolding. The business is divided into four operating segments:
  1. Oil & Gas – 23% Rev.-Share (2020), 0.5% EBIT-Margin: Muehlhan is active both in offshore and downstream Oil & Gas, providing construction activities for oil drilling platforms and refineries, LNG plants, and tank farms => This is the business up for sale
  2. Ship – 25% Rev.-Share, 5.5% EBIT-Margin: Within the maritime division, Muehlhan provides surface corrosion protection for both new shipbuilding and repairs and is also active in scaffolding.
  3. Industry & Infrastructure – 27% Rev.-Share, (6.0%) EBIT-Margin: In the industrial segment, Muehlhan is mainly active in thermal, cryogenic, and acoustic insulation as well as in steel construction, passive fire protection, and also in related training, engineering and inspection services.
  4. Renewables – 24% Rev.-Share, 9.6% EBIT-Margin: The renewables segment consists mainly of Muehlhan Wind Service, a leading full-scope contractor and supplier of wind turbine technicians as well as Installation- and Service solutions. The activities of the company are in the field of mechanical works, painting and surface treatment, blade works, and electrical and high voltage works.

Historically, the firm has its roots in the shipping business. In recent years, the shipping industry went through a wild ride and tried to cut down costs wherever possible. Yet, Muehlhans services are quite essential to maintain a ship in good shape (and often also mandatory due to various regulations). Still, this seems not to the place to invest further capital to.

For industrial customers, Muehlan mainly provides surface protection for bridges or plants in the chemical sector, but also scaffolding, insulation, passive fire protection, enclosure services as well as steel construction. As a result of the corona pandemic, many projects in this segment were postponed and Muehlhan was left with many costs, as the catastrophic EBIT-margin in the last fiscal year shows. While this business was historically also very much related to the maritime sector, Muehlhan managed to broaden its reach. Yet, I do not think that this is the area where a lot of capital can be deployed wisely.

This leads us to the last segments: Renewables. Muehlhan has shown some impressive growth within this division over the last years, both due to strong organic initiatives but most importantly the smart move to start Muehlhan Wind Services A/S. Muehlhan Wind has been the main driver over the last years and we will look closer into that soon.

Historical Financials

The historical ship business had been under pressure for years and the just-finished industry consolidation may take another round after the covid crisis. The management of Muehlhan thus moved early to other industries, first into the Oil & Gas business but later also more into the Industry & Infrastructure segment. However, it was not until 2017 as the firm started to put more focus on renewable energy - in particular, offshore wind - and started to report it as an individual segment.


Once the start was made, the revenue share of the renewables business increased rapidly. If we adjust for the Oil & Gas business (as most of it may be sold soon), the share of the revenue within the Muehlhan Group is even more remarkable. 

In terms of profitability, the oil business brought some major losses within the years of the global financial crisis. Yet, in the last couple of years, the segment provided nice cash flow to fund the ramp-up of the Renewables business. For the maritime segment, Muehlhan did a decent job and turned it around with a focus on more profitable projects. However, the industrial segment did not earn a solid margin within the last year, even though the economy did very well. Hence, it is no surprise, that in 2020 the EBIT turned negative again. 

The first observation is obvious: The business of Muehlhan is - as expected - not very stable and depends very much on the investment budgets of their customers. Yet, they managed to stabilize the margin both in Ship and Oil & Gas. Thus, we can already conclude some preliminary results. The surprising move out of Oil & Gas may not be due to bad performances in recent years. However, it still makes sense, given that Muehlhan did not reach a critical mass within the oil-producing regions in the North Sea. Also, both capital and management's attention are better allocated towards the renewables segment. Hence, I will focus on the prospects and opportunities of Muehlhan in that market.

Muehlhan Wind Services - Is the Growth Star getting profitable? 

When Muehlhan carved out the Renewables segment in 2014 out of the former Energy segment (both Renewables and Oil & Gas combined), it did not look like more than an accounting measure. Yet the company had just pointed out that they want to invest heavily into that segment and make a profitable business out of it. They did this both by establishing a new site in Cuxhaven but also by setting up a company dedicated to the servicing of offshore wind turbines in collaboration with industry specialists: Muehlhan Wind Services (MWS). Muehlhan acquired only 51% of the company based in Middelfart, Denmark, which was a rather unique move, as the company usually holds 100% of the share capital of its subsidiaries. Yet, it might be exactly due to the ownership structure, that granted the historical success of MWS and the excellent current positioning.

Fast forward to 2020, a lot of things have changed. With the annual report published in April, Muehlan disclosed that they are now holding already 56% of MWS. Although I do not know for sure, I suspect that Muehlhan bought the stake of Mathias Eltved Justesen, one of the experienced wind power entrepreneurs with whom Muehlhan had originally started MWS. This leaves five people who, according to public sources, hold minority shares of 5-9.99% in MWS. Since they are likely to withdraw from the operating business in the next few years, Muehlhan could naturally be the first buyer to take over their shares and thus further strengthen the focus on this segment - in addition to investing in the operating business.

This division of Muehlhan has been particularly convincing in operational terms in recent years. The Last Twelve Month revenue is increasing steadily at a high single-digit growth rate compared to the previous LTM figures:

Also, in 2020 the company showed that they have reached a base where they can finally start earning healthy margins: 9.6%. While this extraordinary good result might be inflated by some covid-19 effects, it is evident that this business can yield significantly higher margins than the existing operations in Ship or Industry & Infrastructure. Still, MWS is heavily investing in its workforce, as the FTE development of the MWS A/S subsidiary shows:

A look at the LinkedIn page of Muelhan Wind reveals that the division as a whole (i.e. not only the Danish MWS A/S) already employs over 300 people and that the total headcount has grown 26% over the last six months. Furthermore, the latest posts indicate that this number is to be expanded further at a high speed. This leads logically to the question as to what the new employees are needed and whether the development of the past can still be accelerated with them.

Muelhan offers its services as a full-service provider to both manufacturers of wind turbines and operators of offshore wind farms. In the recent past, the focus has been on expanding the maintenance business in order to reduce the dependency on the more volatile offshore new construction business. The majority of the installation and service business is carried out through the subsidiary MWS A/S, which has its main activity in the overall service and maintenance of wind turbine generators. It is reasonable to assume that Muelhan might keep on investing heavily into this business segment. The expectations for new wind energy installations are high and the political environment with the European Green Deal and Biden's infrastructure plan could be another accelerator. The Global Wind Energy Council expects the new installed offshore capacity to grow from 6.6 GW in 2020 to 31.9 GW in 2030. They expect Europe to maintain steady growth while new installations outside Europe, predominantly from Asia and North America, are likely to surpass Europe in 2020 for the first time and continue exceeding volume in Europe through 2030. One of the most dynamic areas in the near term are China and Taiwan and Muehlan is currently expanding its Taipei footprint by hiring senior staff there.

Yet, the outlook for the European space - Muehlan's main business area - is still promising. Even though the industry has reached a mature stage, the power generated through offshore wind parks has become a cost-competitive source. The European Commission estimates that total offshore wind installations
between 240 and 450 GW will be needed by 2050, making offshore wind a crucial pillar in Europe’s power mix. Also, traditional energy companies like Enel, BP, Shell, or Total have announced large investments into wind and solar projects, while companies like Orsted have developed themselves into a Green-Energy pure-play company. Besides, the current investing environment with low yields and high equity valuations leads many institutional investors like pension funds to allocate capital towards specialized infrastructure funds. In summary, the market environment and outlook remain excellent and Muehlan has a very good chance of benefiting from this.


When analyzing situations like Muehlhan, one might be tempted to use a sum-of-the-part valuation and put adequate multiples on the different parts. Yet, I found it very difficult to come up with reasonable comparables for the different business segments. Therefore, I run a simplified DCF model with the following assumptions:
  • Ship segment turnover decrease by 4% p.a. while the margin can be maintained at around 9%
  • Oil & Gas is sold for nothing
  • Industry/Infrastructure margin is recovering not before 2023 and there is no catch-up effect for the recent turnover drop
  • In Renewables, the high growth rates can be maintained and 100m revenue are reached in 2023 while the margin ramps up to 8% in the steady-state
It is clearly evident that the case is almost solely built on the renewables segment while the other segments might yield to positive surprise. Yet my model (8% WACC, 2% g) computes an enterprise value of 116m which translates into 4.19€ per share. Of course, the valuation is sensitive to the assumptions made, but it certainly shows that the renewable energies business alone could soon be worth more than Muehlhan's current market capitalization. Once the sale of the O&G activities has been completed, this will become even more evident.

Summary & Outlook 

In conclusion, Muehlan represents a very interesting case in which success almost solely depends on their delivery of the ramp-up of the renewables segment. Given the track record shown in the past few years, I am confident that they will continue to succeed in that area. The natural catalyst for greater and changed attention for the company is, of course, the hopefully imminent final sale of the O&G activities. In addition to the failure of the O&G sale process, risks include problems with the minority shareholders in MWS and major, unexpected problems in the other areas. Nevertheless, I think that the last year has already shown something like a "worst-case" for the segments Ship and Infrastructure and it can only get better from here. Operationally, increasing competition in the service and maintenance business with wind turbines can also lead to falling prices or less favorable contracts. In addition, rising labor costs and the difficulty of finding enough qualified personnel are key risks. Yet I am confident that the current valuation of the company and the presented upside optionalities overcompensate for the risks. Given the attractive risk/reward ratio, I view Muehlan as an appealing investment opportunity for suitable investors who are not afraid of the special characteristics of micro-caps. Yet, if one intends to buy the share, one should also consider the low free float as well as the low liquidity and therefore order limited.

Disclaimer: I am long Muehlhan AG (XTRA:M4N).


March 21, 2021

Book Review: Jim Collins - Good to Great

Recently, I had been reading Jim Collins' Good to Great, which is an easy-to-read book based on a five-year scientific project. While it is logically seen before Built to Last, it is interesting to see that the study was done subsequently. Also as an investor, it is certainly always important to be able to recognize a great company (and to be able to assess whether it will remain so). However, it is much more exciting (and in case of success certainly more profitable) to invest in a company that is developing from a good company into a great one.

The Flywheel Concept

One of the most handy facts about the study is the fact that the whole result can be expressed in one framework: The Flywheel. Jim Collins and his team found that every studied company, that made the leap followed the processes described below:

Source: Good to Great, p. 12

  • Level 5 Leadership: Obviously, every great company needs great management. However, the usual picture of an extremely successful CEO is those of a self-confident, almost arrogant, and assertive manager. Nevertheless, the study found that transformation to great companies has always been led by so-called Level 5 leaders. They describe them as intelligent, self-effecting, quiet, and even reserved. None of the managers considered had the idea of attributing the company's success to themselves.
  • First Who ... Then What: Even more surprising is the founding that for great transformations vision and strategy came only second place. First and far more important was to get "the right people on the bus ... and into the right seat". Then the strategy almost takes care of itself. 
  • Confront the Brutal Facts (but yet never lose faith): All of the companies observed had their backs to the wall before their transformation and admitted this to themselves instead of looking for escape routes and appeasement. Nonetheless, they never lost faith that everything would work out in the end if they worked hard enough.
  • Simplicity excellently delivered: Just sticking what has always been core business is not enough. Good-to-great companies followed a Hedgehog Concept: They asked themselves always three important questions before taking any decision
    • What are we deeply passionate about?
    • What can we be the best in the world?
    • What drives our economic engine? 
  • Hence, they did not only strive for a higher purpose (think of Disney trying to make families happy), because they knew, once they achieve that purpose, the profits gonna take care of themselves. Also, they knew their one (!) and only economic value driver (like profit per employee, profit per customer, profit per ton of finished steel, profit per local population, ... ) and did not base decision on standard industry benchmarks. Finally, they knew what is the field in which they can achieve outstanding performance. Only when those three circles intersect each other, the company can make the leap.
  • Culture of Discipline: Many companies made it until that point, but only a few lasted till the end of the journey. Great companies have an intrinsically anchored culture of disciple and hence do not need bureaucracy, hierarchy, and control mechanisms. Disciplined and driven people keep the flywheel going.
  • Technology is an Accelerator, but not an Enabler: Technology did never start a transformation toward greatness. Yet, good-to-great companies used carefully selected technologies as a first mover, well before the competitors thought about making huge investments into them.  
  • The Flywheel and the Doom Loop: No matter how dramatic the final transformation of the companies were, none of them entered those with big announcements. The goal can only be reached with uncountable, small, and incremental steps that accelerate each other.

Recommendation and Learnings

Overall, the book is an easy and interesting read. Nothing of it remembers of a boring scientific study. Yet, the reader finds herself as part of the research team and can truly comprehend the developments toward the just presented flywheel. Although the book was published in the early 2000s, it has not lost any of its importance today. Certainly, I will try to implement the Flywheel process within my investment research process. Especially when attempting to evaluate management (and their bold visions), the concept should be a very helpful tool. I recommend the book to anyone who wants to understand the exciting underlying factors of highly successful corporate transformations.

February 23, 2021

Will Schalke 04 stay alive until the next summer?

The performance of Schalke 04 in the German football league has been incredibly unsatisfying during this season. Hence, it wouldn't be a big surprise to see Schalke dropping out of the first league after this season. Obviously, a relegation from the first league would have major effects on the long-term financials of the club. However, I came across the fact that Schalke has a bond outstanding that is already due in June 2021. And precisely this bond may present a great opportunity. In total, the Fussballclub Gelsenkirchen-Schalke 04 e.V. has bonds with a nominal value of EURm 50 outstanding, of which EURm 15.9 mature on July 7, 2021 and EURm 34.1 mature in 2023. Inexplicably, both the SCHALKE 04 ANL. 16/21 and the SCHALKE 04 ANL. 16/23 have very similar annual yields to maturity. That is something I simply cannot understand, as the risk profiles of those two bonds could not be more different from each other.

SCHALKE 16/21 - The Idea

As with every bond investment, the upside is capped while the downside can be quite significant. Hence, it is crucial to understand, what the key risk determents are. There are two major questions one has to figure out: Will Schalke make it until the end of July? And will they have available funding to pay back the EURm 15.9 due plus the last interest payment, i.e. a total of approx. 17 million euros?

To begin with, bear in mind that the first question is actually not related to whether Schalke may drop out of the Bundesliga or not. The financial impact from that will only roll in after the bond has been paid back. Also, the management of the club stated that the financial planning for the current season is secured and they do not expect any difficulties in obtaining the license for the next season (neither for the first nor for the second league). More importantly, the CFO stated that she is even "convinced that Schalke could [financially] manage a year" in the second league. While I would not underwrite that statement, we have to remember again that this is completely irrelevant to the maturity of our particular bond.

Yet, the second question is even more important for assessing the situation. To do so, we have to put the discussed bond into the context of the whole financing structure. Schalke has been highly levered for many years and reported total liabilities of EURm 205 per 30.06.2020. It is expected that the amount had further increased to EURm 240 per 31.12.2020 as the club obtained a state guarantee of EURm 40 during the second half of the year. The bond due therefore only represents a paltry 7% of the total debt.

Moreover, Schalke has recently shown that they can raise funding of this magnitude at relatively short notice. For extending some sponsoring contracts early, the club received a down payment of approximately EURm 6. In addition, the assets of the soccer club should be mentioned. With the debt-free Veltins Arena (a sell-and-lease-back might be possible), the valuable marketing and catering rights, and a possible sale of the eSports division (Sport1 estimates the value to around EURm 20), the club has still some final trump cards in its hand.

Summary: The bond appears to be securely covered

In summary, I think it is extremely unlikely that Schalke will not repay the bond due in July in full. The amount due of 17 million is simply too small. Rather, I am convinced that the sum was already budgeted for when the club applied for the state guarantee. For Schalke, but also for all other stakeholders, such as banks, sponsors, the city of Gelsenkirchen, and now also the state of North Rhine-Westphalia, there is simply too much at stake to let Schalke slide into insolvency because of a "lumpy" 17 million euros. Especially since the bankruptcy costs would probably be already higher than the amount due.
I am fairly certain that the bond maturing soon is simply being taken into the fold and only a few investors have compared the different risk profiles of the two outstanding bonds. In addition, the liquidity in the securities is extremely thin, which is why it is absolutely advisable to order with a limit.

Disclaimer: I am long SCHALKE 04 ANL. 16/21

February 21, 2021

What I've been reading this week...

February 20, 2021

What is actually a proper investment?

Recently, a friend of mine reached out to me and asked me if I would use Fibonacci numbers when analyzing investments. As I answered him that Fibonacci as well as every other technical analysis tool may have their relevance for traders and speculators but should not be mistaken with fundamental analysis for proper investments, he asked me to define "a proper investment" for him. As this - especially in times of booming stock market - is a very interesting topic, I decided to publish an article about it.

What is an investment for me?

Every intelligent investment has one characteristic: Buying some future expected cashflows or assets for less than they are intrinsically worth. The actual ownership of an asset - be it a property, a company, or just a tiny share in a company - is what makes a transaction into an investment.  It is not for nothing that Warren Buffett once said: "If you don't want to own a stock for 10 years, you shouldn't own it for 10 minutes!" All other approaches, whether momentum trading, charting, or even the simple tracking of broad markets via index funds and ETFs, on the other hand, are not approaches to investment for me. At their core, these concepts are actually a bet that there will be someone later who will buy my financial investment back from me at a higher price. This is not to say that these approaches are worse or less suitable. On the contrary, I am convinced that for the majority of retail investors, a savings plan in a simple, globally diversified equity index fund is an excellent idea. It is the easiest way to participate in the development of the global economy. But it is not a fundamental investment strategy.

Why is this particularly important right now?

Being aware of what you are doing in the markets is always crucial. But in times of liquidity glut of central banks, games stonks, and constantly new SPACs, it is even more important to remember how you want to act. Many newcomers to the financial market have been able to earn a lot of money very easily in recent years and months. However, only the first real setback will show them whether they are up to their own strategy. AndrĂ© Kostolany used to divide stock market investors into two groups: The hard-nosed and the shaky. I cannot answer definitively whether more shares are held by hard-nosed or shaky investors. What I can do, however, is to adjust my strategy so that I never become a shaky investor myself. 

My "PE-like" approach to public equities

Over the years, I have developed a "private equity"-like approach. This means that I only buy shares in companies if I would also buy the whole company. And I always ask myself whether I would also buy the share if I could only enter into the investment in an off-market transaction - and therefore could also not sell it again at any time. If an idea doesn't pass this hurdle, it can never become a serious investment for me. In my opinion, the constant monitoring of real-time prices is actually rather counterproductive. It is not only a waste of time but also leads to short-circuit reactions. For me, the stock exchange is just a marketplace. I only visit it when I intend to buy or sell something. It's a great tool for that - but you have to be careful not to get caught up in the constant offers and the sentiments that come with them. The common sense saying "Only go to the mall if you really intend to buy something" can be easily transferred to the stock exchange. I try to pay attention to the stock exchange only when a prime asset is offered there at a reduced price. And otherwise, I prefer to spend my time discovering these first-class assets.

February 18, 2021

Yet another value investing blog?!

Welcome to my recently started personal investing blog! While I had the idea of writing about my activities on the stock market for years, I never found the time (and probably also not the courage) to actually start pushing out some ideas.

Why am doing this?

I would like to start by explaining why I am starting this blog and what I want to get out of it. First of all, I like the idea of publishing my thoughts so that everyone will be able to see what my investing ideas are. Also, I found myself talking with mutual people about the same ideas, and hence a new blog post might be a good starting point for a conversation that bears fruit. Last and not least, I want to create some kind of investing diary for myself. The huge advantage of doing this online is the fact that this may help me to continue in difficult times. As I had been following some very good investment blogs for some years now, I have to admit that I enjoyed reading them the most during difficult times.

What can you expect?

I will write here irregularly about investment ideas. My goal is to build up a kind of sample portfolio or watchlist here over time. This will naturally be very similar to my private portfolio but does not necessarily have to be the same. So it will certainly also happen that I will write about companies that I find very interesting, but at a given valuation not attractive enough to buy. From an investment philosophy, I would most likely describe myself as a (modern) value investor. This means that I am basically always on the hunt for exceptional companies and try to acquire them at a discount to their intrinsic value. I will also discuss special situations from time to time. These include merger arbitrage situations, restructurings, distressed opportunities, and back-end situations. Finally, it may occasionally occur that I found myself being keen on wild and speculative ideas and I won't miss the joy of sharing those with you. 

What can't you expect?

There is one thing that you cannot expect to get here: Recommendations on how and where to invest! Everything I will do here is my personal opinion and my personal thoughts. None of this should be taken as investment research. Therefore here for the first time in all clarity: Please do your own research! I cannot, may not, and do not want to give recommendations for any investments. I will only reflect on my own thoughts here. What you make of it, is completely up to you. Therefore, I want neither congratulations for good "tips" nor any reproaches for bad "tips"!

Who am I?

That doesn't really matter, as I don't want to create any attention for my person here. Nevertheless, a few words about me. I've been actively involved in the world's capital markets since 2013 and have seen just about every investment philosophy and speculation once (and tried most of them myself). However, after far too many initial mistakes, since 2015 I've been doing mostly quality investing, which means that I've been trying to buy shares in outstanding companies. Over the years, I have developed more and more and now call myself a modern value investor. I still look for outstanding business models. However, I now also look beyond the end of my nose and invest primarily in small and unknown companies and no longer only in high-quality blue chips as I did in the beginning. I also pay much more attention to valuation. My investment philosophy is therefore very much concerned with risks (my definition of risk is the permanent loss of capital) and only then with possible profits. Yes, I want companies with exceptional growth prospects. But I like them, even more, when the market doesn't see them (and therefore doesn't price them in) and I can get them for free. I could go on and on about my investment role models, but that would go beyond the scope of this article (and might also provide an opportunity for a future post). Thank you so much for your time! And welcome to my blog!