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...
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. [...]
Muehlhan - The Business
- 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
- 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.
- 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.
- 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.
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:
- 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