Kissig’s small cap analysis on GESCO: The pearl divers of the German Mittelstand

In the magazine“Der Nebenwerte Investor” from Traderfox you will find regular analyses from me on German small caps. The magazine is paid and who would like to order it or one of the other of Traderfox, ▶ here to the overview. Subscribers receive the new articles, not only those written by me, directly after writing in advance in their email inbox and the magazine with all articles then appears every 14 days.For the readers of my blog, the whole thing also has a direct benefit: after publication of the magazine I may publish one of my analyses then also here. Many thanks for this to Simon Betschinger, founder and CEO of Traderfox.Article from “Der Nebenwerte Investor” Issue 05/2022 from 03/25/2022GESCO

: The pearl divers of the German Mittelstand

GESCO is an industrial holding company founded in 1989 with 11 subsidiaries. The portfolio companies operate with a strong focus on niche markets in which they have established leading market positions. They are “hidden champions” with technology leadership. The formerly formative but crisis-ridden automotive sector was divested, freeing up fresh resources for a new orientation. And the new strategy is paying off, as GESCO has been delivering successes non-stop ever since.

GESCO offers its shareholders access to leading companies in the technology-driven German SME sector. The companies have a successful history and are established players in their respective target markets, some are even global market leaders.

Acquisition strategy

As a long-term investor, GESCO acquires successful companies in three strategically attractive segments: Mechanical and Plant Engineering, Metal and Plastics Processing, and Electrical Engineering and Automation.

Acquisitions are primarily made as part of succession solutions, through management buy-outs (MBO) and management buy-ins (MBI), as well as in the case of group spin-offs. The acquisition targets must meet certain requirements: at least EUR 20 million in sales, a positive cash flow, a solid equity base, the headquarters must be in Germany and the company must have a convincing position in a niche market.

The companies in the network operate independently, but GESCO supports its subsidiaries in financing, administration and also at a strategic level.

Succession problems as an opportunity

The numerous unresolved succession issues in the German SME sector offer GESCO considerable potential for external growth. Companies are founded every day, but the transition within the family is becoming increasingly rare.

This is where GESCO comes in, as it does not act in the style of a financial investor, aiming for quick returns and resale as quickly as possible. Rather, it offers companies a “new home”.

Management participation as a guarantee of

success In the course of succession planning, the mostly new management participates in the company with 10% to 20%, depending on the size of the company. This decisive entrepreneurial component of the GESCO model ensures that interests are aligned: The management is just as long-term oriented as GESCO AG as the majority shareholder and thus also benefits directly from the company’s success. Internal growth through positive development of the subsidiaries is the twoite component in GESCO’s success model alongside the acquisition of further attractive subsidiaries.

Next Level strategyWith

its “Next Level” strategy, GESCO has initiated a comprehensive transformation of its business model. The strategy takes the hidden champion claim seriously and includes excellence programs to develop the Group’s medium-sized companies to the next level.

The aim is to position GESCO Group for the future, create added value at all levels and achieve above-average values in sales growth, margin and cash flow.

The portfolio architecture is of decisive importance in this context. In addition to the Dörrenberg Group, two other larger companies are to be established as new anchor holdings. This can be done through acquisitions or by further developing an existing company. In addition, a group of basic shareholdings will continue to make relevant contributions to sales and earnings. This makes the portfolio more balanced and resilient.

GESCO systematically and sustainably develops the Group companies into hidden champions. With programs for operational excellence, for the active development of market presence and product portfolio, and for sharpening management skills and corporate culture.

2020: The big upheaval

As part of the Next Level strategy, GESCO had successfully sold a group of six subsidiaries and closed its Mobility Technology segment in December 2020. In February 2021, the majority stake in VWH GmbH was also sold as part of a management buy-out.

The disposal of a large part of the previously 17 shareholdings also shook up the balance sheet considerably, but also created the scope to acquire new shareholdings in the established business areas. In addition, the Group’s net debt was reduced by around two thirds and provisions for pension obligations and leasing liabilities were significantly reduced.

3 Segments

Three companies are allocated to the Production Process Technology segment. The MAE Group is the world market leader in automatic levelers and wheel presses. Sommer & Strassburger GmbH & Co. KG manufactures process equipment, especially for the pharmaceutical, food, water technology and chemical industries. While GESCO holds 100% of the shares in these two companies, it only holds 90% in Kesel Group, which is active in the development and production of machine tools and clamping systems.

In 2020, the three companies generated combined sales of just over 54 million euros with 411 employees.

The Resources Technology segment also includes three subsidiaries. With sales of 152 million euros, Dörrenberg Group is by far the largest investment in the GESCO Group. It is involved in the production of and trade in tool steel, steel foundry, cast products as well as coating and hardening. GESCO holds a 90% stake here, while it holds 100% in the other two segment companies. SVT GmbH develops equipment for loading and unloading ships, tankers and tank wagons with liquid and gaseous substances. Pickhardt & Gerlach Group is a leading refiner of strip steel; it nickel-, copper-, brass- and galvanizes steel.

In 2020, the three companies, with 737 employees, brought it to a g

e combined sales of 226 million euros.

The third segment, Health Care and Infrastructure Technology, brings together six companies. The Setter Group produces paper and plastic rods for the hygiene and confectionery industries. Franz Funke Zerspanungstechnik GmbH & Co. KG manufactures turned parts from brass, aluminum and steel. W. Krömker GmbH is the European market leader for articulated crane systems and an innovation leader for the development and manufacture of high-quality products for medical technology and was acquired as the latest addition to the portfolio in June 2021. AstroPlast Kunststofftechnik GmbH & Co. KG develops and produces plastic injection molded parts. GESCO holds 100% in all companies, while the remaining two are 80% owned by GESCO. Haseke GmbH & Co. KG develops and produces support arms and building systems, and at Hubl GmbH everything revolves around the development, design, manufacture and assembly of machine cladding and frames, covers, housings and components made of stainless steel sheet.

In 2020, the segment generated sales of just under 137 million euros with 627 employees.

Brand new: INEX-solutions

The lineup is no longer entirely up-to-date, however, as GESCO announced on March 18 that it was combining two subsidiaries under the umbrella of a new holding company. The previous 12 subsidiaries have now become 11.

Initially, INEX-solutions GmbH, which was founded as a holding company, will be assigned the two stainless steel specialists Sommer & Strassburger GmbH & Co. KG and Hubl GmbH. The newly created stainless steel group primarily addresses the growth sectors of pharmaceuticals/biotech, semiconductors, food/water technology and chemicals. Growth drivers for these sectors are the growing and aging world population, increasing digitization and rising food demand.

All four industries are already addressed by S&S and Hubl in different weightings and processed in parallel. By bundling the application know-how of both companies, new solution possibilities for plants with extended scopes are created.

The now substantial size of the company also plays an important role, as many customers are significantly larger than S&S and Hubl alone and prefer a strong partner with extensive capacities. The attractive business area of INEX-solutions is to be strengthened both through organic growth and inorganically through the acquisition of suitable companies, thus further increasing customer attractiveness.

Record year 2021

GESCO had already presented preliminary figures for the past financial year 2021 a week earlier. And after raising its forecasts several times during the year, it was able to close 2021 as the most successful in the company’s history.

Despite a still challenging environment, consolidated sales in 2021 increased by 23% year-on-year to EUR 488 million (previous year: EUR 397 million). Consolidated net profit for the year rose disproportionately to sales by 361% to 26.9 million euros (previous year: 5.8 million euros).

The main reasons for the very good result in the 4th quarter were the realization of projects despite the supply bottlenecks and the positive effect of the profit and loss transfer agreement with the Setter Group on the tax rate.

In addition, the companies succeeded in reducing the considerable

hen price increases in materials are compensated by forward-looking price adjustments. In view of further price increases for raw materials and materials, GESCO Group’s proven pricing power is a sign of strength.

However, the significant improvement in the Group’s key figures in 2021 is also due to the progress made at the subsidiaries, not least as a result of the excellence programs introduced, which have now had a visible impact. Existing efficiency potential can therefore be increasingly leveraged at the individual companies and also in the Group as a whole.

Earnings per share from continuing operations were 2.48 euros (prior year: 0.54).

Attractive divid

ends Since the IPO on 24 March 1998, investors have been participating in the economic success of GESCO Group within the framework of a transparent and calculable dividend policy. Shareholders have received a distribution in every financial year up to 2020. In doing so, GESCO is guided by a ratio of around 20% to 60% of consolidated net income after minority interests.

However, in the wake of the Corona pandemic and the cost burden associated with the Group downsizing, GESCO had suspended the dividend for the 2020 financial year. However, it is to remain at this one-time suspension.

The company will provide information on the amount of the dividend, which will be proposed by the management to the Annual General Meeting in August 2022, on the occasion of the publication of the 2021 annual financial statements.

Bullcase vs. Bearcase

There is a lot going on at GESCO and most of it sounds promising. This makes the departure of CFO Kerstin Müller-Kirchhofs, who is leaving GESCO AG when her contract expires on April 22, all the sadder. The Executive Board and Supervisory Board paid tribute to her major contribution to the success of GESCO Group and the outgoing CFO confirmed that she was leaving the Group for “purely personal reasons”. The timing is well chosen here, as GESCO is in a better financial position than it has been for a long time, even though the Ukraine war is significantly disrupting global supply chains and has not gone unnoticed at GESCO. So far, however, the company has been able to master these additional hurdles very well.

GESCO focuses on budding and established market leaders with further development potential. The broad industry diversification acts as a safety cushion. On the other hand, it prevents the leveraging of synergy effects. In the development of its subsidiaries and in acquisitions, EGSCO is therefore paying more attention to closing the gaps and also generating further potential for the Group in this way. In doing so, GESCO follows the needs of its customers, as demonstrated by the merger of the two stainless steel specialists Sommer & Strassburger GmbH & Co. KG and Hubl GmbH into the new stainless steel group INEX-solutions GmbH. Further reinforcements through acquisitions are likely to be forthcoming here.

The GESCO companies have so far been able to pass on the enormous price increases for raw materials and supplies to their customers. This shows their pricing power due to their strong competitive positioning. Global supply chain disruptions have recently eased significantly. However, the Ukraine war is once again shaking things up in Europe in particular, and this is also presenting GESCO with new challenges. Nevertheless, the company appears to be well prepared for this as well.


e strategic realignment of GESCO Group is paying off. Even though the record result from 2021 was positively influenced by some one-off effects, GESCO continues to steer a successful course. As part of the Next Level strategy, efficiency potential is also increasingly being leveraged in the individual subsidiaries, thereby improving margins.

GESCO is therefore an attractive opportunity for shareholders to participate in the hidden champions of the German SME sector. With earnings per share of EUR 2.48 in 2021, the price-earnings ratio is below 10 and the share is trading below its book value. A constellation that is otherwise almost only found in problem companies with weak growth. GESCO was one of these for a few years, but those days are now over. The share price could soon find this out as well…

The 4 most important things to know about Gesco

  1. GESCO focuses on emerging and established market leaders with development potential. The broad industry diversification acts as a safety cushion.
  2. The focus is on the strategically attractive segments of mechanical and plant engineering, metal and plastics processing, and electrical engineering and automation.
  3. 2021 was GESCO’s most successful year to date and the company is now focusing on leveraging efficiencies in its portfolio and further acquisitions to continue the success story.
  4. The share is flying under the market’s radar and is valued comparatively low. This offers catch-up potential and additional share price opportunities.

Disclaimer: Have Gesco on my watch list and/or in my portfolio/wiki.

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