Neighboring Sweden has many listed industrial quality companies that are rarely discussed in Finland. Let’s take a superficial look at Bufab, which listed on the Stockholm Stock Exchange in 2014.
Bufab supplies components and related services to the manufacturing industry, such as contract manufacturers. For example, Scanfil is one of their customers. Bufab’s “components” consist of screws, nuts, fasteners, fittings, and other low-value items and related services. Boring, right?
However, these low-value items are critical to the end product. Bufab manages the logistics for these globally and also assists the customer with, for example, internal logistics and warehousing. A customer’s problem might be, for instance, that the right components cannot be found in a messy warehouse, and Bufab helps the customer streamline these processes. From the customer’s perspective, these are not core business activities, but they ultimately improve productivity. Bufab handles the replenishment of C-parts automatically based on inventory levels, avoiding production shutdowns and manual orders.
According to Bufab, 20% of the costs of C-parts arise from the price of the C-parts themselves, and the remaining 80% from indirect costs, such as component procurement, quality, replenishments, potential production shutdowns, time, etc. On the other hand, Bufab aims to provide added value to the customer by also reducing the number of component suppliers and lowering total costs. Bufab also has solutions that provide added value to the customer, such as sub-assembly.
Some of Bufab’s products have high quality requirements; fasteners and such must withstand corrosion for decades, or parts must withstand corrosive chemicals or high temperatures. Bufab’s products are thus used widely, from Ikea furniture to aircraft. Bufab lists customers such as Saab, Safran, Sampo Rosenlew, Scania, Assa Abloy, ABB, IKEA, Metso Outotec, AbbVie, Alstom, and Bombardier.
Bufab grows both organically and through acquisitions by buying smaller local companies. Bufab’s business does not require a massive amount of capital for equipment; instead, costs can be adjusted according to demand. The customer base is diversified, and dependence on a single customer or industry is quite low. As a side note, it should be mentioned that Bufab has made a profit every year for over 40 years. Furthermore, the company’s growth has been funded by cash reserves. The outlook for organic growth remains reasonably good going forward.
Bufab’s market is highly fragmented. Bufab is well-positioned in each of its 28 countries of operation. In addition to this, Bufab supplies products to a total of 70 countries.
Bufab’s strategy is based on long-term relationships with customers and suppliers. Bufab’s financial goals include profitable growth: 10% annual revenue growth and 15% p.a. growth in earnings per share for the coming years. Regarding profitability, the goal is an EBITA margin of at least 12% by 2023 at the latest. Dividends are distributed at 30-60% of the annual result. The target for the ratio of net debt to EBITDA is between 2-3.
The most significant financial risks relate to customer demand, which is affected by general economic development and manufacturing industry activity. A dip was seen, for example, around the financial crisis in 2009 and due to COVID-19 in 2020. Large customers may deal directly with manufacturers and bypass the wholesaler (Bufab). However, Bufab provides added value that reduces this risk. Additionally, Bufab faces risks related to suppliers (price increases, legal risks, a supplier running out of stock and being unable to deliver goods on the agreed schedule, or quality deviations in products). Bufab’s suppliers are located mainly in Asia and Europe, and Bufab aims to procure components from several suppliers and is not as dependent on a single production facility.
Most of Bufab’s capital is tied up in inventory, the movement and management of which is expensive. If inventory management is inefficient, it can pose risks for impairment losses and, on the other hand, the risk of having to fill depleted inventories at any price or paying compensation to customers if components cannot be delivered on time. Bufab’s customers can also move their production to low-cost countries, and Bufab may not necessarily follow or be able to follow suit.
Bufab also grows through acquisitions. There are naturally various risks associated with the success of acquisitions.
The war between Russia and Ukraine causes some uncertainty. The Russian unit has been sold. Russia and Ukraine’s share of revenue was only about 0.5%, so the effects are mainly indirect.
Regarding balance sheet risk, it should be mentioned that Bufab has significant goodwill on its balance sheet. While this does not have direct cash flow impacts, it is good to be aware of.
Bufab is susceptible to fluctuations in raw material prices, especially steel and stainless steel. Additionally, energy and oil prices affect manufacturing and freight costs. Furthermore, Bufab is to some extent susceptible to global supply chain capacity, although it has managed quite well through recent challenges. There is a risk that Bufab may not be able to pass on increased prices to end-customer prices.
The barrier to entry for new companies is quite low, so competition may increase in the future. However, Bufab has been well-positioned and at the top of its field in its countries of operation.
Bufab also faces regulatory risks; states may impose heavy tariffs on standard parts imported from China, for example. In such cases, alternative production facilities would have to be sought elsewhere.
Risks related to IT systems. IT systems play an important role in Bufab’s efficiency, inventory management, etc.
Other risks include currency risks (mainly USD), although some are hedged.
More about risks here:
Business profitability and stock valuation:
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022e | |
|---|---|---|---|---|---|---|
| Revenue | 3 201 | 3 786 | 4 348 | 4 756 | 5 878 | 8 458 |
| EBITDA | 347 | 408 | 517 | 635 | 855 | 1 092 |
| P/E | 18.9x | 12.6x | 19.3x | 24.5x | 36.3x | 14.3x |
| EV / S | 1.58x | 1.17x | 1.70x | 1.84x | 3.18x | 1.44x |
| EV / EBITDA | 14.6x | 10.9x | 14.3x | 13.8x | 21.8x | 11.2x |
| EBIT | 304 | 358 | 368 | 457 | 688 | 855 |
| EBIT margin | 9.50% | 9.46% | 8.46% | 9.61% | 11.7% | 10.1% |
| ROE | 15.7% | 16.9% | 15.1% | 16.2% | 23.0% | 23.0% |
| EPS | 5.61 | 6.79 | 6.75 | 7.95 | 12.3 | 16.4 |
In 2013, Bufab’s revenue was 2,031 million SEK and EPS was 3.43 SEK. In 2021, revenue was 5,867 million and EPS was 12.57 SEK. On average, revenue has grown by 14.2% per year and EPS by 17.6% per year.
During the first three quarters of 2022, revenue amounted to 6,358 million (+49%). The EBITA result grew to 748 million (526 million) and the EBITA margin was 11.8%. The adjusted EBITA operating profit was 845 million and the profit margin was 13.3%.
The rolling 12-month order intake was 7,874 million and the rolling 12-month revenue was 7,953 million. The EBITA operating profit % was 11.5%.
Operating cash flow was weak, which was due to an increase in working capital resulting from organic growth and inventory growth. Inventories grew due to slowed deliveries resulting from a strained supply chain.
In 2021, Bufab’s ROIC was (695 - 145) / 3,828.5 = 19.4% and for the rolling 12 months (918 - 171) / 5,664 = 13.2%. I could not find the taxes paid for Q4’21, so the latter might not be entirely accurate, but it should be indicative.
Earnings forecasts for the next couple of years are 8,420 million revenue for 2023 and 8,900 million revenue for 2024. Corresponding EBITDA results are 1,119 and 1,144 million. EPS forecasts are 17.0 and 19.8 SEK.
I am very much a beginner with DCF calculations, but with an 8% cost of equity (WACC) and expecting 4% annual EPS growth for the next 10 years followed by 2% per year, the DCF value would be 308 SEK, which is clearly higher than the current price of 234 SEK. However, you should check this yourself, as it is a calculation made by a novice.The company’s business looks high-quality. In my opinion, the valuation is not bad at all considering the favorable outlook and the quality of the company. I also believe the company falls into the “value creator” category, and the intention is to hold it in my portfolio for the long term.
Hopefully, this sparks at least some discussion.
