Aplisens SA

Aplisens investment analysis - ticker: APN

Investment Summary

- Polish small cap - $61 million capitalization

- Aplisens is a manufacturer of control and measurement devices

- Strong competitive position in Eastern Europe and market leader in Poland.

- Skin in the game

- Strong cash generation expected for the next two years

- Shareholder-friendly capital allocation through dividends and share buybacks. Number of shares outstanding reduced by 19% since 2014.

- Attractive valuation of 9x LTM P/E with 11% of market capitalization in net cash.

About Aplisens

Aplisens is a manufacturer of control and measurement equipment and automation components.They produce a wide range of pressure, level, temperature and flow measurement devices used in various industries: food, glass, automotive, pharmaceutical, paper, oil & gas, water management, etc.

The company was established in 1992 and started its activities focused on the production of pressure sensors and transmitters, achieving a dominant position in Poland, reaching a market share of about 25%. Over the years, the company has expanded its product range both organically and through acquisitions of companies offering complementary products. Today the company offers measurement products for various applications such as temperature, humidity, flow, pressure, etc.

Some of these products are simple measurement devices, but it also has intelligent measurement and control devices for process automation, so the company's business has a tailwind with the increasing automation.

The company has a wide variety of products, so the prices of each product vary widely, ranging from 100 PLN to 50,000 PLN ($23 to $11693).

The company's products are usually components of machines or structures, and it is very interesting that Aplisens' products, although critical, have a low cost within the total set of machines or structures. For this reason, if the products work, the customer usually does not change the supplier so easily.

On the other hand, the company's products require certification in each market they are intended to enter, which also acts as a barrier to entry.

The products are manufactured in Poland and sold worldwide. Poland is the company's main market with 41.1% of sales, followed by the European Union with 24.5%, CIS markets with 18.1% and other markets with 16.3%.

Competition

The company competes with major players such as Siemens, ABB, Moeller Electric, Scheneider Electric and others. Aplisens has a strong competitive position in Poland and Eastern Europe. The way Aplisens competes is to try to have a better offer in terms of quality and price and to be more flexible as they can offer more specialized products that have an impact on Aplisens sales but would not have an impact on the sales of these large companies.

Growth Strategy

The company's growth strategy is based on expanding the product range, either organically or through acquisitions, and increasing international sales. International sales are made through subsidiaries that act as the company's distributors.

The most recent acquisition was made in May 2023 with the purchase of APAR Control, which specializes in the manufacture of temperature and humidity transmitters, meters, controllers and recorders, and is a distributor of third-party products, particularly in the field of enclosures and connectors. The acquisition was made for 11.6 M, which for a company that has an average profit of 2.2 M over the last 3 years.

Strategy 2023-2025

The company launches 3-year strategic plans and we are currently in the 203-2025 plan.

This strategy includes exceeding 180 million in revenues and 47 million in EBITDA in 2025 with a capital investment of 36.6 million and with the objective of increasing ROE.

The strategy is based on

- Increasing scale, strengthening the leading position in Poland and gaining market share in international markets.

- Product modernization

- Acquisition of other companies that can broaden the Group's offer.

Ukrainian War

The war in Ukraine has affected the company by causing the loss of control of a Russian subsidiary, with the company's revenues in Russia falling from 19.93 million in 2022 to 1.26 million in 2023.

An end to the conflict would mean the reconstruction of Ukraine, which would be very beneficial for the company.

Industry outlook

The Company operates in the control and measurement market.

According to several market analysts, the market outlook is for growth of approximately 4% until 2030. Regardless of the estimated 4%, what matters to us is that the outlook is positive.

Shareholders and Management

The majority of the capital is in the hands of insiders, with Adam Jurawski, CEO since 2008, being the largest shareholder.

Capital Allocation

Cash generated by the company is used for growth through capital expenditures and acquisitions, with the remainder used to return cash to shareholders through dividends and share repurchases.

The payout ratio has ranged from 20.9% to 43.4%, and the latest strategic plan commits the company to a payout ratio of at least 25%.

In terms of share repurchases, the company has repurchased shares for the first time in 2014 and since then the number of shares has been reduced by 19% . In addition, the company holds 3.16% of its own shares, having repurchased 3.65% of the total outstanding shares after the presentation of the H1 2024 results.

Financial Analysis

P&L

Revenues: During all these years the company has been quite resilient in terms of revenues even in times such as the financial crisis, which they attribute to the fact that part of their sales are for equipment maintenance (although they do not specify how much). Despite this, the company's growth is not high, with a CAGR of 8.36% since 2008, 7.38% over the last 10 years and 6.61% over the last 5 years. As for the latest results, sales have slightly decreased in H1 of 2024 and in their latest press release they have emphasized that they expect H2 to be better than H1 and that due to the difficult economic situation they expect this to be a transition year to return to growth in 2025, reaching the target of 180 M in sales, implying a growth of 10%, something that seems reasonable unless we have an economic crisis.

Margins: Like any industrial company, they have operating leverage. 2023 was a year of record margins and should not be taken as a benchmark, especially given the increasing upward pressure on wages in Poland.

EPS: Thanks to share buybacks, EPS growth has outpaced revenue , growing at a CAGR of 13.4% since 2014.

Cash Flow

D&A and Capex: Capex has been consistently higher than depreciation as the company has invested in opening plants and increasing production capacity. In the 2023-2025 strategic plan, the company had planned to invest 36.6 million, of which 26.95 million was invested in 2023 and 11.6 million was for M&A. Excluding M&A from the 36.6 M planned, the company would still have 20.3 M to invest in the next two years, a level close to the expected D&A.

Working Capital: As can be seen in the table above, the level of working capital has increased since 2019 and is practically at its maximum. This is due to the availability issues of certain products that occurred during the COVID. One of the actions the company intends to take as part of its 2023-2025 strategy is to normalize inventory levels.

In terms of cash generation, the company generates cash consistently with some variability due to working capital. If we normalize the working capital, we can see that the level is quite similar to the net income.

In summary, this is a company that is constantly generating cash and that both 2024 and 2025 should be years of significant cash generation due to a lower capex than in 2023 and a normalization of working capital.

Liabilities

The company's balance sheet is strong. They are a fairly conservative company and have always had net cash since their IPO. As of H1 2024, the company had net cash of 28.6M against a capitalization of 240M.

ROIC

The company's return on invested capital has averaged 14.4% since its IPO, ranging from 10.1% in the worst year to 19.8% in the best year. This is an acceptable and above-average return without being spectacular.

Valuation

The company currently trades at an LTM P/E of 8.6x, but while we expect revenues to remain flat and the company to return to growth only in 2025, margins will be lower than today. If we calculate flat revenues and use a normalized EBIT of 19% (vs. 24.6% in 2023 and 20% in H1 2024), the company would generate an EBIT of 31160m and EPS of around 2.23, leaving us with an EV/EBIT valuation of 6.7x and a P/E of 9.6x in 2024.

Outlook : The company said in its last press release that it expects H2 to be better than H1 and that it sees 2024 as a transitional year due to the bad economic situation, but it reiterates that it expects to reach the target of 180m and 47m EBITDA by 2025.

We will run two scenarios for 2027, one where management hits its target and one where sales continue to decline in 2025 and the company misses its target. In both scenarios, we expect a gradual normalization of working capital to be completed in 2026 and a capex-to-sales ratio of 6%.

Warning: These scenarios do not and will not guess what the company will generate, we simply try to have a conservative range of what the company could generate, the reader is kindly asked to make their own estimates.

On this basis, the company would trade at a seemingly attractive price on both multiples and discounted cash flows, especially considering that much of the cash generated is returned to shareholders in the form of dividends and buybacks.

Conclusion of the author

On the negative side, we are dealing with a cyclical company and in an economic situation of uncertainty, one of the dangers of these companies is to buy when everything is going well and then the situation worsens, but we are already at a time when the situation has already worsened and although we may not be at the bottom, at least we are not at the top either. On the other hand, the company has net cash, so a drop in sales in the sector could be used for M&A or simply to protect itself.

On the positive side, we are looking at a business with above-average returns, a growing market with some barriers to entry in a company with a strong position in Poland and Eastern Europe, management with skin in the game, and shareholder-friendly capital allocation with buybacks and dividends.

Disclaimer: This is not an investment recommendation, but a personal opinion. The author is an investor in the company at the time of writing, so his opinion may be biased.