Sell thyssenkrupp (TKA GR) - Restructuring exposes the lack of value - Fair value E12.20 - Bucephalus Research Partnership
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July 2018
Bucephalus client portal
Sell thyssenkrupp (TKA GR)
Restructuring exposes the lack of value – Fair value E12.20
An unwieldy board and wrong-way management incentives have led to creative accounting which hides poor
productivity & efficiency. We show that the elevator business, talked-up by management and the mainstay of
market value, struggles when properly costed and compared to peers.
The unintended consequence of restructuring and spin-offs will be to expose the creative accounting, illustrate the
poor performance, and reveal the lack of value in the shares.
Bucephalus proprietary Governance, Accounting and Performance risk analysis:
G: Director tenure. Depreciation. Pension
A: Capex. Pension accounting. Murky finance
P: Productivity. Employee costs. Low margins.
Copyright 2018 Bucephalus Research Partnership Limited
Governance, Accounting and Performance risks score: 147
Concerns: Board size and tenure, Depreciation, Productivity and Liabilities
225 Governance 2015 2016 2017
Worst
Key director tenure X X X
200
Depreciation rate X X X
175
Thyssenkrupp Unfunded pension XX XX XX
150
Accounting 2015 2016 2017
125
Capex X X XX
100 Unfunded pension XX XX XX
75 Acerinox Other ST Liabilities X X X
50 Best Performance TKA Industry ave. Warning
25 Unlev’d CFO margin 2.1 11.7 XXX
Employee cost (US$k) 70 21 XXX
0
Steel Producers Cont. liabilities/Equity (%) 176 27 XXX
Figure 1: Bucephalus GAP score Figure 1a: GAP warnings
Source: Bloomberg, company filings and Bucephalus Research Partnership 2 Copyright 2018 Bucephalus Research Partnership Limited
Unwieldly board
Reform is difficult
Supervisory Appointed to Employer/other Supervisory Appointed to the
Role Background Role Background
board the board interest board board
Lehner 2008 Chairman Accountant Henkel* Segerath 1999 Employee
University of
Gather 2018 Krupp trust Academic Grolms 2009 Employee
Dortmund
Pellens 2005 Accountant Academic Herbenger 2009 Employee
Keitel 2010 Engineer Hochtief Remmler 2009 Employee
Schmettow 2012 Banker HSBC Schondorf 2013 Employee
Obermann 2013 Investor Warburg Pincus Kluge 2014 Employee
Spohr 2013 Engineer Lufthansa Wurz 2015 Employee Lawyer
Steinbach 2013 Lawyer Henkel Jacquemin 2016 Employee
Hengster 2015 Banker KFW Bank Nasikkol 2016 Employee
Tischendorf 2015 Cevian Investor Cevian Hass 2017 Employee
Several directors, highlighted in pink, were on the board during the disastrous investment in Brazil
*Recently resigned Executive board
Appointed to the
Role Background
board
Figure 2a: The Supervisory board Kerkhoff 2011 CEO Accountant
Burkhard 2013 HR Trade union
Kaufman 2014 Legal Lawyer
Figure 2b: The Executive board
Source: Bloomberg, company filings and Bucephalus Research Partnership 3 Copyright 2018 Bucephalus Research Partnership Limited
Wrong-way management incentives Management paid based on earnings before bad stuff Management EBIT is always higher than shareholder EBIT (EURm) Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Managements EBIT 320 530 1,330 1,680 1,470 1,120 Shareholder's EBIT (4,370) (538) 1,150 1,050 1,190 690 Source: Bloomberg, company filings and Bucephalus Research Partnership 4 Copyright 2018 Bucephalus Research Partnership Limited
EBIT enhanced by under depreciating Capex always exceeds depreciation (US$bn) Depreciation Capex 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Assets lives are too long Figure 3: Depreciation vs Capex and compared to Growth (rolling 2 year average) Source: Bloomberg, company filings and Bucephalus Research Partnership 5 Copyright 2018 Bucephalus Research Partnership Limited
EBIT excludes the full pension cash cost Investor’s choice Either: Or: Capitalise the expense & include the liability Expense the full cost & exclude the liability Capitalise the expense (US$m) Expense the cash cost (US$m) Annual expense Annual cash cost - Personnel* 222 - To pensioners 460 - Interest** 125 - To pension plan 116 Effect Effect Enterprise value includes the pension liability 8,570 Pension liability is excluded from Enterprise value EBIT rises by 222 EBIT drops by (576-222*) 354 *It is unclear from the June presentation whether this includes or excludes the US$181m of defined contribution expense. To be cautious, we have assumed that it is excluded when we net cash cost vs expense. If this expense is included then the cash cost will rise further. ** impact of time on the discounted liability. Source: Bloomberg, company filings and Bucephalus Research Partnership 6 Copyright 2018 Bucephalus Research Partnership Limited
EBIT Shell game Allocations at management’s discretion Figure 4: Results by segment Source: Bloomberg, company filings and Bucephalus Research Partnership 7 Copyright 2018 Bucephalus Research Partnership Limited
Creative Accounting
2 bonds are not reported on the balance sheet
US$109m of finance costs are reported but not explained
30-Sep-13 30-Sep-14 30-Sep-15 30-Sep-16 30-Sep-17
Other finance income 325 750 1,127 931 712
Other finance expense (605) (809) (1,176) (1,066) (794) 2yr Average
Net balance (280) (59) (49) (135) (82) (109)
Figure 5: Extra costs and missing bonds
Source: Bloomberg, company filings and Bucephalus Research Partnership 8 Copyright 2018 Bucephalus Research Partnership LimitedPoor performance
thyssenkrupp has the highest cost per employee
(US$K )
90 88
81 79
80
70 65 64
60 56 54
50
40
30
20
10
0
thyssenkrupp Kloeckner Tenneco Blended peer* Acerinox Kone Fincantieri
*Blended to match thyssen’s segments
Figure 6: Comparative employee costs
Source: Bloomberg, company filings and Bucephalus Research Partnership 9 Copyright 2018 Bucephalus Research Partnership LimitedPoor performance
thyssenkrupp employees are less productive
(US$k) thyssenkrupp Competitor
900
Kloeckner
800 Acerinox
Thyssenkrup’s EBIT/Employee relative to the peer in bold
700
600
500
400
Tenneco Fincantieri
300
200 Kone
100
0
Elevators Components Industrials Materials Steel
Figure 7: Revenue per employee
Source: Bloomberg, company filings and Bucephalus Research Partnership 10 Copyright 2018 Bucephalus Research Partnership LimitedElevator business in bad shape
Re-allocating Head office costs reveals the poor performance
thyssenkrupp thyssenkrupp thyssenkrupp
Kone Schindler OTIS
(reported) (Bucephalus*) ranking
Employees 52,779 54,152 55,075 61,019 68,078
Growth (5 year cagr %) 4.5 4.5 4.6 3.3 1.0
Sales (US$m) 8,000 8,000 10,102 10,341 12,300
EBITDA (US$m) 951 679 1,504 1,361 2,198
EBIT (US$m) 866 594 1375 1206 2021
EBITDA margin (%) 11.9 8.5 14.9 13.2 17.9 Worst
EBIT margin (%) 10.8 7.4 13.6 11.7 16.4 Worst
Personnel costs/Revenue (%) 58.0 59.5 30.5 37.0 N/A Worst
Productivity (Sales/employee) 151,575 147,733 183,431 169,474 180,675 Worst
Efficiency (EBIT/employee) 16,399 10,975 24,966 19,763 29,687 Worst
* Bucephalus normalisation. Head office costs re-allocated to the business unit, based on employee numbers.
Figure 9: thyssenkrupp’s elevator operations compared to its peers
Source: Bloomberg, company filings and Bucephalus Research Partnership 11 Copyright 2018 Bucephalus Research Partnership LimitedAll divisions are in bad shape Every division’s performance is worse than peers (US$m) Elevators Components Industrials Materials Steel Head office Reported EBIT 866 366 (76) 310 799 Head office costs (127) (81) (52) (48) (66) (375) Depreciation to match capex (46) (176) (42) (59) (221) Pension cost (77) (49) (32) (29) (166) (354) Hedging costs (21) (23) (14) (41) (22) (121) EBIT adjusted for bad stuff 594 36 (216) 132 325 Reported EBIT margin 10.8 4.3 (1.5) 2.0 9.5 Adjusted EBIT margin 7.4 0.4 (4.2) 0.8 3.9 Peer Kone Oyj-B Tenneco Inc Fincantieri Spa Kloeckner & Co Acerinox Peer EBIT margin 13.6 4.5 3.5 2.1 6.9 thyssenkupp vs Peer (x) 0.55 0.09 (loss-making) 0.41 0.56 Figure 10: Allocating Depreciation and hedging, while reversing Pension costs Source: Bloomberg, company filings and Bucephalus Research Partnership 12 Copyright 2018 Bucephalus Research Partnership Limited
Re-structuring will be slow and expensive
Matching peer efficiency - US$3.3bn of redundancy costs & 37,900 to be sacked
Elevators Components Industrials Materials Steel Thyssenkrupp
Employees 54,152 34,646 22,301 20,630 27,964 159,693
Sales/employee 148 248 233 756 300
EBIT/employee 11.0 1.0 (9.7) 6.4 11.6
Comparable Kone Tenneco Fincantieri Kloeckner Acerinox
Sales/employee 183 290 284 819 754
EBIT/employee 25 13 10 17 52
Improvement required (%) 24 17 22 8 151
Employees to be cut* 10,539 4,972 3,995 1,575 16,826 37,900
Thyssen employee cost US$87,968
Redundancy multiple based on German rules for long-term employees 1.3 years
Redundancy costs US$3.3bn
*Based on sales per employee
Figure 11: Estimating redundancy costs
Source: Bloomberg, company filings and Bucephalus Research Partnership 13 Copyright 2018 Bucephalus Research Partnership LimitedBull case, 16% upside Restructured to peer profitability, valued on sales (US$m) Elevators Components Industrials Materials Steel Thyssenkrupp Sales 8,000 8,600 5,200 15,600 8,400 45,800 Peer Kone Tenneco Fincantieri Kloeckner Acerinox Peer sales 10,100 9,300 5,600 7,100 5,200 EV/Sales T12M (x) 2.69 0.41 0.59 0.16 0.74 Implied value 21,500 3,500 3,100 2,500 6,200 36,800 Restructuring cost (3,300) Break up value 33,500 Thyssen Enterprise value, includes pension and accretion 30,900 Premium/ (discount) 2,600 Implied market cap (US$m) 18,900 Today’s market cap (US$m) 16,300 Upside/(Downside) 16% Figure 12: Break up value based on EV/Sales Source: Bloomberg, company filings and Bucephalus Research Partnership 14 Copyright 2018 Bucephalus Research Partnership Limited
Base case, 46% downside
Valued on true profitability. Fair value EUR 12.20
Elevators Components Industrials Materials Steel Thyssenkrupp
EBIT adjusted for bad stuff 594 36 (216) 132 325
Peer EV/ EBIT T12M (x) 21.2 9.5 16.9 9.0 13.3
Implied value using EBIT multiple 12,600 300 (3,600) 1,200 4,300 14,800
Enterprise value, excludes pension liability 22,330
Difference (7,500)
Implied market cap (US$bn) 8,800
Today’s Market cap (US$bn) 16,300
Upside/(Downside) (46)
Target price (EUR) 12.20
Figure 13: Break up value based on peer EV/EBIT multiples
Source: Bloomberg, company filings and Bucephalus Research Partnership 15 Copyright 2018 Bucephalus Research Partnership LimitedSupporting documents
Financial statements and the Bucephalus GAP analysis
2018 Interim report 2017 Annual report
Other finance expense, p 12 Depreciation policies, p 155 (pdf)
Capex exceeds depreciation and cartel issues, p19 Revenue recognition, p 160,163, 165,166 (pdf)
Working capital, p 26 Factoring, p169 (pdf)
Discount rate for pensions, p31 Receivables analysis, p180 (pdf)
Segment breakdown, p34 Financial debt, p194 (pdf)
Reconciliation to capital employed, p 216 (pdf)
June presentation Financial income/expense, p 204 (pdf)
Tata deal, p 11-16
Restructuring, p 33 Other annotated annual reports
Pension costs, p 37 Previous notes
Competitors, p 41
Segments, p 42, 45, 49, 53, 59* GAP Analysis and model
*Note Expanding head office employee numbers
Source: Bloomberg, company filings and Bucephalus Research Partnership 16 Copyright 2018 Bucephalus Research Partnership LimitedBucephalus exposes creative accounting
▪ When business realities diverge from management’s reports & accounts.
▪ Where incentives, behaviours and outcomes are being hidden from investors.
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Source: Bloomberg, company filings and Bucephalus Research Partnership 17 Copyright 2018 Bucephalus Research Partnership LimitedDISCLAIMER
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