Energy Infrastructure Dependence Will Expose Overvaluation As Policy Risks And Margins Deteriorate

Catalysts

About MBB

MBB is a listed family-owned industrial holding company that acquires, develops and holds Mittelstand businesses for the long term.

What are the underlying business or industry changes driving this perspective?

• Concentration of growth in energy infrastructure projects, particularly LNG and hydrogen backbone build out, exposes Friedrich Vorwerk to policy delays, permitting bottlenecks and shifting regulation. This could deflate the current order boom and pressure group revenue growth and EBITDA margins once the current EUR 1.1 billion backlog normalizes.
• Heavy dependence on publicly funded infrastructure and German fiscal spending, including grid expansion and IT security programs, leaves the group vulnerable to future budget consolidation, reprioritization or procurement changes. This could slow contract awards and reduce visibility on midterm revenues and earnings.
• Rapid scale up and tight capacity in Service and Infrastructure, fueled by unusually favorable weather, execution and project mix in 2025, raises the risk of cost overruns, execution slippage or less profitable follow up projects as competition intensifies. This could drag down the currently elevated 20 percent plus segment EBITDA margins.
• Structurally challenged end markets in automotive and cyclical consumer goods, even with Aumann’s diversification into cleantech, defense, aviation and automation, may cap pricing power and utilization in weaker macro phases. This could limit the group’s ability to sustain current consolidated margin levels and EPS growth once high margin infrastructure projects roll off.
• Disciplined but slow deployment of the EUR 527 million net cash and reliance on attractively priced M&A to drive incremental value creation could become a drag if high quality targets remain scarce or valuations stay elevated. This could lead to underutilized capital, slower revenue compounding and a plateau in earnings per share.

Assumptions

This narrative explores a more pessimistic perspective on MBB compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming MBB's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.5% today to 0.0% in 3 years time.
• The bearish analysts expect earnings to reach €473.3 thousand (and earnings per share of €6.8) by about December 2028, down from €54.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €29.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2146.0x on those 2028 earnings, up from 19.8x today. This future PE is greater than the current PE for the GB Industrials industry at 19.8x.
• The bearish analysts expect the number of shares outstanding to decline by 1.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural energy transition in Germany, including LNG grid expansion, hydrogen backbone build out, district heating and future CO2 and electricity infrastructure, is already translating into a EUR 1.1 billion order book at Friedrich Vorwerk, which could support sustained high capacity utilization, resilient pricing and structurally elevated EBITDA margins, stabilizing group revenue and earnings over several years.
• Long term digitization and cybersecurity demand, underpinned by multi year public sector IT security contracts and German government spending plans into and beyond 2026, may allow DTS to compound high margin software and services revenue and expand its profitability, offsetting cyclical weakness in automotive and consumer exposed subsidiaries and supporting consolidated net margins.
• Aumann’s ongoing diversification into cleantech, defense, aviation and broader automation, backed by a strong net cash position and double digit order intake growth in its Next Automation segment, could reduce dependence on structurally challenged auto programs and eventually restore volume and pricing power, improving medium term revenue growth and segment EBITDA margins.
• The group’s substantial net cash position of EUR 527 million at year to date, disciplined capital allocation and active add on M&A pipeline in infrastructure, aviation, software and adjacent markets create meaningful optionality to acquire growth and earnings accretive assets at improving valuations, which could accelerate top line growth and expand earnings per share beyond current expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for MBB is €171.0, which represents up to two standard deviations below the consensus price target of €230.63. This valuation is based on what can be assumed as the expectations of MBB's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €285.9, and the most bearish reporting a price target of just €171.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €473.3 thousand, and it would be trading on a PE ratio of 2146.0x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of €198.0, the analyst price target of €171.0 is 15.8% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.