Friedrich Vorwerk And DTS Deals Will Fuel Secular Demand

Key Takeaways

• Strong performance in Service, Infrastructure, and IT segments, combined with successful acquisitions, positions MBB for outsized growth and expanded margins versus expectations.
  
• Strategic investments in energy transition and infrastructure reduce risk, stabilize revenues, and ensure long-term earnings growth through industry shifts and regulatory support.
  
• Structural challenges in key sectors, competitive pressures, economic headwinds, and disruptive industry trends threaten margin expansion, revenue growth, and the sustainability of MBB's business model.

Catalysts

Engages in the acquisition and management of medium-sized companies primarily in the technology and engineering sectors in Germany and internationally.

• Analyst consensus acknowledges strong growth in Service & Infrastructure, but current order books and recent major project wins at Friedrich Vorwerk and sustained momentum at DTS actually point to materially higher revenue growth and sustained margin expansion in these segments well above current forecasts, supporting group-level earnings outperformance.
  
• Analyst consensus highlights DTS's IT security contract as a positive, but the ability to win and execute larger scale, multi-year public sector deals combined with increasing proprietary software sales could accelerate EBITDA margin expansion at DTS, potentially driving group net margin higher than anticipated.
  
• MBB's unique long-term, founder-led succession strategy positions it to capture attractive acquisition opportunities in a fragmented German Mittelstand, with the current exceptionally strong net cash position enabling swift strategic M&A that can materially lift revenues and diversify earnings sooner than peers.
  
• Persistent investment in segments related to the energy transition and critical infrastructure ensures MBB's portfolio will benefit from government-backed secular demand drivers, reducing cyclicality and underpinning multi-year revenue stability and EBITDA growth, even in uncertain economic conditions.
  
• Ample liquidity and willingness to deploy capital, combined with a proven track record of disciplined execution, provide optionality beyond share buybacks, enabling MBB to leverage structural industry shifts and regulatory tailwinds to drive higher long-term earnings growth and net asset value than currently reflected in the stock price.

MBB Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on MBB compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming MBB's revenue will grow by 4.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 3.3% today to 2.8% in 3 years time.
• The bullish analysts expect earnings to reach €35.7 million (and earnings per share of €7.84) by about August 2028, down from €37.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 40.5x on those 2028 earnings, up from 23.9x today. This future PE is greater than the current PE for the GB Industrials industry at 23.0x.
• Analysts expect the number of shares outstanding to grow by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.43%, as per the Simply Wall St company report.

MBB Future Earnings Per Share Growth

Risks

• The company's exposure to a generally weaker automotive environment is evident, with Aumann reporting a dramatic 38 percent year-on-year revenue contraction and continued sluggish order intake, which may signal structural headwinds in this sector and potentially lead to declining revenues and reduced profitability.
  
• Intensifying competition and pricing pressure in both the broad ETF industry and MBB's key operating segments, as well as the need to lower management fees or bid more aggressively for contracts, could compress margins and reduce long-term earnings.
  
• Demographic shifts and slowing household formation in Europe could impact infrastructure and consumer-related businesses within MBB's portfolio, ultimately reducing long-term revenue growth potential as key end markets weaken.
  
• Persistently higher interest rates and tightening financial conditions threaten to dampen pipeline investment, mortgage demand, and overall project financing, which may slow order intake for infrastructure and service subsidiaries, leading to lower growth in both revenues and earnings.
  
• Ongoing automation, fintech disruption, and evolving business models in industries like IT security and manufacturing pose a secular risk that could erode MBB's differentiated positioning, making it harder to sustain current asset inflows and challenging the company's efforts to expand margins and overall returns.

Valuation

• The assumed bullish price target for MBB is €246.5, which is the highest price target estimate amongst analysts. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €246.5, and the most bearish reporting a price target of just €171.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €1.3 billion, earnings will come to €35.7 million, and it would be trading on a PE ratio of 40.5x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of €165.0, the bullish analyst price target of €246.5 is 33.1% higher.
  
• 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.