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Andrew Kuhn

Norbit: A Norwegian Growth Company Trading At 8 Times 2019 EBITDA

by VETLE FORSLAND

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In the middle of June this year, Norbit ASA (ticker: NORBIT) went public on the Oslo stock exchange at 20 kroner per share, after earlier aiming for an IPO price between 23 kroner per share and 30 kroner per share. It had in the first quarter introduced European truck drivers to a new digital tachograph, a device fitted to vehicles to automatically record speed and distance and landed a seven-year contract with the German industrial giant Continental Automotive – which controls 80 percent of the European market for tachographs. This contract helped Norbit’s ITS-segment (more on this later) make 36 million kroner in sales in the first quarter, compared to 40 million kroner for all last year combined. The company’s other segment, which produces sonar products, grew revenues from 28 million in Q1 2018 to 59 million in Q1 2019. Further, the company could boast about EBITDA-margins of 32 percent, bringing EBITDA to 50.1 million in the first quarter. Despite this, the initial interest in the stock seemed non-existent, bringing it to start trading at 9.75 times (conservative) 2019 earnings. Since then, two news articles have brought the stock price up 13 percent to 23 kroner per share – but this still adds up to a 2020 P/E of 11.5, a 2019 EV/EBITDA of 7.8, in an industry where the median peer trades at an EV/EBIT of 17.6 (Pareto Securities). The company is still illiquid, cheap and somewhat overlooked, with a market capitalization of 1,300 billion kroner, or ~144 million dollars.

Business overview

Norbit is a niche-technology company with operations internationally. They produce and provide tailored technology in several markets through three business segments. The company is located in the Norwegian city of Trondheim, known as a technology-heavy town, and has 250 employees (150-170 are engineers). Further, they have sales offices all over the world, and research departments in Budapest and Trondheim. The CEO, Per Jørgen Weisethaunet, was the third employee to work at the company, when he got hired as an engineer sometime in the mid-1990s. After working at Siemens for a couple of years, he became the CEO in 2001, and is currently the second largest shareholder with a stake of 11 percent of shares outstanding, after selling 4 percent of his stake in the IPO. The largest owner is the founder with 15 percent of the shares. As far as I can tell, it’s a very focused and able management. In a longer phone chat with CEO Weisethaunet, he told me that “We have ambitions of building a solid, large technology company with a focus on customized niche products”. “There are commercial genes in us that makes us want to constantly make money. Profitable growth is our focus”, he added. Norbit is aiming for a CAGR growth of 25 percent over the next three years, and Weisethaunet said that the first quarter paves the way for just that – at a minimum. Additionally, the company has been profitable for most of its years since inception.

Oceans

Their Oceans segment, that produces sonar technology, made up 35 percent of revenues in the first quarter of 2019. It’s the growth machine of the company and has doubled revenues every year since it was launched in 2013, including the first quarter of 2019. Sonar technology uses sound propagation for communication, subsea imaging and to detect objects at or below the surface, and exists in two forms: passive and active. Active sonars emit sound pulses and listens for echoes, and are considered the best way for detecting and locating subsea objects, while passive sonars listens for sounds from other vessels – often used in military settings. If you google something like “subsea sonar technology 3D”, you’d get a good look of what this is. The image these sonars produce are geophysical maps, so every point in the pictures are georeferenced. That means the viewer can locate the images to an exact location on the globe through geographical coordinates. Sonar technology is essential for dredging companies (removal of material underwater), environmental surveillance, contracting companies, researchers and scientists, certain offshore exploration and military operations. All the mentioned operations are often limited by deep water, debris, and lack of visibility, creating a demand for sonars.

The global sonar market is estimated to reach 3.7 billion dollars by 2023 (versus 2.6 billion today), but the company is focusing on certain niche markets that Norbit estimates to be worth 700 million: “There’s a lot of stuff happening in the industry that we don’t even touch. We have found niches where we can make a difference – we look for markets with scalability, but not too great – if the scalability is truly atmospheric, then someone other than us will take that market”, Weisethaunet told me. He added that they try to make technology that is difficult to make, and therefore difficult to hijack. Examples of niche solutions where sonars are needed are bottom mapping for an overview of what a sea, river or bay looks like on the bottom, for instance by being able to see if dredging operations are necessary in a place with boat traffic to make the traffic better; inspections of wells to see if there is an erosion; look for objects underwater; mapping of port areas underwater for construction or renovation for the harbor -the list goes on.

Everything needed in these sonar solutions can fit in a briefcase. This isn’t unique for Norbit – a similar company I have researched, Coda Octopus, make small sonars too, but in different markets (Coda is worth a look too, with terrific margins, growth, and a forward P/E of 11.5 and an EV/EBITDA of 14, though it traded at above 25 times EBITDA earlier this year). Norbit’s sonar solutions cost from 1 million kroner to 2 million kroner, which is cheap if you’re a large company that needs this product for an operation. Norbit tries to find small sales teams globally that get most of their revenues from Norbit, making the seller highly focused on these products, and equips them with high knowledge of sonars. Further, the Ocean segment has a diversified customer base, with the single largest client accounting for only three percent of sales. Additionally, oil and gas accounts for ten percent of sales, so the risk of an oil market collapse wouldn’t be that bad for Norbit. “In the Oceans segment we have had a very nice growth rate, but we are still a modest player in the market”, the CEO told me. “After all, we have only scratched parts of the surface”.

ITS

The Intelligent Traffic Systems segment, or ITS, makes up 23 percent of Norbit’s revenues. It’s a simpler segment than Oceans, and operates in a very different market from Oceans, but both require good technology in niche markets – however, the similarities mostly stop there. While Oceans is very diversified, with many small customers, ITS have few, large industrial giants with very large contracts. Luckily for Norbit, the company landed two important contracts in the first quarter of 2019 that are between five and seven years long. The two most important contracts are with Toll Collect and Continental Automotive.

ITS produces and distributes technology used in traffic. In Norway, they provide standard toll tags called AutoPASS, that let drivers pass through road toll areas without stopping. Most drivers in Norway have AutoPASS in their cars, and Norbit controls about 70 percent of this market. AutoPASS is mandatory for medium to heavy vehicles (above 3.5 tons) and Norbit has delivered 2.5 million tags like these since 2007. However, they barely get any revenues from this compared to their two flagship European products – digital tachographs and Short-range satellite communication for truck tolling.

The first one is with Continental, where Norbit produces tachographs for European truck drivers. Continental controls about 80 percent of this market. Basically, Norbit’s solutions allows government officials to read truck data for driving and resting hours wirelessly and digitally without stopping the car. So, a police officer driving by a truck or someone standing by the road, looking at a truck drive by, could read of the tachograph. On June 15th this year, a new EU legislation ruled that all trucks must have digital tachographs installed, in a move to transition to distance-based truck tolling (satellite). This opened a new niche market for Norbit, where the company can produce these short-range communication modules for distance-based truck tolling, that are integrated with the digital “smart tachographs”. As far as I understand it, these integrated solutions are provided to another large German company, Toll Collect.

For 2018, this segment had revenues of 40 million kroner, down 7.9 percent from 43 million in 2017. However, in the first quarter of 2019, this segment had its “step-up”, with the earlier mentioned contracts. In the first quarter revenues reached 36 million kroner, almost the entire sales number from the entire year prior, and EBITDA of 17 million kroner – margins of 47 percent. We will most likely see this quarterly growth continue throughout the year, before the segment will stabilize some. However, they could grow further in this segment as well, as they develop new products and find new niche markets within intelligent trafficking, as the EU continues to digitalize their traffic. This could come through broadening the customer base, or developing new DSRC (dedicated short-range communication) satellite solutions. After all, the global intelligent traffic market is estimated to be worth 23.4 billion dollars in 2018, and reach 30.7 billion in 2023 – that’s a CAGR of 5.7 percent. The growth is mostly driven by governments that shift focus to digital, more efficient traffic systems, increasing concerns for public safety and increasing traffic congestion problems. “The E.U. is now pushing for trucks to pay a fee per driven kilometer”, the CEO told me, which would widen their potential market, as DSRC solutions combined with smart tachographs would be a fitting alternative to today’s system. “Another advantage is that in a satellite based system, you have privacy with good security. No one wants to have data of where the truck is driving uploaded to a database that everyone can see. Instead, the data stays in the truck, and inspectors check only who has paid, and nothing more”, he said. All trucks in Europe registered after June 15th will have to install digital tachographs. The truck market is stable and growing, with close to 350 thousand trucks being registered in the EU on a yearly basis. In this market, Norbit has landed secure, long-term contracts that delivers about 18.5 million kroner in monthly revenues, with EBITDA margins at 30 percent and above (40 percent plus in Q1).

PIR

Norbit third and last segment is their wildcard. PIR – or Product Innovation and Realization – is exactly what it sounds like, a segment that does most of the research and development at Norbit. The company describes PIR as “an enabler for Oceans and IT, but it also offers R&D and contracting for long-term key clients”. So it serves as both an in-house research department, but also a segment that makes a profit through developed products that find its own markets, but don’t fit in either of the other segments. PIR has been making innovative products for nearly 25 years, and is based in three factories that date back to the earliest days of the company in the 1980s (before several mergers formed Norbit in the 1990s). Further, while PIR develops technology for ITS and Oceans and allocates resources to the two, it also offers R&D services and products to clients like Equinor, the largest oil company in Norway, Miros, Inda Nvia, Comrod and Kongsberg group, the largest industrial company in Norway. The department has created radar modules for sensor companies, antennas for Corvettes, DSRC (the technology used in the ITS segment) tags for local Norwegian vendors, developed the first sonars in 2013 and created systems that have been installed on the Snorre A oil platform for Equinor. About fifty percent of their manufacturing volume is directly related to Oceans or ITS, while the rest serves outside clients. So, it’s not a worthless segment, and the numbers can speak for themselves – PIR delivered revenues of 221 million kroner in 2018, down from 229 million in 2017, and generated EBITDA of 20 million in both years, giving a margin of 9 percent.

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