Teqnion (TEQ) Deep Dive
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My name is Yorrin and I welcome you to a deep dive into Teqnion!
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Teqnion
🏢 Company name: Teqnion
🔎 Ticker: TEQ
📈 Stock Price: 211.00 SEK
💰 Market capitalization: 3.67 BSEK
🕸️ Website: www.teqnion.se
👩🏻🏭 Industry: Wholesale Distributors
🦺 Sector: Distribution Services
Company overview & Business Model
What and who is Teqnion? Teqnion is a Swedish company founded in 2006 by Johan Steene. Teqnion is located in the beautiful Solna, Solna is located close to Stockholm, the capital of Sweden. Teqnion's business model aims to create a diversified company group by acquiring high-quality businesses with low risk, promising future prospects, and sustainable product portfolios. These acquired companies operate autonomously, following an entrepreneurial philosophy, while benefiting from ongoing development and support focused on profitability. Leveraging Teqnion's expertise, network, and financial resources, these subsidiaries are nurtured to thrive. By maintaining a lean parent company, Teqnion enables swift decision-making and fosters robust, adaptable, and effective subsidiary operations.
Investing in smaller companies that thrive in international markets, it aims to broaden its portfolio while ensuring sustained profitability in existing ventures. By acquiring robust companies with diverse industry footholds and global reach, it fortifies its position amidst the ever-changing competitive landscape. Aspiring to emerge as a leading technology sales conglomerate in the Nordics, it seeks to excel in turnover, profitability, and technical prowess. Its mission is to cultivate profitable growth in specific product segments and markets, prioritizing risk management while fostering a workplace culture characterized by transparency, optimism, and employee contentment.
Management & Ownership
Let's delve into the management of Teqnion. Understanding its structure, experience, personalities, and more is crucial, as management plays a pivotal role in shaping the future of Teqnion. They hold the final decision-making authority in all aspects of the company, making comprehension of their roles essential in understanding the business.
Ownership of Teqnion
(source: marketscreener.com)
Here's a breakdown of Teqnion's management:
Johan Steene, CEO
Daniel Zhang, CXO
Carina Strid, CFO
Maria Johansson, CAO
Anna-Karin Karlsson, CSO
Mona Axman, COO
Håkan Wahlberg, CMO
Having watched numerous videos on Teqnion and its management, I found certain individuals to be more prominent than others. Through these interviews, I gained insights into various facets of the management team. Johan Steene, in particular, stands out as a leader with a clear vision, aiming for nothing less than the stars. He exhibits directness in handling situations and articulates his thoughts and opinions, even on topics close to his heart concerning Teqnion. Based on the content I've viewed, it's evident that Teqnion is steered by a true visionary, guiding the company forward.
For further insights into Teqnion, I recommend exploring their YouTube channel. There, you'll find meetings with shareholders that offer valuable perspectives on the company. These sessions are certainly worth your time.
Daniel Zhang is another key figure within Teqnion's management team, possessing a deep understanding of his field. Despite his parents' initial aspirations for him to pursue a career in medicine, Daniel chose to chart his own path and ventured into M&A, notably with McKinsey. In an interview that I'll provide a link to, you'll witness Daniel Zhang's distinct personality shining through, along with his unwavering vision for the company.
(I highly recommend exploring more interviews featuring Daniel; they're definitely worth your time!)
I won't delve too deeply into the others, not because they're any less important, but to keep this article from becoming too lengthy! Here's a brief overview:
Carina Strid, CFO
Maria Johansson, CAO
Anna-Karin Karlsson, CSO
Mona Axman, COO
Håkan Wahlberg, CMO
Having examined both their business and academic backgrounds, I've observed that each member brings valuable expertise to their respective roles within Teqnion. From prestigious educational backgrounds to involvement in esteemed projects within the business realm, they've all demonstrated competence and capability. While interviews with them may be scarce, it's evident that they are well-versed in their functions.
One fascinating aspect I discovered is that every member of the board shares common values and a unified future outlook. Their collective aim is to acquire exceptional companies and aid in enhancing various phases of those companies, all while respecting their autonomy. Unlike typical serial acquirers who often impose their will and vision forcefully, potentially disrupting operations, Teqnion takes a different approach. They strive to assist and enhance value where possible, without completely overhauling established systems. This approach fosters a positive bond with the companies they acquire, which is truly commendable to witness.
Many well-known investors harbor apprehensions toward serial acquirers. Why? Because there's a risk that some acquired companies may underperform. Some investors even argue that M&A activities can destroy value rather than create it. However, I strongly disagree. I believe that when executed by individuals genuinely passionate about their work, M&A strategies can generate immense value.
Admittedly, if a company embarks on a rapid acquisition spree, it can raise concerns. However, I don't believe this is the case with Teqnion. In my opinion, their approach differs significantly. Of course, I encourage you to form your own opinion by conducting your own research rather than solely relying on my perspective.
Industry & Competition
Since Teqnion owns numerous companies across various niches, the company operates in diverse industries and serves various end-customers. Previously, the company utilized a reporting framework divided into Niche, Growth, and Industry categories. However, management recently decided to discontinue this approach due to internal underutilization and limited significance, a decision with which I concur. Nevertheless, in an effort to still categorize Teqnion's subsidiaries, I have identified the following main exposures:
Construction: Teqnion owns companies involved in producing building materials and designing houses.
Infrastructure: Subsidiaries provide equipment, tools, and services for infrastructure projects such as railways, trains, cars, trucks, and trailers.
Electrification: Exposure includes electronic components and safety products.
Defence: Subsidiaries provide equipment, materials, and services to military organizations and marine customers.
MedTech: Subsidiaries supply medical technology products and consumables to laboratories.
It's crucial to acknowledge the dynamic nature of Teqnion's exposure to different industries. The current composition of industries differs significantly from that of just a few years ago, and this trend is expected to continue as the number of subsidiaries is projected to double in the next five years. Management has likened Teqnion to a canvas, where they've only just begun painting; while they have a vision, the final outcome remains uncertain.
Most of Teqnion's subsidiaries have some level of exposure to the industrial sector and are primarily focused on Sweden. Given the cyclical nature of the industrial sector, Teqnion is also subject to these fluctuations. However, the presence of niche industries within the company helps mitigate performance declines. For instance, companies with exposure to defence and electrification currently offset declines in construction performance. Consequently, while cyclicality is present within Teqnion, its impact is less severe due to the company's diversification.
Teqnion's diversification also increases competition faced by the group. Competitive advantages are primarily built through long-term customer relationships and leading market positions in specific niches. Some companies within Teqnion's portfolio face little to no competition due to their highly specialized nature. Through these advantages, Teqnion aims to maintain stability throughout the business cycle. While I believe that Teqnion's subsidiaries enjoy some degree of stability and advantages through their business models, certain subsidiaries may not have strong economic moats.
In terms of mergers and acquisitions (M&A), Teqnion faces limited competition. The company typically targets niches that are often overlooked by larger players or private equity firms due to their size or lack of attractiveness. Moreover, Teqnion's management often initiates M&A discussions directly with potential targets, rather than relying on brokers. This approach allows Teqnion to establish strong relationships with sellers, offering continuity and ensuring that entrepreneurs feel comfortable entrusting their businesses to Teqnion. This gives Teqnion a competitive edge in the M&A landscape, thanks to its size, target selection, and deal-making strategy.
Opportunities & Risks
Like any company, Teqnion presents both opportunities and risks. I see opportunities primarily in additional diversification through mergers and acquisitions (M&A). As mentioned earlier, I anticipate Teqnion's subsidiary count to nearly double in the next five years. Alongside exposure to new industries, I also foresee Teqnion expanding its geographic footprint through acquisitions outside of Sweden. Teqnion has already demonstrated this with its acquisitions of Belle Coachworks in England and Reward Catering in Ireland in 2022. Following discussions with management, it appears highly likely that we will witness more acquisitions in these regions as well as in the Nordics in the years ahead.
However, Teqnion also faces certain risks that must be carefully considered. The main risks I've identified include cyclicality, inevitable diminishing returns on capital, and management concerns. Firstly, Teqnion's business model and industry exposure make it susceptible to cyclicality, influenced by various macroeconomic factors. Additionally, the acquisition strategy involving +-45% financing through bank loans exposes Teqnion to negative impacts from rising interest rates.
Secondly, as Teqnion expands, it may need to pursue larger acquisitions to sustain growth. These larger acquisitions introduce greater complexity, heightened competition, and higher multiples, resulting in lower returns on investments. While this scenario may not be immediate for Teqnion, it is a reality that must be acknowledged. Moreover, larger acquisitions carry risks that could potentially diminish shareholder value, such as imprudent investment practices driven by a desire to inflate numbers and satisfy shareholders.
Financials & Valuation
Teqnion is growing, and growing rapidly! Total revenue from '16 to '23 had a CAGR of 30.46%. Gross Profits in the same period had a CAGR of 32.08%, and operating income in the same period had a CAGR of 27.66%. These are impressive results. They're neither over the moon nor low. This is promising! It indicates sustained results without dilution over the coming years. Occasionally, we see high CAGRs that aren't sustainable, but I definitely see these types of CAGRs being sustainable for the foreseeable future. Teqnion is well-positioned, and in my opinion, engaging in effective mergers resulting in these impressive numbers. The only potential issue I foresee in the future is mergers in other countries. I've noticed that companies execute quality mergers in their homeland but struggle elsewhere. Additionally, tax rates, loans, and other required metrics will differ from country to country, potentially disrupting the excellent balance they have now.
Doing acquisitions and more requires capital. In the case of Teqnion, this means taking on debt to finance their acquisitions. We see they are taking on a good amount of debt, but their assets outnumber the debt. The short-term debt does not average their assets, which I like to see. And their long-term debt is also peanuts compared to their long-term assets. Although we see aggressive growth in the assets and liabilities, this can be explained. Teqnion is a starting business and on the move of acquiring. It looks aggressive, and that's because Teqnion is ramping up their portfolio of acquired companies.
My favorite metrics! ROE, ROA, and ROIC.
We can see that Teqnion is capable of deploying capital and investing their money. Teqnion has shown to put capital in rewarding projects that generate a good return. The years before '19 were wonderful years.
ROA average: 10.52%
ROE average: 24.95%
ROIC average: 17.98%
The averages are being pulled back by the most recent two years. I expect Teqnion to come back to an ROA of 14%, ROE of 27%, and ROIC of 20%. When these targets are met, Teqnion might be the next biggest player set for long-term success and shareholder returns.
From the P/E, P/FCF, EV/Sales, and EV/EBITDA ratios, Teqnion appears to be on the expensive side, averaging above the averages of all the ratios. Does this become an issue? No! Teqnion is poised to grow, like all serial acquirers in the market. We pay premium prices for the future returns we would expect from this company. It's engaging in numerous acquisitions to ensure steady returns in the future.
If we take a look at Constellation and other serial acquirers, their multiples are all on the high side. We're in a bull market, and the market is pricing in the prospects of serial acquirers. Personally, these metrics do not deter me from considering investing in the company. I believe that Teqnion has significant potential for the long-term foreseeable future.
Conclusion
So, what's my end view on Teqnion?
I'm personally a fan of their business model. They invest in the industrial sector, which is a sector that steadily gives shareholders returns. The industrial sector is less cyclical than other sectors, such as tech. Furthermore, I think Teqnion has a wonderful balance sheet!
The only issue I have is the loans Teqnion is getting. With the current rates, these loans can be a pain in the neck. I hope to see in the future that their operational income will cover a portion of the expenses instead of borrowing, as we see with other acquirers.
Also, the overseas acquiring. I've read a wonderful book called "Quality Investing," which covers acquiring outside known territory. In many cases, this seems to be destroying shareholder value because the regulations are vastly different, as are the rates/taxes, which can impact us shareholders.
With the current price, Teqnion is on the expensive side, but this should not be an issue for long-term investors. We're at a crucial turning point for Teqnion, and I want to be a part of it. Therefore, I would initiate a "BUY" on this company. Management, the balance sheets, financial statements, debts/assets, and much more are looking modest to me.
End note Author
Thank you for reading! To be completely honest, writing articles is something new to me, and I'm trying my best to make my thoughts into a cohesive story, haha. If this seems like a jumble of thoughts all over the place, I apologize. I will be doing this more often to improve my writing skills and create even more cohesive and compelling stories.
Thank you for reading, and I hope to see you soon!
Disclaimer
The information provided herein is for educational and informational purposes only and should not be construed as financial advice. I, Yorrin, am not a licensed financial advisor, and any investment decisions made based on the content of this material are solely at the discretion and risk of the reader.
Readers are strongly advised to conduct their own research and consult with a qualified financial professional before making any investment decisions. The content provided does not guarantee any specific investment outcome and should not be relied upon as such.
Furthermore, it is important to note that as of the time of writing, I do not currently hold any position in Teqnion. However, I intend to add it to my portfolio within the next six months. This statement does not constitute a recommendation to buy or sell any securities, and the decision to invest in Teqnion or any other asset should be based on individual research and assessment of one's own investment objectives, risk tolerance, and financial situation.
Investing in financial markets involves risks, including the risk of loss of principal. Past performance is not indicative of future results. All opinions expressed herein are subject to change without notice.