Kontron: Internet of things growth company
12 times forward earnings, worth buying?
Kontron AG entered the portfolio in September, as mentioned in my portfolio updates section ($).
Ticker: KTN (Austria)
Price: 23.5
Market Cap: 1.45 Billion Euros.
Since then it is up about 50%.
I don’t always get my buys right, but if you want to follow these opportunities on time, you need to upgrade here:
In September, when I highlighted the purchase, it was at about 9 times forward earnings, and now it is at about 12 times forward earnings.
It’s easy to buy at 9 times earnings. Now comes the hardest part. the question is, how is the value proposition of Kontron today? This is why I needed to do the review in more details to know what I will do with the share.
Kontron is an engineering and service company whose value proposition is about Internet of things. Internet of things, or IOT, is basically connecting devices remotely to the internet, making them exchange information, commands, talk to each other. It is essential in robotics, in transportation, energy, or industry automation.
What is key to understand are the long term perspectives of such a company and the cycle rather than solely financial metrics that don’t capture the future value creation.
1.History
Kontron is an Austrian company. Originally founded in 1959 in Zurich Switzerland, that grew slowly until the a new Kontron company was set up in 2017 with the merger with S&T, changing dimension. S&T was a near 1 billion Euro revenue company.
In August 2017, Kontron was merged into Austrian-based S&T,[7] and was renamed Kontron Group on 1 June 2022, with its corporate headquarters in Linz.[8][9]
S&T was the biggest company, and Kontron was an embedded computer company. S&T was founded in 1993, and expanded as an IT distributor and later consulting company in various countries in Central Europe. S&T was growing with acquisitions.
From then, the new group was born.
In 2022, Kontron announced the sale of its IT services business to Vinci SA in order to concentrate on its realignment as a provider of products and solutions for Internet of Things.[10]
This marked a focus on IOT, selling lower margin and more cyclical IT service business.
In 2024, Kontron bought Katek, a renewable energy company that makes electronics and products for energy and e-mobility., and this brought the share price down with concerns about the acquisition. This segment was named “Greentec”.
That was a 750 million Euros revenue business. Kontron at the time was 1.2 Billion Euros revenue business, so it was substantial. It paid 129 million for 60% of the business making 31 million Euros of net profit expected the next year, or a 15% earnings yield, all funded by loans. Solar and Katek was already in a downturn, so it was a well timed acquisition in my opinion.
There were also small acquisitions along the way of companies adding key technologies to the group.
We can see that the company did a realignment of business in a financial but mostly strategic manner in order to focus on these fast growing IOT segments, with the aim of building expert products and services to customers, and to become a reference in the domain.
We can expect this to continue, with a technology first focus.
2.Business overview
First let’s go to Ownership:
-Ennocon corporation, a Taiwan company, part of Foxconn, owns 27.5% of Kontron AG.
-The free float is 60%.
-Amiral Gestion SA, a good growth/value fund out of France, owns about 3%.
Kontron aims to be a specialist of the Internet of Things. The internet of things consists of connecting objects, usually moving objects, to the internet and making them exchange information and speak to each other. This is a growing market with robotics and AI. While you need an AI brain to operate a robot, you also need a connectivity module and a computer to safely connect the robot to the internet, localise it, exchange information and instructions. It does not need to be a robot. It could be something as simple as a solar panel to be oriented towards the sun based on the time and day and share output, or a train to exchange information in real time with the rail network for safety reasons.
Here is an overview of the business:
We can see here that Software + Solutions has a higher Ebitda margin than the rest at 17% and is already the majority of EBITDA.
Now before we get further, know that the reporting divisions are not very logical, as well as the products which are confusing, so I do my best to decipher it and simplify it.
You have Europe and Global, two geographic zones, and Software+Solutions, an industrial segment. And you also have hardware inside of the software+solutions segments because, why not… .
And you also have services inside the Europe segment.
But to simplify, it makes embedded computers and software to manage them remotely.
Further below, we will see how is the opportunity now, after focusing on products, management, strategy, market perspectives, and capital allocation.