Is BUFAB AB the Next Constellation Software?
Unveiling the Surprising Truth Behind This Market Phenomenon!
BUFAB AB is a Swedish based company founded in 1978. It is a trading company specialised in C-parts. C-parts refer to a category of components typically used in manufacturing and industrial processes.
The company grows with a mix of organic and inorganic growth. More than 50 companies have been integrated into BUFAB’s group since its inception.
Being in the C-parts niche is advantageous, as these components, while essential, do not contribute significantly to the overall cost of the product. Since they are not costly, establishing a strong and quality brand becomes crucial. Customers typically seek high-quality components in this category, as they are vital yet relatively inexpensive..
Also, as I commented in the past, trading businesses are good in times of inflation as they pass the inflation through to their customers and they earn a % of the overall price.
Since 2014 the company stock price has gone up 524%, or a 20.7% CAGR.
Let’s see now how Revenues and EPS have grown:
The company has demonstrated robust performance, with a top line growth of 16.7% CAGR and a net income growth of approximately 17%. This growth in net income has shown a clear correlation with the stock price, especially notable as the company has avoided shareholder dilution. Additionally, the stock's attractiveness is further enhanced by the dividend payments made over the years. Consistently achieving this type of growth over an extended period, without diluting shareholder value, is a hallmark of a high-quality company..
Financials
Lets deep dive into the numbers:
Gross margins have been super stable at around 29%
Operating margins have slightly go up over time from 10% to 12%. But also they have been stable.
Company Free Cash Flow has also grown over time.
BUFAB AB has strategically financed their acquisitions through a combination of cash from operations and debt. In my view, their capital allocation has been exemplary. Each acquisition has been seamlessly integrated, contributing to increased revenues without adversely affecting, and in some cases even improving, profit margins.
Current NET DEBT of SEK3200M with a NET DEBT/ EBITDA of 2.6x. A little bit high but not worrying as company EBITDA is stable.
Historic ROIC between 12% and 15%
Current assets of SEK5000M. Almost covering Total Liabilities. The company has a strong balance sheet even though taking into account its “high” debt. There is no chance of the company going bankrupt as they have enough current assets to pay debt and also they generate positive Cash flow from operations.
Valuation
Fordward P/E ratio: 21x (They recently updated positively guidance for 2023 profit)
Fordward P/FCF ratio: 15.3x
In my opinion it is trading below fair value as it is a high quality company able to compound for many years in the future.
Alignement
Current CEO Erik Lunden has a modest interest in BUFAB AB shares. He currently owns about €1M in shares. It is not that much but it is something to take into account.
Even though, historically the company has shown his interests to treat well shareholders providing a yearly dividend and in some cases a modest share buyback.
The dividend yield has been historically between 1% and 3.5%.
It is not a difficult company to analyse as his business model is easy and they have shown over time an extremely good capital allocation on doing successful acquisitions. They have proofed their ability to grow and it would be a bad thing to think that this trend is going to change. They have earned their strong and good reputation.
However, it remains crucial to closely monitor the company's annual acquisitions and assess its performance. This is necessary to ensure that, in the event of scaling up, the company does not encounter issues with integrating these acquisitions, which could potentially lead to less successful outcomes.
My Ownership
BUFAB AB represents a 14% of my portfolio and I plan to own the company for a long period of time and only get rid of it if fundamentals shift for bad.
I feel is the type of company you want to own like Constellation Software was a few years ago.
Conclusion
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