Schlatter Industries: a very cheap Swiss nanocap with above average earnings quality
Schlatter Industries AG is a small company trading with symbol STRN on the Swiss stock exchange. I wrote this note already in August 2024. It is based on a stock price of about 24 CHF. For that price the company is cheap based on EV/EBIT, EV/Revenue, P/E and cash flow multiples.
Furthermore multi-year metrics suggest earnings quality is better than that of the average public company. An easy to check quality multiple is Gross Profit/Total Assets. Schlatter’s multiple is equal to 0.65, which is very high.
I like small companies: currently the market cap is about 30 million USD. That makes it a nanocap, although one of the larger nanocaps. Trading liquidity is very low, which I like as well. Selling off a small percentage of the shares results in a relatively large price decline. Stocks with such trading behavior are avoided by many investors resulting in fundamentally cheaper shares. One would think such trading behavior results in volatile share prices, but that is not the case for this stock. Share price volatility of Schlatter Industries is comparable with other small companies.
According to the annual report the business is the following:
The Schlatter Group is a leading manufacturer of resistance welding systems for reinforcing mesh, industrial mesh, railway tracks, weaving and finishing machines for paper machine coverings as well as wire mesh and mesh. Two of the three members of the Supervisory Board occupy their seat already more than 10 years (red flag), including the President. A member of the Supervisory Board is CEO for another public company (red flag) and president for that same company (red flag, StarragTornos Group). The president of the Supervisory Board is also president of the Supervisory Board of two other public companies (red flag). This is a weak board.
A positive is that 5 of the 6 excutives are already working for the company for more than 20 years, though they still have several years before reaching retirement age. The sixth executive is also working for the company since 2013, so for more than 10 years. I also like that the CEO was CFO for Schlatter from 2004 until 2012.
The CEO earned 637k CHF (cash 492k CHF net plus 136k CHF pension plus 8.5k CHF for a car) including 144k CHF of variable pay.
The CEO owns 1.0% of the shares and the president of the Supervisory Board owns 1.1%. Members of the Supervisory Board are well paid: 136k CHF for the president and 69k CHF each for the two other members.
Substantial shareholders (31 December 2024): Huwa Finanz- und Beteiligungs AG 19.87% from Au SG, Metall Zug AG 13.60%, Marc Philipp Bär from Zürich 7.66%, Main Line Development Inc from Hamilton 5.87%, Brita Meier-Birkel from Uitikon Waldegg 4.65%, Civen Ltd from Kingstown 3.07%.
The balance sheet has normal leverage with Tangible Assets/Tangible Book = 2.4. The current ratio is 1.7, which is high. There is much more cash than debt. I do not think the company is financially distressed.
My take: Very cheap manufacturing company from Switzerland based on P/E, EV/EBIT, EV/Revenue and P/FCF. I have not found any governance issues but think members of the supervisory board and the CEO are paid too much for a company of this small size. Earnings quality is not excellent but still better than average.
For the first half of 2024 the company has issued a profit warning because of certain setbacks but the company probably will not report a loss. The company has assured investors the second half of 2024 will be good. On 12 August 2024 the company also reported a cyber attack.
I think this is a good stock for a small position.
Disclosure: I own shares of Schlatter Industries AG.