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E2N - Endor AG


EricSchleien
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Endor AG is a Munich-listed holding company whose sole asset is Fanatec, the premium provider of racing wheels and other accessories for sim racing games played on consoles and PCs.

 

It's currently a 5% position for me.

 

Endor is a tiny obscure microcap listen on the Munich stock exchange. I did an interview with one of their shareholders this week on the company.

 

Despite being a German-listed small-cap, the company has ~80% market share in the premium wheel/accessories segment and has essentially locked up exclusive branding rights for all the major OEMs and racing organizations (F1/Nascar/WRC) to produce branded replica racing wheels.

 

Endor AG grew 70-80% last year and has compounded revenues at 40% over the last 10yrs, as iRacing/simulated racing has grown organically in popularity at very high rates.

 

Current growth is exploding due to COVID-19 and the mainstream recognition sim racing has garnered with normal sports closed for the last three months.

 

The current business is growing 100-200% per annum, so much so that the company can barely keep up with demand.

 

The company has already leaked they are targeting 150-200mm in revenues at 25-30% EBIT margins in the next couple of years (versus 40mm revenues last year and 80mm this year).

 

The stock currently trades at ~11x 2021 earnings, and ~2x 2021E sales, despite a multi-year runway where the business could grow 30% for a very long time.

 

Fair value on a ‘normal’ exchange with English disclosures/investor relations would probably be 4-5x the current price.

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The stock currently trades at ~11x 2021 earnings, and ~2x 2021E sales, despite a multi-year runway where the business could grow 30% for a very long time.

 

I understand the extrapolation you are doing but 1Q20 sales implies a run-rate of EUR 45m (13% growth in 2020). 1Q20 actually saw a sequential decline in sales. The company mentioned there are supply chain challenges ahead. There are clear catalysts to attribute the quarterly sales > EUR 10m to. I think these estimates are misleading, especially since you talk about 30% in the second-half of the sentence which would not imply 11x 2021 earnings.

 

It's a cool idea, but it is expensive and it's not at all clear how much of the the recent increase in sales is one-time in nature or sustainable, despite the company promising that it's sustainable.

 

I'm glad cobf is at least talking about some of the exciting small caps out there though.

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Yeah, the bear case is that everybody who was thinking about buying a racing wheel the coming five years did so the past quarter. It's an interesting stock and I wish I was smart enough to buy it in March. It probably was cheap back then and it might still be cheap. But there's also the risk that it's an illiquid stock hyped by some smart growth investors who got in early and are very optimistic (and the cynic in me says perhaps even disingenuous) about what the ridiculously great Q1 results imply for the future.

 

11m revenue in 2016, 17m revenue in 2017, 21m in 2018, crazy quarter due to lockdown in Q1 2020 and suddenly we expect 110m sales in 2021? I'll take the under.

 

That said, I'm no expert here and I could very well be wrong and I hope somebody can point out why.

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writser, the cynic in me says even you are a tad disingenuous- turnover is about 40m in 2019 (fact) and we know what H1 will look like; so achieving 70/80m is possible in 2020 and then we are getting new consoles in Q4, new game launches like GranTurismo7, so I would not totally dismiss 2021 revenue around EUR 100m!

 

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That said, I'm no expert here and I could very well be wrong and I hope somebody can point out why.

 

Well, that was quick :) . I wasn't even aware 2019 results were out already. Couldn't find them on their website (I now see there's only a PR). Yes, that makes it quite a bit more likely. My apologies. Looking forward to more interesting discussion here and I'll try to keep my misinformed, salty thoughts private.

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https://www.wallstreet-online.de/diskussion/1148001-7791-7800/endor-ag-offizieller-thread-mit-beteiligung-des-vorstands#beitrag_63945537

 

not official guidance, but CEO in interview with small German finance newspaper basically just "guided" 2020 turnover of € 80m, and that in two to three years, a sales level of € 150 to € 200 million should be achievable with a net profit margin of 15-20%.

 

still time to go long Writser!

 

 

 

 

 

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Yeah, the bear case is that everybody who was thinking about buying a racing wheel the coming five years did so the past quarter.

I know nothing about the company, but I do know that local racing clubs of all types cancelled in person racing and switched to virtual racing back in the spring.

 

Endor's products seem high end, so lets take the Porsche Club for example. Porsche is the largest brand specific club, so they are a worthwhile example from that stand point too. Local and national cancelled: Social Events, Racing, DE events, Autocross, Time Trials, Rallys, Cars and Coffee, Shows, Swap Meets, on and on. Basically all events of all types were cancelled.

 

And they switched to weekly online racing. So if you were a car enthusiast the only game in town was virtual racing and maybe YouTube, books etc. Everyone selling racing setups sold a ton of equipment.

 

In person racing is opening up in my region and around the world at this point. Anyone who hasn't already set-up their sim racing set-up is probably too busy preparing to race in person to bother setting up a sim at home. That is definitely the bear case for the Endor and all competitors.

 

The bull case would be that there are a lot of people who sunk money in to simulators and that may be bullish for a critical mass of people who will want to race every winter.

 

I have focused my comments on a specific portion of their potential market, but I am guessing you would be foolish to ignore the impact that portion of the market in the context of an unprecedented time period.

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I never heard about this company before. Nice products, but I think the margin expectation of 15-20% seems high. The history of These rocket stocks in Germany (and probably elsewhere) isn’t exactly great.

 

I see lots of bubble stocks I small cap German stocks with low liquidity.

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Couple things:

 

- I have my doubts about their operating leverage. How much capex will be needed to sustain this growth? They are also planning to at least triple their workforce in the short term. Can their factory handle current demand?

 

- This company looks like a mess internally. I get the feeling customer service has been bad for a long time and got worse during the uptick in demand. They have a new website which isn't working as expected. CEO seems a bit dismissive of customers. Admittedly, all of these arguments are a bit subjective I guess.

 

- They are dependent on licenses from console creators, what happens if they get pushed out? This sounds like a nice, little tail risk.

 

- Management (2ppl) is paid ~€850K

 

- Their revenue hasn't grown consistently, so who's to say that we're not looking at some cyclical top this year / next year.

 

OTOH there's quite a lot to like here:

- They own the market right now. And the market potential has to be huge with all of this growth toward online/e-sports etc.

- They aren't serving China yet.

- Their customers love their product from what I can read. Some of them were even willing to pay extra for shipping just to get products separately sent to them.

- All in all demand looks explosive, and on top of this I guess you can argue that switching to English financials and a more liquid exchange could give this company a priceboost. 

 

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