Carlo Gavazzi: A Small Swiss Gem

A niche manufacturer of electronic control components

Ticker: GAV
Price: 326 CHF (04/10/2023)
Market Cap: 231 mCHF
P/E (ttm): 8.4

Business model

Carlo Gavazzi was founded in 1931 by the Italian entrepreneur of the same name in Milan, Italy, and moved its headquarters to Switzerland in the 1970s. The company went public on the Zurich Stock Exchange in 1982.

Today, the company's core business is the manufacturing of electronic control components such as controllers (46%), switches (34%) and sensors (20%) for a wide range of industries including agriculture, construction, energy, semiconductors and mobile communications. GAV has production facilities in Italy, Lithuania, Malta and China. 69% of its sales are generated in the EMEA region, 19% in the Americas and 12% in Asia Pacific.

GAV's success is based on a highly specialised business model in which it manufactures and offers components based directly on the specifications of its customers, the OEMs in various industrial and building automation sector. GAV is a medium-sized player that is very product-driven, as most of the products are built directly to the specifications of GAV's customers. In essence, GAV is a player that dominates certain, often very narrow product niches in the global market for electronic components. There is to be some cyclicality in the business model, but this is likely to be moderate due to the diversification of customers across industries.

Key financials

Since the 2018/19 financial year, GAV's revenues have grown by almost 50% and its operating profit has more than doubled from CHF 15.2 million to CHF 39.3 million. The EBIT margin was almost 15% in the last financial year and has been in double digits for most of the last 8 years. Return on equity (ROE) for the last financial year was 21.4% and return on invested capital (ROIC) was 24.2%. Overall, the profitability ratios look quite satisfactory.

What about the balance sheet? The equity ratio is over 70% and there is no financial debt except for a few million in lease liabilities. But there is a cash pile of CHF 49.2 million. It would be hard to imagine a more conservative balance sheet.

Operating cash flow, at CHF 14 million, is only about half of net profit, mainly due to rising inventories and receivables. Operating cash flow has been consistently higher in the three years preceding the last financial year. The build-up of higher inventories is not unexpected given the supply chain issues that most electronic component companies have faced in recent years.

The dividend yield is 3.7% at the current share price.

Market Environment and Competitors

The heterogeneity of its customer markets makes it difficult to forecast market growth. In principle, it is clear that the worldwide market for electronic components is growing above the rate of global GDP, as automation and digitalisation are a secular trend in all industries. As GAV supplies automation components at the very basic level of the Internet of Things (IoT), I remain quite optimistic about the company's long-term growth prospects.

GAV's market is dominated by 5 major players (Siemens, Schneider Electric, Rockwell Automation, ABB, Omron), which account for around 35% of the market, with a further 30% of the market covered by small, local players. GAV operates in the medium-sized segment with a number of other players in the same size category. The advantage in this market segment is to have a global reach, but also to be able to offer highly customised products. The large number of small and medium-sized players suggests that the market will continue to consolidate in the future.

Ownership and management

Almost 80% of the voting rights are in the hands of the Gavazzi family, mainly Valeria Gavazzi, who was chairwoman of the board for 12 years (until 2022). The current chairman is Daniel Hirschi, former CEO of Saia Burgess, another electronic controls company based in France and a subsidiary of the Honeywell group.

The CEO is Jean-Marc Theoliér, a Swiss-American, who also has an engineering background and who got appointed CEO in 2022.

The entire company is led by people with engineering backgrounds, which clearly reinforces the strategic focus on product capabilities and innovation.

What makes Carlo Gavazzi unique?

If you had to create a greenfield, boring, conservative, hidden champion Swiss engineering company, it would look exactly like GAV. The curious thing is that the company's roots are not Swiss but Italian. But now based in the canton of Zug (in the heart of Switzerland) and family-owned, it is the blueprint of a company that combines financial rigour with Swiss engineering genes. There is no single characteristic that makes GAV unique, but the combination of traits is certainly a big plus in today's competitive world. I also like the fact that GAV flies under the radar of most investors: It is only covered by 2 analysts (a Swiss regional bank and an independent Swiss research house).

Valuation

All available valuation metrics point to an intrinsic value well above the current market cap of around CHF 231 million. My FCF model suggests a value of over CHF 500 per share, implying an upside of around 50% to the current share price.

The bottom line

Despite the cyclical nature of its business, GAV is essentially a moderate-to-strong growth company with excellent profitability and return on capital. As most companies in the construction and industrial sectors are facing headwinds these days, we would not be too surprised if GAV's share price remains volatile and under pressure in the coming quarters or even years. However, the underlying business is very healthy and has excellent long-term growth prospects. Consolidation in the sector means that GAV could also snap up some smaller competitors to accelerate its growth and spend some of its huge cash pile. Take note that the share is not very liquid as only the around 391k bearer shares are trading publicly whereas the registered shares remain private and in the hand of the majority owner family.

Disclaimer

Please note: THIS ARTICLE IS NOT INVESTMENT ADVICE. It reflects my personal views and may contain biased views, factual errors and opinions that may prove to be completely wrong. Do your own research. I may or may not hold shares in the companies I discuss.