M4 BARRON’S October 12, 2020
EUROPEAN TRADER
G
erman industrial conglomer-
ate ThyssenKrupp has been
restructuring its various busi-
nesses in an attempt to reboot
performance and address debt issues.
Shares in the Frankfurt-listed com-
pany (ticker: TKA.Germany), which has
about 400 subsidiaries and is one of the
world’s largest steel producers, have
plunged 75.6% over the past five years.
The coronavirus has slowed its turn-
around, and in April, ThyssenKrupp—
the maker of everything from submarines
to car parts—sought one billion euros
($1.2 billion) in state grants, which it
hasn’t used yet. Last week, it announced
the latest in a series of job cuts, with the
loss of 800 workers at its automotive
business.
These events have weighed on the
stock, which has fallen to €4.53 and is
down about 62% this year. This could be
a nadir if the restructurings succeed. In
September, ThyssenKrupp raised €17 bil-
lion selling its elevator division. While the
company hasn’t confirmed how it will
spend the proceeds, there is the potential
to reduce debt and secure a firmer finan-
cial footing.
ThyssenKrupp is also seeking consoli-
dation in its steel business and shipbuild-
ing arm, and looking to attract buyers or
partners for its plant-engineering unit.
The company is also examining the sale
of noncontrolling stakes in other areas.
Marc Gabriel, an analyst at indepen-
dent private bank Bankhaus Lampe,
thinks the shares can gain momentum
as CEO Martina Merz reshuffles the
company’s portfolio.
Gabriel forecasts that ThyssenKrupp
stock could rise to €10, saying that the
restructurings are a “catalyst for the
financial market to regain trust in the
stock along with the scheduled transfor-
mation phase of two to three years.”
Analysts at Société Générale have a
price target of €10.20.
The business, based in Essen, employs
106,000 workers and is one of Ger-
many’s largest 20 companies, valued at
€2.6 billion. The stock trades at a signifi-
cant discount to its healthier peers.
ThyssenKrupp had a €83 million loss
for the 12 months to Sept. 30, 2019, from
income before tax of €561 million re-
corded the previous year. Net sales in
2019 were €41.9 billion.
At the third-quarter trading update on
Aug. 13, the company posted a deeper net
loss.
Merz said in a statement, “While we
are now seeing signs of stabilization, the
forthcoming restructurings and cleaning
up of the balance sheet will continue to
weigh on earnings in the current quarter.
“With the proceeds from the elevator
transaction, we can now at last systemati-
cally address these overdue measures.”
The business dates back to 1811, when
Friedrich Krupp established a factory with
two partners to make English cast steel.
By 1833, with the first steam engine
lowering production costs, the company
expanded into producing railroad equip-
ment and gun-barrel ingots and artillery,
and later added shipping and ore mining.
In 1871, August Thyssen created Thys-
sen & Co. to produce iron hoops. In 1997,
the two companies agreed to merge their
flat carbon-steel activities and examine
other areas of cooperation. A full merger
was proposed, and ThyssenKrupp was
born in 1999.
Christian Obst, an analyst at invest-
ment bank Baader wrote in a recent note
that “the journey is far from over, and the
CEO always pointed to the fact that it will
take up to three years.”
This is a stock for brave long-term
investors. The sale of its most profitable
elevator unit will shore up finances, but
reaching the next level depends on
successfully slimming down and maxi-
mizing profits.B
By Rupert Steiner
EMERGING MARKETS
Brazil Becomes a Hot
Market for IPOs
A
raging pandemic and 5% eco-
nomic contraction might seem
like a poor backdrop for initial
public offerings. But Brazil’s
IPO market is defying macro gravity
with its hottest year since 2007.
Seventeen companies went public as
of late September. For patient stockpick-
ers, that could offer ground-floor entry to
rising innovative stars. “Brazil has a very
strong and thriving new economy,” says
Pablo Riveroll, head of Latin American
equities at Schroders. “We are focusing
on companies that will benefit from the
new normal.”
A middle-income nation of 210 mil-
lion, Brazil has been a sleeping giant of
the digital revolution. E-commerce ac-
counted for 3% of retail sales last year,
compared with 21% in China, notes Mal-
colm Dorson, Latin American portfolio
manager at Mirae Asset Global Invest-
ments. Covid-19 woke it up.
“We have companies where digital
sales went from 5% to 25% in a few
months,” says Piero Minardi, head of
Latin American investment for private-
equity powerhouse Warburg Pincus.
Two Warburg investments have come
to market in the past month: Pet Center
Comercio e Participacoes (ticker:
PETZ3.Brazil), which combines pet stores
and veterinary clinics, and Sequoia Solu-
coes Logisticas (SEQL3.Brazil), an aspir-
ing FedEx/USPS for Brazil’s burgeoning
e-tailers. Schroders’ Riveroll is also watch-
ing Locaweb Servicios de Internet
(LWSA3.Brazil), a GoDaddy analog for
small businesses in need of web hosting
as they rush online, while Dorson flags
Vasta Platform (VSTA), a provider of
educational content to K-12 schools.
“It’s a business with very visible reve-
nue lines, and incredibly scalable,” Dor-
son says. Established store chains like
Magazine Luiza (MGLU3.Brazil) and
Via Varejo (VVAR3.Brazil) have come
with follow-on equity offerings to fund
online expansion.
These issues are riding a wave of capi-
tal from local investors driven into equity
due to plunging returns in traditional sav-
ings. Brazil’s benchmark Selic interest rate
has fallen from 6.5% to 2% over the past
16 months on the back of record-low in-
flation. A consequent fixed-income exodus
has driven stocks up by half, in local-
currency terms, from their lows in March.
But those same dynamics are deter-
ring global investors. The interest-rate
collapse has all but ended the Brazil
“carry trade” (borrowing a low-interest
currency to buy a high-interest one),
pushing capital out and sending the
Brazilian real relentlessly downward.
The dollar-priced iShares MSCI Brazil
exchange-traded fund (EWZ) is off 40%
for the year, despite a dead-cat bounce.
The trade-weighted real is now at 10-
year lows, Riveroll figures, but Brazil’s
tumultuous politics constrain a rebound.
The government needs to dial back gener-
ous Covid-driven transfers to avoid fright-
ening debt levels. That’s hard to count on,
with mercurial President Jair Bolsonaro
and 30-some parties jockeying in parlia-
ment. “It’s a soap opera,” Mirae’s Dorson
says. “We see it every morning, but don’t
spend too much time in the weeds.”
Brazilian locals are showing signs of
IPO fatigue, as loads of dross are among
the nuggets of gold, says Richard Thies,
an emerging markets portfolio manager
at Driehaus Capital Management. Devel-
opers, in particular, have flooded the
bourse to capitalize on rock-bottom mort-
gage costs. “Everyone and their mother
in real estate seems to be coming to mar-
ket,” he says. “It feels like the manic
momentum phase is over.”
That doesn’t mean the treasures aren’t
there, just that finding them takes dig-
ging. “There’s a massive penetration op-
portunity if you pick the right horse in
Brazil,” Dorson says. “But it has to be a
longer-term story.” B
By Craig Mellow
ThyssenKrupp Aims for
A Slimmed-Down Look