IVU Traffic Technologies AG | Stock Analysis: Debt-free Technology Company with a leading Market Position

3 Dec 2020

Dear Reader,

my Stock Market Research Report published today may divide my readers into two groups.

There will be one group that will directly reject my long-term investment idea because it believes that public transport will no longer exist in the future. They will come up with arguments like “individual transport will play an even greater role in the future” or “through intelligent transport concepts, self-driving cars, and car-sharing, there will be no need for buses and trains anymore”.They will also say that COVID-19 accelerates this trend and then they point to empty trains, busses, and streetcars (like in the picture below, which I admittedly took at a late hour on a Tuesday shortly before the final stop).

But there will also be the second group, which expects exactly the opposite. Arguments are therefore “public transport is much more efficient, more relaxing, faster and more sustainable over long distances” or “buses and trains will have a right to exist also in the future, besides self-driving cars, etc.”

In the last 24 months, transport policy has been the subject of more political and media debate than it has been for a long time.

The following slide from an investor presentation by IVU Traffic Technologies dated November 2019 shows that something is happening:

IVU Traffic Technologies Stock Market Research Capital Compounder Alexander Jagode

But this was not always the case.

The German rail network is aging

The Germans actually have a worldwide reputation for being very punctual and reliable contemporaries. ACTUALLY.

I have traveled by rail a lot in my life. Sometimes everything runs smoothly, but sometimes it’s an absolute nightmare. Delays, train cancellations, traffic jams on the tracks, technical defects, just to name a few common problems you face when you decide to travel by Deutsche Bahn. Remember that it is a scandal when the Japanese high-speed train Shinkansen is a few seconds (!) late.

The German rail network is aging. Still, more than every fourth signal box in Germany is controlled mechanically – and thus as in the 20th century. The German rail network currently covers around 33,000 km. 25 years ago it was still over 40,000 km.

In a statistic comparing the per capita investment in the rail infrastructure in selected European countries, Germany occupies one of the bottom places. In 2019 only € 76 per capita were invested. At the top of the list are Austria, Switzerland and Luxembourg with € 226, € 404 and € 448 respectively – these countries are known for their reliable and punctual train services. It is remarkable that the per capita investment in Germany in 2014 was only € 49.

IVU Traffic Technologies Stock Market Research Capital Compounder Alexander Jagode

Are there profiteers?

At the same time, this circumstance brings with it an opportunity for companies that will benefit massively from the increasing need for investment in public transport in the upcoming years (if you fall into the second group I described in the beginning).

At the end of January 2020, before the outbreak of COVID-19, Deutsche Bahn announced record investments of € 12.2 billion in railroad infrastructure. As part of the “strong rail” program, 1,800 of the 33,400 km of the rail network in Germany, as well as 160 bridges, 1,900 switches, and 800 stations will be renewed and modernized this year. With around 83 million inhabitants, this amounts to € 145 per person. An increase of 90 % compared to 2019.[1]

While these are mainly investments in the physical infrastructure, Deutsche Bahn is not able to avoid digitalization either.

As a train traveler, however, you don’t even notice which logistical requirements are running in the background to coordinate 40,000 trains that drive daily in Germany – which is quite a lot! This applies to the small local bus company just as much as it does to Deutsche Bahn.

Have you ever thought about the following?

Trains and employees must be in the right place at the right time. The timetable should be coordinated as well as possible with connecting services. Which train has to be maintained when and how long and is therefore not available? What is the range of a bus before it has to be refueled and therefore temporarily replaced by another bus? How can the timetable be adjusted in the short-term if there is an unscheduled disruption or if a construction site makes it impossible to keep to the regular bus timetable?

These are questions that every transport company must solve. In some cases, Excel is still used for planning. Unimaginable!

I may have found a company that provides the public transport world with software solutions to help better plan operations. Travelers usually don’t get to see the IVU solutions because it is running in the background.

IVU Traffic Technologies may be one of the greatest profiteers during the next decade serving the increasing need for technological planning tools in public transport

The Berlin-based software company IVU Traffic Technologies develops, installs, maintains, and operates integrated IT solutions for buses and trains. The solutions cover the entire spectrum of planning, operation, and quality assurance. IVU not only serves a growth market driven by political tailwind (at least currently) but is also riding the wave of “ESG investments”. What SAP represents as an ERP system for common companies is IVU for train and bus companies (the quote is not mine, but comes from the CEO’s mouth). Once an IVU system is installed, it is not changed overnight. A new customer usually remains loyal to the company for years or decades. The high switching costs ensure a very low churn rate or high “stickiness”. Through maintenance/service/hosting IVU increases the share of recurring revenues which makes the whole business more stable. Furthermore, these recurring revenues have higher margins.

IVU’s business model, market position, and figures still hold some interesting details that I do not want to reveal to you now that your attention has perhaps reached its peak.

Management summary of IVU Traffic Technologies AG investment case

IVU is a german software company serving a growth market and is also flying under the radar of many institutional investors despite their leading market position in Europe.

The company with more than 40 years of experience develops, installs, maintains, and operates integrated IT solutions for buses and trains. The standard products IVU.suite and IVU.rail cover the whole spectrum of planning, operation, and quality assurance for public transport and railway companies. IVU’s software and hardware systems create timetables, plan and optimize the deployment of buses and trains, dispatch drivers and vehicles, control and monitor the operation for vehicle fleets, sell tickets, inform passengers, cash up takings and prepare statistics. Consequently, they increase efficiency and the quality of public transport.[2]

Since per capita investments in the railroad sector were at a historical low during the last years in Germany, thanks to the political support that emerged in the last months one can assume that the investments in the rail sector (and furthermore in the whole public transport system) will continue to grow over the coming years. In 2019 only € 76 per capita were invested in the rail infrastructure, which is very low compared to other European countries. For 2020 this figure will increase to almost € 150.

Industry experts expect digitization to become the #1 trend over the years to come. As IVU serves this market from a very good market position, the future for IVU might be bright. The business model of IVU has high barriers to entry because of their specific know-how and their broad customer and reference network. What might be the most important thing to consider is that the switching costs for clients are very high. Once IVU has contracted a new client to implement at least one of the modules that comprise the IVU.suite (or IVU.rail), the client will remain loyal for a very long time. The CEO recently compared IVU with SAP. Once installed, always loyal.

Benefiting from the three megatrends of urbanization, mobility, and digitization one can see IVU as a Tech-ESG-company with further potential to increase their margins due to economies of scale. As I expect ESG-investing to become more important during this decade, IVU might yet be too small (market cap approx. € 280 million) to be investable for larger ESG funds. But imagine what this could look like in five years if IVU continues to grow steadily until then. If IVU is suddenly perceived as a strongly sustainable company, this change in perception could become another trigger for the share price.

Since the company does not have its own production facilities, the business model is very asset-light. The management is investing 65 % of profits back into the business. The management team makes main investments by hiring new employees which can be seen in the following slide:

IVU Traffic Technologies Stock Market Research Capital Compounder Alexander Jagode

Long-term framework agreements such as the 15-year contract with DB Fernverkehr (long-distance travel) give the company a better reputation, which should also encourage further internationalization. With an increasing number of renowned customers, an expansion into foreign markets with larger projects should be possible, but I expect management to expand only if the risk/reward-ratio is outstanding.

The ownership structure, with Daimler holding 5.25 % and the founders 22 %, provides a certain incentive for the latter in particular to further increase the share price and to maintain a soundly managed company. I would conclude that the interests of management and shareholders are largely aligned.

[1] https://www.deutschebahn.com/de/presse/suche_Medienpakete/2020-Rekordinvestitionen-von-12-2-Milliarden-Euro-in-die-Eisenbahninfrastruktur-3784910

[2]Annual Report 2019, p. 30

Author’s ownership disclosure: At the time of publishing this research report I hold shares in IVU Traffic Technologies AG