Quick Pitch: M1 Kliniken (M12:DE)

Large Asset Sale

 

This is either a good opportunity that could result in a large asset sale at a big premium to today’s prices, or the management is simply pumping the stock.

M1 Kliniken operates a network of around 60 medical aesthetic clinics across Europe (think botox injections, laser skin correction etc.). The company also has a 68% stake in a listed subsidiary Haemato, which runs pharmaceuticals and beauty products import/distribution business. In February, M1 issued a press release stating that its Beauty segment (the clinics business) caught the interest of PE firms and that the company is open to considering this interest.

M12 press release

The announcement itself was pretty pumpy – management threw in a supposedly comparable transaction multiple of 30x EBITDA (max number rather than peer group average) and summed up by noting that the Beauty segment’s “envisaged valuation level is significantly higher than the current market capitalization of the entire M1 Group”. Moreover, management didn’t receive a direct interest from PE firms, but was instead informed about it by a US investment bank. Finally, instead of providing official guidance for 2024 earnings, the PR referred to analysts’ forecast of €27m EBITDA, and noted that this estimate is “also shared by management”.

I would have quickly disregarded the whole setup if it weren’t for the two aspects:

  • Two months ago co-CEOs of M1 acquired 7% of the company’s stock (see here and here). The purchase amounted to €15m and was done at the prevailing market prices of around €10.5/share. The shares were acquired directly from M1’s parent MPH Health Care, which now owns around 60% of M1 Kliniken. One of the co-CEOs is a son of the Brenske family, which controls MPH Health Care (the parent). Some retail investors on this German investor forum have repeatedly mentioned Brenske family’s questionable track record and shady dealings. However, I was not able to find any solid evidence of this.
  • The company appears to be growing rapidly and is fairly cheap. During the first 9 months of 2023 Beauty segment revenues increased +28.5% and EBITDA for the whole group totalled €17m. In light of this, the analyst forecast of €27m EBITDA for 2024 looks achievable. Out of this figure, around €20m would be attributable to the Beauty segment. M1’s EV currently stands at €230m, out of which €55m is stake in Haemato. Thus the Beauty segment, trades at under 9x forward EBITDA, while growing revenues at a 30% clip.

The reported interest from PE firms is not surprising. There have been numerous M&A transactions in the US aesthetic clinic space over the recent years. The same trends are likely to be observed globally, including Germany and the rest of Europe. As this report explains, the global plastic surgery and aesthetics market is highly fragmented and was/is predominantly dominated by independent clinics and medical practitioners. The recent interest from PE is primarily driven by surging demand. In the age of Instagram and TikTok, the aesthetic clinic business is set to continue booming for the foreseeable future.

M12 industry buyouts 1

“One of the primary factors driving private equity’s interest in plastic surgery and aesthetics is the surge in demand for cosmetic procedures. The global cosmetic surgery and procedure market size was valued at USD 63.4 billion in 2021 and is projected to exhibit a compound annual growth rate (CAGR) of 9.6% from 2022 to 2030 (Grand View Research, 2022). In an analysis done by Springer Nature and International Society of Aesthetic Plastic Surgery 2022, the number of cosmetic operations in the plastic, aesthetic and reconstructive surgery department of a hospital increased by 49.4% in 2021, compared to 2020, and increased by 29.7% compared to 2019. The societal shift towards body positivity and self-improvement, coupled with advancements in technology and techniques, has led to a growing number of individuals seeking aesthetic enhancements.”

I was not able to identify the multiples at which these deals are being done as most/all are private companies. The only semi-comparable transaction with a reported multiple is In Jan’23, Carlyle’s acquisition of two-thirds of an Indian beauty clinics company VLCC at around 15x EBITDA. A chain of clinics such as M12 with 60 units across Germany and Europe should be a desirable target that deserves a premium.

Now a bit more details on financials and M12’s Beauty segment.

Last year, the segment’s topline growth has accelerated from historical teen levels to around 30%, while EBITDA margins have skyrocketed from low double digits to 20%-30%. The EBITDA guidance for 2024 implies this new level of margins is here to stay.

Management hasn’t explained the reason behind this material margin improvement, only mentioning they’re very focused on cost-cutting. However, the leap in profitability within the Beauty segment looks quite suspicious. There’s a risk that it stems not from the better operational efficiency of this particular segment, but rather from the juggling of corporate overheads between the segments (financial disclosures are insufficient to determine which is really the case). The margin improvement in the Beauty segment also coincided with inverse margin volatility in the trade segment. So it might be that management has been trying to prop the numbers for the Beauty segment to make it more attractive for potential suitors. However, we can not reject the possibility that current Beauty segment margins reflect the true profitability of the business for the buyers and that these margins were simply understated previously.

m12 financials tables 1
Note – Haemato stake was acquired in 2020 and the current segment split was started in 2022.

11 Comments

11 thoughts on “Quick Pitch: M1 Kliniken (M12:DE)”

  1. MPH (parent) also trades at the German exchange, and at a substantial discount to NAV – that’s mostly comprised of listed investments. Might be interesting to look at for ppl interested in the situation.

    2
    Reply
    • Yes, I did not want to include it in the write-up to avoid mixing two different investment pitches.

      In my view, MPH is somewhat less attractive (also much less liquid). It is currently trading at approximately a 60% discount to NAV. The NAV primarily consists of three public holdings:
      – M1 Kliniken, in which MPH holds about 60% stake;
      – Haemato, with just around 15k shares;
      – CR Energy, with roughly a 45% stake.

      The discount has consistently ranged between 40-70% over the last 5 years. The gap might narrow if M1’s Beauty segment sale is announced. However, it would also depend on other things, e.g. how management would decide to use the proceeds, etc. It’s not clear why are they even keeping MPH public at this point, but it hardly seems for the benefit of minority shareholders. So unless the whole company or certain assets are sold, I’d expect the holdco discount to persist at similar levels.

      I think M12 seems a bit more interesting as a straightforward play on a large asset sale.

      1
      Reply
      • If one had some degree of confidence in M12 playing out as described, I would think that qualifies as a catalyst to for MPH to approach SOTP value.
        Point being, “if one” wanted to play this with some additional downside protection, 93M1 could theoretically offer this.
        Lot of ifs and “ones” in play here, just throwing it out there.
        Some color on MPH (93M1) SOTP:
        https://ppinvest007.substack.com/p/1-euro-is-currently-available-for

  2. Your guess is as good as mine. Right now, the business seems fairly cheap (if the segmental EBITDA split and earnings projections are as management expects). At a 15x EBITDA multiple the Beauty segment alone could command a 50% premium over M12’s entire EV. But that’s probably the best-case scenario, as I see it. Management has also recently mentioned potential uplisting to the main exchange and initiation of dividends (not clear if these are real plans or just stock promotion talks). If implemented, these should be very positive for the stock price even in the absence of Beauty segment sale.

    On the downside, the stock is already up by 30% following the share purchases by co-CEOs in February. But it is not clear if the stock would revert to previous levels if PE interest does not pan out to anything.

    1
    Reply
  3. Maybe some anecdotal evidence here against the thesis:

    I’ve had a meeting with management 2 years ago (2022), I’m copy pasting from my notes:

    1) 2022:
    – “Doctors and clinicians are clearly incentivised with above mkt pay and employee turnover does not seem to be of concern. M1 seems to be very aggressive in expanding to Eastern-EU. Rationale is there but intuitively doesn’t feel like the right decision, will need to do more work (I never did, oops). Haemato definitely overearning due to COVID. Despite having an interesting set-up with cost cutting and clear market growth ahead, management seems very promotional and comes off as somewhat untrustworthy, they should focus more on the business vs where the stock is trading at as growth should clearly be attractive from here on”.

    I realize this might not be too relevant to the thesis above, but since DT raised some concerns regarding mgmt/family involvement which aligned with my notes from 2ys ago, I might pass on this one. GLTA

    3
    Reply
    • Thanks this is helpful. Promotional management is one of the biggest concerns of the thesis. Might be that PE interest is just a way for management to pump the stock.

      2
      Reply
  4. M12 released preliminary 2023 earnings – in contrast to the strong growth/margin profile during the first nine months of 2023, it appears growth and margin expansion in the Beauty segment stalled during Q4. As always, management shared only limited details on the operations. The previously reported PE interest looks more and more like an attempt to draw investors’ attention to the stock rather than an actual opportunity to sell the business.

    Q4 results:
    – According to my calculations, Beauty segment sales declined by 11% YoY, while the EBIT margin also decreased to 17.8% vs to 20%+ over the last few quarters.
    – Total consolidated EBITDA decreased by 9% YoY.
    – M12 spent €17m to increase Haemato stake from 68% to 82%.
    – Updated balance sheet figures will be released later along with the final annual results.

    https://www.m1-kliniken.de/en/corporate-news/details/m1-kliniken-ag-publishes-preliminary-figures-for-the-2023.html

    2
    Reply
  5. The M12 is now up by 45% since the write-up was posted just 1.5 months ago, but not for the reasons I was expecting initially.

    So far no further details have been announced on the previously reported interest from PE firms. However, management has taken a couple of shareholder friendly actions with regards to capital allocation. The company has launched a buyback program for 5% outs. shares and reinstated dividends for the first time since 2019. The new dividend was set at €0.5/share, a significant increase from €0.3/share pre-COVID.

    Furthermore, management has issued a very positive 2024 guidance, indicating that the Q4’23 downturn was temporary and that the rapid revenue growth and margins strength is about to return. Beauty segment’s guidance for 2024 implies 21% revenue growth YoY at mid-point, while EBIT margins are projected at 24%.

    I suppose that this more aggressive approach to capital return hints that the sale is probably less likely now. Accounting for the 82% stake in Haemato, the core business of M12 now trades at around 13-14x 2024 EBITDA. That is pretty close to the recent Carlyle’s acquisition of an Indian beauty clinics company VLCC at around 15x EBITDA. While there could be further upside, particularly if management follows through on the promised uplisting, the the shorter-term special situation angle no longer looks viable. The thesis has now shifted into more of a longer-term valuation case of a fast growing beauty clinics business.

    1
    Reply
  6. DT – not sure if you meant you exited but I was fine with holding. Any thoughts of adding or reinitiating at current levels?

    Anyone else have thoughts?

    Reply
    • As Dt noted in his previous comment, the special situation play here is over. The actions of the two co-CEOs have confirmed this. One co-CEO (from the Brenske family) has resigned, while the other sold most of his shares in M12. Both of these guys had previously bought lots of stock just before the PE interest announcement. In this context, earlier suspicions about the PE interest announcement being pumpy were very accurate.

      1
      Reply

Leave a Comment