Lifco - A Serial Acquirer of Niche Businesses that has Grown its EBITA by 19.2% for 16 Years 🏆📈

<5 min read 🧠

The Business

Lifco is a Swedish conglomerate of niche businesses. The business has compounded its EBITA by 19.2% since 2006 and is one of the highest-quality businesses in Scandinavia.

Lifco's strategy is to acquire small and medium-sized companies with strong market positions and integrate them into the Lifco family of businesses. This approach has helped them build a diverse portfolio of businesses that are leaders in their respective niches. One of the advantages of Lifco's business model is that it provides stability through diversification. By operating in multiple industries, Lifco can weather downturns in any one sector and maintain a stable revenue stream.

Lifco operates in a diverse range of industries, including dental, demolition, and system solutions. The business is well diversified between the segments:

• Dental: 21% of EBITA

• Demolition: 33% of EBITA

• Systems: 46% of EBITA

Lifco's management is focused on financial metrics like the return on capital employed. This financial metric has been +20% for years and is a sign of a high-quality business:

Lifco is a quality conglomerate of niche businesses, here are some reasons why:

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The Management

Their management team has been in Lifco for more than a decade. Their CEO Mr. Waldemarson has been with the company since '06. This shows that the current management team has been responsible for the formidable growth and capital allocation since '06.

Additionally, insiders have been buying the stock for the last 3 years, with no selling in sight. This reflects management alignment with shareholders:

Source: Stockopedia

The Company Values

Lifco's values are sound, long-term oriented, and based on common sense. "Lifco's employees tend to stay on forever" - This is a sign of a great work environment and that businesses like being under the conglomerate:

The Business Model

Lifco's business model is to decentralize the businesses they acquire. They are oriented around long-term profits and strong cash flow, even for growing companies.

The business is diversified with revenue streams from all over the world, although 80% of the revenue is from Europe:

The Fundamentals

Operational:

• ROCE: 22.6%

• Gross Margin: 42.5%

• Operating Margin: 19%

• FCF/Net Income 5Y: 114%

Growth (5Y CAGR):

• Revenue: 16.5%

• Operating Income: 21%

• EPS: 20.75%

Valuation Metrics:

• PE: 38

• EV/EBIT: 37

• FCF Yield: 2.64%

Note: Op. income and EPS growing faster than revenue, suggesting that Lifco has operating leverage. The business is highly rated.

Cash flows & Capital Expenditure

Lifco's cash conversion has been decent, meaning most of its earnings are converted to cash that can be used to invest in the business at high returns on capital. However, OCF has stagnated in the last few years, this is something to keep an eye on.

Maintenance capex is LOW which is great because Lifco can sustain its operations with very low reinvestment requirements. They are also able to use most of cash flows for new acquisitions.

Lifco Acquisitions

Let's take a look at the acquisitions of 2022:

• Total cost in MSEK: 1372

• Total sales MSEK: 1315

This suggests a price to sales of 1.04 on their acquisitions. If we apply a ~20% EBITA margin (below their current margin), we can estimate a PE of only 5,22

Lifco is buying these assets at the cheap:

Valuation

Using their TTM free cash flow of 2,25BSEK, and providing conservative estimates of growth:

Worst: 10%
Best: 20%
Normal: 15%

The DCFA lands on a value of 90BSEK.

Note: A conservative estimate is used to reduce the risk of overestimating the upside

90BSEK is close to the current market capitalization of ~103 billion SEK.

This means that the company is fairly priced for a ~10% annual return.

Ideally, I'm looking for 15% pa. opportunities, if Lifco were to meet my requirement, it would have to drop by ~30%

Given the best-case scenario, with 20% annual growth and a terminal multiple of 30 at the end of 10 years, I could get a 15% annual return. However, I don't believe this outcome is a high-probability bet.

Conclusion

In conclusion, Lifco is a great business.

The business model has several strengths, including diversification, successful acquisition, and integration strategies.

Investing in value-creating niche conglomerates can be attractive and profitable long term.

Currently, the valuation is a bit too high for my taste, I'd like to see it come down a few levels.

This business is on my watchlist, and if the price starts to approach my price, I will initiate a position.
Additional reading on Lifco: Under-The-Radar Outperformer With 'Buy' At A Good Price

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