thyssenkrupp (TKA GR): Issues to consider​

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Update
We believe the sale of Elevators has transformed thyssenkrupp's prospects. It seems management is finally looking to address their problems and the stock looks to be an interesting value proposition.

Background
thyssenkrupp’s share price has nearly doubled since February 2016. Much of this is due to the resolution of the CSA debacle, hopes about their exit from steel manufacturing in Europe and the excitement about their elevator business. The company came to our attention thanks to our European Debt Manipulation report where we noticed that it had some rather unusual characteristics. We have sent an in-depth report on thyssenkrupp to our clients where we explain our views on the company.

Issues to consider
Assets

• Purchase of CSA: Why did the company buy Vale’s stake for an EV of zero when it had negative book value and presumably knew that the assets faced further impairments?
• Sale of CSA: The company talks about a sale for an EV of EU1.5bn but why does it make no mention of the EU2.8bn that had to be injected into the company prior to sale?
• Since 2011, nearly every asset sale has required an impairment charge. This would suggest that thyssenkrup is systematically under depreciating by around 30%. What is the reason for this? Does this mean that EBIT is being inflated? Is the company going to change its policies/write assets to fair levels?
• Is this why management is so keen to talk about adjusted EBIT?
• Why does the company not reveal assets by segment in the Annual report?

Finance costs

• Their bonds cost 3.64%, its short term credit 3.24% yet its overall credit costs are nearly 5%. Is thyssenkrupp window dressing its accounts to hide its real debt levels?
• The company has cash on the balance sheet but all of this and more belongs to clients. Why does the company imply that this is available to service the company’s debt?
• What are the other finance costs of EU1bn? We see that there is partially offsetting income but the difference between the two is always a loss. Is this a sales subsidy disguised as vendor financing? If so doesn't this inflate EBIT?

Operations

• Why are the EBIT margins at the Elevator company so far below its peers?
• How should the EU500m head office costs be allocated, by sales, by profits or by assets?
• How will the company be affected by the new German pension funding rules?
• Margins have been below competitors but forecast margins are generally higher, is this realistic?

Valuations

• Should hidden debt and customer advances be included or excluded from EV calculations?
• How should on-going financing losses be treated?
• Should pension liabilities be capitalised when comparing companies?

Please contact us, if you would like to become a client and get a full copy of the report.

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Important
This note is written with the sole purpose of highlighting some issues we think are important.
It is not a recommendation to BUY or SELL any of the securities mentioned and should not be taken as such.
​Readers should form their own opinions about the company and seek appropriate advice.
Please read the Bucephalus disclaimer.