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Fresenius: The Wrong Way To Seek Capital Market Attention

Karreta Advisors profile picture
Karreta Advisors


  • Fresenius management is reviewing its group structure to make sure capital markets give it more appreciation. We remain skeptical given its opaque disclosure.
  • The outlook for FY12/2021 is less than robust, as we estimate flat net income and falling free cash flow generation YoY. Accounting government subsidies as revenues in FY12/2020 look odd.
  • With adjusted free cash flow yield dropping to 6% from 10% YoY, we remain sellers of the shares.

Investment thesis

Fresenius (OTCPK:FSNUF) provides opaque free cash flow disclosure and management comments that a review of the company structure is underway to get a deserving valuation. The outlook for FY12/2021 is similarly vague at net income level. With our estimated free cash flow to drop YoY we remain sellers of the shares.

Our objectives

We aim to investigate the following:

  • To assess CEO comment about the company structure being under review, and implying that the capital markets are not giving a level of appreciation the company deserves.
  • The outlook for FY12/2021.

We will take each in turn.

Company structure

Previously we wrote about our concerns about company disclosure, namely a misleading cash flow statement with no distinction made between parent and large non-controlling interests. We did not think the company made enough effort to determine free cash flow that was attributable to Fresenius shareholders.

For FY12/2020 results, the pro forma versus our adjusted free cash flow figure looks as follows (taking net income attributable, and the pro rata amount based on shareholdings for operating cash flow and capex from group companies). The difference is palatable:

Pro forma disclosure Our attributable estimates
Net income (€m) 2,823 1,796
FCF (€m) 4,183 1,991
Current FCF yield (%) 21.0 10.0

Source: Company, created by author

It therefore came as a bit of a surprise when management reported FY12/2020 results with a comment by CEO Stephan Sturm about the company structure being under review. Sturm felt the need to ask whether the capital market is giving them the value that they deserve. Clearly he feels something is amiss.

If management were to believe that the shares are undervalued based on current pro forma disclosure which potentially overstates group free cash flow, we would respond that this measure was incorrect to

This article was written by

Karreta Advisors profile picture
We are an independent research house. We look at global stocks, favoring those with sustainable growth and recognized or emerging as a high quality franchise at suitable valuations. We primarily serve institutional investors.

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Comments (9)

What happens when spin off occurs? You receive the shares of other company etc? But I guess it affects overall picture, cash flow, you need to re-analyze each business then separately?
@Karreta Advisors Would it make sense to spin off Fresenius Kabi and/or North America Segment into their own stock offering so more US investors are not tied to Europe's political climate and other segments of FSE internationally? From FSE financial records, Fresenius Kabi (other than FMC) is the main producer for their revenue.
@Karreta Advisors Interesting points. Increasing the FMC stake might trigger a tender offer. Fresenius has already high debt and would have to issue part equity to buy out FMC shareholders. Merging should be comparatively simpler but its doubtful US investors want to be exposed to German and Spanish hospitals each of them with different politics involved. Overall I agree the stock has more downside than upside potential.
Karreta Advisors profile picture
@heckinvest Thank you for your thoughts. Very valid point over a tender offer. The healthcare industry is highly regulated but perhaps the US is the most difficult of all to operate in? Still, it may be a fairly big ask to become equity holders in European hospital assets.
@Karreta Advisors thanks for the update which reinforced your concerns in your prior article. Two questions; i) based on your own FCF calcs what are your fair value estimates? ii) if Sturm is hinting at a strategic review what are the most likely options? Spinning off Kabi or even FMC? Or separating hospital / dialysis center management from the infusion and biosimilar business?
Karreta Advisors profile picture
@heckinvest Thank you for your questions - i) fair value PBR 1.0x, so 16% downside which is not terrible but there we go ii) this is the big question - FMC has its own pressures with activists (Harris and Artisan) - the simplest solution is to for Fresenius SE to increase its stake in FMC. Making the stake in FMC from 32% to 50% is relatively easy, via debt they should be able to raise that amount (€4bn or so with a premium). But this might not solve the problem - a merger between the two sounds like a long term solution. Depending on the share swap ratio it might be better off to be long FMC, as that would be the target.
Who are the main competitors of Fresenius that are better alternatives if i may ask ? Thx
@marreukske in Europe they have no competition, you would need to look in America.

Disclosure: I'm from Spain and long-term investor in Fresenius
Karreta Advisors profile picture
@marreukske Thank you for your question - the key peer is DaVita (DVA) in the US. There's a few issues with this one as well, but it's a well-known holding of Berkshire Hathaway.
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