Accell Group Might Become The European Tesla Of The Bicycle Industry

Summary

• Bicycles are a very sustainable way of transport, and e-bikes continue to gain market share.
• Accell Group is a small Dutch bicycle producer which has been steadily growing for years now.
• The company has been focusing on e-bikes and innovation, smart technology, and cargo bikes, which all seem like areas with an expanding future market.
• Accell is the European market leader in e-bikes, and shares look very cheap at this moment. Could they become the European Tesla of the bicycle industry?

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In 2017, I wrote my first article as a Seeking Alpha contributor. It was about the company Accell Group (OTC:ACGPF), a small bicycle producer from my home country the Netherlands. You can read it here.

Since then, a lot has changed. The bike market expanded, Accell divested their North American business, a pandemic arrived which caused major supply chain problems in the bike industry. And last but not least, major steps in bicycle innovation were taken. In this article, I will first take a look at the market for e-bikes, then look at Accell and its ambitions in the e-bike market. I also look at the question of whether Accell, as a market leader, could become the European Tesla (TSLA) of the bicycle industry.

E-bikes

The market for electronic bicycles has been expanding greatly in the last couple of years. Since Accell is only active in Europe, I will focus on the European market in this article. In some European countries (especially Germany and the Netherlands) e-bikes have become mainstream during the last couple of years. The European market of e-bikes is estimated to reach a total of $16.6B in 2026, which corresponds with an annual growth rate of more than 12%.

The Covid pandemic has influenced the bike industry to a great extent. Especially during 2020, people have been avoiding public transport and were opting for good alternatives. In locations where a decent bicycle infrastructure exists, e-bikes were a good option.

As a personal side note, I have been living in the Netherlands in a very densely-populated city where it is almost impossible to drive to your job because of the traffic jams during rush hour. My wife decided to purchase an e-bike to drive the 15km to her job a couple of years ago. The trip took her a couple of minutes longer than it would by public transport, but she avoided the crowded trains, and it was usually a much more satisfying experience for her. In case of truly bad weather, she could always opt to use public transit instead. I believe more and more people are making similar decisions nowadays, which is facilitated by governments that are improving bicycle infrastructure at a rapid pace, and in some cases provide subsidies or stimulus to purchase commuting bikes.

Bicycles are also a very environmentally-friendly option compared with cars or other means of transport. E-bikes, when charged using renewable electricity, can be an environmentally neutral option in use, like electric vehicles produced by Tesla, NIO (NIO) Toyota (TM), Volkswagen (OTCPK:VWAGY), Nissan (OTCPK:NSANY), and the like.

But the e-bike market in Europe is much more fragmented than the car market. It is expected that the degree of fragmentation might increase further during the coming decade. Accell Group NV is the biggest e-bike producer in Europe, other major competitors are Derby Cycle (not listed), Georg Fritzmeier (not listed), Giant (OTC:GGLT), Klever (not listed), and Yamaha (OTCPK:YAMCF). One of the reasons for this fragmented market is that the e-bike market is still relatively immature in many countries. Existing companies will have to focus on fast-growing segments while also focusing on innovation and brand quality to build a strong position.

A bird's eye view of Accell's recent results

For a growing company, taking a look at recent developments in sales is probably one of the most important things to do to estimate whether the company is doing well or not. In the most recent results of Accell Group, the H1 2021 presentation, the net sales graph looks quite smooth:

Source: Accell Group H1 2021 presentation

It is important to keep in mind though that Accell sold its North American business in 2019. If we would include this in the graph, sales in 2019 and before would be higher. But for the sake of a clean comparison, I understand that the company uses this graph.

It is also interesting that the company is growing slower than the expected CAGR of e-bikes in Europe, which was estimated to be about 12% as we saw above. One of the reasons for this might be that other products have a large influence on the sales of Accell. Let us take a look at different product categories and their impact on the sales of Accell Group:

Source: Accell Group H1 2021 presentation

This is a surprise, the percentage of net sales of e-bikes has actually decreased during H1 2021. According to Accell, this is mostly due to supply chain constraints, and the company expects e-bikes to recover shortly. It is still their largest category, but other categories are growing quicker, such as cargo bikes. Cargo is an important growth market, though it starts from a small base and contributes only 4% to the net sales of Accell. The parts category is the odd one out: their brand XLC has performed exceptionally well. Accell expects the growth of the parts business to decrease, because of "higher comparative and availability issues".

One of the metrics about which Accell was quite satisfied was the recovery of their margin, after the bad year 2020:

Source: Accell Group H1 2021 presentation

An interesting aspect of the pandemic was its effect on the inventory of Accell. As you can see in the following graph of the trade working capital (TWC), in 'normal' years, inventory levels tend to grow during the winter months (Q1 and Q4), and decrease in summer, when the 'delivery peak' and the 'orders for the new year' usually take place. The pandemic has completely uprooted this cycle. In 2020 there was a continued demand for bicycles, while there were many problems with inventory sourcing.

Source: Accell Group H1 2021 presentation

During the year 2021, there have been two quarters with inventory growth, which is very unusual for Accell. This resulted in a large negative cash flow from working capital during H1 2021, as we can see in the following graph:

Source: Accell Group H1 2021 presentation

The profit and loss and EBIT numbers of Accell, look quite ok, with a 3.3% top-line growth and a net profit growth of more than 54%.

Source: Accell Group H1 2021 presentation

In the outlook of Accell, the company stresses positive secular trends which will lead to market expansion for bicycle producers, but also zooms in on the risks about supply chain constraints:

Source: Accell Group H1 2021 presentation

Valuation and dividend

If we look at the data of YCharts, Accell's valuation graphs look a bit haphazard:

Data by YCharts

Source: YCharts

This was mostly due to the - very costly - divestiture of Accell's North American business in 2019. Though the one-time costs of this have dominated their 2019 results, the North American business was not performing well, and I think it was a strong and brave decision of the company to divest it to focus on their core markets.

But back to the metrics: According to our graph, Accell has a P/E ratio of 11.8. If we extrapolate an EPS of €1.65 of H1 2021 to the whole year, we arrive at an EPS of €3.3 for the whole of 2021, which corresponds with a P/E ratio of only 10.8. This is downright cheap compared with many other companies, especially considering the fact that Accell is still experiencing modest growth.

About the dividend: Accell did not pay a dividend from the book years 2019 and 2020. This is what the company itself had to say about it:

Over book year 2019, in light of the unforeseen and unprecedented impact of COVID-19 at that time the Accell Group Board of Management decided in March 2020 to withdraw the 2019 dividend proposal of € 0.30 per ordinary share.

In 2020, Accell Group arranged a two-year amortizing bank facility of € 115 million with our bank consortium under the Dutch GO-C scheme which mainly serves as an extra financial buffer. According to the amended group financing agreement dividend limitations apply. The most important one being that no cash dividend distributions shall be made, unless the GO-C facility is repaid and cancelled. In this light there will be no dividend payment over book year 2020. (source)

Normally Accell does aim to pay a dividend, and whether the company will pay a dividend from the book year 2021 seems to depend on whether the GO-C facility will be repaid and canceled.

Will Accell become the European Tesla of the bicycle industry?

Tesla has become a $1 trillion market capitalization company recently. As such, it seems a little bit ridiculous to compare Accell, which has a mere $1B market cap, to such a powerhouse. Accell's market cap only amounts to 0.1% of Tesla's, and relatively normal market fluctuations mean that Tesla's stock falls or rises 10 times Accell's total market cap per day. But we should not forget that even Tesla started as a (relatively) small company. Let us take a look at the factors which have made Tesla such a success story and contributed to reaching a market cap of $1T. I have to confess that these factors are a bit subjective, but they are my own interpretation:

• A focus on the high-end of the market
• Profiting from governmental sustainability measures (good timing)
• A dedicated and motivated base of investors

How does Accell compare to Tesla on these topics?

A focus on the high-end of the market

Though Accell does focus on quality, they do not focus on the high-end of the market with all their brands. They do make it an important aim to win awards with their bikes, as they state in their strategy progress update of H1 2021. I would say that Accell simply has too many different brands to be comparable with Tesla here.

Profiting from governmental sustainability measures (good timing)

Currently, there exists a strong secular trend which will likely lead to more market expansion for e-bikes, especially in Europe where bicycle infrastructure is improving in most countries. If governments would give more subsidies for e-bikes used for commuting, this could prove to be another boost for demand, which would make Accell able to profit from comparable secular tailwinds which Tesla did in the past and currently.

A dedicated and motivated base of investors

This might be a bit of a controversial point, but Tesla did not become a $1 trillion company by having a normal investor base. If we compare the valuation of Tesla to its peers, it becomes clear that it has to have a solid base of true believers, which has led to a monstrous stock growth over the last year. You can say a lot of things about Elon Musk, but this is one of the things which he has done right with his visionary ideas: creating a strong shareholder base and upward stock momentum. Without this, I strongly believe Tesla would not have reached a $1 trillion valuation yet. Accell does not seem to have such a visionary leader which can create these kinds of shareholder bases and momentum.

Risks and takeaway

A point of worry for Accell Group is that their top-line growth of 3.3% seems to be a bit on the low side, especially when more than 50% of Accell's earnings are in the e-bike market which is expected to grow by more than 10% per year. Of course, the company experienced supply-side constraints, but it is unclear whether Accell simply lifts with the rising tide of market expansion or whether it will be able to capture a larger part of the e-bike market. The pandemic led to the strange situation of growing demand for bikes coupled with the lower availability of supplies for Accell. If demand continues to grow and supply chain problems subside, this could lead to more growth in the short to medium term.

Accell Group seems to be a solid company with a downright cheap current valuation, but the two biggest similarities between it and Tesla are that (1) both are big in electric modes of transportation and (2) both are profiting from governmental sustainability stimulus tailwinds. When I started my purely theoretical comparison, I hoped to find more similarities that could indicate that Accell could become a future Tesla, but alas. Do not get me wrong, Accell is a very decent company with good prospects and an attractive valuation, and I continue to hold their shares, but Accell and Tesla have more differences than similarities.

Thank you for reading! Please let me know in the comment section what you think about Accell!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ACGPF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.