Make Some Noise
research report
Hello,
1-2 years ago, Italian small and micro-caps were my favorite hunting ground; niche companies with attractive unit economics, dominant market positions, and long growth runways. The kinds of businesses that rarely IPO in the U.S., both because private equity often steps in before a founder even considers listing and because the cost and regulatory burden of going public are higher than on the Euronext Growth Milan market.
And when they do list, they usually do so at much richer valuations. Some examples of companies that fit that mold, and that I have bought in the past, include $LDB.MI, $RFG.MI, and $COM.MI.
That opportunity set has become less fertile over the past year, as Italian equities rerated sharply and the iShares MSCI Italy ETF rose more than 50%, drawing more attention to the space and lifting all boats. As a result, I haven’t done a full A-to-Z in a year and have mostly stuck to revisiting names already on my watchlist.
One of those companies, which I had previously flagged (to myself) as interesting, has fallen 44% from its July highs and now trades at 7.7x LTM EV/EBIT and 12x P/E on what I believe are depressed margins.
The company is what investors would call a hidden champion: a little-known specialty manufacturer that has dominated a niche corner of the audio market for decades. It competes on quality rather than price, most of its production is customized, and most of its products are sold directly to businesses. More importantly, its larger customers have stayed with the company for more than 20 years, with essentially no churn.
That has translated into exceptional economics: average ROE of 30% and ROIC of 42% over the 19 years since it went public, a strong and consistent organic growth profile, and not a single unprofitable year. Just as importantly, the family CEO, who has led the business since listing, has shown he can scale the company effectively, execute industry acquisitions successfully, and behave in a shareholder-friendly way.
That was enough for me to dig into the business in more detail, look at where the risks and opportunities lie, and build a valuation framework that points to a 20.1% total return CAGR.