Some experience with Sixt (SIX3 GR)

Many German investors perceive Sixt as a German high quality business. My experience does not disprove the narrative.

This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time. I might transact in any securities at any time.

Some experience

We recently moved into another bigger flat in Cologne. Our new fridge was delivered by a third-party hauler, after buying from Lidl’s online shop (cheaper and much better then the Haier one initially interested in).

The hauler used a Sixt truck (easy to start business I guess). Since they very likely do use it frequently it has to be cheaper than alternatives or much better. Much better appears difficult since they basically are all located in the same districts/street blocks and offer a variety of cars with more dents anyone cares to count. But…

We also used Sixt for moving into our new flat and overall, it was a good experience. We were pretty late to fix on a date between Christmas and new years eve waiting for some feedback of enough friends. Pricing looked rather cheap for Sixt and various competitors. Since my brother had a Sixt gift card, it is known for somewhat better service and technology, I pretty much decided to try Sixt.

• One or two days later when we wanted to book, it was more expensive (we did not compare again) and, of course, we opted for some add-on services like insurance and a second driver. That is how car rental companies earn money.
• I did not even get to use the gift card since the check out process was quite short (it stated something like quick checkout but I realized I am used to longer checkout processes and thus didn’t believe in it).
• When we arrived at the pick up location, the service personnel educated me the interior was not included in our chosen insurance package (we did not fall for this). This was the only additional service she wanted to sell. Further, she again highlighted we get charged 2 cents per km for AdBlue (hahaha) which was clearly stated online upfront as well and that we shall fill up the car on our own (much cheaper). Overall, the lady was very friendly and asked us to rate them highly if we are asked to do a review via email, since it is very important for the staff. The complete service point seemed clean and paper-less, besides one laminated sheet of paper per counter educating about different car types and their features. As always, it was very much designed in the company’s distinctive orange.

• A few weeks after moving I realize there were many items on our various todo lists when moving. It is probably similar for quite a few people moving and renting a truck. Hence, customers might be less price contious than generally thought, and more concerned with everything (or at least most things) working. Here, a trusted higher-quality brand can help to acquire customers.

Technology can achieve much better/efficient processes, mitigate risks and improve business fundamentals. I guess Sixt is a leader here in Europe, though, I made compare against rental companies in tourist destinations in Italy or Portugal, some years ago (biases).

Service quality and Brand go hand in hand to a certain extend, at least if you decide (against) a rental car company frequently. The service experience was good. Not that many (overpriced) add-on services, but some. Smooth and quick processes (too quick for me?). Telekom — unfortunately another company we currently have to deal with — is probabaly the most shitty consumer-facing company on the planet (besides utilities, insurances, etc. …). I mean really shitty! But, these ‘rate our service polls’ can strongly motivate the service personnel and determine the level service quality (and their remuneration). These customer ratings coupled with proper implemention in service teams can works wonders. I experienced that and I like that. Somehow I found myself receiving endless (daily?) marketing emails from them, until I unsubscribed. I cannot imagine that somebody receives these emails on a non-spam account, at least nobody who values his time, so I guess their email marketing approach can be greatly improved.

Industry fundamentals are marked by high competition, cyclicality, low moats and a rather capital intensive business, and thus far from perfect industry fundamentals. Within this setup, Sixt somehow succeeds to earn good returns on capital and creates strong shareholder value so far (increasing competition or changing trends may upend that, ie Toyota’s entry in mobility services).

Returns on capital are good and presumably better than peers, or at least generated with lower leverage.

Personal experience is very subjective and single point data at best. So a more general view is needed:

Company quicky

Sixt is a car rental company but became or wants to become an integrated mobility company: car rental, car sharing, transportation services and car leasing, including services from third party companies. (about) Sixt is known for better customer service (vs peers), premium cars and its bold marketing that is often right on time regarding current political figures and developments. Other companies would not dare such a marketing approach.  

Quantitative indications for an economic moat: Book value grew by 11% per year over the last decade (despite good dividend payments), with ROEs mostly around 15%. Understandably, 2020 brought the pandemic, lockdowns and a loss. Cashflow and accounting profits seem to diverge quite a lot.

Qualitative considerations for an economic moat: Hard to build a sustainable moat in the rental car industry (discretionary), but creating some customer loyalty seems realistic, via consistently better customer service and a high-quality integrated app (efficiency). Customer ‘lock-ins’ would be an overstatement, I guess. The marketing approach is more aggressive with the distinctive bright orange at airports creates a brand image that some customers like (and want to be a part of?). Its advertising is funny and fitting the location. Helpful patterns might be:

• Helpful middle (wo)men ==> consultants like to drive premium cars and get reimbursed  
• High switching costs / customer lock-ins? ==> not that high (getting higher?)
• Low-cost producer ==> better technology might lower total costs 
• Intangibles (brands, patents) ==> cool branding 
• Owner operators / family ownership 

Where does growth come from? High ROEs are valuable for long growth runways.

• Market Volume: might grow with younger people owning less cars (sharing) and ongoing modularisation of business / asset light business models. Near-term pent-up demand for travel might be a boost, longer-term flight shaming might be an issue reducing traveling without one own car.  
• Market share: might grow with brand and better service? Further, many corporates want to use EVs only (ESG image/policies) and Sixt is building up its EV fleet. Overall network expansion of rental stations. Own rental stations in Germany and Europe decrease, whereas expansion in North America progresses with Canada resembling the US strategy (being present at half of the top ten airports).  
• Product mix: premiumisation over customer lifetime? — Why not chose the more expensive car next time, and have some (well deserved) fun.  
• Price: brand and app might have some lock-in loyalty effects, but overall price and customer acquisition effectiveness / channels are an important factor for the consumer decision. Price might have lower impact for business decisions (think consultants with long workdays, lots of travelling and anyway getting reimbursed, aka the useful middlemen?)? 

Financials: The operating margin is rather stable at around 10% since 2005, with a bump in 2009 (5%). The cyclicality also came through in the corona years 2020 (-3%), 2021 (21%) with 9M’22 20%+ as well. The car rental industry is asset heavy. Sixt shows asset turnover in the .5-.7x range (2020: .3x). High ROEs (c. 15%) are generated through 3-4x leverage ratios (TA/EQ). Sixt’s leverage seems OK and much more conservative vs peers. Though, Sixt’s debt is mostly floating and matures in the not-so-distant future (2024 and 2027). Further, with much of its revenues derived from international markets, fx risks (or headwinds) might exist. 

The bear case, risks:  The industry remains competitive, cyclical and capital intensive. Sixt wants to built a large EV fleet with BYD vehicles.  Car producers have incentives to create their own mobility companies to push their cars into the market. (Toyota is starting a company in Cologne) Capacity (rental cars) that are in the market once, will stay there for some time  

Two share classes: Commons (SIX2 GR) have one vote attached whereas the prefs (SIX3 GR) have none, but — to make up for it — the prefs carry a higher regular dividend (+.02 €, no diff in special divis). Combined with the much lower price, the dividend yield is considerably higher (6.6% vs 4.2%). There are about two times as many commons outstanding (30,367k) as prefs (16,576k). The prefs are clearly more attractive, for me as a little private investor. 

Pref seems cheap:  BVPS compounded at 13% over the last decade with an avg ROE of 20%. Common and pref shares trade at P/B ratios of 2.1x and 1.4x respectively, indicating cheapness. Cyclical fundamentals can be expected but might be lived through trusting in good management. 

Current factors: Sixt experiences subdued demand for its services in Germany, but benefits from high prices (shortages of vehicles) and high travel activity in Europe and North America, resulting in record results from 9m2023. .

My Conclusion. Interesting company that I would like to look into further and probabaly buy at some point (maybe when shares are down harder / cyclicality). I am not allowed to invest.

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