Commercial kitchens

Out of the Frying Pan into the Fire?

Rational makes steam cooking devices for use in commercial kitchens.
  • Why it matters

    Why it matters

    Unless Rational expands its very narrow product line, it is unlikely to achieve significant new growth.

  • Facts


    • Rational makes hot-air and steam cooking devices for commercial kitchens.
    • It supplies equipment to Kentucky Fried Chicken, as well as discount food retailer Aldi.
    • The firm has just replaced robot maker Kuka in Germany’s MDAX index.
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Eleven years ago, analysts said shares in kitchen-equipment supplier Rational were rated too high. A decade later, and experts are again issuing warnings about the specialist in commercial steam-cooking devices.

But one essential difference exists: The stock in 2005 was priced at €85 ($96.10). On Tuesday, it was about €453. Those who held on to their shares have watched the value increase fivefold, and each share also collects €61.25 in dividends.

It isn’t just the rise in the share price since the Bavarian company’s IPO in 2000 that has awakened interest. Last week, Rational replaced robot-maker Kuka in the MDAX, Germany’s index of the top 50 medium-sized listed companies in terms of market capitalization and volume of shares traded.

Since Chinese investors took a stake in Kuka, its stocks have been trading too little for it to fit in the mid-cap index. The Deutsche Börse, the operator of the Frankfurt stock exchange, therefore brought Rational back into the MDAX.

The stocks are showing a distinct price premium following the years of success.

The Rational stocks had been in the MDAX from 2009 to 2014. But the company’s return is on shaky ground because both major shareholders, the founding families of Meister and Kurtz, together hold 70.9 percent of the shares. For that reason, the percentage of stocks available for open trading is also quite small.

The accession into the MDAX has given the stocks a visible boost, which, admittedly, has cooled off in the meantime. Most analysts see Rational, which has only two categories of devices in its product line, as being strategically well-positioned but think the stocks are priced too highly at the moment. Even so, hope exists for further increases in company value.

Analysts at Hamburg private bank Berenberg are pinning such hopes on Rational possibly starting a third product line.

So far, the company has been manufacturing combi-steamers under the principal brand name Rational. These appliances reduce labor costs in commercial kitchens by using software to control automatically the cooking of everything from pork roasts to pastries.

There are also appliances marketed under the secondary brand name Frima. The manufacturer calls the appliance the Vario Cooking Center, which includes additional functions.

The Berenberg analysts point out that Rational has been capitalizing around 15 percent of its research and development expenses since the third quarter of 2015, justifying it as a “special project.” Normally, the company doesn’t capitalize its development expenditures, so it must be something big, the analysts reason.

“We now believe that this could point to a third product line,” said analyst Sebastian Künne. It would be the first real new development at the company in 10 years.

Mr. Künne sees two scenarios.

The more unexceptional is that Rational is developing a third line for professional kitchens. It could have something to do with supplying particularly large commercial kitchens. In this scenario, Mr. Künne figures on only a slowly increasing number of units, but high profitability, because Rational is keeping to its core know-how.

The more exciting version is that Rational is entering the consumer market. To do this, the steam-cooking specialist could further develop its software for established household appliance manufacturers such as Bosch-Siemens or Electrolux. This would mean household ovens could be created so non-professionals could also control their cooking using software programs.

In this scenario, Rational would be able to quickly build up a huge licensing business with global significance without adversely affecting its core business. Analyst Mr. Künne does, however, qualify that he sees this scenario as highly unlikely.

Rational supplies its combicookers to the likes of KFC and Aldi. Source: Bloomberg


But such a new product could give a boost to the stocks. After all, they have been taking a break in 2016 with a stagnating, if high, operating profit margin, due, among other things, to development expenditures.

Other small developments might help, such as discount food retailer Aldi currently testing Rational units for its baking stations. That could mean a huge contract that could offset the somewhat flagging orders from Kentucky Fried Chicken in China. The U.S.-based fast food chain is now widely equipped with Rational units.

The company’s management, led by chairman Peter Stadelmann, has ruled out takeovers despite having €300 million in cash reserves by the end of the year. But analysts think it is equally unlikely that this money will be paid out to the shareholders. The conservative major stockholders still have the last word, they note.

However, in the judgment of the experts at DZ Bank, growth remains intact, in the United States for example. The experts wrote: “The strategy there of pushing forward the business with a broad base of smaller customers and focusing less on major chains is paying off.” But they see the stocks currently as being “amply valued.”

Metzler analyst Alexander Neuberger is more optimistic. Rational could still expand its 54 percent share of the global market, he says, and it has chances in places like refugee homes and shelters in Germany. He recommends buying the stock, unlike the majority of analysts.

Private bank Hauck & Aufhäuser points out that growth involves higher costs: “Rational is continuing to strongly expand its number of employees in marketing and service to ensure growth through the further penetration of less-saturated markets like the United States and Asia.” Moreover, the experts warn not to underestimate the exchange rate risk.

One thing is clear: The stocks are showing a distinct price premium following the years of success. The Berenberg analysts see 100 percent-plus compared to the sector and 30 percent to comparable companies. That also limits the potential for the stocks.

On the other hand, many analysts 11 years ago were looking at it the same way. Yet the stocks clearly went up. The quality of the pork roast coming out of Rational cooking units was obviously convincing.


Christoph Kapalschinski covers consumer goods, textiles and food for Handelsblatt. To contact the author:

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