👝 A Mini Berkshire in Europe?
Investment Case Chapters Group
Hi Partner 👋
Greetings from Washington DC. Over the next few days, I’ll travel to Omaha to attend the shareholder meeting of Warren Buffett.
Speaking about Buffett…
If you are looking for a mini Berkshire Hathaway with a specific focus on software, Chapters Group might exactly be the business you are looking for.
I am thinking about launching an exclusive series about Tiny Compounders.
Those are Micro Cap Quality Stocks with tremendous upside potential.
It uses exactly the same philosophy as Compounding Quality, but focuses on very small companies. Think about trying to invest in Apple twenty years ago.
Please note that we'll never write about these companies via Compounding Quality (and they are not in our coverage) as we would influence the stock price too much.
Because these companies are so small, the series will be very exclusive. Maximum 200 people will be allowed and it will be quite expensive.
If you are interested, you can put yourself on the waiting list here.1. How does Chapters Group make money?
Chapters Group started 25 years ago as a small software startup called Medical Columbus. The company focused on improving procurement in German hospitals.
After 20 years, Medical Columbus sold its core software to a strategic buyer.
At that point, the company was a listed entity with a pile of cash.
They now had two options:
Take the money and relax
Build something new
They chose the second option.
In 2019, that new business became MEDIQON Group AG, which was renamed to Chapters Group (ETR: CHG) in 2023.
Today, Chapters Group is a European holding company owning 46 subsidiaries. Most of them operate in Vertical Market Software (VMS).
But what exactly is VMS?
Unlike horizontal software (e.g., Excel), which serves many industries, vertical software is designed for a specific niche.
For example, software that calculates the queue times in amusement parks. This niche focus limits competition, creating a competitive advantage.
One key subsidiary is Software Circle (LON: SFT), a serial acquirer in Vertical Market Software (VMS) businesses.
Software Circle is a public company of which Chapters owns 29.9%.
Chapters Group operates with a decentralized approach, giving subsidiaries autonomy. As a result, only 3.5 (!) full-time employees (FTEs) work at its headquarters.
With this decentralized approach, Chapters Group wants to maximize organic growth in the subsidiaries.
Jan Mohr, CEO:
“Our key theme in 2024 was instilling a culture of organic growth in our businesses. Today, I’m proud to announce our 2025 outlook for low teens organic revenue and EBITDA growth."This is what Chapters Group looks like today:
A few of their key platforms:
Ookam: focuses on building a decentralized Vertical Market Software (VMS) group similar to Constellation Software and Topicus
CarMa: building an integrated group in the telecommunications sector
mlog capital: invests in industry software companies based in France and Benelux
Altamount: is acquiring software companies in the field of cybersecurity, governance, risk management, and compliance solutions
Nachfolgekapital: invests in profitable companies needing support during succession, whether for financial, personnel, or growth reasons
Chapters Group usually invests through these platforms.
They typically buy 80% of these platforms. Afterwards, the platforms go and buy operating companies that do the work.
2. Management
At the age of 11, a young German kid read a biography of someone called Warren Buffett. This completely changed his thinking.
Since then, the thought of a mini Berkshire Hathaway has always stayed with him.
Today, that German kid is 35 years old and the CEO of Chapters Group.
I’m talking about Jan-Hendrik Mohr.
As an investor in Medical Columbus, he has led the divestment of Columbus’ assets and eventually joined Chapters in 2020.
Before Chapters Group, Jan-Hendrik ran a successful equity fund called JMX Capital and was chairman of Software Circle.
He is a great value investor who turned operator.
(Listen to this podcast to learn more about the CEO and Chapters Group.)
Not only the CEO is interesting.
Chapters Group’s shareholder base looks impressive.
Mitch Rales is the founder of Danaher ($DHR) and owns 14.4%.
Danaher is very similar to Chapters Group. Over the years, they have acquired dozens of businesses in the life sciences industry.
Another large shareholder is Anteia (10.9%). This is the family office of Daniel Ek, the founder of Spotify.
3. Fundamentals
Let’s dive into the numbers.
Since Chapters Group changed in 2019, we'll only focus on the recent numbers.
Investing is saying no as soon as possible.
The sooner we can find a reason not to invest, the better.
A healthy Balance Sheet is non-negotiable, so let’s start there.
I always look at three ratios to determine the healthiness of the Balance Sheet:
Interest coverage: -0.1x (Interest Coverage > 15x? ❌)
Net Debt/FCF: 1.1x (Net Debt/FCF < 4x? ✅)
Goodwill/Assets: 44.0% (Goodwill to assets < 20%? ❌)
The higher amount of goodwill is normal for serial acquirers like Chapters Group, but what about the interest coverage?
Let’s verify the profitability.
As you can see, the Net Profit Margin is negative.
In other words, Chapters Group hasn’t had a full profitable year (yet). This is also the reason for their negative Interest Coverage.
That’s it.
After less than one minute, we found a reason to put Chapters Group in the no-thank-you pile.
Before investing, I always want to see a proven track record of profitability.
One of the main reasons for this is to evaluate the Return on Invested Capital (ROIC).
Return On Invested Capital (ROIC) = (NOPAT / Invested Capital)
NOPAT = Net Operating Profit After Tax = EBIT *(1 - Tax Rate)
Invested Capital = Total Assets - Non-Interest-Bearing Current Liabilities
Low profitability results in a negative NOPAT, making it hard to understand capital allocation.
Capital allocation is crucial, especially for holding companies such as Chapters Group.
At the current point, you need to trust the CEO’s capital allocation skills.
A ‘no’ it is.
But a ‘no’ is not permanent.
Chapters Group is still very young, and they are currently on the verge of becoming profitable.
Analysts expect a Net Profit Margin of roughly 19.2% in 2026.
In my opinion, this is very optimistic. The Net Profit Margin of similar companies is way lower:
Constellation Software (TSE: CSU): 7.3%
Topicus (CVE: TOI): 7.1%
Vitec Software (STO: VIT-B): 12.3%
What’s more interesting than the current profitability is the impressive revenue growth.
Since Jan-Hendrik transformed Chapters, they are compounding sales at an annual growth rate of 56.1%.
While this type of growth can be exciting, you must be very careful.
What’s driving this aggressive growth? What’s going on under the hood?
In Chapter’s case, they are issuing a lot of shares to fuel their growth engine.
For (potential) investors in Chapters, don’t just look at the evolution of Earnings and Free Cash Flow.
Instead, look at Earnings-per-Share (EPS) and Free Cash Flow per Share (FCFPS). This will give you a better understanding of how the dilution relates to growth.
Taking into account the rise in Total Shares Outstanding, revenue growth has been ‘only’ 14.4%.
This is still strong but very different from the initial 56.1% annual growth.
Another important metric? Capital intensity.
The less capital a business needs to operate, the better.
This is especially true for Chapters, as cash is crucial for their growth engine.
Chapters’ CAPEX-to-Sales ratio stands at just 3.9%. This indicates Chapters is a capital-light business.
Next, I look at stock-based compensation.
Some companies use this method to reward employees, but Chapters takes a different approach. It doesn’t rely on stock-based incentives at all, which is great to see.
Apart from the profitability, Chapters Group’s numbers look good.
4. Valuation
Now let’s dive into the valuation of Chapters Group.