Founded in 2016, 123fahrschule quickly emerged to become the largest and most digitized driving school chain in Germany. Thanks to an aggressive bolt-on M&A strategy in a largely unconsolidated market, which allowed for strong top-line growth, the company built a portfolio of 60 driving school locations across 36 cities, where 118 FTE driving instructors are employed.

With its proprietary, self-developed software suite the company is at the forefront of digitization in a largely outdated market and should be considered the only disruptive player in the industry. In fact, 123fahrschule provides a best-in-class e-learning solution as well as a full-stack IT platform, which connects back-office, students and instructors. Considering the digitally affine customer group (avg. of 22.2 years), 123fahrschule is seen to enjoy a preferred-choice status among potential students.

On top of its superior digital set-up, 123fahrschule looks set to cope well with one of the industry’s biggest problems – lack of skilled workforce. The average driving instructor is 54 years old and thus approaching retirement, leading to a shrinking pool of driving instructors. However, 123fahrschule counteracts on this with its own driving instructor training centres (4 across Germany), where more than 60 instructors completed training since late 2021. Against this backdrop, the company’s access to instructors is secured, which should enable for dynamic top-line growth going forward.

Online theory lectures: The German government recently announced, that online theory lectures will be permanently re-introduced as of January 2025. 123fahrschule is expected to strongly benefit from this, as it allows for higher capacities and improved constructor utilization, thus supporting growth and margin expansion as no relevant costs are incurred.

On the back of the fragmented market, the high quality and potential scale effects, 123fahrschule is seen to grow sales at a CAGR ’23-‘26e of 20% to € 34.3m. At the same time, the company is set to enjoy significant economies of scale thanks to the highly digitized business model leading to an EBITDA increase to € 4.6m by 2026e (vs € -2.7m in 2022).

Although we expect short-term share price pressure due to a backstop agreement with an investor, the shares appear undervalued in light of the company's promising prospects as well as an undemanding valuation of 0.6x EV/Sales 2023e. We hence initiate with BUY and a € 8.70 PT based on DCF.