Datron — FY17 results: Growth continues

Datron (DAR)

Last close As at 28/03/2024

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Research: Industrials

Datron — FY17 results: Growth continues

2017 was another year of healthy growth extending Datron’s powerful recovery following the years of economic crisis. On the basis of management guidance for the current year, the shares trade at 15.0x earnings. Further growth is expected in 2019 which could drive margins to the previous level of 10% and beyond.

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Industrials

Datron

FY17 results: Growth continues

Engineering

Scale research report - Update

6 March 2018

Price

€13.40

Market cap

€54m

Share price graph

Share details

Code

DAR

Listing

Deutsche Börse Scale

Shares in issue

4m

Last reported cash as at 30 June 2017

€5.6m

Business description

Datron makes CNC high-speed milling (HSM) machines and associated tools. 56% of revenue comes from generalist machines used by widely diversified clients. Less volatile revenue sources – “after sales” (16%) and replacement tools (21%) – are growing in importance.

Bull

Growing sales from repeat business: after sales and tools.

HSM demand still growing.

Technologically advanced and innovative.

Bear

Small size relative to global market.

Sales of dental HSM machines far below peak.

Lack of market data creates risk of surprises.

Analyst

Adrian Phillips

+44 (0)20 3077 5700

2017 was another year of healthy growth extending Datron’s powerful recovery following the years of economic crisis. On the basis of management guidance for the current year, the shares trade at 15.0x earnings. Further growth is expected in 2019 which could drive margins to the previous level of 10% and beyond.

2017 broadly in line with expectations

Turnover in 2017 rose by 8% to €49.3m and operating EBIT was up an impressive 33% to €3.9m. These compare with guidance at the H1 results of turnover of at least €50m and EBIT of approximately €4m. Both sales and operating EBIT softened in H217 after healthy increases in the first half. Adjusted EPS for the year was €0.69.This underpinned a 33% increase in the dividend to €0.20. By contrast to the lower turnover, order inflow growth accelerated to 22% in H2 making for a 13% increase for the full year. This boosted the book/bill ratio excluding purely technical turnover items to 1.05x up from 1.01x in 2016.

Core CNC HSM milling machines drive business

The main driver was the core computer numerically controlled high-speed milling (CNC HSM) machines segment where performance broadly mirrored results for the group as a whole with turnover growth of 12% and order inflow growth of 16%. The replacement tools segment was another noteworthy performer with a 14% rise in turnover to €10.4m, in this case spread evenly across the two halves. Here, sales of tools for third-party manufacturers’ machines continue to grow in importance. The expanding installed base of machines (principally CNC HSM) helped drive a 14% increase in after sales and other revenue. There were no new product launches in either of the smaller machine segments, dental and dispense systems although the biennial trade fair effect helped drive a recovery in dental sales.

Strong outlook for 2018

The most important feature of 2018 at a product level will be the full-scale roll-out of the ‘next’ tablet-based control system, which appears in the CNC HSM machine segment. Management expects another year of growth and guides to turnover of €55m (up 12%), EBIT of €5.0m (up 37%) and EPS of €0.87 (up 26%). Management expects little expansion of the cost base so there should be a straightforward overhead recovery effect on operating margin which is guided at 9.1% up from 7.9%. Growth in 2018 will be bunched in the second half.

Historical financials and management guidance

Year
end

Revenue
(€000s)

EBIT
(€000s)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

43,220

3,262

0.56

0.10

23.9

0.7

12/16

45,683

2,925

0.52

0.15

25.8

1.1

12/17

49,325

3,901*

0.69*

0.20

19.4

1.5

12/18e

55,000

5,000

0.87

N/A

15.4

N/A

Source: Datron data and management guidance for 2018. Note: *Excludes capital gain.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FY17 broadly in line with expectations

Turnover in 2017 rose by 8% to €49.3m and reported EBIT was up 63% to €4.8m including a €870,000 capital gain on the sale of the UK affiliate. Excluding the capital gain, operating EBIT was still up an impressive 33% to €3.9m. These compare with guidance at the time of the half year results of turnover of at least €50m and EBIT of approximately €4m. Both sales and operating EBIT softened in H217 after healthy increases in the first half. FY17 EPS came out at €0.90 including the capital gain compared to guidance of €0.91 at the half year stage, or €0.69 excluding the capital gain. This underpinned a 33% increase in the dividend to €0.20.

Much of the company’s commercial success can be attributed to a high level of R&D spend which has sustained product renewal. R&D spend in 2017 was maintained at the high level of €4m, charged fully to revenue.

The company also gave a consolidated profit figure (including the newly established subsidiaries in France and Austria) of €4.08m excluding the capital gain. Together, the subsidiaries contributed €179,000 with Datron France (founded in 2016) contributing €160,000 suggesting that Austria (founded in 2017) is profitable. It is impressive that these businesses have emerged so rapidly from the start-up phase.

In contrast to turnover, order inflow growth accelerated to 22% in H217 resulting in a 13% increase for the full year. This boosted the book/bill ratio excluding purely technical turnover items to 1.05x up from 1.01x in 2016.

Exhibit 1: Financial performance

H116

H216

FY16

H117

H217

FY17

Turnover

19,767

25,916

45,683

23,552

25,773

49,325

Change

19%

-1%

8%

Order inflow

23,352

22,051

45,403

24,270

26,999

51,269

Change

4%

22%

13%

EBIT (ex capital gain)

20

2,905

2,925

1,306

2,595

3,901

Change

N/M

-11%

33%

Source: Datron

Revenues by segment/division

Exhibit 2: Revenues by segment, 2017

Exhibit 3: Revenues (excluding ‘miscellaneous’) by geography, 2017

Source: Datron data

Source: Datron data

Exhibit 2: Revenues by segment, 2017

Source: Datron data

Exhibit 3: Revenues (excluding ‘miscellaneous’) by geography, 2017

Source: Datron data

The continuing expansion of the international business diluted the contribution from Germany to 50% from 54% in 2016. This was largely driven by the strong growth in sales in North America which were up an estimated 55%; the US is now the largest single national market after Germany. The domestic share remains typically high for a machine tool maker. Other strong national markets include France (perhaps helped by the new regional presence) and Russia.

Core CNC HSM machines drive business

There were distinct differences in the contributions from Datron’s product areas to financial performance. The main driver was the core CNC HSM machines segment where the performance broadly mirrored the results for the group as a whole with turnover growth of 12% to €27.5m and order inflow growth of 16%. Again, the split across the two halves saw a decline in turnover in H217 (5%), but a powerful (25%) improvement in order inflow. CNC HSM machines accounted for 270 of the 370 machines of all types sold in the year – 150 of these were the higher-end MXCube and 120 the compact neo range.

The replacement tools segment was another noteworthy performer with a 14% rise in turnover to €10.4m, in this case spread evenly across the two halves. Here, sales of tools for third-party manufacturers’ machines continue to grow in importance especially in sales of tools for dental applications where sales of tools for third-party machines now account for half of the total. This compares with only a tenth of CNC HSM tools sold for third-party machines. The expanding installed base of machines (principally CNC HSM) helped drive a 14% increase in after sales and other revenue.

There were no new product launches in either of the smaller machine segments, dental and dispense systems. Second half sales in dental machines showed a 77% rise in turnover and 115% in order inflow albeit from low bases. The biennial dental fair in the spring gave its accustomed fillip to business but it is possible that Datron is reaping the first fruits of its strategic decision to concentrate on high-end machines. Turnover in dispense systems fell 46% in 2017.

Strong outlook for 2018

The most important feature of 2018 at a product level will be the full-scale roll-out of the ‘next’ tablet-based control system. It should drive growth in the CNC HSM machine segment. Initially, the ‘next’ system will be offered exclusively on Datron’s own machines but may ultimately be made available for third-party machines.

Management expects 2018 to be another year of growth and guides to turnover of €55m (up 12%), EBIT of €5.0m (up 37%) and EPS of €0.87 (up 26%). According to management, there will be little expansion of the cost base so there will be a straightforward overhead recovery effect on operating margin which is guided to expand to 9.1% from 7.9% in 2017. Presumably, some increase is expected in the tax rate, explaining the slower growth at the net level. Growth in 2018 will be second half weighted as turnover of €25m (up 3% y-o-y) is expected in the first half.

Management sees potential for further growth in 2019 and holds out the prospect of returning to a pre-economic crisis 10% EBIT margin even if sales growth decelerates to €60m for the year.

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