Accelerating the pace of growth

Ringmetall 5 June 2018 Update (1-4pgs)
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Ringmetall

Accelerating the pace of growth

Industrials

Scale research report - Update

5 June 2018

Price

€4.74

Market cap

€130m

Share price graph

Share details

Code

HP3 GR

Listing

Deutsche Börse Scale

Shares in issue

27.7m

Net debt as at 31 December 2017

€4.4m

Business description

Ringmetall manufactures specialist industrial packaging solutions. Its core products are drum closing systems for the chemicals, pharmaceuticals and food sectors. It is also active in industrial handling where it manufactures speciality forklift components and specialist components for trucks, as well as industrial and agricultural vehicles.

Bull

Solid market leadership with barriers to entry in a structural growth market

Balance sheet enables further M&A growth

Move to Standard board of the Deutsche Borse in July 2018 should aid strategy

Bear

Execution risk on M&A strategy and constrained by high market shares in Industrial Packaging

Volatility of steel prices and FX

Client concentration

Analyst

Andy Chambers

+44 (0)20 3077 5700

Ringmetall continues to experience healthy organic growth and develop its operations through strategic acquisitions. Management has provided guidance for FY18 that may be considered slightly muted due to one-off, largely administrative costs but also targets M&A which add revenues of between €5m and €40m. Management has set an ambitious medium-term goal. It hopes to reach €200m of revenues generating EBITDA margins in excess of 15% by 2021. Achieving this successfully would more than justify the current rating.

FY17 delivered to plan

FY17 revenues came in towards the top end of the anticipated range of €98–103m and EBITDA, less affected by the adoption of IFRS accounting standards, rose 7.6% to €12.0m, a broadly maintained margin of 11.8%. Both divisions showed healthy profit growth, despite the temporary drag on margins from passing on higher steel prices in Industrial Packaging and adverse FX translation of US and Turkish results. The most notable factor was the reduction in net debt to €4.4m (FY17: €16.4m) following a capital raise of €9.5m in November 2017. Ringmetall remains well-positioned to pursue its growth strategy.

A significant challenge has been set

FY18 guidance is for moderate progression in sales to between €107m and €112m, with limited EBITDA improvement due to one-off costs for the securities prospectus necessary for the segment change on the Deutsche Borse and the adoption of IFRS accounting standards. However, the medium-term targets for sales of €200m and EBITDA margins above 15% are more challenging. The implication of achieving the 2021 target is for an EBITDA contribution of €30m compared to €12m last year. With c €75m of sales growth expected to come from acquisitions, there is clearly execution risk to overcome. In Industrial Packaging, Ringmetall enjoys strong market positions in clamping rings in the US and Europe, which may limit opportunities to develop product adjacencies.

Valuation: Rerating set to continue

Despite the improved profitability, boosted by the switch to IFRS, the stock has only modestly rerated since our initiation a year ago, notwithstanding the c 40% increase in the share price. Achievement of the medium-term targets would suggest that this has further to go when considered against the company’s peers, which currently trade on a FY19e P/E of 15.6x.

Consensus estimates (historical restated to IFRS from HGB)

Year
end

Revenue
(€m)

PBT*
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

94.3

8.1

0.24

0.05

19.8

1.1

12/17

102.4

9.3

0.28

0.06

16.9

1.3

12/18e

110.0

10.2

0.25

0.06

19.0

1.3

12/19e

116.0

12.4

0.30

0.08

15.8

1.7

Source: Bloomberg estimates, Ringmetall. Note: *Adjusted to exclude all tax items.

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.

Company description: World leader in drum closures

Ringmetall is a leading manufacturer of specialist packaging solutions, with sales of around €102m in FY17, split about 34% in Germany and 25% in the US, with the balance split across Europe and Asia. The company has two divisions:

Industrial packaging (86% of 2017 sales). Ringmetall manufactures industrial drum closure systems, lids and gaskets, locking rings, handles and accessories. The company’s most important end-markets are within the food, chemicals/petrochemicals and pharmaceutical sectors, as well as speciality industrial equipment and agriculture. Ringmetall’s products also have applications in other sensitive industries, such as nuclear. It is the global market leader in secure drum closure systems, manufacturing over 2,000 different types of clamping rings, and has been active in the business for 60 years. In 2015, the company entered the US market through the acquisition of market-leading drum closure manufacturer Self Industries. In 2017, it announced two further deals extending its growth strategy: in June 2017, it announced the acquisition of the assets of Hong Renim (Hong Ren) in China, which completed in February 2018. On 31 July 2017, it acquired Latza, based in Attendorn, Germany, for an undisclosed price.

Industrial handling (14% of 2017 sales). Ringmetall manufactures forklift components and specialist components for trucks and agricultural vehicles. These are niche components, such as restraint systems, speciality brake and clutch pedals, lifting mast components, as well as complex welded assemblies, trailer coupling systems and hydraulic brackets.

Founded in 1997 under the name of HPI and listed in 2007, the company was rebranded to Ringmetall in 2015, an industrial manufacturing company. It operates as a holding company for its 19 subsidiaries, which operate largely autonomously from 19 manufacturing locations around the globe. The centre provides finance, investor relations, strategic and corporate development functions for the group’s operations. Ringmetall is the global market leader in drum closure systems with market shares of about 70% globally and 80% in Europe and the US. It has longstanding relationships with the three leading global drum manufacturers, Greif, Mauser and Schuetz, with a global capability to provide tailored solutions, which provides a significant barrier to entry for new entrants and existing competitors. It also has other blue-chip clients, notably Linde, BASF, Novartis and John Deere. Industries handling hazardous products with high safety requirements (eg chemicals, petrochemical, pharmaceuticals, food, etc) make up most of the customer base for Industrial Packaging, while the Industrial Handling division primarily service the logistics and agricultural equipment markets.

Strategy

During 2017, the company has further developed its strategy and has stated ambitious financial targets for 2021. It expects to achieve sales in excess of €200m, almost double the FY17 level, generating an EBITDA margin of at least 15% (FY17 11.8%). The growth is expected to be achieved through organic growth at a rate of 4–5% per annum with the balance coming through targeted M&A, primarily for the Industrial Packaging division. However, following restructuring in FY17, acquisitions for the Industrial Handling operation will also now be considered. If we assume the lower end of the organic growth range then acquisitions with sales of over €75m will be required to achieve the revenue target.

In FY17, the company raised €9.5m through the issue of 2.52m new shares at €3.80 per share to help facilitate the growth strategy this followed to significant deals during the year:

The acquisition of Latza for an undisclosed price was announced on 31 July 2017. Based in Attendorn, Germany, Latza is a manufacturer of specialist clamping rings of different dimensions, material widths and surface coatings including the corresponding sealing plugs, with a specialisation in tinplate applications. It also brings with it innovative spring clamping ring technologies that Ringmetall will be able to offer across its Industrials Handling division. Management indicates that Latza will add €4–5m to group sales in a full year, with similar EBITDA margins to Ringmetall at the group level.

In June 2017, it announced the proposed acquisition of Hong Renim (Hong Ren), a Changzhou, China-based producer of tension rings and barrel closure systems in an asset-based deal. The selling family retain a 20% stake with the production facilities integrated into Ringmetall’s existing operation in Changzhou. The purchase of a small profitable competitor with sales of around €1.2m extends customer relationships and further raises awareness of quality and safety standards in dangerous goods packaging. It also increases export capabilities into the Asian market. The deal completed in February 2018.

The group remains in discussions with several potential takeover prospects and expects to conclude at least one acquisition in FY18.

As part of its growth strategy, management has also stated that it intends to move to the Regulated Market (General Standard) of the Deutsche Borse in July 2018.

FY17 highlights

FY17 saw a combination of strong top-line growth and margin pressure from commodity prices and FX effects. The company has adopted IFRS accounting in 2017, so FY16 numbers have been restated from Handelsgesetzbuch (HGB) accounting previously applied. Prior years are as previously presented. Overseas sales accounted for €68.0m or 66% of the group total (FY16 €60.3m, 64%).

Exhibit 1: Ringmetall FY17 results summary

Year to December (€m)

FY16 HGB reported

FY16 IFRS restated

FY17

% change IFRS

Sales

Industrial Packaging

79.1

79.0

88.3

11.7%

Industrial Handling

15.3

15.3

14.1

0.0%

Total group

94.4

94.3

102.4

8.5%

Gross profit

41.8

41.7

45.4

8.8%

Gross margin

44.3

44.2

44.3

EBITDA

10.9

11.2

12.0

7.6%

EBITDA margin (%)

11.6

11.9

11.8

EBIT*

6.4

9.7

10.4

7.0%

PBT*

5.0

8.1

9.3

15.2%

Net income

2.3

5.7

7.1

25.2%

Net debt

19.0

16.4

4.4

(73.2%)

Source: Ringmetall. Note: *Adjusted to exclude all tax items.

Strong revenue growth of 11.7% in the Industrial Packaging division was driven by positive macroeconomic environment, notably in the chemical industry in Germany, as well as the boost provided to the top line from price increases to reflect rising steel prices. In addition, Latza made an initial €2.0m sales contribution from 2 August 2017. It is expected to add €4-5m in sales in the first full year, 2018, at similar margins to Ringmetall’s ongoing activities.

While the steel price increases boosted the top line, they could not be fully passed on to end-customers and thus reduced margins. Currency effects also led to lower sales and EBITDA contributions on the translation of US and Turkish profit contributions, although these mitigated as the year progressed. The EBITDA divisional contribution fell to €12.1m from €11.5m in FY16, a margin of 13.7% compared to 14.5% in 2016. However, the core markets of Germany and the US experienced a strong operational development. Management continues to monitor the performance in Turkey, which had been attributed to political factors and currency effects. It has sold property in the region and is now renting a more cost-effective production facility.

The EBITDA contribution of the smaller Industrial Handling business more than doubled to €1.2m from €0.6m, despite a c 8% drop in sales to €14.1m. The strategic realignment that was undertaken with increased investment in proprietary products started to bear fruit, and management now appears more inclined to invest in growing the division.

Overall group EBITDA increased by 7.6% to €12.0m. Reduced interest costs on sharply lower net debt following H2 led to a 15% increase in PBT with the margin maintained at 9.1%, up 50bp on the prior year. With a lower tax charge, net income was up 25%.

Outlook

Management indicated that for FY18 it expects sales to grow to a range of €107m to €112m. EBITDA is expected to increase slightly as the non-recurring administrative costs of moving markets segments are absorbed, including the preparation and issue of a prospectus.

FY18 guidance remained unchanged following the release of the Q1 trading update in mid-May. In addition, the introduction of medium-term targets for revenues in excess of €200m in 2021 and an EBITDA margin of at least 15% provide a challenging strategic framework for management.

Q118 trading performance

Exhibit 2: Ringmetall Q118 results summary (IFRS)

3m to March (€m)

Q117

Q118

% change

Sales

Industrial Packaging

22.7

24.9

9.5%

Industrial Handling

4.0

3.6

-9.7%

Total group

26.7

28.4

6.6%

Gross profit

11.8

12.2

3.0%

Gross margin (%)

44.3

42.8

EBITDA

Industrial Packaging

3.4

3.2

9.5%

EBITDA margin

Industrial Handling

0.3

0.4

-9.7%

EBITDA

Central costs

(0.4)

(0.7)

Group total

3.3

2.9

-10.8%

EBITDA margin (%)

12.4

10.3

EBIT

2.7

2.4

-12.8%

PBT

3.9

4.3

10.6%

Net income

2.3

3.0

27.9%

Source: Ringmetall

While revenues showed good progress in the Industrial Packaging division, EBITDA margins were affected by special items relating to the change of stock market segments and the introduction of IFRS accounting standards, which also increased costs for the holding company during the period.

Conversely, the Industrial Handling operations saw a modest improvement in EBITDA contribution with significantly higher margins on lower revenues. Management had anticipated the overall sales decline but, encouragingly, sales of new, self-developed products rose during the period, including stabilisers and arrestor hooks.

Financial summary

Exhibit 3: Financial summary

Year end 31 December

€000s

2012*

2013*

2014*

2015*

2016*

2016 IFRS

2017 IFRS

Income statement

Revenue

48,304

46,498

65,828

66,678

94,345

94,294

102,348

Profit before tax (adjusted)**

(691)

(71)

2,346

718

5,001

8,094

9,288

Net income (as reported)

(1,612)

(970)

1,528

(643)

2,320

5,348

6,766

EPS (as reported) – (€)

0.07

(0.03)

0.09

0.24

0.28

Dividend per share (€)

0

0

0.05

0.05

0.05

0.05

0.06

Balance sheet

Total non-current assets

15,362

26,986

24,942

36,970

34,027

35,855

35,810

Total current assets

11,873

19,620

19,615

26,938

30,704

30,384

39,986

Total assets

27,235

46,606

44,557

63,909

64,731

66,239

75,796

Total current liabilities

6,062

17,195

16,833

20,726

22,187

18,065

14,265

Total non-current liabilities

8,245

11,524

9,347

23,466

17,349

21,868

22,249

Total liabilities

14,307

28,718

26,180

44,192

39,536

39,933

36,694

Net Assets

12,928

17,888

18,377

19,717

25,195

26,306

39,102

Shareholders’ equity

12,928

17,888

18,377

19,717

25,195

26,306

39,102

Cash flow statement

Net cash from operating activities

6,263

3,173

3,827

5,283

8,935

7,936

9,922

Net cash from investing activities

(5,628)

(17,170)

(1,711)

(18,788)

3,231

(3,238)

(5,108)

Net cash from financing activities

1,706

14,238

(3,352)

15,668

(2,615)

(1,609)

4,906

Net cash flow

2,341

241

(1,236)

2,163

3,089

3,089

9,720

Cash & cash equivalent end of year

2,382

3,268

2,514

2,950

5,265

5,265

14,844

Net debt

2,958

12,244

12,361

24,157

18,962

16,413

4,232

Source: Ringmetall accounts. Note: *2012-16 historics under HGB accounting standards. **Before all tax items.

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