Business as usual

Blue Cap 10 May 2019 Update
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Blue Cap

Business as usual

Financials

Scale research report - Update

10 May 2019

Price

€17.65

Market cap

€71m

Share price graph

Share details

Code

B7E

Listing

Deutsche Börse Scale

Shares in issue

4.0m

Net bank debt (€m) at 31 December 2018

27.0

Business description

Blue Cap is a Munich-based industrial holding company, investing in medium-sized manufacturing companies with a turnover range of €20–100m.

Bull

Proven business model and management.

Strong finances set for boost from transformative transactions.

Economic downturn enhances buying opportunities.

Bear

Execution risk in resolving problems.

Valuation risk in identifying acquisitions.

Dependence on economic conditions, mitigated by diverse business and geographical mix.

Analyst

Richard Finch

+44 (0)20 3077 5700

Blue Cap’s solid 2018 results were epitomised by a 15% rise in NAV and a positive trading statement. Management confidence in continued operational gains across the board and long-term turnaround potential at Knauer is complemented by an increasing appetite for transformative investments. However, such optimism risks being obscured by the demands of its new major shareholder, PartnerFonds (44%), even if hitherto settled judicially in favour of Blue Cap management, and now looking to be resolved amicably in the interests of all shareholders. Despite more challenging conditions (consensus forecasts have been reduced), the 40% share price discount to NAV (€29.55 at December 2018) appears excessive.

Good H218 momentum

Without the level of corporate activity which distorted first half comparisons, in H218 there was welcome visibility of continued firm underlying progress, notably a 21% rise in EBITDA excluding Knauer (see Exhibit 2 on page 2). This would have been yet higher (maybe on a par with the increase of a third in H1) if WISAP, a thriving business, had not been sold at the end of Q3. Knauer made an initial profit, albeit minor (€0.9m), which is creditable early in its turnaround. EBIT was slightly ahead of plan, if lower y-o-y because of investment costs and initial Knauer depreciation.

On a growth tack

2019 guidance is for much higher revenue thanks largely to a full year of Knauer and a small gain in EBIT, again driven by Knauer (first restructuring benefits offset by a full depreciation charge). Further out, this purchase should allow a step-change in returns, given its size (c €70m sales pa) and Blue Cap’s success in turning around temporarily distressed businesses such as Biolink and Neschen. The deal typifies Blue Cap’s growing focus on larger companies, as does its disposal of small-cap WISAP to a strategic Chinese investor.

Valuation: Long-term opportunity

Blue Cap’s NAV (fair value of portfolio companies less net debt) of €118m at end 2018, highlights potential hidden reserves (c 40% share price discount to NAV) and rapid value creation (15% in 2018 alone). This, and an undemanding rating (under 6x 2020e EV/EBITDA), may reassure amid slowdown and tensions with the major shareholder. Latest deal of size (Knauer) should enthuse, with more in prospect.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA

(€m)

Net profit

(€m)

EPS
(€)

DPS

(€)

EV/EBITDA
(x)

12/17

141.8

11.2

39.9*

10.0

1.00

7.3

12/18

176.1

11.5

4.6

1.2

1.00

8.5

12/19e

206.5

13.6

4.6

1.2

1.00

7.6

12/20e

210.5

17.0

6.6

1.7

1.00

5.8

Source: Blue Cap accounts, consensus estimates. Note: *€37m gain on Biolink sale.

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.

Review of 2018 results

Exhibit 1: Revenue and EBITDA

Source: Blue Cap accounts, consensus estimates

2018 was another successful year for Blue Cap as underlying EBITDA, ie excluding Biolink and Knauer, rose by over a quarter (see Exhibit 2). It would have been higher but for the absence of profitable WISAP in Q4, hence flat Medical Technology revenue in H2. Otherwise the replacement of high-margin Biolink (€2.5m EBITDA in H117) with Knauer in its early stages of turnround (€0.5m) explains the apparent pause in overall EBITDA (see Exhibit 1). Net profit of €4.6m included profit from the disposal of WISAP (estimated c €1.8m), substantially exceeded by Knauer restructuring costs.

Exhibit 2: Analysis of revenue and profit

€m

H117

H217

FY17

H118

H218

FY18

2019e

Guidance: FY19 vs FY18

Revenue

Coating technology:

Neschen

30.1

29.2

59.3

30.6

30.5

61.1

Change

n/a

n/a

n/a

+2%

+4%

+3%

Biolink*

9.3

-

9.3

-

-

-

-

Total Coating technology

39.4

29.2

68.6

30.6

30.5

61.1

Higher

Adhesive technology

18.0

17.7

35.7

18.7

17.5

36.2

Change

-5%

Flat

-3%

+4%

-1%

+1%

Higher

Plastics technology (Knauer)**

-

-

-

9.6

28.1

37.7

Higher

Production technology

5.4

9.3

14.7

10.6

7.2

17.8

Change

-25%

-28%

-27%

+97%

-23%

+21%

Higher

Precious metals recycling

6.4

6.0

12.4

6.3

6.2

12.5

Change

n/a

-15%

n/a

-1%

+3%

+1%

Higher

Medical technology

5.2

5.0

10.2

5.5

5.1****

10.6

Lower

Consensus

Total revenue

74.4

67.4

141.8

81.4

94.7

176.1

210.5

Change

+73%

+25%

+45%

+9%

+40%

+24%

+20%

EBITDA

13.6

Continuing

4.9

3.8

8.7

6.5

4.6

11.1

Margin

7.5%

5.6%

6.6%

9.1%

6.8%

8.0%

Biolink*

2.5

-

2.5

-

-

-

-

Knauer**

-

-

-

(0.4)

0.9

0.5

Total EBITDA

7.4

3.8

11.2

6.0

5.5

11.5

13.6

Margin

9.9%

5.6%

7.9%

7.4%

5.8%

6.5%

6.5%

EBIT

6.0

2.5

8.5

4.5

2.2

6.7

7.9

Net profit

39.0***

0.9

39.9

1.3

3.3

4.6

4.6

Source: Blue Cap accounts, consensus estimates, Edison Investment Research. Note: *Sold June 2017. **From May 2018. ***Including €37m profit on sale of Biolink. ****WISAP sold September 2018.

Given our H1 results review, we focus here on the second half performance. Integration of Knauer (c 30% of revenue) was, predictably, a key factor. Initial restructuring measures involved mainly the closure of a small and inefficient production site and improvements in the organisational structure, notably in R&D and production. Neschen, the other major turnaround activity, again achieved higher revenue (4%), while stepping up its digitisation strategy and productivity enhancements at its main site. A new CRM system, allowing better sales management and customised campaigns, was also a feature in Adhesives, where second-half revenue was steady.

Elsewhere, as shown in Exhibit 2, Production Technology saw H2 revenue down by a quarter in contrast to the bumper performance (a doubling) in the first half which was largely due to the inclusion of business postponed from the previous year, eg project delays at Gämmerler and client backlog at SMB-David. Medical Technology again did well, notably at em-tec in terms of sensors and its multi-channel platform.

Continued optimism in 2019

Guidance is for a clear rise in revenue, driven by a full year of Knauer (eight months in 2018), and higher EBIT as a result of generally positive trading and increasing reorganisation gains at Knauer. Savings apart, it assumes synergies with its own adhesives and coatings as well as expansion of Knauer in the food sector and new markets, such as pharma and medical. Management also accepts that as ever there is execution risk ie restructuring delays and costs. Only Medical Technology is expected to see lower revenue as the absence of WISAP for nine months is unlikely to be made up even by a buoyant em-tec.

Dispute with major shareholder

News a year ago of the promised collaboration with like-minded counterpart, PartnerFonds, Blue Cap’s new major shareholder (44%) and planned merger partner, was warmly received as it could bring scale and similar corporate targets. PartnerFonds shares Blue Cap’s "buy, hold & develop" strategy, targeting medium-sized industrial companies in the DACH region.

A continuation of Blue Cap’s strategy was therefore expected but the new shareholder demanded transactions which management regarded as not in the best interests of the company and duly resisted. A court recently confirmed management’s position by rejecting the demands of PartnerFonds as unlawful.

The situation is clearly unfortunate but apart from this confirmation for the CEO and advisory board, it remains business as usual for M&A, investment and restructuring personnel engaged on new projects as well as on improvements within portfolio companies. Moreover, the board is working to resolve the dispute with PartnerFonds in a positive way for all shareholders.

Balance sheet and cash flow

Exhibit 3: Net debt and net debt/EBITDA

Source: Blue Cap accounts, consensus estimates, Edison Investment Research

The disposal of Biolink for €39m led to a significant y-o-y reduction in net debt at end 2017. A balance of €11m was historically low for Blue Cap and reinvestment, namely in Knauer, has duly followed (€27m at December 2018). Further significant scope for spend is indicated by positive consensus forecasts (see the table on page 1). This explains last year’s reversal by management of its longstanding policy not to pay a dividend, preferring to reinvest to fund expansion.

Valuation

Despite headwinds (macro factors and company-specific) Blue Cap’s prospects are positive, both operationally and strategically. The company has a proven business model and strategy, highly experienced management, and a visible record of financial success and prudence (eg borrowing and dividend policy). It is making good progress turning round the latest deal of size (Knauer) and believes that there is opportunity for more of the same. The rating is attractive at under 6x 2020e EV/EBITDA.

NAV (fair value of the portfolio companies included in the businesses less net debt), published for the first time last year by Blue Cap, was €118m at December 2018 (prior year €102m). This is well ahead of the current market cap (c 60% premium). It excludes non-operating assets and liabilities of group holding and real estate companies. Including these assets, the NAV valuation would be even higher.


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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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