Confidence undimmed

Delignit 7 May 2019 Update
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Delignit

Confidence undimmed

Materials

Scale research report - Update

7 May 2019

Price

€7.46

Market cap

€61m

Share price graph

Share details

Code

DLX

Listing

Deutsche Börse Scale

Shares in issue

8.2m

Last reported net debt (€m) at December 2018

7.8

Business description

Delignit manufactures ecological products and system solutions based on sustainable raw materials for the automotive and railway industries. Exports account for over 40% of sales.

Bull

Solid order intake in the LCV and rail transport segments.

Increased and enhanced applications for existing products

Rapid take-up of the products in global markets.

Bear

High dependence on large OEM contracts.

An increase in oil prices could reduce the company’s profitability.

Valuations already factor in growth prospects, creating downside risk.

Analyst

Richard Finch

+44 (0)20 3077 5700

Delignit continues to please with a 16% rise in FY18 EBITDA despite a demanding comparative and one-off contract as well as project start-up costs. Automotive, the major sector, stole the show with revenue up a quarter thanks to strong OEM activity and the maximisation of revenue per vehicle. This momentum, allied with an initial contribution from a potentially transformative OEM motor caravan order, underpins guidance of further double-digit growth in 2019 revenue at maintained EBITDA margin. Finances are healthy (year-end net debt was inflated by a temporary delay in customer receipts), allowing investment (up c 20% in FY18) and a progressive dividend policy.

Buoyant H218 curbed by one-off costs

H218 saw a clear acceleration in revenue (up 21% y-o-y from 8% in H1) and FY18 revenue beat (up 14% against expected at least +8%). As in H1, Automotive was to the fore (revenue up by a third), reflecting high volumes from series supply contracts and demand for system solutions in cargo securing. Technological Applications remained subdued (revenue down 8% in H2) despite higher railway systems sales. Exports were again the driver (up by over a half) in line with strategic expansion. By contrast, there was a marked fall in the H2 EBITDA margin (8.7% vs 9.4% in H217) owing to one-off start-up costs, notably for the caravan model. However, the FY18 EBITDA margin of 9.3%, up marginally y-o-y, met guidance. A near doubling in net debt was largely due to the adverse timing of debtor payments.

Sustained growth expected

A confident statement reflects buoyant target markets, a good order book and increasing invitation to major tenders owing to Delignit’s reputation for development and technology. FY19 guidance is for top-line growth of c 14% and EBITDA margin similar to last year. Longer term, successful business model transition, as shown by the caravan order, supports management’s “vision” of revenue of over €100m at 10%+ EBITDA margin by 2022.

Valuation: Time to deliver

Key ratios appear to be at a significant premium to that of wood processing and automotive supplier peers. For example, management guidance for FY19 gives Delignit EV/EBITDA of c 11x (peer average c 7x). However, evident strong long-term growth prospects could lead to a visible reduction in valuation.

Historic financials

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/15

44.4

1.7

0.14

0.03

53.3

0.4

12/16

48.6

2.1

0.18

0.03

41.4

0.4

12/17

52.7

2.9

0.24

0.05

31.1

0.7

12/18

60.3

3.8

0.31

0.05

24.1

0.7

Source: Delignit accounts

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 FY18 results

Exhibit 1: Analysis of half-yearly revenue and profit

Year end December (€m)

H117

H217

FY17

H118

H218

FY18

REVENUE

27.1

25.6

52.7

29.4

30.9

60.3

Change (%)

+11%

+6%

+8%

+8%

+21%

+14%

Automotive

37.7

Change

+12%

+2%

+7%

+15%

+33%

+24%

Technological applications

15.0

Change

+8%

+16%

+12%

-10%

-8%

-9%

Germany

16.6

16.7

33.3

16.6

17.3

33.9

Change

-5%

+1%

-2%

Flat

+4%

+2%

Exports

10.5

8.9

19.4

12.8

13.6

26.4

Change

+50%

+17%

+33%

+22%

+53%

+36%

Other income

0.3

(0.3)

Neg.

(0.3)

0.8

0.5

Total income

27.4

25.3

52.7

29.1

31.7

60.8

Material costs

(15.5)

(13.8)

(29.3)

(15.2)

(18.7)

(33.9)

Labour costs

(7.6)

(7.0)

(14.6)

(8.6)

(7.7)

(16.3)

Other operating costs

(1.8)

(2.2)

(4.0)

(2.4)

(2.6)

(5.0)

EBITDA

2.5

2.4

4.9

2.9

2.7

5.6

Margin

9.0%

9.4%

9.2%

9.9%

8.7%

9.3%

Depreciation

(0.7)

(1.0)

(1.8)

(0.8)

(0.8)

(1.6)

EBIT

1.7

1.4

3.1

2.1

1.9

4.0

Net interest

(0.1)

(0.1)

(0.2)

(0.1)

(0.1)

(0.2)

Pre-Tax Profit

1.6

1.3

2.9

2.0

1.8

3.8

Taxation

(0.5)

(0.5)

(1.0)

(0.6)

(0.6)

(1.2)

Net income

1.1

0.8

1.9

1.4

1.2

2.6

Source: Delignit accounts

As shown in Exhibit 1, H218 saw contrasting fortunes as a surge in revenue (up 21%) was offset by a sharp dip in margin, notably at EBITDA level 8.7% vs 9.4% y-o-y and vs 9.9% in H118. As mentioned, this shortfall was attributable to one-off start-up costs and thus a function of investment, so should not reasonably concern. Indeed for the year as a whole EBITDA margin was slightly ahead of the previous year with principal costs, raw material and labour, both at a maintained ratio to revenue. With depreciation down and finance costs unchanged, the 2018 revenue boost of 14% was even more pronounced further down the line (pre-tax profit and net income up 31% and 33% respectively).

The revenue pattern was much as in the first half with Automotive and exports particularly buoyant thanks to continued OEM demand, additional orders from car makers and geographical expansion, notably in the US. Even allowing for positive macro conditions (eg in Germany light commercial vehicle registrations again up 5% in 2018), such progress is credited by management to its record investment (c €6m over the last two years) paying off in terms of both customised system solutions and expanded product applications. It was also more of the same for Technological Applications, with a further near double-digit percentage decline in revenue in H2 as headwinds in certain markets were not made up by higher railway systems sales.

Prospects looking good

Prospects, both macro and company-specific, appear set fair even if 2019 economic forecasts are for a slowdown in growth and attendant risks, eg trade policy tensions and Brexit. Its key market of light commercial vehicles is still expected to grow by 10% between 2017 and 2020. Management is mindful of disruption to registrations from the introduction of the new vehicle emissions test standard (WLTP) in Q318, but regards this as short-term and likely to be comfortably absorbed by the company thanks to high call-off OEM custom.

In “Vision 2022”, management has newly reiterated its forecast of revenue growing by two-thirds over the next four years, with expected clear economies of scale driving margin benefits (Exhibit 2 shows most cautious stated assumptions for 2022). This vibrancy is highlighted by the reference contract for interior systems for motor caravans. Not only is this award significant (revenue contribution of up to €10m pa after ramp-up with production due to run to 2027) but further evidence of expanded product applications.

Exhibit 2: Revenue and EBITDA margin from 2015 to management’s “Vision 2022”

Source: Edison Investment Research

Balance sheet and cash flow

One-off factors, eg adverse timing of debtor payments, contributed to a near doubling of year-end net debt (€7.8m). Otherwise, Delignit remains lightly borrowed with ample room for investment and dividend growth. Even on stated net debt the equity ratio was only marginally down from 51% to 49%.

Exhibit 3: Net debt/EBITDA

Source: Edison Investment Research

Valuation

Peer valuation

As there are no companies that match Delignit’s profile closely, for peer comparison we have identified four wood processing companies, even if with lower exposure to the automotive sector (Pfleiderer, Surteco and Ober), and four automotive suppliers (Grammer, Progress Werk, SHW and Delfingen), which offer products such as seat covers, insulation, components and systems for car interiors.

As consensus forecasts for Delignit are not available, we have conducted a comparative analysis based management’s revenue and EBITDA margin guidance for 2019. Despite recent prolonged consolidation, Delignit still trades at a considerable premium to the blended peer group on prospective EV/EBITDA (61%). Management’s guidance for FY19 implies an EV/EBITDA multiple of c 10.6x, admittedly on most cautious assumptions but well ahead of the 6.6x peer average. Although this suggests that the company’s apparently strong growth outlook is factored in, it also reflects confidence that investors should look at the long term ie management’s “vision” of more than €100m revenue in 2022 at a double-digit EBITDA margin owing to scale benefits. For indicative purposes, this may imply EBITDA of at least €10m ie 10% margin on €100m+ revenue, compared with formal guidance for the current year of c €6.5m. At the current market valuation, this would imply a multiple broadly in line with the peer group.

Exhibit 4: Peer group comparison

Market cap

EV/EBITDA (x)

(€m)

2019e

Wood processing companies

Pfleiderer

358

5.5

Surteco

399

7.5

Ober

16

13.6

Automotive suppliers

Grammer

477

4.6

Progress Werk

83

4.6

SHW

130

5.1

Delfingen

49

5.1

Peer group average

6.6

Delignit

61

10.6

Premium to peer group

61%

Source: Company accounts, Refinitiv, company guidance. Note: Prices as of 2 May 2019.


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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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.

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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.

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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.

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.

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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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