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Coping well with challenging market conditions

Kendrion 11 November 2021 Update
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Kendrion

Coping well with challenging market conditions

9M21 results

Industrial engineering

11 November 2021

Price

€20.40

Market cap

€304m

Net debt (€m) at 30 September 2021

141

Shares in issue

14.9m

Free float

49%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.2)

(8.1)

24.7

Rel (local)

(7.3)

(12.6)

(9.4)

52-week high/low

€24.65

€16.20

Business description

Kendrion develops, manufactures and markets high-quality electromagnetic systems for automotive (52% of FY20 revenues) and industrial applications (48%). The geographical spread of revenues in FY20 was Germany 39%, other Europe 30%, the Americas 15% and Asia 16%.

Next events

FY21 results

25 February 2022

Analyst

Johan van dan Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

Kendrion’s Q3 results showed better than expected revenues but also reflected the impact of global supply chain constraints and volatile order patterns on profitability. However, the company has managed to limit the effect of these challenging market conditions to a decline in EBITDA margin of 60bp y-o-y, resulting in a margin of 11.0%. The long-term growth outlook remains intact, with Kendrion benefitting from trends such as electrification and the shift to renewable energy.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/19

412

43.8

0.94

0.00

8.7

21.7

12/20

396

44.6

0.79

0.40

8.3

25.8

12/21e

462

55.7

1.32

0.66

8.0

15.5

12/22e

499

64.6

1.69

0.85

6.8

12.1

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong revenue growth in Q321

Kendrion’s Q3 results were stronger than expected in terms of revenues but EBITDA was somewhat weaker. Revenues increased 14% organically with the anticipated slower growth in automotive (6%) but much stronger growth in the industrial segment (23%). The impact of the supply chain constraints, higher raw material prices and volatile order patterns (which caused inefficiencies) only limited growth in normalised EBITDA to 9%, resulting in a modest decline in EBITDA margin in Q3 of 60bp y-o-y after the strong recovery of 240bp y-o-y in H121. Kendrion seems to be coping well with the challenging market conditions and its financial position remains strong, with an equity ratio of 44% and a net debt/EBITDA multiple of 2.4x, which is well within the covenant of 3.25x.

Long-term outlook is intact

Kendrion is optimistic about the rapidly expanding economy as we emerge from the COVID-19 pandemic but is cautious about continuing high demand volatility and supply-chain constraints. Although difficult to predict, management does not expect the situation to worsen in the short term and has measures in place that will help. Long-term trends of electrification and the shift to renewables will drive underlying growth. We have raised our FY21 revenue growth forecast to 16.5% (from 12%) and lowered our EBITDA estimate, although we still expect the EBITDA margin for FY21 to be 80bp higher.

Valuation: Discount to peers offers upside

We value Kendrion using three different methods: historical multiples, discounted cash flow (DCF) and a peer comparison. On our adjusted estimates, the updated unweighted average now points to a valuation of €27.0 per share (previously €29.0 per share). Compared to peers, Kendrion is valued at a discount of 14% on FY22e EV/EBITDA. We believe this discount could narrow if the company demonstrates accelerating growth and higher profitability.

Very strong quarter in industrial

Kendrion reported Q3 revenues that were clearly higher than we had expected (+15% y-o-y to €113m versus our estimate of €108m). The main difference was the much stronger growth in industrial whereas the slower growth in automotive (due to material shortages and volatile ordering) was as expected. According to management the supply chain problems are much larger compared to the problems experienced during the pandemic last year and are not limited to shortages in the semiconductor sector.

Organic revenue growth in Q321 was 14% y-o-y, with the remaining 1% from forex gains. Organic growth in the automotive division was 6% y-o-y despite the much lower number of car registrations in Europe in the quarter, resulting in 21% y-o-y organic revenue growth in 9M21, particularly driven by the strong recovery in Q221. The industrial division reported 21% y-o-y organic revenue growth in brakes and 25% y-o-y in actuators & controls in Q3, with both segments reporting higher growth rates than in H121 and both reporting organic revenue levels above the pre-pandemic levels seen in Q319.

Gross margin was 40bp y-o-y lower at 48%, mainly due to the impact of higher raw materials prices (particularly in industrial brakes). High demand volatility in automotive (due mainly to semiconductor shortages) also had a negative impact on profitability resulting in normalised EBITDA growth of 9% y-o-y to €12.4m (versus our estimate of €13.5m) compared to revenue growth of 15% y-o-y. Q3 EBITDA was more than 3m lower than in Q2; according to management 80% of this was caused by lower volumes (normal seasonal pattern but also order cancellations) and the remaining 20% was caused by inefficiencies due to volatile order patterns. Despite the difficult market conditions, Kendrion managed to limit the decline in normalised EBITDA margin in Q3 to only 60bp y-o-y to 11.0%. For the first three quarters of 2021 the EBITDA margin was still up 140bp y-o-y to 12.7%. Due to lower depreciation charges, normalised EBITA increased 30% y-o-y in Q3 (+86% in 9M21).

Exhibit 1: Kendrion Q321 results

€m

Q320

Q321

Change

Revenues

98.6

113.2

15%

Gross margin

48.4%

47.9%

EBITDA normalised

11.4

12.4

9%

EBITDA margin

11.6%

11.0%

Depreciation

-6.2

-5.9

-4%

Amortisation, acquisition related

-1.1

-1.0

-5%

EBIT normalised

4.2

5.5

31%

EBIT margin

4.3%

4.9%

Non-recurring items

-0.5

-0.5

EBIT reported

3.7

5.0

35%

Financial income and expenses

-1.3

-0.8

Pre-tax income

2.4

4.2

75%

Taxes

-0.8

-1.3

63%

Net profit

1.6

2.9

81%

Net profit normalised

3.0

4.0

33%

Shares outstanding, average

14.9

14.9

0%

EPS – reported (€)

0.11

0.19

81%

EPS – normalised (€)

0.20

0.27

33%

Source: Kendrion

Non-recurring items of €0.5m included costs related to the acquisition of 3T in the Netherlands, which was announced in late September 2021. 3T is a developer, manufacturer, distributor and provider of lifecycle management services for client-specific electronics and embedded systems. It offers a strong fit with the control technology activities of Kendrion’s Industrial Actuators and Control division (around 25% of total revenues). It will also benefit the Automotive division by strengthening its software and electronics development capabilities, which are becoming increasingly important in this division. According to Kendrion, 3T has annual revenues of 12m and is highly profitable (EBITDA margin of around 20%).

Kendrion’s financial position remains strong with an equity ratio of 44% and net debt/EBITDA multiple of 2.4x, which is well below the covenant of 3.25x. Net debt increased from €113m in H121 to €141m in 9M21, largely due to the acquisition of 3T, which is consolidated as of 21 September (cash out was €23.3m and the IFRS lease liability was €1.9m). Free cash flow was a negative €3m in Q3, but this was mainly due to higher inventories (partly to secure its own production) and higher capex (partly related to the construction of the new manufacturing plant in China, scheduled to be fully operational after the summer in 2022).

FY21 revenue estimate raised but margin lowered

Kendrion is cautiously optimistic, with the economy expanding rapidly as we emerge from the pandemic, but with high demand volatility and supply chain constraints continuing, possibly well into H122. Management does not expect the situation to get worse, but it remains difficult to predict. Within industrial brakes, the company has taken price actions to cover the higher raw material costs and it expects to feel the benefit in Q421 and Q122. Within automotive, contracts contain clauses based on which Kendrion can pass on the higher price of raw materials to its customers. All in all, management expects the gross margin to stay around 48%. Currently there is more demand than the company can meet, and this gap is larger in automotive, but short-term cancellations make it difficult to control direct staff costs, which can sometimes lead to inefficiencies.

Based on the positive long-term trends, Kendrion is confident that it will realise its financial targets for FY25: organic revenue growth of 5% or more on average per annum and an EBITDA margin of at least 15%, which compares to the 11.3% reported in FY20. If the company achieves these targets, they should result in revenues of at least €625m and EBITDA of at least €94m in 2025.

We have slightly raised our revenue estimates after the stronger than expected growth in Q3, particularly from the industrial segment, while the industrial order book looks very good according to management. We have also included the acquisition of 3T which has a positive impact on overall profitability. We now estimate group revenue growth in FY21 of 16.5% of which 15.5% is organic (our previous estimates assumed 12% growth). We have left our revenue growth estimate for automotive almost unchanged at 15.5% (was 16%) but raise our estimate for industrial to 17.5%, of which 16% is organic growth (was 12%). For 2022 and beyond, we continue to expect 6–8% organic revenue growth, driven by positive underlying trends, new projects and the doubling of the floor capacity in China.

Exhibit 2: Change in estimates

€m

2021e

2022e

2023e

Old

New

Change

Old

New

Change

Old

New

Change

Sales

452

462

2.1%

482

499

3.5%

518

538

3.9%

EBITDA normalised

58.5

55.7

-4.8%

65.0

64.6

-0.6%

72.5

75.7

4.4%

EBITDA margin

12.9%

12.1%

13.5%

13.0%

14.0%

14.1%

EBITA margin

7.6%

6.8%

8.4%

7.8%

9.1%

9.2%

Net profit normalised (before amortisation)

21.3

19.7

-7.4%

25.4

25.1

-1.1%

32.5

33.0

1.6%

EPS normalised (€)

1.43

1.32

-7.7%

1.70

1.69

-1.0%

2.18

2.22

1.4%

DPS (€)

0.72

0.66

-7.7%

0.85

0.84

-1.0%

1.09

1.11

1.4%

Source: Edison Investment Research

We have lowered our EBITDA estimate for FY21 to incorporate the larger than expected effect of supply chain constraints and volatile ordering. We now expect EBITDA of €55.7m versus our previous estimate of €58.5m, which reflects a 90bp reduction in our margin estimate. However, this still assumes an 80bp y-o-y increase in margin to 12.1% for the full year, mainly driven by the reported margin recovery in the first half. For FY22 we are more cautious about the margin development in the first half due to ongoing material shortages but we expect higher margins in the second half, partly due to a favourable comparison base. The adjustment to our FY22 EBITDA estimate is far less severe compared to our adjustment for FY21 due to the contribution of an estimated €2.4m from the acquired 3T which will also have a positive impact on the overall margin. From FY23 we expect a steady margin improvement driven by the high level of revenue growth.

Kendrion has started a process of closing the manufacturing plant in Austria (planned for H222) and the first product lines are already transferred to subsidiaries in Germany and Rumania and several larger ones will follow. Restructuring charges are estimated at €1–2m with the bulk of this falling in FY22, whereas previously we anticipated half of it being charged in FY21. With gradually lower financial expenses, due to declining net debt, and a broadly stable tax rate, we expect a CAGR in our estimated EPS (before amortisation) of 41% in 2021–23e.

Valuation

We value Kendrion using three different methods, namely historical multiples, discounted cash flow (DCF) and a peer comparison. Please refer to our initiation note for more details.

Kendrion’s 2022e EV/EBITDA shows a discount of 22% versus its historical multiples. When we assume a valuation in line with its historical multiples, as current profitability is in line with its historical average, this points to a value of €28.5 per share (versus €29.0 previously). For our DCF, we have not changed our assumptions, but on our adjusted estimates and higher tax rate, the fair value comes in at €27.7 per share versus €29.4 previously.

The peer group multiples have declined since our last update in August, most likely driven by the uncertainty about the magnitude of the impact of the supply chain constraints. Still assuming a valuation in line with peers on 2022e EV/EBITDA delivers a value per share of €24.7 (from €26.2).

The unweighted average of these valuation methods points to a value of €27.0 per share, down from €29.0 per share previously, but still offering ample upside potential in the share price.

Exhibit 3: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2022e EV/EBITDA in line with historical multiples

28.5

DCF

Terminal growth 1.5%, terminal EBITA margin 7.5%

27.7

Peer group

2022e EV/EBITDA in line with peers

24.7

Average value per share

27.0

Current share price

20.4

Upside/(downside)

32%

Source: Edison Investment Research

Exhibit 4: Financial summary

€m

2018

2019

2020

2021e

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

448.6

412.4

396.4

461.8

498.5

538.4

Gross Profit

211.9

193.3

191.0

221.6

237.5

257.6

EBITDA normalised

58.5

43.8

44.6

55.7

64.6

75.7

EBITDA reported

49.7

38.1

40.2

55.0

63.1

75.7

Depreciation & Amortisation

(23.1)

(24.0)

(25.7)

(24.1)

(25.5)

(26.1)

EBITA normalised

35.4

19.8

18.9

31.6

39.1

49.6

Amortisation of acquired intangibles

(2.3)

(2.2)

(4.4)

(3.8)

(4.3)

(4.3)

Exceptionals (Edison definition)

(8.8)

(5.7)

(4.4)

(0.7)

(1.5)

0.0

EBIT reported

24.3

11.9

10.1

27.1

33.3

45.3

Net Interest

(3.1)

(0.9)

(4.4)

(4.0)

(3.9)

(3.4)

Participations

(0.1)

0.0

0.0

0.0

0.0

0.0

Profit Before Tax

21.1

11.0

5.7

23.2

29.5

42.0

Reported tax

(7.3)

(2.7)

(1.4)

(6.8)

(8.5)

(12.0)

Profit After Tax

13.8

8.3

4.3

16.3

20.9

30.0

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

22.6

12.6

11.7

19.7

25.3

33.2

Net income (reported)

13.8

8.3

4.3

16.3

20.9

30.0

Average number of shares (m)

13.4

13.5

14.8

14.9

14.9

14.9

Total number of shares (m)

13.5

14.9

14.9

14.9

14.9

14.9

EPS normalised before amortisation (€)

1.69

0.94

0.79

1.32

1.69

2.22

EPS reported (€)

1.03

0.62

0.29

1.09

1.40

2.01

DPS (€)

0.87

0.00

0.40

0.66

0.85

1.11

Revenue growth

-2.9%

-8.1%

-3.9%

16.5%

7.9%

8.0%

Gross Margin

47.2%

46.9%

48.2%

48.0%

47.6%

47.8%

EBITDA Margin

13.0%

10.6%

11.3%

12.1%

13.0%

14.1%

Normalised Operating Margin

7.9%

4.8%

4.8%

6.8%

7.8%

9.2%

BALANCE SHEET

Fixed Assets

246.4

244.8

299.6

325.1

326.5

324.1

Intangible Assets

116.1

115.5

158.1

177.0

173.1

169.3

Tangible Assets

113.6

111.4

118.7

125.3

130.6

132.0

Investments & other

16.7

17.9

22.8

22.8

22.8

22.8

Current Assets

128.9

113.2

129.5

142.0

169.1

187.0

Stocks

63.5

56.3

61.7

74.1

79.5

85.3

Debtors

48.0

42.9

47.2

57.7

62.3

67.3

Other current assets

7.2

6.9

7.6

8.0

8.6

9.3

Cash & cash equivalents

10.2

7.1

13.0

2.1

18.7

25.0

Current Liabilities

81.2

73.8

87.9

105.5

113.0

121.1

Creditors

41.7

41.3

44.0

56.4

60.9

65.7

Other current liabilities

27.3

26.9

31.9

37.2

40.1

43.3

Short term borrowings

12.2

5.6

12.0

12.0

12.0

12.0

Long Term Liabilities

112.0

80.7

137.8

147.8

157.8

147.8

Long term borrowings

78.5

48.9

104.2

114.2

124.2

114.2

Other long term liabilities

33.5

31.8

33.6

33.6

33.6

33.6

Shareholders' equity

182.1

203.5

203.4

213.8

224.8

242.2

Balance sheet total

375.3

358.0

429.1

467.1

495.6

511.1

CASH FLOW

Op Cash Flow before WC and tax

51.4

36.1

40.6

55.0

63.1

75.7

Working capital

(8.3)

13.0

5.4

(5.7)

(3.2)

(3.4)

Tax

(4.2)

(6.1)

(1.3)

(6.8)

(8.5)

(12.0)

Net interest

(2.2)

(2.1)

(2.9)

(4.0)

(3.9)

(3.4)

Net operating cash flow

36.7

40.9

41.8

38.5

47.6

57.0

Capex

(31.4)

(20.0)

(16.0)

(28.4)

(31.2)

(27.9)

Acquisitions/disposals

(2.6)

0.1

(78.2)

(25.0)

0.0

0.0

Equity financing

(6.6)

23.3

0.0

0.0

0.0

0.0

Dividends

(5.8)

(8.1)

0.0

(6.0)

(9.9)

(12.6)

Other

(0.2)

(3.1)

(3.4)

0.0

0.0

0.0

Net Cash Flow

(9.9)

33.1

(55.8)

(20.9)

6.5

16.4

Opening net debt/(cash)

70.6

80.5

47.4

103.2

124.1

117.5

Closing net debt/(cash)

80.5

47.4

103.2

124.1

117.5

101.2

Source: Kendrion, Edison Investment Research


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Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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United States

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.

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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

New York +1 646 653 7026

1185 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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