DC specialist on the verge of margin recovery

Schaltbau Holding 8 April 2021 Initiation
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Schaltbau Holding

DC specialist on the verge of margin recovery

Initiation of coverage

Industrial engineering

8 April 2021

Price

€32.65

Market cap

€289m

Net debt (€m) at 31 December 2020

80

Shares in issue

8.9m

Free float

35%

Code

SLT

Primary exchange

Frankfurt (Prime Standard)

Secondary exchange

Munich

Share price performance

%

1m

3m

12m

Abs

3.2

1.9

24.5

Rel (local)

(5.3)

(6.2)

(15.0)

52-week high/low

€34.30

€23.40

Business description

Schaltbau Holding specialises in products for rail infrastructure and rolling stock and also road vehicles and other industrial applications. Rail represents 68% of revenues. The geographical spread of revenues in FY20 is Germany 36%, other Europe 47% and rest of the world 17%.

Next events

Q121 results

29 April 2021

Analyst

Johan van dan Hooven

+44 (0)20 3077 5700

Schaltbau Holding is a research client of Edison Investment Research Limited

Schaltbau Holding should benefit from trends towards digitalisation and interconnectivity in its core Rail segment (68% of FY20 revenues), while restoring profitability levels. The ability to leverage direct current (DC) switching expertise should provide opportunities in growth markets, such as new energy, e-mobility, the DC industry and smart grids. Schaltbau’s valuation offers re-rating potential now that the company is on the verge of restoring profitability after an extensive restructuring programme.

Year end

Revenue (€m)

EBIT**
(€m)

EPS**
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/19

491.9*

29.0

1.05

0.00

9.9

32.4

12/20

502.3

26.8

1.47

0.00

9.5

20.3

12/21e

530.5

28.6

1.19

0.00

10.0

27.5

12/22e

567.5

35.6

1.65

0.00

8.6

19.8

Note: * Revenue is like-for-like; **EBIT and EPS are like-for-like and normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Expanding beyond rail in high-growth segments

Schaltbau Holding offers products and technologies for safe, sustainable energy and mobility solutions. Its core Rail division represents two-thirds of revenues but only one-third of EBIT due to poor performance in recent years. Management expects to realise growth of around 5% in this modestly growing market until 2026, driven by the modernisation of Rail, and to significantly improve margins towards 6–8% in 2026, up from an estimated 2–3% in FY20. The Components division represents one-third of revenues but two-thirds of EBIT and the focus is on realising higher revenue growth while maintaining the above company average margins. Revenue growth will come from market segments such as new energy, new industry and e-mobility.

All set for acceleration of growth

Schaltbau Holding performed well in 2020 with like-for-like revenues up 2% and like-for-like EBIT margin up 60bps to 4.3% (like-for-like and normalised EBIT margin declined by 60bp to 5.3%). For 2021, the company expects revenues of €520-540m (or growth of 5.5% at midpoint) and reported EBIT margin to improve to around 5%. We expect revenues to grow 5–8% in FY21–23, with an increasing contribution from new product segments, and reported EBIT margin to improve 270bp to 7.0% in 2023, driven by revenue growth, operating leverage and efficiency gains. This drives a CAGR in EBIT of 25%. Around 23 April, the company will issue a mandatory and already fully underwritten convertible bond of €60m, for the financing of a new factory in Germany, debt reduction and add-on acquisitions.

Valuation: Re-rating potential

We value Schaltbau at €40 per share, which is the average of historical multiples (€42), DCF (€40) and peer comparison (€38). Schaltbau is valued at a large discount to peers due to its lower margins. We believe that the company’s focus on high-growth segments and anticipated improvements in profitability should trigger multiple expansion once the margin gap to peers declines.

Investment summary

Focus on new segments post restructuring

Schaltbau Holding got itself back in shape again, after a three-year restructuring programme that was finalised in 2019. Its focus is on rail infrastructure and rolling stock, but also on the automotive and capital goods industries. Within the core Rail segment, focus is on outperforming the modestly growing rail supply market while restoring EBIT margins to the peer group average of 6–8%. As one of the few DC specialists, the company should leverage its long history in this segment and benefit from a range of relatively new applications, such as electric drives, lithium-ion batteries, solar systems, wind turbines and other stationary energy storage devices (ie micro grids). The Components segment is expected to grow from 32% of revenues in 2020 to 40% in 2026, with e-mobility and new energy showing growth rates of >20% pa on average. To facilitate this growth, Schaltbau is constructing the New work, Excellence, Technology driven (NExt) factory, which should be operational from autumn 2022 and deliver additional revenues of €140–160m by 2026.

Financials: Improved balance sheet and profitability

After a solid performance in 2020 and with positive guidance for 2021, we expect revenue growth of 5–8% in 2021–23, with the acceleration in growth driven by the contribution of the new market segments. We expect the EBIT margin to strongly improve by 270bp to 7.0% in 2023, driven by revenue growth, operating leverage and efficiency gains (particularly in the rail division at subsidiaries Bode and Pintsch). This implies a CAGR in reported EBIT of 25%. With declining financial expenses and a stable tax rate, this boils down to a CAGR in EPS of 30%. The company’s financial ambitions for 2026 are revenues of €750–800m (implying a CAGR of 7–8%) and a high single-digit EBIT margin, aiming to outperform the peer group average of 6–8%.

After having divested several loss-making subsidiaries and having refinanced its balance sheet (including two equity issues), net debt has come down from €158m in 2017 to €80m in 2020. The recently announced mandatory convertible bond (net proceeds €57.4m), which we treat as equity, will be used to finance the new factory (50–60%), debt reduction (25–30%) and add-on acquisitions (15–20%). As a result, the equity ratio will improve to 35% in 2021 from 20% in 2020. Management stated that it would most likely not need further funding to realise its 2026 financial targets.

Valuation: Margin and new segments’ expansion key catalysts

Schaltbau Holding’s share price has fully recovered to pre-COVID-19 levels. The expected margin recovery and new orders in new market segments should be a positive catalyst for Schaltbau Holding’s share price and help narrow the valuation gap with peers. We value Schaltbau at €40 per share based on the average of historical multiples (€42), DCF (€40) and peer comparison (€38).

Sensitivities: Both upside and downside risks

We see the following triggers to the investment case and our forecasts: a faster than anticipated increase in the penetration of electric vehicles; more government push to lower CO2 emissions faster; a quicker pick-up in margins in the rail division than currently anticipated; and a faster roll-out of the rail infrastructure plans by Deutsche Bahn.

The downside risks include: a prolonged drag from the COVID-19 pandemic on the overall economic environment and investment climate; increased competition in the DC segment where Schaltbau is one of the few specialists; a slower than currently expected development in the energy transition; increasing price pressure resulting from customer consolidation; and the emergence of alternative products and technologies in the different market segments.

Company description: An energy and mobility player

Schaltbau Holding supplies products and technologies primarily for rail infrastructure and rolling stock and also for the automotive and capital goods industries. All products are focused on smart protection for mobility and DC power. Schaltbau is one of the few specialists in smart DC energy concepts. The geographical split of FY20 revenues is as follows: Germany 36%, other Europe 47%, Asia 10% and the US 7%. Schaltbau Holding employs around 2,900 staff.

Activities: Expanding beyond rail in high-growth segments

Schaltbau was founded in 1929 as a producer of switches and heaters for the railway sector, and in 1956 it entered the capital goods market. In 1987, Pintsch was acquired, which focuses on rail infrastructure. Schaltbau was listed in 1992 and in 1995 it acquired Bode, a manufacturer of door systems. In 2000, the company name was changed to Schaltbau Holding and since then the company has expanded its business both organically and via several acquisitions.

In March 2021, Schaltbau provided a new segmentation (see Exhibit 1) with a split between core rail activities (68% of FY20 revenues) and components and DC applications (32%). Rail consists of infrastructure, rolling stock/bus, refurbishment and aftersales, where Schaltbau expects modest growth. Components and DC-applications is focused on battery-powered DC applications in growth areas in new energy, new industry and e-mobility, building on its experience in DC-rail components.

Exhibit 1: Schaltbau’s segment overview

Source: Schaltbau Holding

Schaltbau operates under four brands: Pintsch, Bode, Schaltbau GmbH and SBRS, as shown in Exhibits 2 and 3.

Exhibit 2: Revenues by brand FY20

Exhibit 3: EBIT by brand FY20

Source: Schaltbau Holding

Source: Schaltbau Holding

Exhibit 2: Revenues by brand FY20

Source: Schaltbau Holding

Exhibit 3: EBIT by brand FY20

Source: Schaltbau Holding

Pintsch (part of Rail segment)

Pintsch focuses on safety-relevant products for railway infrastructure, with customers such as Deutsche Bahn Netz, Norwegian Railways and Dutch Pro-Rail. Pintsch will benefit from the investment plans of Deutsche Bahn (DB) to expand, update and digitise its rail infrastructure (€86bn in 2020–30). Due to the higher usage of rail track, demand for systems that ensure maximum occupancy of tracks will significantly increase. Pintsch manufactures the following product range:

Level crossings, including trackside signals and barrier drives.

Point heating systems to keep the points’ movable components free of snow and ice.

Lighting systems for tunnels and track fields.

Interlocking systems for safety controlling and supervision of routes and signals.

Axle counting systems to control the occupation status of rail sections through the detection of passing railway vehicles, thereby using wheel sensors that divide the track into sections.

Shunting technology for fully automated formation of trains in shunting yards, plants and ports.

Digitisation and diagnostics via the system Diagon, which collects infrastructure data (eg for predictive maintenance). Diagon is compatible with Deutsche Bahn’s system Diana.

Exhibit 4: Examples of Pintsch’s product range

Level crossings

Point heating systems

Interlocking systems

Source: Schaltbau Holding

The rail infrastructure market is very fragmented and global market shares are small. Pintsch is a strong player in Germany in its chosen segments. Within level crossings, there is one other large player: Scheidt & Bachmann (not listed). Competitors in the different segments are Siemens, Bombardier, Frauscher (wheel sensors and axle counters) and Voestalpine.

Bode (part of Rail segment)

Bode is a supplier of door and access systems for trains, buses, commercial and electric vehicles. We estimate that rail represents 85% of Bode’s revenues, while automotive contributes the other 15%. The latter was hit much harder by the COVID-19 pandemic, affecting the division of activities in favour of rail. Customers in rail include Stadler, Hitachi, Siemens, Alstom/Bombardier, CRRC and CAF; and customers in automotive include Daimler, Iveco and MAN. Bode works with long-term framework contracts based on the customer’s platform strategy whereby suppliers have to comply with the set standards, which includes product testing. Bode’s orderbook is therefore relatively long.

Exhibit 5: Bode product range

Entrance systems for metro trains

Entrance systems autonomous vehicles

Outward swinging doors for buses

Source: Schaltbau Holding

Bode is developing from traditional door systems towards smart systems that will enable digital features, such as access control, ticketing and monitoring. Bode collaborates with automotive supplier Brose to develop smart door systems for people movers (autonomous e-shuttle buses for up to 15 passengers). Another new type of vehicle is the courier, express and parcel (CEP) vehicle for last mile delivery. According to McKinsey & Company, the last-mile delivery cost per parcel with an automated delivery vehicle is 40% lower when compared to delivery with a traditional vehicle.

According to Schaltbau, the global market for door systems to rolling stock was valued at around €800m in 2018, with its market share at 18–20% globally and 30–35% in Europe. Bode considers itself the number one player in Europe, although the other major player in the segment, Knorr-Bremse, claims the same. Other players are Chinese Kangni, Japanese Nabtesco and US Wabtec.

Schaltbau GmbH (part of Components segment)

Schaltbau GmbH develops and manufactures electromechanical components and customised solutions for railway and industry segments. Its products are contactors, connectors, snap-action switches and driver’s desk equipment (see Exhibit 6 and explanatory text underneath). Customers are rail OEMs Alstom/Bombardier, CRRC, Siemens and Stadler. Its order book is relatively short as revenues are product driven, with the company supplying a range of over 1,000 products.

Exhibit 6: Schaltbau GmbH product range

Contactors

Connectors

Snap-action switches

Driver’s desk equipment

Source: Schaltbau Holding

Contactors are electrical devices for switching a large amount of electrical power through its contacts (switching an electrical circuit on and off). Contactors safely extinguish electric arcs within milliseconds. Schaltbau contactors are equally suitable for alternating current (AC) and DC networks and can cope with widely varying supply voltages.

Connectors are used for reliable transmission of energy and signals. Schaltbau’s connectors have high material and temperature resistance as well as resistance to shock and vibration. They have to be durable enough to withstand years of continuous operation, under harsh environmental conditions.

Snap-action switches are switches that provide double safety: a switch with double-break contacts and positive opening operation, which guarantees that the contacts will open, even when they have become welded together or the spring of the snap mechanism has broken.

Driver’s desk equipment: Schaltbau delivers complete driver’s desk, modular and configurable master controllers, toggle switches and interactive screens and consoles. The portable driver console can be connected via plug and play and is immediately ready for use.

Schaltbau GmbH’s original focus was on the railway market, which is rather mature and more predictable in developed countries. We estimate that the rail market represents c 80% of divisional revenues and that relatively high top-line growth should come from the new areas such as new DC energy applications, new mobility and automation solutions (ie material handling). Schaltbau is constructing the NExt factory with a locally CO2-free energy concept. This should facilitate the anticipated growth in new segments as of autumn 2022.

Exhibit 7: Schaltbau GmbH applications

Railway

Industry

New energy

New mobility

Light rail

Machinery and plant engineering

Stationary battery energy storage

e-buses

Multiple-unit trains

Tunnel and mining

Wind turbines and PV systems

e-trucks

Suburban trains

Medical technology

Tracking systems for wind turbines and PV systems

e-cars

Underground trains

Battery test stands

Fuel cells

Battery charging stations

High speed trains

Building control

Battery charging stations

Battery test stands

Test systems

Energy conversion

e-fork lift trucks

DC power network

Battery second life

AGV

e-boats

Source: Schaltbau Holding, Edison Investment Research

The markets in which Schaltbau GmbH is active are very fragmented thus global market shares per participant are small. Competitors are large multinationals such as ABB, Siemens, Schneider Electric, Sensata Technologies, TE Connectivity, TT Electronics and Wabtec. When looking at the DC segment, Schaltbau GmbH is one of the larger players globally with an estimated share of 20%.

SBRS (partly Rail segment and partly Components)

SBRS has two main activities: 1) the partial or complete modernisation and refurbishment of rolling stock, including service, and 2) high-performance fast charging solutions for electric cars, buses and commercial vehicles (see Exhibit 8 and explanatory text underneath). Rail operators are the customers for refurbishments and bus service operators are the customers for the charging solutions.

Exhibit 8: SBRS product range

Fast charging solutions

Refurbishment of rolling stock

Source: Schaltbau Holding

Fast charging solutions (around two thirds of SBRS’s revenues): SBRS develops charging infrastructure systems for electric vehicles, including fast charging, depot charging and DC charging. SBRS’s modular BalanceStar charging stations provide recharging cycles of only 5-10 minutes. If available, power for charging can be drawn from existing DC systems, such as the overhead transmission wire or switchgear from the substation.

Refurbishment of rolling stock (around one third of SBRS’s revenues): after refurbishment, trains have a new and modern appearance and will fulfil the latest technical standards. SBRS’s product offering includes door systems, air conditioning, driver’s cabs, control systems and components. SBRS has developed the ‘I-Door-Scape’ interior door system for rolling stock (see Exhibit 8). SBRS has access to the complete product portfolio of the Schaltbau Group.

SBRS is a relatively small activity of Schaltbau Holding and is active in relatively small market segments. A competitor in refurbishments is Wabtec, competitors in fast bus charging are ABB and Heliox and competitors in passenger car fast charging are Alfen, Siemens and FastNed.

Strategy

Schaltbau Holding’s strategy is based on the following four pillars:

Focusing on performance over pure revenue growth. Management is steering on EBIT margins, return on capital employed (ROCE) and cash generation. Margin improvement will be mainly driven by 1) better margins in the rail segment via higher efficiency, cutting costs and reducing complexity, and 2) strong growth at higher-margin Schaltbau GmbH.

Profitable growth in its core rail infrastructure and rolling stock/bus activities by benefiting from the modernisation and digitisation trend within the sector.

Increasing the proportion of aftersales, service and rail modernisations. These higher margin activities account for 12% of revenues and management aims at 20% by 2026.

Leveraging its DC technology by benefiting from the increasing use of this technology beyond rail in relatively new attractive markets such as new energy, new industry and new mobility.

The Rail division represented 68% of FY20 revenues and management expects that to decline to 60% by 2026. Looking at revenue guidance for 2026, this implies a CAGR of 4.7–5.8% (see Exhibit 9). Growth in the Components division is expected at 11–12% pa, growing to 40% of revenues in 2026, up from 32%. Growth is driven by new energy, new industry and new mobility.

Exhibit 9: Revenue ambitions for 2026e per market segment

Business segment

Brands active in respective market segments

Revenue 2020
% of total

Revenue 2020
(€m)

Revenue 2026e
% of total

Revenue 2026e
of €750m

Revenue 2026e
of €800m

CAGR
at revenue of €750m

CAGR
at revenue of €800m

Rail

Pintsch, Bode, SBRS

68%

342

60%

450

480

4.7%

5.8%

Components

Schaltbau GmbH, SBRS

32%

161

40%

300

320

11.0%

12.2%

Total

100%

502

100%

750

800

6.9%

8.1%

Source: Schaltbau Holding, Edison Investment Research

The strategic direction for the four brands is summarised below:

Pintsch: reduce manufacturing costs, optimise processes, move to more digital products and grasp a large chunk of the investments by Deutsche Bahn.

Bode: further efficiency measures, simplifying processes, more concentration of production and assembly and closer cooperation with subsidiaries.

Schaltbau: leverage expertise in safe DC switching, change to more modular design, enhance process efficiency in the supply chain and expand position in new markets. The focus is on building the NExT Factory in 2021–22e for more flexibility and test laboratories for automotive.

SBRS: expand in project business and international markets such as Italy, the UK and the US.

Convertible bond to finance new factory

In March 2021, Schaltbau Holding announced the issue of a mandatory convertible bond of €60m. According to IFRS, this mandatory convertible bond with a fixed conversion rate has to be treated as equity. The net proceeds of €57.4m will be split in three parts: financing the NExt factory (50–60% of net proceeds), reducing net debt and creating more financial flexibility (25–30%) and financing potential add-on acquisitions (15–20%).

For this mandatory convertible bond with shareholder subscription rights, the company has a pre-placement agreement with investors for 100% of the bond’s volume. Shareholders that are supporting this issue are AiC Group, Teslin Capital Management, Active Ownership Gruppe and Axxion which represent an estimated 46% of the outstanding share capital of the company.

The issuance of the bond is scheduled on or around 23 April 2021, with the subscription period running to 16 April. The bond carries a nominal rate of 0.5% and the fixed conversion price is €29 per share, the convertible thus being in the money based on the company’s current share price. The bond will mature on 30 September 2022 and the mandatory conversion will increase the number of shares outstanding by 2.1m to 10.9m (+23%).

Financial targets

Schaltbau Holding’s ambition for 2026 is for revenues of €750–800m (CAGR of 7–8%) and a high single-digit EBIT margin. As such, Schaltbau aims to perform better than its chosen peer group of rail infrastructure and rolling stock peers, such as Alstom, Stadler, Knorr-Bremse, Vossloh and Wabtec, which on average generate 6–8% EBIT margins. All four brands should meet this target.

Exhibit 10: Schaltbau financial ambitions for 2026

Source: Schaltbau Holding

Management

In April 2020, Mr Jürgen Brandes was appointed as member of the executive board as designated successor of Mr Köhler as CEO from 1 January 2021. Mr Brandes has 35 years of experience in electrical engineering and automation in industries such as electromobility and rail. He had general management roles and in 2015–19 was CEO of Process Industries and Drives at Siemens. Mr Albrecht Köhler was the company’s CEO for the past three years, leading the restructuring programme. His appointment ended on 1 January 2021 due to his age.

After the announcement that the previous CFO, Mr Thomas Dippold, would step down, Mr Thorsten Grenz, the deputy chairman of the supervisory board, was appointed as interim CFO with effect from 1 September 2020. Mr Steffen Munz has been appointed new CFO as of 1 March 2021. Previously, he fulfilled CFO roles at Varta (2018–20), at the medical division of Gardner Denver in the US (2014–18) and at medical device manufacturer Hartmann.

Mr Volker Kregelin is responsible for Pintsch and has worked for over 25 years in rail and logistics. Previously, he occupied positions at Siemens Transportation, Siemens Dematic (logistics), Bombardier (rail infrastructure and railway traction vehicles and in his second period mobile and stationary transportation technology in Germany) and InoSig (rail infrastructure).

Shareholders

Schaltbau was founded in 1929 and has been listed on Germany’s Prime Standard since 1992. There is no public share register and we use the figures provided by the company. Around 65% of the shares are in the hands of nine shareholders, each owning >3%. Several shareholders are acting in concert, namely Luxempart, Hans-Jakob Zimmermann, Dr Johannes Zimmermann and Elrena GmbH. Dutch Monolith used to be part of this group but is currently mentioned separately.

Exhibit 11: Shareholders Schaltbau Holding

Shareholders

Number of shares

Stake

Type of investor

Acting in concert (Luxempart S.A., H.-J. Zimmermann, J. Zimmermann, Elrena GmbH)

1,920,315

21.7%

Institutional / Private (LU/DE)

Teslin Capital Management

902,587

10.2%

Family office (NL)

Active Ownership Gruppe

644,133

7.3%

Institutional (DE)

Axxion

593,403

6.7%

Institutional (DE)

Kreissparkasse Biberach

433,757

4.9%

Institutional (DE)

BayernInvest

382,986

4.3%

Institutional (DE)

Universal-Investment *

339,719

3.8%

Institutional (LU)

Monolith

324,257

3.7%

Institutional (NL)

Praude *

186,753

2.1%

Institutional (Malta)

Total

8,852,190

64.7%

 

Source: Schaltbau Holding, Edison Investment Research. Note: *Stake calculated with current number of shares outstanding.

Markets

Originally serving the rail industry, Schaltbau Holding has expanded into other markets with the following distribution of FY20 revenues: Rail 68% and Components & DC applications 32%. The latter consists of rail DC applications and applications for new energy, new industry and e-mobility.

The long-term market environment in the rail sector offers many growth opportunities driven by the mega-trends of climate change, urbanisation and digitisation. Disruptive trends that will change the transportation sector are connectivity, autonomous driving, digital mobility, transport services and electromobility. These segments make use of DC technology and therefore Schaltbau should be a clear beneficiary. For Schaltbau’s industry segments, growth is driven by automation and Industry 4.0, offering ample opportunities to increase the number of DC-industry applications.

Schaltbau has many years of experience in DC technology, which is mainly used in the rail industry. DC is more resource-conserving compared to AC, because it can be recovered and stored and transported over long distances without any losses. DC power supply is suitable for energy-intensive technologies, is much more efficient and has the advantage that it can be used for bi-directional charging, so that power also can be returned to the grid. The DC charger is therefore suitable for integration with home solar installations and battery energy storage. DC charging is known as level 3 or direct-current fast charging (DCFC), compared to level 1 (AC charging at home) and level 2 (AC charging at public charging points, up to 20 kilowatts). The DC system converts the AC from the grid to DC before it enters the car and charges the battery without the need for an inverter, operating at powers from 25 kilowatts to more than 350 kilowatts. McKinsey expects that DC fast charging in Europe will increase from 6% of total kilowatt hours in 2020 to 32% in 2030.

Rail (68% of FY20 revenues, guidance 60% in FY26e)

The core Rail segment consists of rail infrastructure, rolling stock/bus, refurbishment and aftersales, thus including the brands Pintsch, Bode and part of SBRS. The rail industry has always been the most important industry for Schaltbau Holding. An overview of the global market can be found in our Edison Explains: Rail supply market. UNIFE, the Association of the European Rail Supply Industry, expects 2.3% market growth per annum in the period 2019–25, which reflects 4.6% growth per annum for 2021–25 after the decline of 8% in 2020. Growth in the rail supply sector is driven by three broad areas: 1) population growth and urbanisation, 2) technology focused on energy efficiency, lightweight, automation and digitisation, and 3) decarbonising global transport. These mega-trends are expected to gradually change the current mobility solutions in the following ways:

intercity transport will become faster and cleaner;

city centres will reduce the reliance on cars within their area;

smart solutions will manage people flow due to increasing population density within cities; and

passengers’ comfort will further increase to attract them to use rail more often.

Besides the sound underlying growth prospects for the rail sector over the next few years, we want to particularly highlight the European Green Deal and the plans of Deutsche Bahn, which will have a major effect on Schaltbau’s growth over the next decade.

The governmental push to lower emissions is expected to trigger more use of rail transport. Increasing air and road congestion could also cause a shift towards the less emitting rail transport. The European Green Deal is a clear example of governmental initiatives to reduce CO2 emissions with all the transport modes needing to become more sustainable. To realise the targeted reduction of 90% in emissions by 2050, a shift to rail will be a key driver to decarbonise the overall transport industry. The European Commission’s Sustainable & Smart Mobility Strategy comprises several priorities that high-speed rail traffic will double across Europe by 2030 and will triple by 2050, while rail freight transport is expected to double over the next three decades. The aim is to shift 75% of road traffic to railway and inland waterways.

Deutsche Bahn infrastructure and expansion plans

Particularly important for Schaltbau are the plans of DB (Germany’s largest railway operator) as this is its largest customer and Germany reflects 36% of total revenues.

In January 2020, the Performance and Financing Agreement (LuFV III) between the German government and DB was signed (‘Digital Rail for Germany’), which comprises a total capex of €86bn to be invested in the maintenance and modernisation of the existing rail network. This money will be used to renew tracks and stations, signal boxes and energy supply systems. The federal government will finance €62bn and DB the other €24bn. The average of €8.6bn per annum reflects an increase of 54% compared to the previous planning period.

DB anticipates further growth in rail transport and it plans to double intercity rail traffic to over 260 million passengers, add one billion new regional and local passengers and add 70% more freight transportation by 2030. This higher usage will increase wear and tear of the infrastructure, which requires more maintenance and replacement. DB therefore wants to improve its infrastructure and continues to work on quality and customer service. For its ‘Strong Rail’ strategy, DB has total gross capex plans of €178bn for the period 2020–30, of which €19bn is for passenger transport, €13bn is for transport and logistics and €144bn for infrastructure. The planned capex for infrastructure, largely financed by the government, is double the amount DB invested in the period 2009–19. The building blocks of DB’s plan are:

120 new trains for long-distance transport,

300 new locomotives for rail freight transport,

expansions to its regional transport fleet,

to modernise 1,000 existing vehicles, enabling them to transport up to 12% more passengers,

to upgrade its depots and integrate 3D printing, smart diagnostics systems, robotics and other digital tools into its portfolio,

to introduce the European Train Control System and digital signalling technology across the board, reducing disruptions and enabling trains to run faster and closer together, and

to equip 68,000 freight cars with smart sensors to predict malfunctions.

Schaltbau Holding is well positioned to benefit from the expected growth in rail, both in rolling stock and in infrastructure. In December 2020, Pintsch announced the first order of €40m from DB Netz out the ‘Digital Rail for Germany’ programme. We also expect that the delivered content per vehicle will increase, due to smarter solutions with higher added value, which will further support the company’s growth.

Bode is focusing on entry systems for rail, bus and other automotive. For buses, it delivers its systems to all bus manufacturers independent of the type of engine. Based on market research from LMC Automotive, the bus market might only show moderate growth of 1–2% per annum until 2030. When looking at the e-bus market, there is a major difference between China and the rest of the world. So far, most of the e-buses are sold in China while the penetration in other parts of the world is still relatively low. According to BloombergNEF (New Energy Finance), the overall e-bus market is expected to show growth of 5% per annum until 2040 while growth outside China is expected to be 24% per annum until 2040. On top of this good growth outlook, entrance systems will become smarter and offer more functions, which will clearly add more value to its customers.

DC applications (32% of FY20 revenues, 40% in FY26e)

This segment comprises the DC rail applications and new energy (generation and storge), new industry (distribution and industry) and e-mobility (charging and automotive), representing the brands Schaltbau GmbH (28% of FY20 revenues) and two thirds of the revenues of SBRS (4%). In previous presentations, Schaltbau has expressed its expectation that the market for DC applications will grow by over 20% per annum. The Components division is expected to show growth of 11–12% on average per annum until 2026, as it also includes the slower growing DC rail applications. Below we comment on growth prospects for the different elements of this segment.

DC rail applications

This is the origin of Schaltbau GmbH with DC applications for the railway industry. Growth is expected to be in line with the general rail supply market, which UNIFE estimates at 2.3% for 2019–25. This includes a recovery in the next few years after the 8% decline in 2020 due to the coronavirus pandemic. Schaltbau expects that this segment will represent 55% of the Components division in 2026, or 22% of total revenues.

E-mobility

Schaltbau increasingly focuses on e-mobility with solutions for electric cars, buses, trucks, forklifts and people movers. SBRS manufactures high-speed charging stations, which are based on DC technology, and Schaltbau GmbH manufactures contactors based on patented technology, which have a safety function for high-power battery systems in the event of danger.

Schaltbau expects this segment to grow strongly to 30% of the Components division or 12% of total revenues. We estimate that e-mobility is currently about 6% of revenues (ie 2% from Schaltbau GmbH and 4% from SBRS). The company will be beneficiary of the transition to electric drivetrains in all vehicle categories. Below we list the expected growth in the different market segments:

Electric passenger cars: according to BloombergNEF, growth in electric passenger cars will be 38% per annum until 2025 and 31% per annum until 2030, with the number of cars growing from 1.7m in 2020 to 8.5m in 2025 and 26m in 2030.

Electric buses: according to BloombergNEF, the global e-bus market is expected to show a CAGR of 5% until 2040 with much stronger growth outside China of 24% per annum until 2040.

Electric light commercial vehicles (e-LCV): according to IDTechEx the share of e-LCVs in the total LCV market will grow from 2.6% in 2020 to 23% in 2030, or 2.4m new e-LCVs in 2030.

Charging infrastructure: according to BloombergNEF, cumulative global investments in all the types of charging hardware and installation will total US$500bn by 2040. McKinsey expects that DC fast charging will increase from 6% of total kilowatt hours in 2020 to 32% in 2030.

Forklifts: Schaltbau supplies switches and connectors to all types of forklifts and contactors to e-forklifts. According to IDTechEx, the global forklift battery market is expected to show a CAGR of 20% in the period 2018–25 with much stronger growth in the lithium-ion battery segment of over 65% growth annually, driven by the replacement of lead-acid batteries.

AGVs: according to Grand View Research, the global market for automated guided vehicles (AGVs) had a value of US$3.0bn in 2019 and is expected to show a CAGR of 14.1% in 2020–27. According to Mordor Intelligence, the European market for AGVs (€0.9bn in 2019) will show a CAGR of 16% until 2025. Market growth is driven by further automation, especially in retail, automotive and pharma, and within the market lead-acid batteries will be gradually replaced by lithium-ion ones.

New energy and new industry

Schaltbau GmbH is the only brand within Schaltbau Holding active in new energy and new industry. Its DC contactors, connectors and switches are ideally suited for the different market segments that use DC technology.

Examples of Schaltbau’s products in this segment are:

contactors for solar installations,

snap-action switches for photovoltaic tracking systems and wind turbines,

charging connectors for battery storage systems, and

brakes, rotor locking systems and monitoring systems for wind turbines.

This is another growth area for Schaltbau Holding. We estimate that this segment currently represents 3% of total revenues. Based on the company’s expectations, new energy and new industry will represent 15% of the Components division in 2026, or 6% of total revenues. This reflects a CAGR of more than 20% per annum. Below we show the market growth expectations for the different end-markets:

Solar: according to BloombergNEF, the market for photovoltaic panels is expected to show a CAGR of 17% per annum until 2025 followed by double-digit growth per annum until 2030.

Wind energy: according to the Global Wind Energy Council the total global capacity for wind energy is expected to grow at a CAGR of 9% per annum until 2025.

Battery storage systems: according to BloombergNEF, the energy storage market is expected to grow at a CAGR of 28% per annum until 2025, followed by 14% per annum until 2030.

Valuation

For the valuation of Schaltbau Holding we look at three different methods: historical multiples discounted cash flow (DCF) and peer comparison. The blended average of these three valuation methods points at a valuation of €40 per share.

Exhibit 12: Valuation Schaltbau Holding

Valuation method

Edison assumptions

Equity value per share, €

Historical multiples

2022E EV/EBITDA in line with historical multiple

41.9

DCF

Terminal growth 1.5%, terminal EBIT margin 7%

39.8

Peer group

2022E EV/EBITDA at 20% discount to peers

38.4

Average value per share

40.0

Current share price

32.7

Upside

22%

Source: Edison Investment Research

Historical multiples

Now Schaltbau is on the verge of restoring its profitability, its historical multiples can provide guidance for the potential upside in the shares. Schaltbau is valued at a discount of 16% based on 2022e EV/EBITDA (we do not use P/E due to several negative P/Es for loss-making years). We estimate that the company will achieve an EBIT margin of 6.3% in 2022, which is broadly in line with the average margin over the past nine years with clear upside in the years thereafter. This margin level might justify a valuation in line with the historical multiples and when we assume this based on FY22e EV/EBITDA, the value per share would be €41.9.

Exhibit 13: Historical multiples

Historical valuation
(nine years)

2021e

2022e

2023e

Premium/(discount)
versus average

Average

Min

Max

2022e

2023e

EV/sales

0.8

0.6

1.0

0.9

0.9

0.8

4%

-8%

EV/EBITDA

10.4

8.0

14.0

10.2

8.7

7.4

-16%

-29%

P/E

13.9

-10.6

32.4

28.2

20.3

15.8

46%

14%

Assumed premium, EV/EBITDA

0%

0%

Value per share, €

41.9

51.1

Source: Schaltbau Holding, Edison Investment Research

Discounted cash flow

Our DCF model is based on the following assumptions:

We only assume organic revenue growth, at a terminal revenue growth rate of 1.5%. Management’s aim for potential add-on acquisitions might trigger higher growth.

The terminal EBIT margin is set at 7.0%, which compares to Schaltbau’s nine-year average margin of 6.6%. We believe that the company is on the verge of margin improvement hence our higher terminal margin forecast. Given Schaltbau’s ambition of significantly improving its margin towards high-single digits, our expectations are rather conservative and potentially suggest further upside over the next few years.

An effective tax rate of 30%, in line with previous years.

The risk-free rate and market equity risk premium are set at 2.0% and 5.0% respectively. With an assumed Beta of 1.25 the WACC is 6.7%.

Our DCF suggests a value per share of Schaltbau Holding of €39.8. Our sensitivity analysis shows the value under different sales growth, EBIT margin and WACC scenarios (see Exhibits 14 and 15).

Exhibit 14: Sensitivity analysis, WACC vs terminal growth rate

Value per share, €

Terminal growth rate

0.5%

1.0%

1.5%

2.0%

2.5%

WACC

5.7%

43.6

48.1

53.7

60.7

69.9

6.2%

38.1

41.7

46.0

51.3

58.1

6.7%

33.5

36.4

39.8

44.0

49.1

7.2%

29.6

32.0

34.7

38.0

42.0

7.7%

26.3

28.2

30.5

33.1

36.3

Source: Edison Investment Research

Exhibit 15: Sensitivity analysis, WACC vs EBIT margin

Value per share, €

EBIT margin

6.0%

6.5%

7.0%

7.5%

8.0%

WACC

5.7%

45.0

49.3

53.7

58.0

62.3

6.2%

38.5

42.2

46.0

49.7

53.5

6.7%

33.2

36.5

39.8

43.1

46.4

7.2%

28.9

31.8

34.7

37.7

40.6

7.7%

25.3

27.9

30.5

33.1

35.7

Source: Edison Investment Research

Peer multiples

There are no companies that closely match Schaltbau’s business profile. For comparison with Schaltbau’s Rail division, we have selected rolling stock OEMs Alstom and Stadler and several railway suppliers. Knorr-Bremse realises >50% of revenues from rail and is Schaltbau’s largest competitor in entrance systems. Vossloh is focused on rail infrastructure, that is fastening systems, switches and crossings, rail services and tie technologies. US Wabtec is active in segments that show overlap with Schaltbau such as entrance systems and refurbishment. For comparison with Schaltbau’s Components division, we have selected electrical components companies that show overlap with the activities of Schaltbau’s contactors, connectors and switches. Although competing in segments, we did not include the (too) large multinationals Siemens, ABB and Schneider Electric. We did not include Voestalpine, because Rail only represents 12% of revenues, and Nabtesco, as it is largely focused on Japan with a 70% local market share in door systems for railroad vehicles. We also excluded Dutch Alfen, active in smart grid solutions, EV charging and energy storage. Its share price has quadrupled since the low in March 2020 and its 2022e EV/EBITDA of >30 shows the market expectations of pure e-mobility companies.

For comparison, we take the weighted average according to Schaltbau’s new segmentation of Rail (68% of FY20 revenues) and Components (32%). Schaltbau is valued at a discount of 29% on FY22e EV/EBITDA, which is due to its lower margin. We expect strong margin improvement in the medium term, which should be supportive of shares and potentially offer multiples expansion as the gap in margin compared to peers is gradually reduced. If we assume a smaller discount of 20% in 2022, as we expect the company to make gradual progress towards improving its profitability, this would reflect a value per share of €38.4.

Exhibit 16: Peer comparison

Company name 

Currency 

Market cap (local FX)

EV/Sales (x)

EV/EBITDA (x)

EBITDA margin

CAGR EBITDA

2021e

2022e

2023e

2021e

2022e

2023e

2022e

2020-23

Alstom

12782

1.7

0.9

0.9

17.2

11.9

9.5

9.9%

22.5%

Stadler

CHF

4492

1.4

1.2

1.1

14.9

12.0

10.3

9.2%

23.7%

Knorr-Bremse

17297

2.6

2.2

2.3

13.8

11.2

11.5

19.0%

11.3%

Vossloh

739

1.2

1.2

1.2

9.4

8.6

8.6

13.2%

6.4%

Wabtec

US$

14996

2.3

2.0

2.0

12.8

10.6

10.3

17.8%

7.0%

Rail average

1.8

1.5

1.5

13.6

10.9

10.1

13.8%

14.2%

Altra Industrial Motion

US$

3872

2.8

2.6

2.4

13.2

11.7

11.5

20.9%

6.6%

Amatek

US$

29956

5.8

5.3

4.9

19.7

17.7

16.6

29.5%

8.0%

Amphenol Corporation

US$

40910

4.6

4.4

4.1

19.2

18.3

16.5

23.8%

10.9%

Eaton

US$

56217

3.5

3.0

2.9

18.7

15.2

14.4

18.6%

11.2%

Sensata Technologies

US$

9374

3.2

3.0

2.6

13.3

11.9

10.1

24.3%

15.3%

Electrical components average

4.0

3.7

3.4

16.8

15.0

13.8

23.4%

10.4%

Weighted average

2.5

2.2

2.1

14.6

12.2

11.3

16.9%

13.0%

Schaltbau Holding

289.0

0.9

0.9

0.8

10.0

8.6

7.2

8.6%

17.0%

Premium/discount

-64%

-61%

-64%

-31%

-29%

-36%

Assumption premium/discount

-20%

-15%

Implied value per share, €

38.4

45.9

Source: Refinitiv, Edison Investment Research. Note: Priced at 7 April 2021.

Financials

Schaltbau Holding went through a restructuring in 2017–19, resulting in a simplification of its organisation and the divestment of the subsidiaries Alte, Pintsch Bubenzer and Sepsa. These subsidiaries had revenues of more than €100m in the year prior to their divestment. In 2019, the company showed improvements in its results and at the start of 2020 management was positive about its outlook based on its internal scenario for revenues of €520–540m, reflecting underlying growth of 5–9%. Driven by operating leverage and efficiency improvements, the EBIT margin was anticipated to rise to 6–7%, compared to the adjusted margin of 5.9% in 2019 (like-for-like 3.7%).

However, the COVID-19 pandemic hindered the recovery story and had a mixed effect on the Schaltbau brands. Both Schaltbau, with locations in China, Italy and the US, and Bode, facing temporary plant closures of the major bus manufacturers, felt the impact, while Pintsch and SBRS reported strong growth. In FY20, total revenues increased 2% to €502.3m on a like-for-like basis and exceeded the company’s guidance of €500m. Also, the reported EBIT margin was better than company guidance, at 4.3% versus around 4%, even including several negative one-offs of around €5m or 100bps. For the years 2017-2019, Schaltbau also published a normalised EBIT due to a range of exceptional items, but from 2020 the company only publishes reported and like-for-like figures.

The company is at the start of a new era of focused growth. The company expects the highest acceleration in growth in 2023 when it expects to realise revenues of €600-650m. Its ambition for 2026 is to achieve revenues of €750–800m (CAGR of 7–8%) and a high single-digit EBIT margin, which reflects almost a doubling compared to the reported margin of 4.3% in 2020.

Earnings acceleration expected from 2021

At the time of the FY20 preliminary results, Schaltbau Holding provided guidance for 2021. It expects revenues in the range of €520–540m, or growth of 5.5% at midpoint, and a reported EBIT margin of around 5%. Order intake is estimated at €550-580m. Assuming that the peak of the COVID-19 pandemic is behind us, we expect the company to realise an acceleration in growth with investments in new market segments gradually contributing to revenue growth. Our divisional forecasts are shown in the next table and show revenue growth in a range of 5–8% with a reported EBIT margin improvement of 270bp to 7.0% in 2021-23. This drives a CAGR in EBIT of 25%.

Exhibit 17: Divisional forecasts

Divisional results, €m

2019

2020

2021e

2022e

2023e

Pintsch

72.5

75.8

87.2

95.9

105.5

Bode

248.4

257.3

262.4

275.6

289.4

Schaltbau

154.4

139.5

143.7

155.2

173.8

SBRS

16.6

29.8

37.3

41.0

45.0

Total revenues (like-for-like)

491.9

502.4

530.6

567.6

613.6

Pintsch

19%

5%

15%

10%

10%

Bode

1%

4%

2%

5%

5%

Schaltbau

6%

-10%

3%

8%

12%

SBRS

-

-

25%

10%

10%

Total revenue growth

8.6%

2.1%

5.6%

7.0%

8.1%

Pintsch

2.4

3.9

4.4

5.8

7.5

Bode

6.2

4.2

8.4

13.4

17.5

Schaltbau

24.1

19.7

22.9

24.0

25.8

SBRS

1.3

2.7

3.4

3.7

4.1

Other

-16.0

-8.8

-10.5

-11.3

-11.9

Total EBIT reported (like-for-like)

18.0

21.7

28.6

35.6

42.9

Pintsch

3.3%

5.1%

5.1%

6.0%

7.1%

Bode

2.5%

1.6%

3.2%

4.9%

6.0%

Schaltbau

15.6%

14.1%

16.0%

15.5%

14.8%

SBRS

7.8%

9.1%

9.0%

9.0%

9.0%

Total EBIT margin

3.7%

4.3%

5.4%

6.3%

7.0%

Source: Schaltbau Holding, Edison Investment Research

Pintsch showed an 48% higher order intake in 2020 driven by the first order of €40m from DB Netz out of the ‘Digital Rail for Germany’ investment plans of €86bn until 2030. The digital interlocking systems under this first order are scheduled to be operational in September 2023. In 2021, the company expects an order for level crossings with a low double-digit million order size. We therefore expect strong revenue growth at Pintsch over the next few years to continue. After relatively stable revenues in 2021 (due to the coronavirus pandemic), we expect Bode to grow slightly faster than the broader rail market at around 5% per annum, also driven by the higher added value of smart entrance systems coming to the market. After a relatively stable 2021, due to the coronavirus pandemic, Schaltbau GmbH is expected to continue to outperform the overall rail market and a contribution from new market segments is expected from 2022–23. Management recently commented that it is in talks with several interested customers for its e-mobility solutions. The NExt factory is expected to deliver additional revenues of €140-160m by 2026. The smallest unit, SBRS, is expected to take on more projects (order intake was +60% in 2020), which will drive double-digit revenue growth over the next few years, after which we assume a continued growth path of 5% per annum.

We expect strong growth in EBIT over the next few years, driven by better revenue growth, operating leverage and efficiency gains. The largest improvements are expected to come from Bode and Pintsch as Schaltbau Holding is focused on improving the profitability of its core Rail segment, which is far below industry average. Management believes that Bode should be able to reach the peer group margin range of 6–8% by 2026. Pintsch showed a good improvement in margin in 2020 and we expect further improvement over the next few years driven by higher volumes triggering operating leverage. Schaltbau GmbH realises the highest margin within the company and we expect this to remain unchanged, although we do expect a slight decline in margins due to the entrance of new, more competitive markets. Schaltbau GmbH’s EBIT in 2020 was affected by the impairment of €5.1m related to subsidiary SPII. For SBRS, we expect margins to remain stable at around 9%, which is already higher than the peer margin range of 6–8%.

Exhibit 18: Consolidated profit and loss

€m

2017

2018

2019

2020

2021e

2022e

2023e

Sales (reported)

516.5

518.3

513.7

502.3

530.5

567.5

613.6

Growth

1.4%

0.4%

-0.9%

-2.2%

5.6%

7.0%

8.1%

Growth organic

1.4%

12.1%

9.5%

1.4%

5.6%

7.0%

8.1%

Gross margin

52.3%

51.6%

52.2%

51.2%

51.7%

51.8%

51.9%

EBITDA normalised

28.1

28.2

45.1

43.1

47.5

56.5

64.0

Growth

0.2%

60.1%

-4.4%

10.1%

19.0%

13.4%

EBITDA margin

5.4%

5.4%

8.8%

8.6%

9.0%

10.0%

10.4%

Depreciation & Amortisation

(-17.7)

(-12.2)

(-17.0)

(-16.3)

(-18.9)

(-20.9)

(-21.2)

EBIT normalised and like-for-like

10.4

21.1

29.0

26.8

28.6

35.6

42.9

EBIT normalised

10.4

16.0

28.2

26.8

28.6

35.6

42.9

EBIT margin

2.0%

3.1%

5.5%

5.3%

5.4%

6.3%

7.0%

Restructuring and other items

(-8.0)

(-5.2)

(-12.6)

0.0

0.0

0.0

0.0

Impairment

(-25.4)

(-18.1)

1.7

(-5.1)

0.0

0.0

0.0

EBIT reported

(-23.0)

(-7.3)

17.2

21.7

28.6

35.6

42.9

EBIT margin (reported)

-4.4%

-1.4%

3.3%

4.3%

5.4%

6.3%

7.0%

Financial income and expenses

(-10.9)

(-5.8)

(-7.0)

(-6.9)

(-5.8)

(-5.2)

(-4.7)

Pre-tax income

(-33.9)

(-13.1)

10.2

14.8

22.8

30.4

38.1

Taxes

(-13.9)

1.9

(-3.1)

(-8.9)

(-6.8)

(-9.1)

(-11.4)

Tax rate

-41%

15%

30%

60%

30%

30%

30%

Participations

(-1.8)

(-3.0)

0.3

(-0.3)

0.0

0.0

0.0

Minorities

(-2.2)

(-2.4)

(-3.3)

(-1.8)

(-3.0)

(-3.3)

(-3.6)

Net profit for equity holders

(-51.7)

(-16.5)

4.1

3.9

12.9

18.0

23.1

Growth

-68%

-125%

-5%

235%

39%

28%

Normalised net profit

(-16.4)

8.8

9.3

13.0

12.9

18.0

23.1

Growth

-154%

5%

40%

0%

39%

28%

Shares outstanding, average (m)

6.4

8.5

8.8

8.9

8.9

9.5

10.9

Shares outstanding, fully diluted average (m)

6.4

8.5

8.8

8.9

10.9

10.9

10.9

EPS reported, €

(-8.04)

(-1.93)

0.46

0.44

1.46

1.90

2.11

EPS normalised, €

(-2.55)

1.04

1.05

1.47

1.46

1.90

2.11

EPS normalised fully diluted, €

(-2.55)

1.04

1.05

1.47

1.19

1.65

2.11

DPS, €

0.00

0.00

0.00

0.00

0.00

0.00

0.42

Source: Schaltbau Holding, Edison Investment Research.

The CAGR in EBIT normalised is 17% for 2021-23. We expect financial income to decline hand in hand with the decline in net debt and the tax rate to remain around 30%. Minorities will recover from the temporary dip in 2020 with 10% growth over the next few years. All in all, this delivers a CAGR in normalised net profit of 21%, but due to the dilution of the convertible bond the CAGR in EPS normalised fully diluted is 13% for the period 2021–23.

Cash flow: The trend is up again

In 2016–18, Schaltbau Holding reported negative cash flows due to a weak operating performance, restructuring charges and write downs. The main driver for improved cash flow generation over the next few years will be the anticipated better operating performance.

Strict working capital management will continue over the next few years and we expect working capital to grow at a rate below the revenue growth level. Due to available tax loss carryforwards, we estimate cash taxes in the range of €5-7m over the next three years.

Maintenance capex is expected to be around 3.5% of revenues, which reflects a modest increase from €19m in 2020 to almost €23m in 2023. For 2021, the company plans a maintenance capex of €22.9m, according to the prospectus. On top of the normal capex programme, Schaltbau is currently in the process of constructing a new manufacturing plant in Velden, Germany, where it will develop and manufacture electromechanical components such as contactors, connectors and switching systems for a broad range of DC applications for industry, rail and new markets. The ‘NExT factory’ is scheduled for completion in autumn 2022. In the prospectus of 30 March 2021, Schaltbau mentions a committed amount of €34.6m for investment in the NExt factory, extension of the plant of RAWAG and the construction of a new logistics center of Pintsch and SBRS. This amount also includes a budget for add-on acquisitions of an estimated €10m (at mid-point of the announced 15-20% of the net proceeds of the convertible bond). In our model, we do not take into account any spending on acquisitions, so we take €24.6m for expansion capex in 2021. This investment will be fully financed by the announced mandatory and already fully underwritten convertible bond of €60m (scheduled to be issued on or around 23 April 2021).

Schaltbau Holding’s dividend policy is for a pay-out ratio of 30% of net profit according to local GAAP (that is net profit of the holding). Since 2016, it has passed dividend payments given the relatively weak financial position and profit generation at the holding level. In the prospectus of 30 March 2021, management stated not to intend a dividend payment for 2020 and 2021. As we assume a steady decline in net debt/EBITDA, we expect the first dividend again for 2023 with a pay-out ratio of 20%, further building up to 30% in the years thereafter.

Due to the investments in the NExt factory, we expect free cash flow to be negative in 2021 and around break-even in 2022, after which it will turn significantly positive. Based on our current assumptions, we expect an improvement in free cash flow towards €25m in 2023 (see Exhibit 19 and the financial summary table on page 19).

Exhibit 19: Cash flow statement

€m

2017

2018

2019

2020

2021e

2022e

2023e

EBIT

(-23.0)

(-7.3)

17.2

21.7

28.6

35.6

42.9

Depreciation/amortisation

32.3

26.7

15.4

21.0

18.9

20.9

21.2

Change in provisions

(-0.5)

(-7.4)

14.7

(-5.5)

(-2.0)

0.0

0.0

Change in working capital

(-2.3)

(-19.6)

17.8

(-1.9)

(-22.1)

(-3.5)

(-5.0)

Cash taxes

(-3.8)

(-2.1)

(-4.3)

(-4.1)

(-4.8)

(-6.1)

(-6.4)

Cash interest

(-7.1)

(-5.3)

(-8.7)

(-4.4)

(-5.8)

(-5.2)

(-4.7)

Cash flow from operations

3.4

(-11.5)

54.2

27.8

12.7

41.7

47.9

Cash flow from investments

(-34.3)

28.1

(-20.6)

(-18.5)

(-47.0)

(-37.8)

(-22.7)

Cash flow from financing

26.1

(-21.1)

(-30.2)

4.9

34.1

(-18.3)

(-18.3)

Change in cash

(-4.8)

(-4.5)

3.4

14.2

(-0.2)

(-14.4)

6.9

Cash at year-end

(-4.8)

21.8

25.2

39.4

39.2

24.8

31.7

Free cash flow

(-14.2)

(-26.2)

35.1

9.2

(-34.3)

3.9

25.1

FCF yield

-8.2%

-15.2%

11.7%

3.5%

-11.6%

1.1%

6.9%

Source: Schaltbau Holding, Edison Investment Research

Balance sheet: Successfully refinanced

Schaltbau’s balance sheet looks much better compared to a few years ago. After having divested several loss-making subsidiaries and having refinanced its balance sheet (including two equity issues), net debt has come down from €158m in 2017 to €80m in 2020 (including leases of €12m).

After several impairments and divestments over the past few years (including impairment of €5.1m for SPII in 2020), goodwill amounts to €30m, reflecting >10% of total assets. Management has commented that it does not expect any more impairments as all risks are taken into account.

Inventories are relatively high, which is a characteristic of the rail market. Suppliers are connected to a certain rail platform for five to seven years but also have to guarantee for 30 years to supply spare parts when needed. The decline in accounts receivable in 2020 was mainly due to timing issues as before year-end an amount of €20m had been sold in relation to reverse factoring arrangements.

The level of provisions is rather high at around €90m, representing 20% of the balance sheet total. Pension provisions reflect almost half of the amount and are not expected to change materially over the next few years. The other provisions are related to warranties, outstanding supplier invoices, personnel bonuses, severance pay and pre-retirement part-time working arrangements.

In 2017, half of shareholders’ equity of €70m came from minority interests. In 2018, the company issued new equity of €50m, which improved the equity ratio from 16% in 2017 to 24% in 2018. The net proceeds of the announced convertible bond of €57.4m will push the equity ratio up to 35% in 2021 after the decline to 20% in 2020. Driven by increasing profits without paying any dividends in the next two to three years, we expect further improvement in the equity ratio towards 42% in 2023.

About 25–30% of the net proceeds of the mandatory convertible bond of €57.4m will be used to redeem debt, while 15–20% is allocated to potential add-on acquisitions. According to our estimates, this should reduce net debt to around €65m in 2021 with further reductions in the years thereafter. Net debt/EBITDA (reported) improved from 2.5x in 2019 to 1.9x in 2020 and we expect it to further improve to just 0.7x in 2023, well below the company target of <2.0x.

Exhibit 20: Balance sheet

€m

2017

2018

2019

2020

2021e

2022e

2023e

Intangible fixed assets

67.5

51.1

49.8

43.4

42.5

41.6

40.9

Tangible fixed assets

72.3

75.6

89.9

94.4

123.5

141.3

143.6

Financial fixed assets

14.9

16.0

24.3

17.1

17.1

17.1

17.1

Inventories

94.3

108.1

109.7

118.7

125.3

130.1

136.5

Receivables

91.9

93.3

83.6

72.8

92.3

96.7

102.5

Other current assets

85.9

31.6

18.5

26.0

27.4

28.8

30.5

Cash

25.3

21.1

25.2

39.4

39.2

24.8

31.7

Total assets

452.0

396.8

401.0

411.8

467.3

480.5

502.8

Equity

39.3

64.6

68.1

62.7

134.8

155.8

184.3

Minority interest

31.3

29.2

29.3

28.0

28.0

28.0

28.0

Payables

46.4

47.4

50.4

41.9

44.2

47.3

51.1

Other current liabilities

63.9

53.4

49.3

54.8

57.9

62.0

67.0

Short-term interest-bearing debt

58.6

109.4

14.7

10.6

10.6

10.6

10.6

Long-term interest-bearing debt

125.2

12.1

92.7

108.6

93.6

78.6

63.6

Provisions and other

87.4

80.6

96.7

105.2

98.2

98.2

98.2

Net working capital

161.7

132.2

112.2

120.8

142.9

146.4

151.4

Net debt

158.4

100.4

82.2

79.8

65.0

64.4

42.5

Capital employed

301.5

258.9

251.9

258.6

308.9

329.3

335.9

ROCE (normalised)

3.1%

5.4%

10.7%

10.2%

9.8%

10.9%

12.7%

Equity ratio

16%

24%

24%

22%

35%

38%

42%

Net debt/EBITDA normalised

5.6

3.6

1.8

1.9

1.4

1.1

0.7

EBITDA/Net interest

2.6

4.9

6.5

6.3

8.1

10.8

13.6

Source: Schaltbau Holding, Edison Investment Research

Exhibit 21: Financial summary

€ m

2018

2019

2020e

2021e

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue (reported)

518.3

513.7

502.3

530.5

567.5

613.6

Gross Profit

267.3

268.3

257.2

274.3

294.0

318.5

EBITDA normalised

28.2

45.1

43.1

47.5

56.5

64.0

EBITDA reported

23.0

32.5

43.1

47.5

56.5

64.0

Depreciation & Amortisation

(12.2)

(17.0)

(16.3)

(18.9)

(20.9)

(21.2)

EBIT normalised and like-for-like

21.1

29.0

26.8

28.6

35.6

42.9

EBIT normalised

16.0

28.2

26.8

28.6

35.6

42.9

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals (Edison definition)

(23.3)

(11.0)

(5.1)

0.0

0.0

0.0

EBIT reported

(-7.3)

17.2

21.7

28.6

35.6

42.9

Net Interest

(5.8)

(7.0)

(6.9)

(5.8)

(5.2)

(4.7)

Participations

(3.0)

0.3

(0.3)

0.0

0.0

0.0

Profit Before Tax

(16.1)

10.5

14.5

22.8

30.4

38.1

Reported tax

1.9

(3.1)

(8.9)

(6.8)

(9.1)

(11.4)

Profit After Tax

(14.1)

7.4

5.7

15.9

21.3

26.7

Minority interests

(2.4)

(3.3)

(1.8)

(3.0)

(3.3)

(3.6)

Net income (normalised)

8.8

9.3

13.0

12.9

18.0

23.1

Net income (reported)

(16.5)

4.1

3.9

12.9

18.0

23.1

Average number of shares (m)

8.5

8.8

8.9

8.9

9.5

11.5

Average number of shares, fully diluted (m)

8.5

8.8

8.9

10.4

11.5

11.5

EPS normalised (€)

1.04

1.05

1.47

1.46

1.90

2.00

EPS normalised fully diluted (€)

1.04

1.05

1.47

1.19

1.65

2.00

EPS reported (€)

(1.93)

0.46

0.44

1.46

1.90

2.00

DPS (€)

0.00

0.00

0.00

0.00

0.00

0.42

Revenue growth

0.4%

-0.9%

-2.2%

5.6%

7.0%

8.1%

Gross Margin

51.6%

52.2%

51.2%

51.7%

51.8%

51.9%

EBITDA Margin

5.4%

8.8%

8.6%

9.0%

10.0%

10.4%

Normalised Operating Margin

3.1%

5.5%

5.3%

5.4%

6.3%

7.0%

BALANCE SHEET

Fixed Assets

142.7

164.0

155.0

183.1

200.0

201.6

Intangible Assets

51.1

49.8

43.4

42.5

41.6

40.9

Tangible Assets

75.6

89.9

94.4

123.5

141.3

143.6

Investments & other

16.0

24.3

17.1

17.1

17.1

17.1

Current Assets

254.1

237.0

256.9

284.2

280.4

301.2

Stocks

108.1

109.7

118.7

125.3

130.1

136.5

Debtors

93.3

83.6

72.8

92.3

96.7

102.5

Other current assets

31.6

18.5

26.0

27.4

28.8

30.5

Cash & cash equivalents

21.1

25.2

39.4

39.2

24.8

31.7

Current Liabilities

210.2

114.4

107.3

112.7

119.9

128.7

Creditors

47.4

50.4

41.9

44.2

47.3

51.1

Other current liabilities

53.4

49.3

54.8

57.9

62.0

67.0

Short term borrowings

109.4

14.7

10.6

10.6

10.6

10.6

Long Term Liabilities

92.7

189.4

213.8

191.8

176.8

161.8

Long term borrowings

12.1

92.7

108.6

93.6

78.6

63.6

Other long-term liabilities

80.6

96.7

105.2

98.2

98.2

98.2

Shareholders' equity

93.8

97.2

90.7

162.8

183.8

212.3

Minority interests

29.2

29.3

28.0

28.0

28.0

28.0

Balance sheet total

396.8

401.2

411.8

467.3

480.5

502.8

CASH FLOW

Op Cash Flow before WC and tax

15.5

49.4

38.3

45.5

56.5

64.0

Working capital

(19.6)

17.8

(1.9)

(22.1)

(3.5)

(5.0)

Tax

(2.1)

(4.3)

(4.1)

(4.8)

(6.1)

(6.4)

Net interest

(5.3)

(8.7)

(4.4)

(5.8)

(5.2)

(4.7)

Net operating cash flow

(11.5)

54.2

27.8

12.7

41.7

47.9

Capex

(16.1)

(19.2)

(18.6)

(47.0)

(37.8)

(22.7)

Acquisitions/disposals

44.2

(1.5)

0.1

0.0

0.0

0.0

Equity financing

46.5

0.0

0.0

57.4

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

0.0

Other

(5.0)

(15.4)

9.2

(8.3)

(3.3)

(3.3)

Net Cash Flow

58.0

18.2

18.5

14.8

0.6

21.9

Opening net debt/(cash)

158.4

100.4

82.2

63.7

48.9

48.3

Closing net debt/(cash)

100.4

82.2

63.7

48.9

48.3

26.4

Source: Schaltbau Holding, Edison Investment Research.

Contact details

Revenue by geography FY20

Schaltbau Holding AG
Hollerithstrasse 5
81829 Munich
Germany
+49 89 93005-0
www.schaltbaugroup.com

Contact details

Schaltbau Holding AG
Hollerithstrasse 5
81829 Munich
Germany
+49 89 93005-0
www.schaltbaugroup.com

Revenue by geography FY20

Management team

CEO: Mr Jurgen Brandes

CFO: Mr Steffen Munz

In April 2020, Mr Jurgen Brandes was appointed as member of the executive board as the designated successor of Mr Köhler as CEO from 1 January 2021. Mr Brandes brings 35 years of experience in electrical engineering and automation in industries such as electromobility and rail.

Mr Steffen Munz has been appointed CFO as of 1 March 2021. Previously, he fulfilled CFO roles at Varta (2018–20), at the medical division of Gardner Denver in the US (2014–18) and at medical device manufacturer Hartmann.

Executive board member: Mr Volker Kregelin

Mr Volker Kregelin is responsible for Pintsch and has more than 25 years of experience in rail and logistics.

Management team

CEO: Mr Jurgen Brandes

In April 2020, Mr Jurgen Brandes was appointed as member of the executive board as the designated successor of Mr Köhler as CEO from 1 January 2021. Mr Brandes brings 35 years of experience in electrical engineering and automation in industries such as electromobility and rail.

CFO: Mr Steffen Munz

Mr Steffen Munz has been appointed CFO as of 1 March 2021. Previously, he fulfilled CFO roles at Varta (2018–20), at the medical division of Gardner Denver in the US (2014–18) and at medical device manufacturer Hartmann.

Executive board member: Mr Volker Kregelin

Mr Volker Kregelin is responsible for Pintsch and has more than 25 years of experience in rail and logistics.

Principal shareholders

(%)

Acting in concert (Luxempart, Hans-Jakob Zimmermann, Dr Johannes Zimmermann, Elrena GmbH)

21.7

Teslin Capital Management

10.2

Active Ownership Gruppe

7.3

Axxion

6.7

Kreissparkasse Biberach

4.9

BayernInvest

4.3

Universal-Investment *

3.8

Monolith

3.7

Praude *

2.1

*Stake calculated with current number of shares outstanding


General disclaimer and copyright

This report has been commissioned by Schaltbau Holding and prepared and issued by Edison, in consideration of a fee payable by Schaltbau Holding. 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 research department of Edison 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 2021 Edison Investment Research Limited (Edison).

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.

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

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

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

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

General disclaimer and copyright

This report has been commissioned by Schaltbau Holding and prepared and issued by Edison, in consideration of a fee payable by Schaltbau Holding. 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 research department of Edison 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 2021 Edison Investment Research Limited (Edison).

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.

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

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

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

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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