Improving outlook expected for 2019

Daldrup & Söhne 13 June 2019 Update
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Daldrup & Söhne

Improving outlook expected for 2019

Alternative energy

Scale research report - Update

13 June 2019

Price

€4.15

Market cap

€25m

Share price graph

Share details

Code

4DS

Listing

Deutsche Börse Scale

Shares in issue

6.0m

Last reported net debt as at December 2018

€65m

Business description

Daldrup & Söhne is an onshore drilling and environmental services company with vertically integrated competencies in geothermal projects (from feasibility study, permitting and constructing to power supply contracting). It is seeking to create predictable revenue streams as an independent power producer.

Bull

Emission reduction and renewable energy targets provide a positive macro environment.

Favourable feed-in tariffs continue in Germany.

Healthy order book.

Bear

Investment in geothermal power capital intensive.

Projects can be subject to delays.

Daldrup & Söhne has little surplus capital for expansion.

Analyst

Graeme Moyse

+44 20 3077 5700

Following a disappointing 2018, Daldrup & Söhne has embarked on a strategic realignment. Although the realignment will take some time to bear fruit, the outlook for FY19 appears more promising and the financial position of the company should improve after the recently announced disposals. For FY19 Daldrup & Söhne is expecting group revenue of €40m and a breakeven performance at the EBIT level. Based on consensus forecasts, the company is trading on an EV/Sales multiple for 2019 of 1.2x, towards the bottom end of the range for its peer group (average 3.3x).

FY18 results fall below target

In 2018 Daldrup & Söhne failed to meet its group revenue target of €40m or its forecast EBIT margin of between 2% and 5%, recording losses at the EBITDA (€12.7m) and EBIT levels (€16.3m). The reduction in profitability resulted from one-off valuation adjustments, significantly higher material costs (€29.1m in FY18 versus €21.8m in FY17) and delays due to bad weather, customer orders and the commissioning of the Taufkirchen power plant. As a result of the consolidation of the Taufkirchen geothermal power plant during the year, overall indebtedness rose from €39.9m in 2017 to €64.7m in 2018. Following the difficulties of FY18, the executive board has proposed a ‘realignment’ of strategy to the supervisory board. It is proposed that the strategy will be to focus on the drilling service business and minority holdings medium-sized power projects.

EBIT breakeven targeted for FY19

The outlook for FY19 appears more promising. The regulatory framework for geothermal power generation in Germany remains attractive and at the company level trading remains strong. At the end of May Daldrup & Söhne had an order backlog of €48m and a pipeline of €105m. The financial position of the company should improve after the recently announced disposals (expected proceeds €5.2m and the deconsolidation of other liabilities). Overall for FY19 Daldrup & Söhne is expecting group revenue of €40m and a breakeven EBIT performance.

Valuation: Below peer group averages

We base our valuation analysis on consensus forecasts for FY19 which are more optimistic than management forecasts (EBIT €5m versus €0m). At a share price of c €4.15, the company is trading on an EV/Sales multiple for FY19e of c 1.2x, towards the bottom end of the range of quoted peers. The FY19e EV/EBIT multiple of 10.5x is also below the peer group median of 11.3x.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

PBT
(€)

EPS
(€)

P/E
(x)

Yield
(%)

12/17

43.04

1.14

(0.01)

0.00

N/A

N/A

12/18

34.91

(16.30)

(18.66)

(2.88)

N/A

N/A

12/19e

43.00

5.00

3.00

0.25

16.6

N/A

Source: Refinitiv. Daldrup & Söhne

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FY18 results: Asset write downs and delays force loss

In 2018 Daldrup & Söhne failed to meet its group revenue target of €40m and its forecast EBIT margin of between 2% and 5%. Sales of €38.9m represented a significant rise on the FY17 figure of €24.8m, thanks to the completion of a number of deep geothermal wells. However, changes in work in progress resulted in a decline in overall output, from €43.0m in FY17, to €34.9min FY18. In addition, Daldrup & Söhne recorded losses at the EBITDA (€12.7m) and EBIT levels (€16.3m) in FY18. The reduction in profitability resulted from one-off valuation adjustments, significantly higher material costs (€29.1m in FY18 versus €21.8m in FY17) and delays due to bad weather, customer orders and the commissioning of the Taufkirchen power plant. Despite a reduction in liabilities due to banks, from €14.5m in 2017 to €11m in 2018, due to the consolidation of the Taufkirchen geothermal power plant during 2018, total debt (including other liabilities that the company indicated should be regarded as debt) rose from €39.9m in 2017 to €64.7m in 2018.

Exhibit 1: FY18 results vs FY17 – key highlights

€m

FY17

FY18

Change (%)

Sales

24.8

38.9

+56.9

Increase in work in progress

18.3

-4.0

N/A

Output

43.0

34.9

-18.8

EBITDA

4.7

(12.7)

N/A

Depreciation, Amortisation and Impairment

(3.6)

(3.9)

+8.3%

EBIT

1.1

(16.3)

N/A

EBIT Margin (%)

2.6%

N/A

N/A

Debt

(39.9)

(64.7)

+62.2%

Cash

1.5

2.4

+60.0%

Net debt

38.4

62.3

+62.3%

Cashflow

From operating activities

9.9

34.4

+247.4%

From investing activities

(13.2)

(31.1)

+136.6%

From financing activities

(1.3)

8.2

N/A

Source: Daldrup & Söhne

Post year-end developments

Since the year end Daldrup & Söhne has made a number of significant announcements.

In January Geysir Europe, a subsidiary of Daldrup & Söhne, increased its holding in Geox, the operating company for the Landau geothermal plant, to 100%. As a result of the transaction Daldrup & Söhne’s share of Landau increased from 67.5% to 75%.

In April Daldrup & Söhne announced it had started the first exploratory drill for Swiss Nagra in Bülach, north of Zurich. Nagra is the Swiss National Cooperative for the Disposal of Radioactive Waste. According to Nagra, the drilling work at Bülach is expected to last six to nine months. However, Bülach is the first in a series of exploratory drills to be carried out for Nagra. In total Nagra has submitted 23 applications for deep boreholes, although not all 23 will necessarily be drilled as the extent of the programme will depend on the initial findings. Daldrup has confirmed this major project is planned over several years with a potential order volume in ‘double-digit millions’.

In a preliminary announcement on 22 May, Daldrup & Söhne confirmed it would report an EBIT loss for 2018 of €14–17m. The company also announced a proposal to ‘realign’ the strategy and revealed an increase in its holding in Geysir Europe to c 98%.

On 31 May, in tandem with its FY18 results, Daldrup & Söhne announced that it intended to sell shares in the Landau geothermal power plant and Geysir Europe to IKAV Group. The deal is scheduled to complete in June and is expected to raise c €5.2m. Daldrup & Söhne will pursue a separate agreement to sell down its holding in Taufkirchen geothermal power plant. The sales should ultimately allow Daldrup & Söhne to deconsolidate the liabilities associated with the projects (c €33m).

Exhibit 2: Post year-end developments

Date

Event

18 January 2019

Increase holding in Landau plant to 75% (subsidiary Geysir acquires 100%)

17 April 2019

Commenced first exploratory drilling for Swiss Nagra

22 May

Indicates an EBIT loss for 2018 and an increase in its stake in Geysir Europe (from 1/4/19)

31 May

FY18 results and announced sale of shares in Landau and Geysir Europe

Date

18 January 2019

17 April 2019

22 May

31 May

Event

Increase holding in Landau plant to 75% (subsidiary Geysir acquires 100%)

Commenced first exploratory drilling for Swiss Nagra

Indicates an EBIT loss for 2018 and an increase in its stake in Geysir Europe (from 1/4/19)

FY18 results and announced sale of shares in Landau and Geysir Europe

Source: Daldrup & Söhne

Strategy

The executive board proposed a ‘realignment’ of strategy to the supervisory board. It is proposed that the company will focus on the drilling service business and medium-sized power projects. Rather than invest in one or two large projects as a majority shareholder, Daldrup & Söhne will seek to diversify its risk over a greater number of projects, via minority holdings.

FY19 outlook

Despite a difficult FY18, the outlook for FY19 appears more promising. From a macro perspective the feed-in-tariff remains 25.2c/kW, with funding in place for 20 years. Geothermal generation also remains exempt from the tendering process that wind and solar are subjected to. According to Daldrup & Söhne, given the benign regulatory situation, banks remain happy to lend and infrastructure investors continue to show an interest in geothermal plants. At the company level, the outlook is positive, the three main drilling rigs are expected to be in operation during the year and Daldrup & Söhne had an order backlog at the end of May of €48m and a pipeline of €105m. The financial position should improve post the recently announced disposals (expected proceeds €5.2m and the deconsolidation of liabilities). Overall for FY19, Daldrup & Söhne is expecting group revenue of €40m and is aiming for a break-even performance at the EBIT level.

Valuation

Following recent share price weakness linked to the disappointing performance in FY18, Daldrup & Söhne is now trading at c €4.15 per share. We base our valuation analysis on consensus forecasts for FY19 of revenues of €43m and EBIT of €5m. At a share price of c €4.15, Daldrup & Söhne is trading on an EV/Sales multiple for FY19e of c 1.2x, towards the bottom end of the range of quoted peers. The FY19e EV/EBIT multiple of 10.5x is also below the peer group median of 11.3x.

Exhibit 3: Comparable valuation analysis

 

EV/Sales
2019 (x)

EV/Sales
2020 (x)

EV/EBIT
2019 (x)

EV/EBIT
2020 (x)

Daldrup &Söhne

4DS.DE

1.2

1.1

10.5

8.8

Awilco Drilling

AWDR.OL

3.1

2.6

N/A

N/A

SD Standard Drilling

SDSD.OL

2.5

2.2

9.9

6.0

Northern Drilling

NODL.OL

15.1

3.5

N/A

15.2

Nabors Industries

NBR.BE

1.4

1.3

N/A

27.2

Transocean

RIG.BE

3.6

3.3

113.4

39.8

Odfjell Drilling

ODL.NO

1.6

1.4

31.5

13.6

7C Solarparken

HRPK.DE

8.3

Energiekontor

EKTG.DE

3.5

1.5

16.4

9.0

Good Energy

GOOD.LN

0.6

0.5

11.3

10.3

Ormat Technology

ORA.US

6.0

5.5

20.9

17.6

Median (excluding D&S)

 

3.3

2.2

11.3

13.6

Source: Refinitiv. Note: Prices as at 7 June 2019.


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

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

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

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

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

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

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

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

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

United Kingdom

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

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

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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