industry-2692640_1920

Industrial continues on strong growth path

Kendrion 22 November 2022 Update
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Kendrion

Q322 results review

Industrial engineering

22 November 2022

Price

€16.00

Market cap

€242m

Net debt (€m) at 30 September 2022

154

Shares in issue

15.1m

Free float

43%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

18.9

5.5

(21.4)

Rel (local)

9.2

6.8

(9.0)

52-week high/low

€22.40

€13.02

Business description

Kendrion develops, manufactures and markets high-quality actuators for industrial applications (54% of 9M22 revenues) and automotive applications (46%). The geographical spread of FY21 revenues was Germany 39%, other Europe 30%, the Americas 16% and Asia 15%.

Next events

FY22 results

28 February 2023

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

Kendrion’s Q322 results showed a relatively good performance under difficult market conditions, with continued pressure from a shortage of materials, volatile demand and inflation. Revenues in the quarter were stronger than we expected; the Industrial division remained the top performer, with revenues up 27% y-o-y, while the Automotive division returned to growth with an 8% top-line increase. Kendrion expects the current difficult environment to continue for the rest of the year and into 2023 but is confident that the trends towards electrification and clean energy will drive strong growth in the medium term. The average of our three valuation methods points to a fair value of €22.2 per share.

Year end

Revenue
(€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/20

396.4

44.6

0.79

0.40

8.3

20.9

12/21

463.6

55.8

1.39

0.70

8.2

15.1

12/22e

515.5

58.6

1.60

0.80

6.7

10.0

12/23e

541.3

68.7

1.96

0.98

5.6

8.2

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

Industrial: Strong performance continues

Kendrion’s better than expected performance in Q322 was again driven by strong revenue growth in Industrial (27% of which 18% was organic). The division continues to benefit from the trend towards cleaner energy and the company remains focused on adding high-growth segments such as automated guided vehicles and collaborative robots. Automotive returned to growth with revenue up 8% (5% organic) despite the challenging market conditions (volatile demand, inflation and material shortages).

Medium-term outlook remains positive

Kendrion expects the unpredictability of the economic environment to continue into 2023, although there are signs that input cost pressures are easing in some market segments. Based on order books, management expects Industrial’s performance to remain strong, while it is on track to realise €8m in cost savings in Automotive, with the full effect in 2023. In China, Kendrion is on track to double its manufacturing footprint by Q123, which would enable strong growth in that region (in both Industrial and Automotive). We have raised our revenue and EBITDA estimates by 3% for FY22, driven by the better-than-expected Q3 results. For FY23 and FY24, we have left our estimates unchanged given the uncertain economic outlook. These assumptions deliver a CAGR in normalised EPS for 2021–24 of 23%.

Valuation: Still offering ample upside

Kendrion is valued at an EV/EBITDA multiple for FY22e of 6.7x and a P/E of 10.0x. For its valuation we look at historical multiples, discounted cash flow (DCF) and peer multiples. We have not changed much in our estimates and valuation assumptions, and the average outcome of these valuation methods has not changed much either: €22.2 per share versus €21.7 previously.

Q322 results: Stronger than expected growth

Kendrion has published its Q322 results, with stronger than expected revenue growth of 17% y-o-y to €133m, despite the continuing economic turmoil, inflation and demand volatility particularly in Automotive. According to management, market conditions in Q3 have not changed materially compared to the first half. 3T (an electronics and embedded systems expert acquired in September 2021) added 2% to revenues and positive exchange rates had an impact of 3%. Organic revenue growth of 12% y-o-y was better than we expected and showed an acceleration from the 2% growth in Q222 (or 5% when corrected for management’s estimated impact of the lockdowns in China of €3.5m on Q2 revenues). Group volumes in Q3 were up 6%, which is a good improvement from slightly lower volumes in Q2. Price increases also contributed 6% to the overall organic revenue growth and that is at the same level as in Q222.

Exhibit 1: Kendrion’s Q322 divisional revenues

€m

Q321

Q322

Change

Change constant scope

Change organic

Industrial Brakes

31.3

40.1

28%

24%

24%

Industrial Actuators & Controls

25.8

32.5

26%

14%

11%

Automotive

56.1

60.3

8%

5%

5%

Total revenues

113.2

132.9

17%

14%

12%

Source: Kendrion

The industrial activities benefited from high demand for products related to the transition towards cleaner energy. Industrial Brakes continued its strong performance, reporting 28% y-o-y growth of which 24% was organic. Industrial Actuators & Controls showed 26% growth, of which 12% came from 3T and 3% from positive exchange rate effects. Automotive returned to growth, showing 8% yoy growth (5% organic) after the decline in the first half, despite continuing semiconductor shortages, demand volatility and inflation. Within Automotive, developments in commercial vehicles are relatively stable with larger demand volatility in passenger cars. Commercial vehicles still have mostly diesel engines, but there is a big push for electric ones, which will drive the electrification trend in this market segment over the next few decades.

In China (around 10% of group revenues), production caught up with the backlog caused by lockdowns during H1. The construction of the new factory, which will double the manufacturing footprint towards 28,000m² is on schedule and Kendrion expects the plant to be operational in Q123.

Exhibit 2: Kendrion’s Q322 results

€m

Q321

Q322

Change

Revenues

113.2

132.9

17%

Gross margin

48.0%

47.3%

EBITDA normalised

12.4

14.9

20%

EBITDA margin

11.0%

11.2%

Depreciation

(5.9)

(6.0)

2%

Amortisation, acquisition related

(1.0)

(1.2)

20%

EBIT normalised

5.5

7.7

40%

EBIT margin

4.9%

5.8%

Non-recurring items

(0.5)

(1.6)

EBIT reported

5.0

6.1

22%

Financial income and expenses

(0.8)

(0.5)

Pre-tax income

4.2

5.6

34%

Taxes

(1.3)

(1.6)

23%

Net profit

2.9

4.0

38%

Net profit normalised

4.0

6.1

53%

Shares outstanding, average (m)

14.9

15.1

1%

EPS – reported (€)

0.19

0.27

37%

EPS – normalised (€)

0.27

0.40

51%

Source: Kendrion

Despite higher input prices, Kendrion managed to keep its gross margin relatively stable. As price increases of input materials are passed on to customers without margin, the gross margin was 70bp lower at 47.3% in Q3 (H122 +40bp). Continued operating leverage in Industrial and the higher revenue share of higher-margin Industrial Brakes resulted in an increase in normalised EBITDA margin of 20bp to 11.2%, despite weaker profitability in Automotive. This increase compares to the decline in EBITDA margin of 170bp in the first half, resulting in a 110bp decline in the first nine months of the year (9M22).

Within Automotive, Kendrion is on schedule to finalise the closure of the factory in Austria in Q422, which should result in annual savings of €4m. The company is also making good progress with the organisational change into Core and E as announced during its capital markets day on 8 September 2022, which should lead to cost savings of €4m in 2023.

The one-offs related to the organisation change within Automotive are now estimated at €5m (at the capital markets day, management estimated €6m), with €1.6m taken in Q322 and the remaining €3.4m will fall in Q422, according to management. The cash outflow from these P&L one-offs will be largely in FY23. With stable depreciation, lower financing costs and a lower tax rate, normalised net profit before amortisation in Q322 increased 53% to €6.1m.

Kendrion’s financial position remains solid with net debt/EBITDA at 2.6x (covenant is <3.25x) and an equity ratio of 43%. Net debt in Q3 increased €8m to €154m versus Q2, mainly due to higher capex for the new production facility in China and new production lines in Automotive. Inventories remained at a high level but were slightly lower compared to Q2. Kendrion expects net debt to be lower at year end. At the Q222 analyst meeting in August, management indicated to expect a positive free cash flow in H222 and this was reiterated on the Q322 analyst call. This means that the free cash flow in Q4 must be higher than €9m, which was the level of negative free cash flow in Q3. This will mainly be realised via lower working capital in Q4, which is normally the weakest quarter of the year with a corresponding lower working capital.

Positive outlook despite difficult market conditions

Kendrion expects the current difficult economic environment to continue for the rest of the year and into 2023, but is confident that the trends towards electrification and clean energy will drive growth in the medium term. At the Q322 analyst meeting, management commented that, based on the order book, it expects the performance of Industrial to remain strong. In FY22, Kendrion is investing in product lines for projects in Automotive that will ramp up from 2023. There seems to be some easing in semiconductor shortages, but in Automotive there is still scarcity of certain components. It might change for the better over the next couple of months, but uncertainty is high. The company is on track to realise €8m in cost savings within its Automotive division, with the main benefit in 2023 (€4m related to the split in Automotive into Core and E and €4m related to the closure of its factory in Austria).

Kendrion’s financial targets for 2019–25 are unchanged: organic revenue growth of at least 5% on average per year, an EBITDA margin of at least 15% in 2025 (12.0% in FY21) and return on invested capital of at least 25% in 2025 (FY21: 15.6%).

Exhibit 3: Change in estimates

€m

2022e

2023e

2024e

Old

New

Change

Old

New

Change

Old

New

Change

Revenue

500

516

3.0%

537

541

0.9%

582

584

0.4%

EBITDA normalised

57.0

58.6

2.9%

68.6

68.7

0.1%

81.3

81.1

(0.2%)

EBITDA margin

11.4%

11.4%

12.8%

12.7%

14.0%

13.9%

EBITA margin

6.8%

6.9%

8.2%

8.1%

9.7%

9.6%

Net profit adjusted

22.3

24.2

8.4%

29.6

29.6

0.2%

39.1

39.0

(0.1%)

EPS adjusted (€)

1.48

1.60

8.4%

1.96

1.96

0.2%

2.58

2.58

(0.1%)

DPS (€)

0.74

0.80

8.4%

0.98

0.98

0.2%

1.29

1.29

(0.1%)

Source: Edison Investment Research

We have raised our revenue estimate for FY22 after the better-than-expected results in Q322, and now expect 11% growth versus 8% previously, with an uplift in both divisions (Industrial from 17% to 20% growth and Automotive from -1% to 2%). Due to the economic uncertainty, we have left our revenue estimates for FY23 and FY24 broadly unchanged despite the higher basis in FY22. We expect revenue growth of 5% in FY23 and 8% in FY24, with stronger growth in Automotive as market research is still anticipating a recovery from the lower levels caused by the COVID-19 pandemic and supply chain constraints. Kendrion’s underlying growth is still driven by the long-term trends of electrification and clean energy.

We have left our EBITDA margin estimates broadly the same for FY22–24, which reflects a slight increase in our EBITDA estimate for FY22, in line with the raised revenue forecast. This reflects a decline in EBITDA margin of 60bp for the full year after the decline of 110bp in 9M22. For FY23 and FY24 we expect further margin improvement, fuelled by the announced cost savings in Automotive and the operating leverage within Industrial. The easing of the shortage in materials will also help, but the timing of this is difficult to predict.

Our new estimates assume a CAGR in EPS in 2021–24e of 23%.

Valuation offers upside

For the valuation of Kendrion, we look at three different valuation methods: historical multiples, DCF and peer comparison (for more details see our recent outlook report).

Historical valuation: Kendrion is trading at a discount of 20% compared to its historical EV/EBITDA valuation of 8.4x (last eight years), based on our estimates for FY22. As the company’s current profitability is somewhat below its eight-year average, with margins in automotive under pressure, we now assume a small discount of 5% to its historical multiples is justified (down from the valuation in line with historical multiples). This slightly changed assumption leads to a value per share of €20.7 per share (from €22.2 previously).

DCF valuation: we have left the assumptions in our DCF model unchanged and, in our earnings estimates, we only slightly raised our revenue and EBITDA forecasts for FY22 and have left FY23 and FY24 broadly the same. As a result, and using an unchanged WACC of 8.0%, the DCF outcome has not varied much since our last update in September: a value per share of €24.1, versus €23.9 previously.

Peer group comparison: we still think that a valuation in line with its peers is merited, based on the 2022e EV/EBITDA multiple, versus the current discount of 18%. As peer multiples have increased in the past few months, this delivers a higher value per share of €21.9, versus €18.8 previously.

The average of the three valuation methods is shown in Exhibit 4 and points to a valuation of €22.2 per share (previously €21.7).

Exhibit 4: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2022e EV/EBITDA at a small discount of 5% to its historical multiples

20.7

DCF

Terminal growth 1.5%, terminal EBITA margin 7.5%

24.1

Peer group

2022e EV/EBITDA in line with peers

21.9

Average value per share

22.2

Current share price

16.0

Source: Edison Investment Research

Exhibit 5: Financial summary

€m

2019

2020

2021

2022e

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

412.4

396.4

463.6

515.5

541.3

584.2

Gross Profit

193.3

191.0

225.8

248.7

262.8

284.2

EBITDA normalised

43.8

44.6

55.8

58.6

68.7

81.1

EBITDA reported

38.1

40.2

51.7

51.2

68.7

81.1

Depreciation & Amortisation

(24.0)

(25.7)

(23.9)

(22.8)

(24.6)

(24.7)

EBITA normalised

19.8

18.9

31.9

35.8

44.1

56.3

Amortisation of acquired intangibles

(2.2)

(4.4)

(3.9)

(4.8)

(4.8)

(4.8)

Exceptionals (Edison definition)

(5.7)

(4.4)

(4.1)

(7.4)

0.0

0.0

EBIT reported

11.9

10.1

23.9

23.6

39.3

51.5

Net Interest

(0.9)

(4.4)

(3.7)

(3.3)

(3.0)

(2.4)

Participations

0.0

0.0

(0.1)

0.0

0.0

0.0

Profit Before Tax

11.0

5.7

20.1

20.3

36.3

49.2

Reported tax

(2.7)

(1.4)

(5.7)

(5.8)

(10.3)

(13.8)

Profit After Tax

8.3

4.3

14.4

14.5

26.0

35.4

Net income (normalised)

12.6

11.7

20.6

24.2

29.6

39.0

Net income (reported)

8.3

4.3

14.4

14.5

26.0

35.4

Average number of shares (m)

13.5

14.8

14.8

15.1

15.1

15.1

Total number of shares (m)

14.9

14.9

14.9

15.1

15.1

15.1

EPS normalised before amortisation (€)

0.94

0.79

1.39

1.60

1.96

2.58

EPS reported (€)

0.62

0.29

0.97

0.96

1.72

2.34

DPS (€)

0.00

0.40

0.70

0.80

0.98

1.29

Revenue growth

-8.1%

-3.9%

17.0%

11.2%

5.0%

7.9%

Gross Margin

47.4%

48.4%

48.3%

48.3%

48.5%

48.6%

EBITDA Margin

10.6%

11.3%

12.0%

11.4%

12.7%

13.9%

Normalised Operating Margin

4.8%

4.8%

6.9%

6.9%

8.1%

9.6%

BALANCE SHEET

Fixed Assets

244.8

299.6

324.5

337.7

334.2

331.8

Intangible Assets

115.5

159.1

183.4

181.6

179.0

176.4

Tangible Assets

111.4

118.7

121.9

136.9

136.0

136.2

Investments & other

17.9

21.8

19.2

19.2

19.2

19.2

Current Assets

113.2

129.5

166.3

172.7

178.9

199.7

Stocks

56.3

61.7

79.7

88.1

91.9

98.6

Debtors

42.9

47.2

56.8

63.2

66.3

71.6

Other current assets

6.9

7.6

11.2

12.5

13.1

14.1

Cash & cash equivalents

7.1

13.0

18.6

9.0

7.6

15.5

Current Liabilities

73.8

87.9

97.6

107.1

111.8

119.7

Creditors

41.3

44.0

51.6

57.4

60.3

65.0

Other current liabilities

26.9

31.9

33.2

36.9

38.8

41.8

Short term borrowings

5.6

12.0

12.8

12.8

12.8

12.8

Long Term Liabilities

80.7

137.8

170.2

176.2

160.2

150.2

Long term borrowings

48.9

104.2

136.4

136.4

126.4

116.4

Other long term liabilities

31.8

33.6

33.8

39.8

33.8

33.8

Shareholders' equity

203.5

203.4

223.0

227.2

241.1

261.7

Balance sheet total

358.0

429.1

490.8

510.5

513.1

531.5

CASH FLOW

Op Cash Flow before WC and tax

36.1

40.6

54.6

57.2

62.7

81.1

Working capital

13.0

5.4

(17.4)

(6.5)

(2.9)

(5.1)

Tax

(6.1)

(1.3)

(6.2)

(5.8)

(10.3)

(13.8)

Net interest

(2.1)

(2.9)

(3.2)

(3.3)

(3.0)

(2.4)

Net operating cash flow

40.9

41.8

27.8

41.6

46.5

59.8

Capex

(20.0)

(16.0)

(30.0)

(40.8)

(25.9)

(27.1)

Acquisitions/disposals

0.1

(78.2)

(18.8)

0.0

0.0

0.0

Equity financing

23.3

0.0

0.0

0.0

0.0

0.0

Dividends

(8.1)

0.0

(4.3)

(10.4)

(12.1)

(14.8)

Other

(3.1)

(3.4)

4.0

0.0

0.0

0.0

Net Cash Flow

33.1

(55.8)

(21.3)

(9.6)

8.6

17.9

Opening net debt/(cash)

80.5

47.4

103.2

124.5

134.1

125.5

Closing net debt/(cash)

47.4

103.2

124.5

134.1

125.5

107.6

Source: Kendrion accounts, Edison Investment Research


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Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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

United Kingdom

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

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

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

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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