Missing a gear

Delignit 11 September 2019 Update
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Delignit

Missing a gear

Materials

Scale research report - Update

11 September 2019

Price

€4.51

Market cap

€37m

Share price graph

Share details

Code

DLX

Listing

Deutsche Börse Scale

Shares in issue

8.2m

Last reported net debt at June 2019

€10.5m

Business description

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

Bull

Solid order intake in LCV segment.

Increased and enhanced applications for existing products.

Rapid take-up of the products in global markets.

Bear

High dependence on large OEM contracts.

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

Valuations already factor in growth prospects, creating downside risk.

Analyst

Richard Finch

+44 (0)20 3077 5700

After further positive guidance in April, Delignit’s H119 earnings shortfall (EBITDA down 16%) and full-year profit warning are all the more disappointing. In mitigation, the company has arguably been a victim of its own successful Automotive OEM business in ramping up for special call-offs that may yet materialise, while incurring higher costs than planned for a still potentially transformative motor caravan order. Management now expects 2019 revenue of €64m (ahead of last year but below the original forecast of €70m) and an EBITDA margin between 6% and 7% (originally 9.3%, as in 2018). Its confidence in Delignit’s strategic direction and long-term prospects appears to remain undimmed.

H119 cools off after a ‘flying start’

H119 was notable both for initially ‘very pronounced’ growth in light commercial vehicles (LCV) largely from special call-offs from OEM customers and a new serial supply order for motor caravan equipment. Subsequent delays aside, this drove a 20% rise in revenue by Automotive, the principal division, which all but matches 2018’s impressive rate of growth. Indeed overall H119 revenue was up 10% despite a further softening by Technological Applications (down 21%), particularly in railway solutions. In terms of profit, the outturn was less positive (EBITDA and EBIT down 16% and 36% respectively) mainly owing to a ‘high six-figure loss’ by the start-up caravan order (excluding this, the EBITDA margin was c 9% vs 9.9% y-o-y) and capacity adjustments for anticipated special call-offs.

Reduced full-year expectations

The guidance for 2019 has been revised, as described, in the light of persistent company pressures, as in H1, and more cautious market forecasts. EBITDA is now expected to be €3.8–4.5m (based on 6% to 7% margin forecast), compared with previous guidance of c €6.5m. This equates to an H2 EBITDA setback of between a quarter and a half. Encouragingly, management confirms medium- and long-term prospects are positive. Its longstanding ‘vision’ is for €100m+ revenue at 10%+ EBITDA margin by 2022, driven by successful business model transition.

Valuation: Recovery factored in

Even after c 25% price decline post-profit warning, revised guidance for 2019 gives EV/EBITDA of 9.8x to 11.6x, which is a marked premium to peer groups (average c 6x), thereby suggesting a discounting of assumed strong long-term prospects.

Historical financials

Year
end

Revenue
(€m)

EBITDA

(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

EV/EBITDA (x)

12/15

44.4

3.5

1.7

0.14

0.03

11.3

12/16

48.6

3.7

2.1

0.18

0.03

11.2

12/17

52.7

4.9

2.9

0.24

0.05

8.4

12/18

60.8

5.6

3.8

0.31

0.05

8.0

Source: Delignit accounts

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

Review of H119 results

Exhibit 1: Analysis of half-yearly revenue and profit

Year-end December (€m)

H118

H218

FY18

H119

H219 F/C

FY19 F/C

REVENUE

29.4

30.9

60.3

32.3

31.7

64.0

Change (%)

+8%

+21%

+14%

+10%

+3%

+6%

Automotive

46.7

Change

+15%

+33%

+24%

+20%

Technological Applications

13.6

Change

-10%

-8%

-9%

-21%

Germany

16.6

17.3

33.9

Change

Flat

+4%

+2%

Exports

12.8

13.6

26.4

Change

+22%

+53%

+36%

Other income

(0.3)

0.8

0.5

2.5

Total income

29.1

31.7

60.8

34.8

Material costs

(15.2)

(18.7)

(33.9)

(21.1)

Labour costs

(8.6)

(7.7)

(16.3)

(8.4)

Other operating costs

(2.4)

(2.6)

(5.0)

(2.8)

EBITDA

2.9

2.7

5.6

2.4

1.4–2.1

3.8–4.5

Margin (on total income)

9.9%

8.7%

9.3%

6.9%

4.4–6.6%

6.0–7.0%

Depreciation

(0.8)

(0.8)

(1.6)

(1.1)

EBIT

2.1

1.9

4.0

1.3

Net interest

(0.1)

(0.1)

(0.2)

(0.1)

Pre-tax profit

2.0

1.8

3.8

1.2

Taxation

(0.6)

(0.6)

(1.2)

(0.4)

Net income

1.4

1.2

2.6

0.8

Source: Delignit accounts, company guidance

The first half of 2019 saw Delignit maintain double-digit percentage top-line growth, somewhat less than originally expected because of a late absence of LCV call-offs and a delayed start to the motor caravan equipment contract. Automotive, the main activity, was again the spur with 20% higher revenue (quantity is not disclosed at the half-year) thanks to continued strong demand from OEM customers and an initial contribution from the caravan order, thereby confirming Delignit’s ability to move into new markets. By contrast, the passenger car business was predictably lower, exacerbated by disruption from the introduction of the new vehicle emissions test standard (WLTP) to new registrations. Aside from favourable conditions (H119 European LCV market up 4% and in Germany by a striking 12%), this buoyancy is credited by management to record investment (€6m over 2017–2018) paying off in terms of customised system solutions and expanded product applications. It was also more of the same for Technological Applications, with a further steep decline in revenue (21%) owing to headwinds across the board, notably in railway solutions.

Delignit’s profit performance in the period was less benign with EBITDA and EBIT down by 16% and 36% respectively. The principal factor in this decline was a loss from the caravan business as short-notice order changes added to start-up costs. The loss is disclosed as ‘high-six figure’ or 2.1 points of the three-point year-on-year fall in EBITDA margin (6.9% vs 9.9%). Otherwise the shortfall reflected costs from temporary extra capacity for special call-offs and a new ERP system as well as reduced higher-margin revenue from Technological Applications. Indeed, material costs (see Exhibit 1) increased by almost 40% (61% of total income vs 52%).

By contrast, labour costs were almost unchanged (down 2%), flattered by the absence of stock option provisions in the comparative, whereas other operating costs held steady in terms of ratio to total income.

Depreciation rose by a third, partly because of IFRS 16 adoption.

H219 caution

Revised guidance is for only 3% higher revenue in the second half. Although this partly reflects uncertainty about the caravan order, the outlook for Automotive is seen by management as ‘conservative’ despite stable markets with strong OEM business for Delignit. Seasonality (holiday shutdowns by customers), the impact of WLTP on car registrations and cautious market forecasts are contributory factors. In addition, the expected pickup in Technological Applications is delayed.

With costs also an issue in H2, forecast full-year EBITDA margin is now between 6% and 7% against the April 2019 expectation of c 9.3%.

Balance sheet and cash flow

Investment in plant capacity and inventories (special call-offs and the caravan order) led to a 35% increase in net debt (€10.5m) from December 2018’s €7.8m (y-o-y €4.4m). The equity ratio was down from 49% at December 2018 to 43%.

Valuation

Peer valuation

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

We have conducted a comparative analysis based on management’s revenue and EBITDA margin guidance for 2019 (Exhibit 2). Despite a pronounced share price correction after the recent profit warning, Delignit trades at a considerable premium (56% to 84%) to the blended peer group on prospective EV/EBITDA, ie 9.8x to 11.6x on forecast €3.8m to €4.5m EBITDA (see Exhibit 1) against a rating of 6.3x for the peers. This suggests investor confidence in management’s ‘vision’ of more than €100m revenue in 2022 at double-digit margin owing to scale benefits. For indicative purposes, this may imply EBITDA of at least €10m, ie 10% margin on €100m+ revenue, more than double the expected outturn this year.

Exhibit 2: Peer group comparison

Market cap

EV/EBITDA (x)

(€m)

2019e

Wood processing companies

Pfleiderer

320

5.5

Surteco

358

6.7

Ober

12

12.9

Automotive suppliers

Grammer

433

3.7

Progress Werk

81

4.8

SHW

125

5.5

Delfingen

45

4.8

Peer group average

6.3

Delignit

37

9.8–11.6

Premium to peer group

5684%

Source: Company accounts, Refinitiv, company guidance. Note: Prices as of 4 September 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.

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.

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

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

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

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

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280 High Holborn

London, WC1V 7EE

United Kingdom

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1,185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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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.

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 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.

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

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

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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