New business focus should benefit FY20

Daldrup & Söhne 11 June 2020 Update
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Daldrup & Söhne

New business focus should benefit FY20

Alternative energy

Scale research report - Update

11 June 2020

Price

€2.08

Market cap

€12m

Share price graph

Share details

Code

4DS

Listing

Deutsche Börse Scale

Shares in issue

6.0m

Last reported net debt at December 2019

€11.6m

Business description

Daldrup & Söhne is a provider of drilling and environmental services.

Bull

Emission reduction and renewable targets provide a positive macro environment.

Strengthened balance sheet.

Healthy order book.

Bear

Volatility in project sales.

Projects can be subject to delays.

Low margins currently.

Analyst

Graeme Moyse

+44 20 3077 5700

FY19 was a year of significant change for Daldrup & Söhne (D&S), marked by the disposal of Geysir Europe. With a strengthened balance sheet, a renewed focus on its drilling activities, a healthy order book and further improvements to internal control mechanisms targeted, the management board (and consensus forecasts) expect an improvement in profitability in FY20.

FY19 results hit by restructuring

Daldrup & Söhne recorded a total output figure for FY19 of €41.8m, +9.8% (sales of €24.8m), and a loss of €10.8m at EBIT level. The key feature of the year was the two-stage sale of Geysir Europe. The total output figure of €41.8m exceeded the original FY19 guidance for the year of €40m. The EBIT loss of €10.8m failed to meet the FY19 target of a balanced EBIT, although this forecast was originally made in May 2019, before the divestment of Geysir Europe’s business. D&S estimates an underlying EBIT loss for FY19 of c €1.3m, after accounting for one-off items of €9m in income and €18.5m in expenses. Thanks in large part to the disposal of Geysir, net debt reduced from €62.3m to €11.6m.

Improved performance anticipated in FY20

Daldrup & Söhne reports that the drilling and service business has hardly been directly affected by COVID-19, and that its supply and service chains continue to work on time. With a strengthened balance sheet following the disposal of its shares in Geysir, D&S will now focus on the drilling business, which has been profitable in recent years. Expanded funding and incentives for renewable heating provide a helpful backdrop and, with a strong market position, the company remains confident in its ability to generate profits. In view of the outlook, the management board is targeting a total output figure of around €40m for FY20 and a positive EBIT margin of between 2% and 4%.

Valuation: Margin a key to improving valuation

We base our valuation analysis on consensus forecasts for FY20 sales of €30.2m and EBIT of €1.1m. According to Refinitiv, at a share price of c €2, Daldrup & Söhne is trading on an EV/Sales ratio of 0.6x in FY20e (peer group median 1.6x), but due to low assumed margins, an EV/EBIT multiple of 18.0x in FY20e (peer group median 13.7x). A margin of c 5% (compared with management’s FY20 target of 2–4%) on predicted sales of €30.2m would produce an EBIT of c €1.5m and an EV/EBIT ratio of 13.2x, broadly in line with the peer group median.

Consensus estimates

Year
end

Sales
(€m)

EBIT
(€m)

Net income
(€m)

EPS
(€)

P/E
(x)

Yield
(%)

12/18

38.9

(16.3)

(18.5)

(2.9)

N/A

N/A

12/19

24.8

(10.8)

(12.3)

(2.1)

N/A

N/A

12/20e

30.2

1.1

2.0

0.2

10.4

N/A

Source: Refinitiv as at 4 June 2020, 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.

FY19 results: A year of significant change

Daldrup & Söhne recorded a total output figure for 2019 of €41.8m and a loss of €10.8m at EBIT level. The key feature of the year was the two-stage sale of Geysir Europe, including Geysir’s holdings in the geothermal power plants in Taufkirchen and Landau. The financial outcome for FY19 compared to original guidance for the year of an output figure in excess of €40m and a balanced result at the EBIT line.

The output figure (an aggregation of actual sales and work in progress) rose by 19.8% to €41.8m, helped by a significant rise in work in progress. The EBIT loss of €10.8m failed to meet the target of a balanced EBIT, although this forecast was originally made in May 2019, before the divestment of Geysir Europe’s business, and it is therefore not directly comparable. D&S estimates the underlying EBIT figure for FY19 to be a loss of c €1.3m after accounting for one-off items of €9m of income (including €7.2m from deconsolidated businesses) set against €18.5m of expenses (the majority, €18m, is accounted for by the revaluation/losses of receivables due to D&S from the companies of Geysir Europe).

Thanks in large part to the disposals, liabilities to banks reduced from €11m to €8.7m, while other liabilities, which should also be treated as debt, declined from €53.7m to €5.6m. Cash increased from €2.4m to €2.7m, with the overall effect of reducing net debt from €62.3m to €11.6m.

Exhibit 1: FY19 results vs FY18 – key highlights

€m

FY18

FY19

Change (%)

Sales

38.9

24.8

-36.2%

Increase in work in progress

-4.0

17.0

N/A

Output

34.9

41.8

+19.8%

EBITDA

(12.4)

(7.9)

+68.5%

Depreciation, amortisation and impairment

(3.9)

(2.9)

-25.6%

EBIT

(16.3)

(10.8)

-33.7%

EBIT margin (%)

N/A

N/A

N/A

Debt

(64.7)

(14.3)

Cash

2.4

2.7

+12.5%

Net debt

62.3

11.6

-81.4%

Cash flow

From operating activities

34.4

4.1

-88.9%

From investing activities

(31.1)

(0.5)

+98.4%

From financing activities

8.2

(3.1)

-137.8%

Source: Daldrup & Söhne

Post year-end developments

Most significantly, in January, D&S announced that it had completed the sale of Geysir Group (it now holds no shares in Geysir) with its geothermal power plants to IKAV. The total consideration for the two-stage sale (48.9% in July 2019 and 48.9% January 2020) was a relatively modest €6.2m, but the key to the transaction is that the disposal allows €42m of debt associated with the power plants to be deconsolidated from the balance sheet, and Geysir Group’s ongoing losses (€28.6m in 2010–18) will be eliminated as from 2020. As a result of the disposal, D&S expects to be less capital intensive going forward. However, D&S also took a hit to the value of capitalised services and receivables from the Geysir companies of €18m (out of a total of c €32m) in its FY19 results (see above). In the FY19 results, Geysir was treated as an equity investment.

In February, D&S completed its first exploratory well for Swiss Nagra, which it began drilling in April 2019. At the same time, D&S announced that it had already commenced the drilling of a second well for Nagra in Marthalen, with a project value of €5.3m. D&S’s work for Nagra is designed to help it find a suitable site for a deep geological repository for radioactive waste in Switzerland.

In March, D&S also received a €20m order from the Dutch company, Aardwarmte Combinatie Luttelgeest (ACL), for a geothermal heating plant in the Netherlands, involving the drilling of three geothermal boreholes (D&S subsequently announced in June that it had successfully completed drilling the first well). The project is expected to complete in spring 2021. In March, at the time of the original announcement, D&S revealed that its order backlog totalled €51m, c 1.7x estimated annual sales for FY20. The ACL order can therefore be seen as substantial, both in the context of predicted annual sales (66%) and the total order backlog (39%).

Also in March, in a sequence of management changes, Josef Daldrup resigned from his position as chairman of the management board and was appointed to the supervisory board in April (to be confirmed at the AGM scheduled for 27 August 2020). Andreas Tönies, who has been with D&S since 2005, was appointed spokesman of the management board in succession to Mr Daldrup.

In May, D&S received an order from Zweckverband Therme Obernsees to drill a thermal water well for supply to the thermal baths. The work is expected to take six months and is due to start in late summer 2020.

Exhibit 2: Post year-end developments

Date

Event

15/01/20

Sells Geysir Group with geothermal power plants to IKAV Group

03/03/20

Completes first exploratory well for Swiss Nagra

12/03/20

Receives €20m order from ACL based in the Netherlands for geothermal heating plant

19/03/20

Josef Daldrup resigns from the board

25/05/20

Receives order for thermal water drilling well

05/06/20

Successfully drills production well for ACL geothermal heating plant

Date

15/01/20

03/03/20

12/03/20

19/03/20

25/05/20

05/06/20

Event

Sells Geysir Group with geothermal power plants to IKAV Group

Completes first exploratory well for Swiss Nagra

Receives €20m order from ACL based in the Netherlands for geothermal heating plant

Josef Daldrup resigns from the board

Receives order for thermal water drilling well

Successfully drills production well for ACL geothermal heating plant

Source: Daldrup & Söhne

Strategy

During 2019, D&S’s executive board adopted a strategy of ‘realignment’, with a desire to focus on the drilling service business and medium-sized power projects (a greater number of projects with smaller minority positions). D&S continues to adhere to this strategy as the disposal of Geysir Group illustrates. We expect D&S will also continue with its efforts to expand and tighten management control mechanisms. Ultimately, the goal is to create a business that generates predicable cash flows.

COVID-19 and FY20 outlook

D&S reports that the drilling and service business has hardly been directly affected by the COVID-19 pandemic, and that its supply and service chains continue to work on time. The company points to the improved liquidity position following the disposal of Geysir Group, and is also of the opinion that its order backlog is sufficient and well diversified into 2020, offering the prospect of regular group sales. Following the disposal of its shares in Geysir, D&S will focus on the drilling business, which has been profitable in recent years. Expanded funding and incentives for renewable heating provide a helpful backdrop to the business and, with a strong market position, the company remains confident in its ability to generate profits. In view of the outlook, the D&S’s management board is targeting a total output figure of around €40m for FY20 and a positive EBIT margin of between 2% and 4%.

Valuation

Despite its assessment of improved prospects for 2020, following further declines, D&S’s share price now stands at c €2. For the purposes of assessing the valuation of the company, we use consensus estimates for FY20, ie sales of €30.2m and EBIT of €1.1m (EBIT margin of 3.7%). According to Refinitiv, at a share price of c €2, D&S is trading on an EV/Sales ratio of 0.6x in FY20e (peer group median 1.6x) but, due to low assumed margins (within management guided range), an EV/EBIT multiple of 18.0x in FY20e (peer group median 13.7x). By way of illustration, a margin of c 5% on the predicted sales of €30.2m would produce EBIT of c €1.5m and an EV/EBIT ratio of 13.2x, broadly in line with the peer group median.

Exhibit 3: Comparable valuation analysis

 

EV/Sales
2020e(x)

EV/Sales
2021e (x)

EV/EBIT
2020e (x)

EV/EBIT
2021e (x)

Daldrup &Söhne

4DS.DE

0.6

0.6

18.0

16.4

Awilco Drilling

AWDR.OL

-0.2

-0.1

0.2

0.1

SD Standard Drilling

SDSD.OL

1.4

1.3

4.8

3.8

Northern Drilling

NODL.OL

0.6

0.4

82.6

-3.7

Nabors Industries

NBR.BE

1.7

1.9

-12.3

-9.9

Transocean

RIG.BE

2.8

2.9

962.0

705.3

Odfjell Drilling

ODL.NO

1.5

1.5

14.9

10.8

7C Solarparken

HRPK.DE

9.6

8.6

32.5

26.7

Energiekontor

EKTG.DE

2.6

1.6

12.4

9.8

Good Energy

GOOD.LN

0.6

0.6

10.8

10.5

Ormat Technology

ORA.US

6.8

6.2

21.6

18.9

Median (excluding D&S)

 

1.6

1.5

13.7

6.8

Source: Refinitiv. Note: Prices as at 4 June 2020.


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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.

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 2020 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 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.

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

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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