Seeking sustainable growth

paragon 27 November 2019 Update
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paragon

Seeking sustainable growth

Q319 results and
FY20 guidance

Automobiles & parts

27 November 2019

Price

€12.54

Market cap

€56m

Net debt (€m) at 30 September 2019

134.5

Shares in issue

4.5m

Free float

50%

Code

PGN

Primary exchange

Frankfurt (Xetra)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.0

9.5

(45.9)

Rel (local)

2.2

(3.6)

(53.6)

52-week high/low

€39.00

€9.62

Business description

paragon designs and supplies automotive electronics and solutions, selling directly to OEMs, including sensors, interior, digital assistance and body kinematics. Production facilities are in Germany, the US and China. It retains 60% of Voltabox, which supplies battery power systems.

Next events

FY19 results

March 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

paragon is a research client of Edison Investment Research Limited

While Q319 results confirm the anticipated issues in Electromobility (Voltabox), with a more robust performance from the automotive segments (Electronics and Mechanics), there are signs that management is addressing the shortcomings. Indeed, some more positive elements are evident at this early stage, notably the trade receivables reduction as planned. A more prudent view of growth with stronger profitability and positive cash flow is indicated by initial FY20 guidance. The challenge now is to rebuild confidence in the investment, with a focus on reducing costs, improving operational performance and executing to plan.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

124.8

5.9

(0.09)

0.25

N/A

2.0

12/18

187.4

14.8

1.45

0.25

8.6

2.0

12/19e

200.1

(5.3)

(0.43)

0.25

N/A

2.0

12/20e

233.4

9.5

1.39

0.25

9.0

2.0

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

Q3 trading

The Electronics and Mechanics segments continued to deliver robust Q319 revenue performance and an improved EBITDA. The Electromobility segment suffered the anticipated shortfall in sales and profits arising from the production delays caused by supply chain issues in the period and the deferral of a major new contract. Encouragingly, the situation has not deteriorated further. In addition, the cash performance appears to be in line with management’s plan, with the large trade receivable from Triathlon being settled as scheduled, and the major benefits of destocking yet to be realised progressively into FY20.

Expectations for profitable growth in FY20

The Q319 report also gave the first view of management expectations for FY20. Voltabox has adopted a more rigorous and prudent approach to its forecasting methodology aided by external consultants. We feel this is reflected in FY20 guidance commentary. With management cost reduction initiatives already in train, Voltabox is indicating revenues of €85–100m with EBITDA margins of 15% and an EBIT margin of 5–7%. Both margins are ahead of our estimates. For the group as a whole, management expects FY20 revenues of €225–240m, with EBITDA of €34–39m (EBITDA margin of 15–16%) and EBIT of €12–17m (EBIT margin of 5–7%). Again, our earnings estimates are below guidance, so if management can execute to plan there is upside potential.

Valuation: An encouraging start to rebuilding

The encouraging FY20 outlook and the stabilisation of cash flow in H219 provide initial encouragement. However, the test will come as FY20 progresses where delivery of the more rigorously developed plan is essential to allow the rating to recover, rebase and reset the growth path and deliver improving cash flows. The FY20 P/E of 9.0x on our below-guidance estimate appears undemanding.

Q319 results

The Automotive-facing businesses have not been the main support for the growth story, but both the Electronics and Mechanics segments provide a solid backbone in the face of a still challenging market backdrop. Both grew revenues in Q319, by 17% and 43%, respectively, meaning for the nine months to date Automotive sales were up 24% to €30.9m (FY18: €24.9m) with both segments contributing to the growth. The gross profit contribution in Q319 rose 18% to €16.4m (Q318: €13.9m), although gross margin fell 290bp to 53.0%. The combined Automotive Q319 EBITDA contribution improved 16% to €3.34m (Q318: €2.89m).

In stark contrast Electromobility (Voltabox) saw revenues drop by over 60% in Q319. The performance had already been foreshadowed by the change to guidance in August, with significant disruption to Voltabox production and deliveries in Europe arising from the battery cell supply issue and the US business falling victim to deferral of orders. Costs and resources had been built in anticipation of higher sales levels, and in Europe as production stoppages were required, there was overhead under recovery, which drove a €5.8m Q319 EBITDA loss (Q318: €3.3m profit). Although management has already initiated cost efficiency programmes, these had little effect in the period.

Overall Q319 group revenues fell 9% to €36.6m (Q318: €40.2m), generating an EBITDA loss of €2.9m (Q318: €6.1m). Again, management cost and efficiency initiatives across the segments should show progressive benefit through the remainder of the year and in FY20.

Exhibit 1: paragon Q319 analysis

Q318

Comprised of

Q319

Comprised of

% change

€m

paragon

Voltabox

Automotive

paragon

Voltabox

Automotive

paragon

Voltabox

Automotive

Revenues

- Sensors

8.1

8.1

8.1

8.1

-0.4%

-0.4%

- Interior

9.9

9.9

11.9

11.9

19.7%

19.7%

- Digital Assistance

0.0

0.0

1.2

1.2

Electronics

18.1

18.1

21.2

21.2

17.3%

17.3%

Mechanics

6.8

6.8

9.7

9.7

42.5%

42.5%

- Voltabox Germany

13.7

13.7

4.6

4.6

-66.5%

-66.5%

- Voltabox of Texas (US)

1.7

1.7

1.1

1.1

-31.0%

-31.0%

Electromobility

15.3

15.3

5.7

5.7

-62.7%

-62.7%

Total group revenues

40.2

15.3

24.9

36.6

5.7

30.9

-9.0%

-62.7%

24.2%

Gross profit

25.3

11.4

13.9

17.4

1.1

16.4

-31.1%

-90.5%

17.7%

Gross margin

63.0%

74.5%

55.9%

47.6%

18.9%

53.0%

-24.4%

-74.6%

-5.2%

EBITDA

6.1

3.3

2.9

(2.9)

(5.8)

3.0

-146.4%

-279.4%

3.3%

EBITDA margin

15.3%

21.2%

11.6%

-7.8%

-101.9%

9.6%

Electronics

1.7

1.7

(1.7)

(1.7)

Mechanics

(0.4)

(0.4)

0.8

(0.7)

Electromobility

2.2

2.2

(7.7)

(7.7)

Eliminations

(0.7)

(0.7)

(0.1)

1..5

EBIT

2.9

2.2

0.6

(8.7)

(7.7)

(1.0)

PBT

1.9

2.2

(0.3)

(10.2)

(7.9)

(2.3)

EPS (€)

0.07

(1.11)

FCF

(16.8)

(18.3)

1.5

(3.6)

(0.9)

(2.8)

Source: paragon reports

Probably the most encouraging factor was in cash performance, where the free cash outflow of €3.6m in Q319 was significantly improved versus both the prior year (outflow of €16.8m) and H119 despite continued inventory build. Voltabox’s c €45m trade receivable outstanding at Triathlon has started to be paid to schedule and was reflected in a significant fall in overall trade receivables during the quarter ending the period at €50.7m compared to €83.5m at H119. Most of the outstanding amount should flow back to the group in Q419 and inventory levels should start to reduce as manufactured stock items are deployed to amenable customers with good pricing.

Overall company defined net debt increased by €11.2m in Q319, as other available liquidity pools reduced by €8.6m. On our standard definition (gross debt less gross cash), net debt rose just €2.6m in Q319 compared to a €63.2m H119 increase, ending the period at €134.5m (H119: €132.0m).

Management guidance for FY19 remains unchanged (see our note published in October).

Exhibit 2: Liquidity analysis

€m

FY18

H119

Q319

paragon

Voltabox

Automotive

paragon

Voltabox

Automotive

paragon

Voltabox

Automotive

Gross cash

41.8

28.2

13.6

10.1

4.2

5.9

5.6

3.4

2.2

Gross debt

(110.6)

(3.7)

(106.9)

(142.0)

(18.7)

(123.3)

(140.1)

(18.9)

(121.2)

Net debt (Edison definition)

(68.8)

24.5

(93.3)

(132.0)

(14.6)

(117.4)

(134.5)

(15.5)

(119.0)

Other liquidity

7.1

0.0

7.1

21.4

14.4

7.0

12.8

7.5

5.3

Net debt (company defined)

(61.7)

24.5

(86.2)

(110.6)

(0.1)

(110.4)

(121.7)

(7.999)

(113.7)

 

 

 

 

 

 

Change (€m)

 

 

 

Gross cash

 

 

 

(31.8)

(24.0)

(7.7)

(4.5)

(0.8)

(3.7)

Net debt (Edison definition)

 

 

 

(63.2)

(39.1)

(24.1)

(2.6)

(0.9)

(1.6)

Other liquidity

 

 

 

14.3

14.4

(0.1)

(8.6)

(6.9)

(1.7)

Net debt (company defined)

 

 

 

(48.9)

(24.6)

(24.2)

(11.2)

(7.9)

(3.3)

Source: paragon reports

Guidance for FY20

The managements of both Voltabox and paragon have for the first time indicated expectations for FY20.

For Voltabox:

Revenues of between €85m and €100m – Edison estimate €91.3m.

EBITDA margin of 15% – Edison estimate 13.0%.

EBIT margin of 5–7% – Edison estimate 2.2%.

Free cash inflow between €0 and €10m.

Investment of €12.5m, of which c 70% should be own work capitalised (development costs).

For the group as a whole:

Revenues of between €225m and €240m – Edison estimate €233.4m.

EBITDA of €3439m – Edison estimate €31.9m. Guided EBITDA margin of 1516% – Edison estimate 13.7%.

EBIT of €1217m – Edison estimate €12.7m. Guided EBIT margin of 57% – Edison estimate 5.4%.

Free cash inflow between €0 and €10m.

Investment of €32.5m, of which c 60% should be own work capitalised (development costs).

While our revenue expectations appear aligned with the guidance, we feel our earnings estimates currently err on the cautious side. If indeed the new planning approach by management does prove to be more conservative, our estimates could prove to be unduly so.

Exhibit 3: Financial summary

€m

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

124.8

187.4

200.1

233.4

Cost of Sales

(72.4)

(96.7)

(116.1)

(116.7)

Gross Profit

52.5

90.7

84.1

116.7

EBITDA

 

 

18.3

30.3

13.6

31.9

Operating Profit (before amort. and except).

13.3

23.4

5.6

22.9

Intangible Amortisation

(3.0)

(4.3)

(5.0)

(6.2)

Exceptionals

(4.9)

(4.2)

(4.0)

(4.0)

Other

0.0

0.0

0.0

0.0

Operating Profit

5.4

14.8

(3.4)

12.7

Net Interest

(4.4)

(4.2)

(5.9)

(7.1)

Profit Before Tax (norm)

 

 

5.9

14.8

(5.3)

9.5

Profit Before Tax (FRS 3)

 

 

1.0

10.6

(9.3)

5.5

Tax

(5.0)

(7.2)

2.5

(1.5)

Profit After Tax (norm)

(0.4)

7.6

(3.9)

6.9

Profit After Tax (FRS 3)

(4.0)

3.4

(6.8)

4.0

Average Number of Shares Outstanding (m)

4.5

4.5

4.5

4.5

EPS - normalised (€)

 

 

(0.09)

1.45

(0.43)

1.39

EPS - normalised fully diluted (€)

 

 

(0.09)

1.45

(0.43)

1.39

EPS - (IFRS) (€)

 

 

(0.30)

0.52

(1.07)

0.76

Dividend per share (€)

0.25

0.25

0.25

0.25

Gross Margin (%)

42.0

48.4

42.0

50.0

EBITDA Margin (%)

14.7

16.2

6.8

13.7

Operating Margin (before GW and except.) (%)

10.7

12.5

2.8

9.8

BALANCE SHEET

Fixed Assets

 

 

104.1

172.9

196.0

216.9

Intangible Assets

67.4

122.1

131.2

138.9

Tangible Assets

36.4

50.5

64.5

77.7

Investments

0.3

0.3

0.3

0.3

Current Assets

 

 

203.8

189.4

181.7

186.6

Stocks

17.3

58.9

66.0

65.4

Debtors

32.7

70.7

70.1

72.4

Cash

145.8

41.8

21.8

21.8

Other

8.0

17.9

23.7

27.1

Current Liabilities

 

 

(46.4)

(84.4)

(39.6)

(42.8)

Creditors

(27.4)

(42.2)

(39.6)

(42.8)

Short term borrowings

(19.0)

(42.2)

0.0

0.0

Long Term Liabilities

 

 

(70.2)

(71.7)

(140.4)

(159.8)

Long term borrowings

(67.3)

(68.4)

(136.5)

(156.2)

Other long term liabilities

(2.8)

(3.3)

(4.0)

(3.6)

Net Assets

 

 

191.4

206.2

197.6

200.9

CASH FLOW

Operating Cash Flow

 

 

0.8

(42.0)

(0.2)

31.2

Net Interest

(4.4)

(4.2)

(5.9)

(7.1)

Tax

(6.3)

(7.2)

1.4

(2.6)

Capex

(21.8)

(48.8)

(40.1)

(40.1)

Acquisitions/disposals

(15.9)

(26.3)

0.0

0.0

Financing

143.2

1.5

0.0

0.0

Dividends

(1.1)

(1.1)

(1.1)

(1.1)

Net Cash Flow

94.4

(128.3)

(45.8)

(19.8)

Opening net debt/(cash)

 

 

34.9

(59.5)

68.8

114.6

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(59.5)

68.8

114.6

134.4

Source: Company reports, Edison Investment Research estimates


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This report has been commissioned by paragon and prepared and issued by Edison, in consideration of a fee payable by paragon. 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.

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This report has been commissioned by paragon and prepared and issued by Edison, in consideration of a fee payable by paragon. 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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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 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.

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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

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