Short-term profits hit for future gain

STEMMER IMAGING 2 April 2019 Update
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STEMMER IMAGING

Short-term profits hit for future gain

Technology

Scale research report - Update

2 April 2019

Price

€25.6

Market cap

€166m

Share price graph

Share details

Code

S9I

Listing

Deutsche Börse Scale

Shares in issue

6.5m

Last reported net cash at end Dec 2018 (including €13.4m short-term securities and excluding €20.3m loan to associate)

€27.1m

Business description

STEMMER IMAGING Group (SI) is Europe‘s leading independent provider of machine vision technology solutions to science and industry, selling both directly and indirectly, via system integrators or OEMs.

Bull

Demand for machine vision solutions growing, driven by increased automation and IoT.

Broad supplier base combined with in-house development capability enables SI to offer precisely tailored solutions to customers.

Not dependent on individual industry sectors.

Bear

Business model difficult to implement in the US.

Meaningful proportion of market purchases directly from component suppliers.

Free float of 46%.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

The two acquisitions completed since the IPO in February 2018 contributed to a 7% year-on-year revenue growth during H119, even though the German machine vision market was flat. The recent acquisition of French competitor ELVITEC depressed gross margins, resulting in a 10% dip in adjusted EBITDA. However, management expects purchasing and other synergies to kick in during H219, improving margins and potentially delivering year-on-year profit growth.

H119 margins depressed by recent acquisitions

Revenues totalled €50.7m. €1.8m of the €3.3m increase was attributable to three months’ contribution from ELVITEC, the remainder primarily to organic growth in Sweden and Switzerland. Gross margin decreased by 3.0pp because the gross margins realised by recent acquisitions Data Vision and ELVITEC were lower than the group average, in part because of less favourable terms from suppliers. After adjusting for one-off transaction costs and the switch to IFRS, profit before tax fell very slightly (1%) to €3.7m.

Internationalisation supports market outperformance

The management board expects FY19 revenues of €108–114m and adjusted EBITDA of €10.0–12.2m (FY18: €11.1m). Incoming orders during H119 were 7% higher than H118 at €56.4m, supporting the revenue guidance. Management expects the integration of ELVITEC to complete fully by end FY19, resulting in synergy effects such as purchasing advantages and the removal of duplication. This should have a positive impact on the EBITDA margin in H219. Further out, management is confident of growth based on the need for machine vision systems to provide the imaging information required for fully automated industrial processes.

Valuation: High rating for strong revenue growth

The share price has halved since it peaked at €51.37 in September and is now lower than the IPO issue price of €34.00. At this level, the stock is trading on prospective EV/Sales, EV/EBITDA and P/E multiples that are close to the mean for our sample of value-added distributors. We see scope for a share price recovery if SI is able to deliver faster sales growth than its peers through its participation in the machine vision market or higher EBITDA margin. This could be realised by increasing the proportion of sales of proprietary software and services, and benefiting from economies of scale.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

06/17

88.3

5.8

0.67**

0.0

38.2

N/A

06/18

100.6

8.9*

1.18**

0.50

21.7

2.0

06/19e

113.3

10.7

1.23

0.25

20.8

1.0

06/20e

130.2

14.9

1.62

0.25

15.8

1.0

Source: Refinitiv. Note: *Adjusted for IPO and other non-recurring items. **On number of shares at listing. FY17 and FY18 HGB standard, FY19 and FY20 IFRS.

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.

Financials

H119 profit margins depressed by recent acquisitions

Revenues grew by 7.1% year-on-year to €50.7m. This was substantially faster than the German machine vision market, which the German Mechanical Engineering Industry Association (VDMA) estimates remained at calendar 2017 levels (which were a record) in calendar 2018. €1.8m of the €3.3m increase was attributable to three months’ contribution from ELVITEC, the remainder primarily to organic growth in Sweden and Switzerland. SI benefited from its broad customer base across numerous application areas, industries and geographies.

Gross margin decreased by 3.0pp to 33.7% because the gross margins realised by recent acquisitions Data Vision and ELVITEC were lower than the group average, in part because of less favourable terms from suppliers. After adjusting for €0.8m payments to ELVITEC as part of the transaction costs and a €0.4m charge reflecting the switch from the HGB to IFRS accounting standard, EBITDA decreased by €0.4m to €4.0m, with the dip attributable to the reduction in gross margin noted above. Adjusted EBITDA margin declined from 9.4% to 7.9%. Adjusted profit before tax benefited from €0.4m interest on the remaining funds from the IPO, which have been loaned on a short-term basis to majority shareholder Primepulse, resulting in only a very modest 1.2% fall year-on-year to €3.7m.

Exhibit 1: Comparison of H119 and H118 performance

H119

H118

Year-on-year change

Revenue (€m)

50.7

47.4

+7.1%

Gross margin

33.7%

36.7%

-3.0pp

Adjusted EBITDA (€m)

4.0

4.4

-10.2%

Adjusted EBITDA margin

7.9%

9.4%

-1.5pp

Reported EBITDA (€m)

2.8

4.4

-36.6%

Adjusted PBT (€m)

3.7

3.8

-1.2%

Reported PBT (€m)

2.5

3.8

-32.6%

Reported consolidated profit (€m)

1.8

2.6

-32.4%

Source: Company data. H119 IFRS standard, H118 HGB

Strong balance sheet

Operating cash flow was very slightly lower than the corresponding period the previous year (€3.8m vs €3.9m) as lower EBIT was offset by a substantially smaller increase in working capital. Trade receivables reduced by €1.5m, reflecting timing or deliveries at the respective period ends, together with tighter payment terms for customers. Trade payables rose by €3.9m, partly as a result of higher revenues, but also reflecting more favourable terms with suppliers as the group increases in scale. At €0.6m, capital expenditure was very slightly higher than H118, although as management follows an asset-light model, capital expenditure is typically modest. Net cash, including short-term securities held as a proxy for cash, decreased by €19.7m during the period to €27.1m at the end of December 2018. The decrease is primarily attributable to the €20.3m short-term loan to Primepulse discussed above, as well as €4.2m spent on acquisitions and €3.3m on dividend payments.

Outlook: Internationalisation supports market outperformance

The management board expects FY19 revenues of €108–114m (FY18: €100.6m) and adjusted EBITDA of €10.0–12.2m (FY18: €11.1m). The order book supports this view of revenue growth. Incoming orders during H119 were 7% higher than H118 at €56.4m. This positive trend has continued in calendar 2019. The increase is attributable to the group’s international reach and its ability to serve a wide range of industries. It contrasts with German machine vision industry as a whole, which the VDMA noted showed revenues stagnating and a disinclination to invest caused by economic and geopolitical concerns during calendar 2018. According to the VDMA, revenues from the German machine vision industry, which includes exports, reached a record €2.6bn in calendar 2017 as the automotive and electronic industries invested heavily in automation. With regards to EBITDA, management expects the integration of ELVITEC to complete fully by the end of FY19, resulting in synergy effects such as purchasing advantages and the removal of duplication, which should have a positive impact on EBITDA margin in the second half.

While growth in this sector in Germany stalled during calendar 2018, we believe this is temporary because the industrial landscape is shifting to a highly automated world where machines communicate with each other using imaging information as key decision-making data. This shift is not restricted to any one industry, but is being widely adopted as a way of achieving better quality control and higher efficiency rates.

Progress on execution of strategy

SI has an exemplary track record of identifying and integrating acquisitions (see our February 2018 initiation note). Management is using some of the €51m (gross) funds raised from the IPO to continue this strategy, selecting companies that will consolidate its position in existing geographies, expand its footprint or add complementary products, particularly software or other technology. In the short term, management expects most growth to come from acquisitions, as the group strengthens its competitive position in Europe and notes that it has sufficient funds to realise its acquisition plans. The funds raised at the IPO are also being used to develop the group’s technology offer, with a focus on enhancing its own Common Vision Blox imaging software and its ability to provide embedded machine vision solutions, and to integrate machine vision systems into IT systems and processes. SI’s scale gives it the ability to invest in differentiating technology, strengthening its competitive position and creating another virtuous circle.

Strengthening distribution network

In July 2018, SI announced that it had acquired the French distributor ELVITEC for €5.2m (including working capital adjustments but excluding payments of €2.0m in FY19 and FY20). ELVITEC was founded in 2002 and is an established provider of machine vision products and services to customers that include OEMs and system integrators. Management expects that the significant overlap between products offered by ELVITEC and SI will provide substantial purchasing synergies. In addition, it is likely that ELVITEC will be able to win business with much larger companies now that it is part of a bigger group, as happened with Iris Vision, which SI acquired in 2012.

New geographic market penetration

In August 2018, SI announced that it had signed a memorandum of understanding with the Chinese provider of machine vision technology, Nanjing Inovance, which is a subsidiary of the publicly traded Shenzhen Inovance Technology, a leading manufacturer of automation components in China. This takes SI into one of the most dynamically growing automation markets where demand is high, yet knowledge of how to implement image processing systems is relatively low. Both partners believe that the co-operation will generate significant revenues with above-average growth rates in China. In particular, SI expects high sales potential for its proprietary machine vision software, Common Vision Blox. China is the largest market for German machine vision exports.

Enhancing product portfolio

In October 2018, SI took a 42% stake in Austrian software provider Perception Park for €1.3m, thereby adding hyperspectral imaging software technology to its product portfolio. Perception Park’s software platform processes complex hyperspectral data at the molecular level, extracting highly precise colour co-ordinates, chemical material properties and layer thickness information. This information is used in machine vision applications for food-processing, mining, healthcare and recycling, all of which applications have high growth potential. The transaction was closed as of 1 February 2019. This is the first time the group has acquired a company that was not a pure distributor, highlighting management’s commitment to enhancing its technology portfolio.

Proposed move to Prime segment

STEMMER IMAGING listed on the Scale index of the Deutsche Börse on 27 February 2018. It plans to switch to Deutsche Börse's Prime Standard in May 2019.

Management changes

CEO Christof Zollitsch stepped down from this role at the end February 2019, although he remains available in an advisory capacity. His position has been taken by Arne Dehn, who joined the executive board at the beginning of January as part of an organised handover. Mr Dehn was previously a member of the executive board of the Amsterdam-listed TKH Group where he had held global business segment responsibility for vision & security activities since 2011.

Valuation

The share price has halved since it peaked at €51.37 on 3 September 2018 and is now lower than the IPO issue price of €34.00. While the DAX lost 14.2% of its value during the last six months of calendar 2018, it has regained some of this in the last three months. It is possible that SI’s underperformance with respect to the DAX is related to the temporary stalling of growth in the German machine vision industry, or alternatively to the short-term reduction in reported profit associated with the ELVITEC acquisition.

Following the share price decline, SI’s prospective EV/Sales, EV/EBITDA and year 2 P/E multiples are close to the mean for our sample of value-added distributors (eg SI’s year 2 P/E is 15.8x vs 15.3x mean). However, none of these peers is focused on the machine vision industry. While growth in this sector in Germany stalled during FY18, as noted above, we believe this is temporary. We believe that a premium to value-added distributors should become applicable if there is evidence that, through its participation in the machine vision market, SI can deliver stronger growth than its peers. We note that manufacturers of machine vision equipment such as Basler are trading on substantially higher multiples than the value-add distributors, which we attribute to the higher margins they deliver. A premium to the value-add would also be justified if SI was able to deliver a substantially higher EBITDA margin than its peers. We see potential for margin uplift as SI increases the proportion of sales of proprietary software and services and benefits from economies of scale. We note that the company achieved an adjusted EBITDA margin of 11.0% in FY18 before the ELVITEC acquisition and see no reason why it could not return or exceed this level in future.

Exhibit 2: Peer comparison

Company

Market cap (€m)

EV/Sales 1FY (x)

EV/Sales 2FY (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

P/E 1FY
(x)

P/E 2FY
(x)

EBITDA margin 2FY (%)

CAGR Sales

Manufacturers

Basler

502

2.9

2.6

15.3

12.7

32.3

25.3

20.3

14.1%

Cognex Corp

7,549

9.1

7.9

27.9

23.3

39.1

32.0

34.1

13.7%

Isra Vision

717

4.3

3.9

13.7

12.4

28.0

25.0

31.4

11.3%

Mean

5.4

4.8

18.9

16.1

33.1

27.4

28.6

13.0%

Value-add distributors

Addtech

1,202

1.5

1.4

13.3

12.5

17.1

15.9

11.0

11.2%

APC Technology Group

14

0.6

0.6

7.5

6.5

8.8

7.6

9.2

15.2%

Diploma

1,884

3.0

2.9

15.9

15.3

22.7

21.7

18.7

5.8%

discoverIE Group

335

0.8

0.8

9.9

9.1

14.7

13.5

8.5

5.9%

Electrocomponents

2,832

1.4

1.3

10.3

9.5

15.2

13.9

13.6

6.6%

Solid State

40

0.6

0.5

7.4

7.0

11.4

11.5

6.7

21.2%

Mean

1.3

1.2

10.7

10.0

16.2

15.3

11.3

11.0%

Stemmer Imaging

166

1.1

0.9

9.3

7.1

20.8

15.8

13.0

13.3%

Source: Refinitiv. Note: *Historic to year 3 except for Solid State, which is historic to year 2. Grey shading indicates exclusion from mean. Prices at 28 March 2019.

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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

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United States of America

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General disclaimer and copyright

This report has been prepared and issued by Edison. 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 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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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.

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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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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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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