Staying resolute

Diskus Werke 11 July 2019 Update
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Diskus Werke

Staying resolute

Mechanical engineering

Scale research report - Update

11 July 2019

Price

€16.80

Market cap

€163m

Share price graph

Share details

Code

DIS

Listing

Deutsche Börse Scale

Shares in issue

9.7m

Net debt at December 2018

€64m

Business description

Diskus Werke is an archetypal Mittelstand systems provider with extremely strong market positions in the sub-segments within which it operates. The company is organised around three business units: Machine Tools & Automation, Tools & Components, and Production.

Bull

Strong market position.

Few strategic threats.

Growth in contract manufacturing.

Bear

Very low free float.

Loss-making subsidiaries in 2018, albeit responding well to turnround.

Development of the automotive industry, notably e-mobility.

Analyst

Richard Finch

+44 (0)20 3077 5700

Diskus Werke has countered the disappointment of its September profit warning by clearly exceeding reduced PBT guidance for 2018 (€14.6m vs €14m) and securing a strong 9% rise in its year-end order book. This is impressive, given a slowing German machine tool market and procurement cost pressures. As in 2017, continued loss elimination at three problematic subsidiaries has been accompanied by volatility at some larger businesses. Current-year guidance is for 4% revenue growth at higher margin, driving a 10% increase in PBT to c €16m (€14.6m). Finances remain resilient (the debt/equity ratio is down slightly at 51%).

H218 outturn defies management caution

Lowered guidance post-H1 results, prompted by pronounced margin disappointment (down slightly in H1 in contrast to the sharp rise expected for the full year) and softening conditions, suggested that H2 revenue and margin would do well to hold steady. It was therefore creditable that revenue was up by 6% y-o-y at maintained margin, allowing 10% higher PBT. While half-year subsidiary and divisional performance is not disclosed, we assume that continued turnround at three longstanding loss-makers (combined loss before tax reduced to €0.5m from €2m in 2017) was accompanied by volatility at major contributors NAXOS (full year profit more than doubled) and DVS Production (full year profit down by two-thirds). We also assume the strongest growth has again come from Production and Tools & Components, if from a much smaller base than the main Machine Tools business.

Good for now

While the recent slowdown in the machine tool market (Q1 down 7% worldwide, per VDW) is troubling, an opening order book of €139m should ensure a good workload in 2019 (over 50% of 2018 sales) and supports guidance of a 4% rise in revenue to €275m. Expected margin gain (6.6% on total operating income vs 6.3%) may seem ambitious, especially after last year’s disappointment, but would be achieved simply by loss elimination. On this admitted ‘best case’ scenario, management forecasts 2019 PBT at c €16m.

Valuation: Fair

The vast bulk of the company’s equity is firmly held and likely to remain so. With a free float of 0.4%, Diskus Werke may not appeal to most institutional investors. Headwinds justify caution but their impact is expected more in 2020, by which time management is confident that the company should have been able to adjust.

Historical financials

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

199.2

14.0

0.78

0.21

21.5

1.2

12/16

218.4

11.4

0.52

0.20

32.3

1.1

12/17

246.9

16.2

0.75

0.25

22.4

1.4

12/18

264.0

17.2

0.89

0.25

18.9

1.4

Source: Diskus Werke 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 2018 results

2018 has calmed Diskus Werke’s recent volatile profit record. After sharp dips in EBIT in 2014 and 2016, a 6% improvement ensured another record outturn. A prime contributor was loss elimination at three subsidiaries, Pittler, Diskus Werke Schleiftechnik and DVS Production South, ie €0.5m vs c €2m in 2017, c €6m in 2016 and near breakeven in 2015.

Exhibit 1: Analysis of revenue and profit before tax

Source: Diskus Werke accounts

As detailed in Exhibit 2, second-half performance showed continued profit restoration against a relatively subdued H217 (EBIT up 9% y-o-y), if only unchanged on the preceding half. By contrast, revenue growth was ahead on both counts (by 6% and 4%, respectively).

Overall, the company appears thus to have performed on a par with the cutting and grinding segment of the German machine tool industry, ie production up 6% in 2018.

Exhibit 2: Financial performance

Year end December (€m), HGB

H117

H217

FY17

H118

H218

FY18

Revenue

Machine Tools

178

172

Change

+9%

-3%

Tools & Components

30

45

Change

+25%

+50%

Production

37

42

Change

+32%

+14%

Other

2

5

International

68%

58%

Total

120.5

126.4

246.9

129.5

134.5

264.0

Change

+19%

+8%

+13%

+7%

+6%

+7%

Other operating income

5.5

0.7

6.2

2.8

4.4

7.2

Total operating income

126.0

127.1

253.1

132.3

138.9

271.2

Other income

0.9

2.4

3.3

1.1

3.4

4.5

Material costs

(58.5)

(57.1)

(115.6)

(61.3)

(64.8)

(126.1)

Labour costs

(35.5)

(36.9)

(72.4)

(39.1)

(41.2)

(80.3)

Other operating costs

(19.5)

(22.7)

(42.2)

(19.3)

(23.0)

(42.3)

Depreciation

(5.1)

(5.0)

(10.1)

(5.0)

(4.8)

(9.8)

EBIT

8.3

7.9

16.2

8.6

8.6

17.2

Margin on total operating income

6.6%

6.2%

6.4%

6.5%

6.2%

6.3%

Associates

Neg.

0.3

0.3

Neg.

0.2

0.2

Net interest

(1.3)

(1.6)

(2.9)

(1.2)

(1.7)

(2.9)

Pre-tax profit

7.1

6.5

13.6

7.4

7.2

14.6

Net profit

4.1

3.1

7.2

4.9

3.7

8.6

Source: Diskus Werke accounts

Order intake in H2 effectively stalled at just 1% up y-o-y (€137.7m), which was in marked contrast to an especially healthy first half (up almost a quarter). This took the order book to €138.6m at the end of the period (€126.4m at December 2017 and €137.7m at June 2018). Costs were also a challenge, notably in procurement with intensifying pricing pressures and a tightening of delivery times. Indeed H2 saw raw material costs rise by 20% (just 2% in H1), even if bought-in services (less significant at €12m) enjoyed a slight reduction. In addition labour costs accelerated, up 12% yo-y vs up 8% in H1. The ratio of material and labour costs to total operating income was therefore up 4% and 2%, respectively.

2019

Management has hedged its guidance with admission that Q1 market slowdown suggests that it may be a ‘best case’ scenario. On the other hand, the company’s involvement in market niches with high barriers to entry promises resilience.

Guidance is for revenue and order intake of €275m (up 4%) and €280m (up 1%), respectively. Although this may seem cautious, given the size of the order book (c 50% of forecast sales) and the start of projects at DVS Production, we are mindful of conditions and also the lowering of original 2018 guidance. The targeted improvement in margin on total operating income (6.6% against 6.3%) is less ambitious than in 2018 (7.5%) and may be achieved simply through continued resolution of structural issues at problematic subsidiaries. Also, pricing pressures may lessen during the period. Investment will remain at a high level (c €10m capex as well as €4m on expansion projects, while the workforce is set to increase by over 5%, notably because of the business ramp-up at DVS Production. PBT of c €16m is expected.

Balance sheet and cash flow

Finances remain resilient with December 2018 net debt of €64m, down slightly on June 2018, if up on €52m at the start of the year. This represents a manageable equity ratio of 51%, which is almost unchanged on the year.


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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.

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.

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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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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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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

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