Well on track

Blue Cap 14 September 2018 Update
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Blue Cap

Well on track

Financials

Scale research report - Update

14 September 2018

Price

€22.00

Market cap

€88m

Share price graph

Share details

Code

B7E

Listing

Deutsche Börse Scale

Shares in issue

4.0m

Net bank debt at June 2018

€27.6m

Business description

Blue Cap is a Munich-based industrial holding company, investing in medium-sized manufacturing companies with a turnover range of €10-100m.

Bull

Proven business model and management.

Strong finances set for boost from transformative transactions.

Economic downturn enhances buying opportunities.

Bear

Execution risk in resolving problems.

Valuation risk in identifying acquisitions.

Dependence on economic conditions, mitigated by diverse business and geographical mix.

Analyst

Richard Finch

+44 (0)20 3077 5700

Blue Cap continues to deliver with c 10% organic sales growth in H118 and confirmation that the recent, potentially transformative investment (Knauer) is well in hand. The shortfall in profit (EBIT down by 25%) was, as expected, rather a matter of timing as the impact of the disposal of a significant contributor to H117 (Biolink) was compounded by the initial inclusion of underperforming Knauer. Consensus forecasts for this year and next are therefore maintained, given renewed evidence of progress across the board, notably at key turnaround situations, Neschen and Knauer. Substantial increasing benefit is expected after joining forces with new major shareholder PartnerFonds (44%) as long as conducted by Blue Cap management. Internal disputes between PartnerFonds management and their shareholders should have no impact on independent Blue Cap.

H1: Good underlying progress

Blue Cap’s performance risks being distorted by corporate activity, ie the absence of Biolink, which contributed in full to the comparative and the advent of Knauer for two months. As their revenues were similar (€9m), they cancel each other out on adjustment, yielding a c 10% like-for-like increase. While Production Technology stole the show with a doubling of revenue, there was progress across the board with continued solid low single-digit percentage gains by main divisions, Coating and Adhesives. However, in terms of profit, the performances of Biolink and Knauer were contrasting; H117 was boosted by c €2.5m from Biolink, while H118 was depressed by c €0.7m loss by Knauer (understandable as bought for its turnaround potential). Adjustment shows a c 40% EBITDA rise by continuing businesses. The Knauer deal explains higher net debt (€28m vs €11m at end 2017).

Continued optimism

Management has reaffirmed 2018 guidance (higher sales but lower EBIT). Once the latter is adjusted for likely restructuring costs, consensus forecasts suggest a sharp rise in H2 profit. Further out, the purchase of Knauer should allow a step change in returns, given its size (c €70m sales pa) and Blue Cap’s success in turning round temporarily distressed businesses such as Biolink and Neschen.

Valuation: Long-term appeal

As well as current growth opportunities, the proposed PartnerFonds tie-up should bring scale and similar corporate targets. Blue Cap has a proven business model and strategy, highly experienced management and a visible record of success.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

Net profit
(€)

EPS
(€)

DPS
(€)

EV/EBITDA
(x)

12/16

96.6

6.8

1.2

0.3

0.00

18.9

12/17

141.8

11.2

39.9*

10.0

1.00

8.9

12/18e

181.0

12.7

4.9

1.2

0.75

9.0

12/19e

213.2

15.3

6.3

1.6

1.00

7.5

Source: Blue Cap accounts, consensus estimates. Note: *Includes €37m gain on Biolink sale.

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 H118 results

Exhibit 1: Analysis of revenue and profit

€m

H117

H217

FY17

H118

Guidance:
FY18 vs FY17

Revenue

Coating technology:

Neschen

30.1

29.2

59.3

30.6

Higher

Change

n/a

n/a

n/a

+2%

Biolink*

9.3

-

9.3

-

-

Total Coating technology

39.4

29.2

68.6

30.6

Lower

Adhesive technology

18.0

17.7

35.7

18.7

Higher

Change

-5%

Flat

-3%

+4%

Plastics technology (Knauer)**

-

-

-

9.6

Production technology

5.4

9.3

14.7

10.6

Higher

Change

-25%

-28%

-27%

+97%

Precious metals recycling

6.4

6.0

12.4

6.3

Higher

Change

n/a

-15%

n/a

-1%

Medical technology

5.2

5.0

10.2

5.5

Lower****

Total revenue

74.4

67.4

141.8

81.5

Change

+73%

+25%

+45%

+9%

EBITDA

Continuing

4.9

3.8

8.7

6.8

Margin

7.5%

5.6%

6.6%

9.4%

Biolink*

2.5

-

2.5

-

Knauer**

-

-

-

(0.7)***

Total EBITDA

7.4

3.8

11.2

6.1

Margin

9.9%

5.6%

7.9%

7.5%

EBIT

6.0

2.5

8.5

4.5

Source: Blue Cap accounts, management guidance, Edison Investment Research. Note: *Sold June 2017. **From May 2018. ***Excluding estimated €0.3m restructuring costs. ***WISAP sold September 2018.

As explained, the timing of significant transactions masks an otherwise positive performance in H118, hence management’s upbeat comment. Exhibit 1 shows the impact of the disposal of a highly profitable investment (Biolink) coinciding with that of initial consolidation of an underperforming activity (Knauer). The focus should therefore be on continuing businesses, where evident top-line gains have been converted disproportionately and impressively at the bottom line, ie indicative of a c 40% EBIT increase.

We highlight Neschen as the single largest Blue Cap investment before Knauer. Enhancements in H1 included expansion of the main plant to improve productivity, a focus on digital strategy and a revamp of Filmolux. Apart from a continued commitment to graphics, documents and industrial applications and synergy benefits with Coating Technology, Neschen has brought a new sales channel to Blue Cap through its international Filmolux subsidiaries. Efficiencies have been secured through elimination of substantial consulting expenses, the revision of insurance and energy contracts and leases, and organisational streamlining. While not disclosed, the apparently slight rise in revenues (2% in H1) may be assumed to have translated into marked profit improvement.

Production Technology, if smaller, was boosted by strong contributions from SMB-David and nokra, while Gämmerler benefited from the postponement of a major order from 2017 and continued reorganisation.

Precious Metals was the single revenue loser in the half, albeit marginally. This is attributed to the lower gold price, which is now being seen by management as a clear buying opportunity.

More of the same in H2

Guidance for 2018 remains positive, if vague, ie no quantification of sales growth. Nevertheless, management indications of divisional performances (see Exhibit 1) indicate good H2 trading momentum and order books, which should more than reverse the decline in H1 profit. This is despite the disposal of WISAP at the end of Q3.

Balance sheet and cash flow

The disposal of Biolink for €39m led to a significant y-o-y reduction in net debt at end 2017. A balance of €11.3m was historically low for Blue Cap and reinvestment, namely in Knauer, duly followed (€27.6m at June 2018). Further significant scope for spend is indicated by consensus forecasts, enhanced by WISAP proceeds. This explains management’s recent reversal of its longstanding policy not to pay a dividend, preferring to reinvest to fund expansion.

Valuation

Share price consolidation is understandable after the c 50% rise in the spring, Blue Cap appears attractively rated at c 9x 2018e EV/EBITDA. The company has a proven business model and strategy, highly experienced and stable management, and a visible record of financial success and prudence (eg borrowing and dividend policy). There is enthusiasm about the company’s latest deal of size (Knauer) and clear opportunity for more of the same. This is reinforced by new collaboration with PartnerFonds, which shares its ‘buy, hold & develop’ strategy, targeting medium-sized industrial companies in the DACH region.

NAV (fair value of the portfolio companies included in the businesses less net debt), published for the first time by Blue Cap, was €102m at December 2017. This is well ahead of the current market cap (c 15% premium) and of course excludes Knauer.

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