paragon — A dip in the road ahead

paragon (FRA: PGN)

Last close As at 04/03/2024

EUR2.30

0.00 (0.00%)

Market capitalisation

EUR11m

More on this equity

Research: Industrials

paragon — A dip in the road ahead

paragon expects extended summer breaks and anticipated year-end shutdowns of customer plants to restrict growth in H223. We have reduced our earnings expectations to reflect the disposal of the battery business and resulting lower growth trajectory, with FY23 and FY24 EPS estimates falling by 9% and 11% respectively. However, the debt reduction continues and the ownership issues have been resolved. Further news on the plan for the Eurobond redemption has yet to be communicated, but should improve the equity outlook and investor sentiment.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

paragon

A dip in the road ahead

Q3 trading update

Automobiles and parts

25 October 2023

Price

€4.41

Market cap

€20m

Adjusted net debt at 30 September 2023
(excludes leases c €14m)

c €50m

Shares in issue

4.5m

Free float

50.7%

Code

PGN

Primary exchange

Frankfurt Xetra

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.7)

(19.5)

11.6

Rel (local)

0.7

(12.4)

(3.0)

52-week high/low

€6.38

€3.86

Business description

Based in Delbrück, Germany, paragon designs and supplies automotive electronics and solutions, selling directly to OEMs, including sensors, interior, and body kinematics. It has production facilities in Germany, Croatia and China.

Next events

Q323 result

13 November 2023

Analysts

Andy Chambers

+44 (0)20 3077 5700

Natalya Davies

+44 (0)20 3077 5700

paragon is a research client of Edison Investment Research Limited

paragon expects extended summer breaks and anticipated year-end shutdowns of customer plants to restrict growth in H223. We have reduced our earnings expectations to reflect the disposal of the battery business and resulting lower growth trajectory, with FY23 and FY24 EPS estimates falling by 9% and 11% respectively. However, the debt reduction continues and the ownership issues have been resolved. Further news on the plan for the Eurobond redemption has yet to be communicated, but should improve the equity outlook and investor sentiment.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/21**

135.4

(3.5)

(0.72)

0.0

N/A

N/A

12/22**

160.3

(7.9)

(1.15)

0.0

N/A

N/A

12/23e

164.7

1.1

0.38

0.0

11.6

N/A

12/24e

178.0

10.3

1.56

0.0

2.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing – restated for paragon semvox, discontinued in FY21/FY22.

H223 constrained by customer output adjustments

Sales for the ongoing activities rose 2.9% to around €122m in the first nine months of FY23. Q323 revenues fell c 6.4% due to extended summer plant shutdowns at some customers and the previously indicated ending of a sensor supply contract for a discontinued car model in Q223. Ongoing EBITDA for the year to date rose to €16.3m, including the gain on the Power asset disposal in Q323, which we estimate at around €5m. Debt reduction continued with adjusted net debt falling below €50m, a leverage ratio of around 2x. Management has adjusted FY23 revenue guidance to €160–170m from c €170m previously, and the EBITDA expectation is increased to €25–27m. Excluding the estimated gain on the asset disposal, the underlying level is within the previous guidance range of €20–25m.

Adjusting for the lower growth trajectory

As it has reduced debt, management has disposed of two potentially high-growth parts of its business. That increases the focus on the remaining automotive activities of the Electronics and Mechanics (body kinematics) segments, which have solid growth potential. The strategy is designed to drive above market growth through new product innovation and regional expansion, but the overall medium-term growth rates are lower without the sold businesses. We have adjusted our forecasts to exclude the batteries business from forecasts and we expect management to update its medium-term outlook following Q323 results in November.

Valuation: Bond redemptions remain key

The lower growth expectations reduce anticipated cash flow growth and thus, despite the debt reduction achieved to date, our DCF value falls to €18.5/share from €22.1/share previously. The low single-digit FY24e P/E multiple highlights the potential if the accelerated bond redemption plans are successfully implemented.

Earnings revisions

As a result of the slower automotive prospects in H223, we have reduced both our revenue and EBITDA estimates for the continuing operations and assumed lower future year revenues for the sensor subsegment in Electronics pending new product introductions. The result is a 6% decline in ongoing EBITDA in FY23 and an 11% decline in FY24. Our EPS estimates fall by 9% and 11%, respectively.

Exhibit 1: paragon earnings revisions

€m

2023e

2024e

 

Prior

New

% change

Prior

New

% change

Electronics

114.4

105.7

-7.5%

131.5

113.1

-14.0%

Mechanics

59.0

59.0

0.0%

63.7

64.9

1.9%

Total group revenue

173.3

164.7

-5.0%

195.2

178.0

-8.8%

Electronics

18.9

17.4

-7.5%

22.4

19.2

-14.0%

Mechanics

3.5

3.5

0.0%

5.1

5.2

1.9%

Group EBITDA (underlying)

22.4

21.0

-6.4%

27.5

24.4

-11.0%

Underlying PBT

1.7

1.1

-36.2%

11.5

10.3

-10.7%

EPS - underlying continuing (€)

0.41

0.38

-9.3%

1.76

1.56

-11.3%

DPS (€)

0.0

0.0

0.0

0.0

 

Net cash/(debt)

(58.9)

(42.2)

-28.4%

(57.1)

(35.9)

-37.0%

Source: Edison Investment Research estimates


Exhibit 2: Financial summary

€m

2020

2021

2022

2023e

2024e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

127.2

135.4

160.3

164.7

178.0

Cost of Sales

(69.2)

(72.1)

(94.2)

(93.9)

(99.7)

Gross Profit

58.0

63.4

66.1

70.8

78.3

EBITDA

 

 

13.8

15.1

11.6

21.0

24.4

Operating Profit (before amort. and except).

6.6

8.4

4.8

14.0

17.3

Intangible Amortisation

(6.0)

(6.0)

(5.0)

(3.6)

(3.7)

Exceptionals

(11.2)

(4.2)

(2.9)

3.4

(1.6)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

(10.6)

(1.8)

(3.1)

13.8

12.0

Net Interest

(6.5)

(5.9)

(7.7)

(9.4)

(3.4)

Profit Before Tax (norm)

 

 

(6.0)

(3.5)

(7.9)

1.1

10.3

Profit Before Tax (FRS 3)

 

 

(17.2)

(7.7)

(10.7)

4.5

8.7

Tax

9.6

0.5

2.1

(0.3)

(2.8)

Discontinued

(37.1)

(4.2)

5.3

7.0

0.0

Profit After Tax (norm)

3.6

(3.2)

(5.2)

1.7

7.1

Profit After Tax (FRS 3)

(44.7)

(11.4)

(3.4)

11.2

5.9

Average Number of Shares Outstanding (m)

4.5

4.5

4.5

4.5

4.5

EPS - normalised (€)

 

 

0.79

(0.72)

(1.15)

0.38

1.56

EPS - normalised fully diluted (€)

 

 

0.79

(0.72)

(1.15)

0.38

1.56

EPS - (IFRS) (€)

 

 

(9.87)

(2.52)

(0.74)

2.47

1.30

Dividend per share (€)

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

45.6

46.8

41.3

43.0

44.0

EBITDA Margin (%)

10.8

11.2

7.2

12.7

13.7

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

5.2

6.2

3.0

8.5

9.7

BALANCE SHEET

Fixed Assets

 

 

143.1

115.0

75.6

68.9

67.7

Intangible Assets

81.5

76.4

43.1

41.2

40.4

Tangible Assets

47.0

36.2

25.7

20.9

20.6

Right of use asset

13.1

1.8

5.1

5.1

5.1

Investments

1.5

0.6

1.6

1.6

1.6

Current Assets

 

 

57.4

44.7

97.0

52.4

55.0

Stocks

27.3

24.0

25.2

23.1

24.1

Debtors

11.6

10.9

7.7

7.9

8.3

Cash

5.7

1.5

18.1

6.1

6.1

Other

12.7

8.4

46.0

15.3

16.5

Current Liabilities

 

 

(90.6)

(125.5)

(99.6)

(43.1)

(45.0)

Creditors

(41.3)

(31.9)

(47.8)

(43.1)

(45.0)

Short term borrowings

(49.3)

(93.6)

(51.8)

0.0

0.0

Long Term Liabilities

 

 

(96.6)

(30.9)

(72.3)

(66.3)

(60.0)

Long term borrowings

(67.6)

(10.2)

(52.3)

(48.3)

(42.0)

Lease liabilities

(18.7)

(12.1)

(16.0)

(14.0)

(14.0)

Other long term liabilities

(10.4)

(8.6)

(4.0)

(4.0)

(4.0)

Net Assets

 

 

13.2

3.3

0.7

11.8

17.7

CASH FLOW

Operating Cash Flow

 

 

11.6

18.7

17.9

11.0

22.1

Net Interest

(6.5)

(5.9)

(7.7)

(9.4)

(3.4)

Tax

9.6

0.2

2.7

0.6

(3.2)

Capex

(7.7)

(15.0)

(7.7)

(5.4)

(9.3)

Acquisitions/disposals

0.0

8.4

0.0

0.0

0.0

Financing

1.9

4.7

8.4

47.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

8.9

11.1

13.6

43.8

6.3

Opening net debt/(cash)

 

 

117.4

111.2

102.3

86.0

42.2

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(2.7)

(2.2)

2.7

0.0

0.0

Closing net debt/(cash) (excluding leases)

111.2

102.3

86.0

42.2

35.9

Total financial liabilities

 

 

130.0

114.4

102.0

56.2

49.9

Source: Company reports, Edison Investment Research estimates


General disclaimer and copyright

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 £60,000 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.

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.

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 2023 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 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

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 £60,000 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.

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.

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 2023 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 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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