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Research: Industrials
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.
Written by
paragon |
A dip in the road ahead |
Q3 trading update |
Automobiles and parts |
25 October 2023 |
Share price performance
Business description
Next events
Analysts
paragon is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
Research: Healthcare
Paradigm reported favourable quantitative MRI data from the six-month analysis of the Phase II trial (PARA OA 008) evaluating a single six-week course of injectable pentosan polysulfate sodium (iPPS) treatment at 2mg/kg twice weekly in knee osteoarthritis (kOA) patients. This analysis provides more precise numerical measurements from the semi-quantitative analysis shared in April. In both studies treated patients exhibited increased cartilage thickness and volume in knee joints in patients, while the placebo group experienced reductions in both. The reversal of structural changes in the cartilage (structural changes in the knee joint are associated with the natural course of kOA) resulted in reduced bone marrow lesions and synovitis intensity as well as enhanced joint function. While the range of responses was not shared, and the number of treated patients is small (n=15), the recent data, coupled with the 12-month durable clinical responses disclosed last week, support iPPS as a potential disease-modifying treatment for kOA and address an unmet need. The company reiterated its plans to file a Provisional Approval application to the Australian regulatory authority and use the identified optimal dose of iPPS in the registration programmes.