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Research: Industrials
paragon has announced that it is to sell its digital assistance business unit, paragon semvox, to CARIAD, the wholly owned software subsidiary of Volkswagen. The anticipated price is c €40m, which equates to approximately 33% of paragon’s enterprise value. The disposal seems likely to provide sufficient liquidity to satisfy paragon’s bond redemptions for FY23, which should finally release the shackles on the rating. The final timing of regulatory approvals, and any additional accelerated redemptions from the recently extended eurobond, remain important. However, as financial risk is retired, attention should start to focus on paragon’s automotive growth plans.
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paragon |
Agreement to sell paragon semvox
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Automotive components |
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2 December 2022 |
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paragon has announced that it is to sell its digital assistance business unit, paragon semvox, to CARIAD, the wholly owned software subsidiary of Volkswagen. The anticipated price is c €40m, which equates to approximately 33% of paragon’s enterprise value. The disposal seems likely to provide sufficient liquidity to satisfy paragon’s bond redemptions for FY23, which should finally release the shackles on the rating. The final timing of regulatory approvals, and any additional accelerated redemptions from the recently extended eurobond, remain important. However, as financial risk is retired, attention should start to focus on paragon’s automotive growth plans.
Disposal of semvox should crystallise value
Although subject to possible completion adjustments, a debt free price of €40m for semvox looks attractive. Sales of €12m in the last 12 months represent less than 8% of group revenues, although given its relatively early stage of business development, semvox clearly has future growth potential. Together with its artificial intelligence technology capability that growth is clearly of interest and value to CARIAD, which has been developing its own digital assistance business. Completion should occur in spring 2023 once all regulatory hurdles are cleared.
Help to alleviate bond redemption pressures
The €40m of sales proceeds should be more than sufficient to cover the redemption of the outstanding Swiss franc bonds due in April 2023 (CHF21m), as well as the €5m accelerated partial redemption payment due next year for the €50m eurobond (its maturity was extended to FY27 earlier this year). Increasingly positive cash flow should then improve in future years as the business growth plan is executed, further reducing the debt burden to more appropriate operational levels.
Current year trading has developed positively
The Q322 operational performance remained encouraging allowing management to improve FY22 revenue guidance to c €170m, with EBITDA margins above 15%, implying FY22 EBITDA of c €26m and free cash flow (FCF) of c €12m. The growth also means the group is tracking towards management’s FY26 targets for revenues of €250–300m with EBITDA margins of 20%, which should support progressive improvement in FCF. While no current consensus is available management’s guidance implies undemanding earnings metrics from next year and a substantial discount to cash flow valuations.
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Historical financials
Source: paragon. Note: PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. *Restated following Voltabox sale. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: Investment Companies
Henderson International Income Trust (HINT) has succeeded in achieving its dual objectives of capital gains and a high and growing dividend. Annualised NAV total return (TR) of 9.4% over the 10 years to end November 2022 is complemented by an average, inflation-beating rate of 5% per year since inception, representing a 4.2% dividend yield. HINT’s focus on income and geographic diversification (see Edison’s January 2022 report for details) and value means that performance has lagged the benchmark 10-year annualised TR of 10.9%. The market weakness of the past 12 months allowed the manager, Ben Lofthouse, to invest in what he perceives as well managed, resilient businesses at more attractive valuation levels. He is hopeful that these prudent investments will result in strong capital growth and healthy dividends, supporting HINT’s solid TR.