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Last close As at 30/03/2023
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Research: Industrials
paragon’s Q222 results show an acceleration of revenue growth across the business and, while adjusted EBITDA was modestly lower, management has increased guidance. It now expects FY22 revenues of €170m while continuing to expect an EBITDA margin over 15%, with free cash flow (FCF) of €12m. While the equity value remains subordinate to financing bond redemption issues, we anticipate positive progress by the year end.
paragon |
Building momentum in Q222 |
H122 results |
Automobiles and parts |
30 August 2022 |
Share price performance
Business description
Next events
Analyst
paragon is a research client of Edison Investment Research Limited |
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paragon’s Q222 results show an acceleration of revenue growth across the business and, while adjusted EBITDA was modestly lower, management has increased guidance. It now expects FY22 revenues of €170m while continuing to expect an EBITDA margin over 15%, with free cash flow (FCF) of €12m. While the equity value remains subordinate to financing bond redemption issues, we anticipate positive progress by the year end.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/20** |
127.2 |
(6.0) |
0.79 |
0.00 |
6.1 |
N/A |
12/21** |
146.9 |
1.2 |
0.27 |
0.00 |
17.7 |
N/A |
12/22e |
170.8 |
2.9 |
0.47 |
0.00 |
10.2 |
N/A |
12/23e |
188.1 |
7.4 |
1.19 |
0.00 |
4.0 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated following the disposal of Voltabox, excluded from FY20 and FY21 as discontinued.
All businesses show revenue growth in H122
Despite lower global vehicle production, paragon continued to make positive progress with revenues growing 14% to €86.4m in H122 (H121: €75.7m). All four of the Electronics Division’s strategic business units (SBUs) and the Mechanics division, which is comprised of the Kinematics SBU, grew revenues in H122. With China recovering following the most recent lockdowns in H122, global market conditions may improve in H222 as paragon initiates production against several important new long-term contracts, which already underpinned paragon’s H222 revenues as well as the growth strategy. Absent the €3.1m of one-off charges seen in H122, the FY22 EBITDA margin progression to over 15% looks plausible as operational leverage improves.
Refinancing remains the key issue
The operational performance remains encouraging as management seeks to deliver against its FY26 targets for revenues of €250–300m with EBITDA margins of 20%. That should support progressive improvement in FCF. However, the clear immediate priority is to fund the bond repayments due over the next 12 months. The company has to address the refinancing of the outstanding CHF21.0m (€21.4m) maturity of the Swiss franc (CHF) bond due for redemption in 2023. Management expects to present information around possible solutions for the FY23 bond repayments to the market in the autumn.
Valuation: Equity rating dependent on refinancing
Assuming the bond issues can be resolved including the additional Eurobond early repayments, we would expect the equity valuation to start to reflect increased confidence in the execution of the growth strategy. If further debt reductions are subsequently achieved, we would expect the share price to trend towards potential cash valuations. Our capped DCF valuation has increased modestly to €19.8 per share (from €19.6), reflecting the better-than-expected progress so far in FY22.
H122 results
paragon’s automotive activities continued to perform strongly in H122, aided by the introduction of new products and the bias towards the premium end of the vehicle market. This was despite continued supply chain constraints in global car markets, exacerbated by the Russian invasion of Ukraine and some continued effect from pandemic lockdowns, which led to an overall decline in global car production in the first half of the year. All five SBUs grew revenues, contributing to the group increase of 14% to €86.4m, and while EBITDA was €3.3m lower this was largely due to €3.1m of non-recurring charges. Adding these back, the H122 EBITDA margin was 13.9%, which is aligned with management’s FY22 guidance.
Exhibit 1: paragon H122 results summary
€m |
H121 |
H122 |
% change |
Electronics |
54.5 |
59.6 |
9.3% |
Body Kinematics |
21.2 |
26.8 |
26.4% |
Revenues |
75.7 |
86.4 |
14.1% |
|
|
||
Gross Profit |
43.0 |
50.2 |
16.6% |
Gross margin |
56.8% |
58.1% |
2.2% |
|
|
||
Electronics |
9.1 |
8.6 |
-5.6% |
Body Kinematics |
2.0 |
0.3 |
-82.9% |
Eliminations |
0.2 |
0.0 |
|
EBITDA |
11.2 |
8.9 |
-20.7% |
EBITDA margin |
14.8% |
10.3% |
-30.5% |
|
|
||
EBIT |
2.7 |
1.2 |
-55.1% |
|
|
||
PBT reported |
(0.3) |
(1.8) |
554.7% |
PBT adjusted* |
1.7 |
3.3 |
91.0% |
EPS (€) – reported |
(0.12) |
(0.60) |
421.4% |
EPS (€) – adjusted* |
0.22 |
0.24 |
12.4% |
FCF |
(0.7) |
2.0 |
n.m. |
Adjusted net debt (excludes lease liabilities) |
(102.3) |
(91.1) |
-11.0% |
Lease liabilities |
(12.1) |
(12.6) |
4.5% |
Net financial liabilities (IFRS) |
(114.4) |
(103.7) |
-9.4% |
Source: paragon reports, *Edison Investment Research adjustments and estimates
The Electronics segment, which accounted for 69% of H122 group sales, grew revenues by 9.3% to €59.6m (FY21: €54.5m). In terms of the constituent SBU revenues, Sensors saw revenues grow by 4% primarily due to increasing demand for air quality sensors. Interior sales showed the strongest growth in the division, rising 14% due to strong demand for cockpit display instruments, while Digital Assistance grew 6.0%. The nascent Power SBU also developed positively.
The Mechanics division, which consists of the body Kinematics SBU, delivered the strongest revenue growth of 26.4% in H122 with revenues of €26.8m (H121: €21.2m). A relatively flat Q122 performance was followed by a strong improvement in Q222, where sales increased to €14.7m.
Exhibit 2: paragon H122 revenue development
€m |
Q121 |
Q221 |
H121 |
Q122 |
Q222 |
H122 |
Q1 vs Q1 |
Q2 vs Q2 |
H1 vs H1 |
– Sensors |
12.59 |
11.45 |
24.04 |
12.59 |
12.47 |
25.06 |
0.0% |
8.9% |
4.2% |
– Interior |
12.66 |
12.45 |
25.11 |
13.95 |
14.56 |
28.51 |
10.2% |
16.9% |
13.6% |
– Digital Assistance |
2.30 |
3.03 |
5.33 |
2.67 |
2.98 |
5.65 |
16.0% |
-1.6% |
6.0% |
– GB Power |
0.00 |
0.03 |
0.03 |
0.36 |
0.02 |
0.38 |
-25.0% |
1271.4% |
|
Electronics |
27.55 |
26.96 |
54.51 |
29.57 |
30.03 |
59.60 |
7.4% |
11.4% |
9.3% |
Mechanics |
11.66 |
9.53 |
21.19 |
12.11 |
14.68 |
26.79 |
3.9% |
54.1% |
26.4% |
Revenues |
39.21 |
36.49 |
75.69 |
41.68 |
44.71 |
86.39 |
6.3% |
22.5% |
14.1% |
Source: paragon reports
The divisional EBITDA contributions were both down on the prior year, although €3.1m of non-cash costs were charged across the two divisions, with Electronics contributing €8.6m (H121: €9.1m) and Mechanics €0.3m (FY21: €2.0m). The €3.1m of one-off non-cash charges is made up of book losses on the disposal of the Aachen site (€0.45m) and the former Voltabox production facility (€1.75m). The €0.9m balance was a non-cash exchange rate loss incurred on the CHF bond.
While the reported group H122 EBITDA margin fell to 10.3% compared to 14.8% in H121, adding back the one-off charges increases the H122 margin to 13.9%.
Adjusted net debt (excluding lease liabilities) fell by €10.2m to €91.1m, as the latest CHF8.75m (€8.6m) CHF bond partial repayment was completed in April, funded from a combination of improved operating cash flow, and asset disposals.
We expect management to discuss potential solutions to the funding of the 2023 bond repayments in the autumn. Alongside various alternative potential bonds, the possibility of a business disposal remains an option, but only at the right price.
Outlook
As we discussed in our recent note paragon appears well positioned to achieve its growth targets, with a very strong booked business backlog. As paragon is expected to increase its global market penetration and products are applicable across brands, models and fuel types, we expect it to continue to outperform the general market trend. In recent months, market forecasts for global vehicle production have continued to anticipate growth both for FY22 (following a weaker H122) and through FY23, although deteriorating macroeconomic conditions could dampen demand next year.
Earnings revisions
We have increased our revenue forecasts to reflect the latest guidance, with the improvement mainly coming from the Mechanics division.
We expect paragon to continue to grow group revenues by over 10% next year, with a further improvement in EBITDA margins.
Exhibit 3: paragon earnings revisions
Year to December (€m) |
2022e |
2023e |
||||
|
Prior |
New |
% change |
Prior |
New |
% change |
Electronics |
121.7 |
120.6 |
-0.9% |
135.1 |
133.9 |
-0.9% |
Mechanics |
44.2 |
50.2 |
13.6% |
47.7 |
54.2 |
13.6% |
Total group revenues |
165.9 |
170.8 |
3.0% |
182.8 |
188.1 |
2.9% |
|
|
|
|
|
|
|
Electronics |
21.9 |
21.7 |
-0.9% |
25.7 |
25.4 |
-0.9% |
Mechanics |
3.1 |
4.0 |
29.9% |
4.8 |
5.4 |
13.6% |
HQ Other and intersegment |
0.2 |
0.2 |
0.0% |
0.2 |
0.2 |
0.0% |
EBITDA (company reported) |
25.2 |
25.9 |
2.9% |
30.6 |
31.0 |
1.4% |
|
|
|
|
|
|
|
Underlying PBT |
2.3 |
2.9 |
26.8% |
6.9 |
7.4 |
7.2% |
|
|
|
|
|
|
|
EPS – underlying continuing (€) |
0.4 |
0.5 |
26.8% |
1.1 |
1.2 |
7.2% |
DPS (€) |
0.0 |
0.0 |
|
0.0 |
0.0 |
|
Net cash/(debt), excluding leases |
(91.9) |
(89.0) |
-3.1% |
(89.9) |
(83.8) |
-6.8% |
Source: Edison Investment Research estimates
Exhibit 4: Financial summary
€m |
2020 |
2021 |
2022e |
2023e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
127.2 |
146.9 |
170.8 |
188.1 |
Cost of Sales |
(69.2) |
(72.6) |
(80.3) |
(86.5) |
||
Gross Profit |
58.0 |
74.4 |
90.5 |
101.6 |
||
EBITDA |
|
|
13.8 |
20.0 |
25.9 |
31.0 |
Operating Profit (before amort. and except). |
6.6 |
13.3 |
17.1 |
21.9 |
||
Intangible Amortisation |
(6.0) |
(6.0) |
(6.4) |
(7.5) |
||
Exceptionals |
(11.2) |
(6.5) |
(7.1) |
(4.0) |
||
Other |
(37.1) |
(5.9) |
0.0 |
0.0 |
||
Operating Profit |
(47.7) |
(5.1) |
3.6 |
10.4 |
||
Net Interest |
(6.5) |
(6.1) |
(7.8) |
(7.0) |
||
Profit Before Tax (norm) |
|
|
(6.0) |
1.2 |
2.9 |
7.4 |
Profit Before Tax (FRS 3) |
|
|
(54.2) |
(11.3) |
(4.2) |
3.4 |
Tax |
9.6 |
(0.2) |
1.1 |
(0.9) |
||
Profit After Tax (norm) |
3.6 |
1.2 |
2.1 |
5.4 |
||
Profit After Tax (FRS 3) |
(44.7) |
(11.4) |
(3.1) |
2.4 |
||
Average Number of Shares Outstanding (m) |
4.5 |
4.5 |
4.5 |
4.5 |
||
EPS - normalised (€) |
|
|
0.79 |
0.27 |
0.47 |
1.19 |
EPS - normalised fully diluted (€) |
|
|
0.79 |
0.27 |
0.47 |
1.19 |
EPS - (IFRS) (€) |
|
|
(9.87) |
(2.52) |
(0.68) |
0.54 |
Dividend per share (€) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Gross Margin (%) |
45.6 |
50.6 |
53.0 |
54.0 |
||
EBITDA Margin (%) |
10.8 |
13.6 |
15.2 |
16.5 |
||
Operating Margin (before GW and except.) (%) |
5.2 |
9.1 |
10.0 |
11.6 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
143.1 |
115.0 |
104.9 |
104.1 |
Intangible Assets |
81.5 |
76.4 |
78.9 |
80.8 |
||
Tangible Assets |
47.0 |
36.2 |
23.6 |
21.0 |
||
Right of use asset |
13.1 |
1.8 |
1.8 |
1.8 |
||
Investments |
1.5 |
0.6 |
0.6 |
0.6 |
||
Current Assets |
|
|
57.4 |
44.7 |
47.2 |
48.3 |
Stocks |
27.3 |
24.0 |
25.6 |
26.8 |
||
Debtors |
11.6 |
10.9 |
11.1 |
11.1 |
||
Cash |
5.7 |
1.5 |
1.5 |
1.5 |
||
Other |
12.7 |
8.4 |
9.0 |
8.9 |
||
Current Liabilities |
|
|
(90.6) |
(125.5) |
(37.5) |
(40.7) |
Creditors |
(41.3) |
(31.9) |
(37.5) |
(40.7) |
||
Short term borrowings |
(49.3) |
(93.6) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(96.6) |
(30.9) |
(111.2) |
(106.0) |
Long term borrowings |
(67.6) |
(10.2) |
(90.5) |
(85.3) |
||
Lease liabilities |
(18.7) |
(12.1) |
(12.1) |
(12.1) |
||
Other long-term liabilities |
(10.4) |
(8.6) |
(8.6) |
(8.6) |
||
Net Assets |
|
|
13.2 |
3.3 |
3.3 |
5.8 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
11.6 |
19.8 |
29.0 |
32.2 |
Net Interest |
(6.5) |
(6.1) |
(7.8) |
(7.0) |
||
Tax |
9.6 |
0.0 |
(0.8) |
(2.0) |
||
Capex |
(7.7) |
(17.5) |
(17.1) |
(17.9) |
||
Acquisitions/disposals |
0.0 |
8.4 |
0.0 |
0.0 |
||
Financing |
1.9 |
6.5 |
10.0 |
0.0 |
||
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
8.9 |
11.1 |
13.3 |
5.2 |
||
Opening net debt/(cash) |
|
|
117.4 |
111.2 |
102.3 |
89.0 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
(2.7) |
(2.2) |
0.0 |
0.0 |
||
Closing net debt/(cash) (excluding leases) |
111.2 |
102.3 |
89.0 |
83.8 |
||
Total financial liabilities |
|
|
130.0 |
114.4 |
101.1 |
95.9 |
Source: company accounts, Edison Investment Research
|
|
Research: Real Estate
Custodian REIT’s (CREI’s) Q123 report showed continuing strong performance, with like-for-like rental and capital value growth supporting a three-month total return of 3.2%. Capital growth has been strong in the past year, but it is CREI’s income-driven approach that has driven its consistent record of attractive returns. It is optimistic that this will continue, while any weakness in capital values may present opportunities for further income and dividend accretive growth.
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