DATRON — Building on success

Datron (DB: DAR)

Currency in

Last close As at 30/01/2023

0.30 (2.61%)

Market capitalisation

48m

Research: Industrials

DATRON — Building on success

Confirmation of a “very successful” start to 2018 is reassuring, given a softening in H217 after marked progress in the preceding half. Albeit from a low base and not strictly comparable, EBIT in Q118 more than trebled, thereby underpinning management guidance of a full-year outturn once again up by a third, after adjusting for 2017 exceptionals. Prospects are also positive for next year as consensus forecasts of a further 10% rise in revenue on a tight cost base drive trading margin to 10%, which management regards as a “realistic target” (9% 2018e and only back to pre-crisis level). Despite investment (8% of 2017 sales) finances are robust.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Industrials

DATRON

Building on success

Engineering

Scale research report - Update

29 June 2018

Price

€12.85

Market cap

€51m

Share price graph

Share details

Code

DAR

Listing

Deutsche Börse Scale

Shares in issue

4.0m

Net cash at December 2017

€7.1m

Business description

DATRON is a long-established provider of innovative CNC milling machines, dental milling machines, dosing machines and milling tools.

Bull

Strong growth in recurrent income (after sales and tools) with medium-term target 45% of revenue. Enhances client retention.

High-speed milling demand still growing.

Technologically advanced and innovative.

Bear

Small size relative to global market.

Sales of dental HSM machines far below peak.

Lack of market data creates risk of surprises.

Analyst

Richard Finch

+44 (0)20 3077 5700

Confirmation of a “very successful” start to 2018 is reassuring, given a softening in H217 after marked progress in the preceding half. Albeit from a low base and not strictly comparable, EBIT in Q118 more than trebled, thereby underpinning management guidance of a full-year outturn once again up by a third, after adjusting for 2017 exceptionals. Prospects are also positive for next year as consensus forecasts of a further 10% rise in revenue on a tight cost base drive trading margin to 10%, which management regards as a “realistic target” (9% 2018e and only back to pre-crisis level). Despite investment (8% of 2017 sales) finances are robust.

Strong growth resumes

Full-year 2017 saw initial group figures, so there are no available comparatives for the previous period or the quarterly level. However, the dominance of parent company DATRON AG in the group allows its performance to be taken as a good proxy. Q118 saw a double-digit percentage rise in revenue, which, given overhead recovery, led to EBIT up from €0.2m (DATRON AG) to €0.7m (group). Order intake (slightly ahead y-o-y) was also positive. Such buoyancy fuels continued expansion, notably €2m investment in a specialist tool technology operation. In addition, 2018 guidance is maintained, ie revenue c €55m (+9%) and EBIT c €5.0m (+30%, excluding exceptional 2017 gains of €0.9m on a business disposal and €0.4m on consolidation). This is all the more encouraging as H217 saw lower revenue and EBIT (guidance was slightly missed), in marked contrast to an upbeat first half.

Core CNC HSM milling machines drive business

In 2017 the main driver was the core computer numerically controlled high-speed milling (CNC HSM) machines segment, which broadly mirrored results for the group as a whole with revenue up 12% and order inflow up 16%. The replacement tools segment was another noteworthy performer with a 14% rise in revenue. Here, sales of tools for third-party manufacturers’ machines continue to grow in importance. The expanding installed base of machines (principally CNC HSM) helped drive a 14% increase in after sales and other revenue.

Valuation: Fair

After a bumper 2017 (+35%), current share price consolidation is understandable. The valuation reflects a greatly improved outlook, the stability of its model and recent profit progression. DATRON now needs to confirm these expectations.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16*

45.7

2.9

0.52

0.15

24.7

1.2

12/17

50.2

3.9**

0.99

0.20

13.0

1.6

12/18e

55.0

5.0

0.87

0.20

14.8

1.6

12/19e

60.0

6.0

1.06

0.30

12.1

2.3

Source: DATRON accounts, Bloomberg consensus estimates. Note: *Parent company only. **Excludes exceptional gains of €0.9m on sale of business and €0.4m on consolidation.

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.

Full-year 2017 broadly in line with expectations

Full-year 2017 saw initial group figures, so there are no available comparatives for the previous period or at the quarterly level. However, the dominance of parent company DATRON AG in the group allows its performance to be taken as a good proxy.

On a parent company basis revenue in 2017 rose by 8% to €49.3m and reported EBIT was up 63% to €4.8m including a €870,000 capital gain on the sale of the UK affiliate. Excluding the capital gain, operating EBIT was
still up an impressive 33% at €3.9m. These compare with guidance at the half-year results of revenue of at least €50m and EBIT of c €4m. Both sales and operating EBIT softened in H217 after healthy increases in the first half.

Much of the company’s commercial success can be attributed to a high level of R&D spend, which
has sustained product renewal. R&D spend in 2017 was maintained at the high level of €4m, charged fully to revenue.

In contrast to turnover, order inflow growth accelerated to 22% in H217, resulting in a 13% increase for the full year. This boosted the book/bill ratio excluding purely technical turnover items to 1.05x up from 1.01x in 2016.

Exhibit 1: Financial performance – DATRON AG (parent company)

Year end December (€m), HGB

H116

H216

FY16

H117

H217

FY17

Turnover

19.8

25.9

45.7

23.6

25.8

49.3

Change (%)

+19%

-1%

+8%

Order intake

23.4

22.1

45.4

24.3

27.0

51.3

Change

+4%

+22%

+13%

EBIT (ex €0.9m capital gain in H117)

Neg.

2.9

2.9

1.3

2.6

3.9

Change

N/M

-11%

+33%

Source: DATRON accounts

The continuing expansion of the international business diluted the contribution from Germany to 50% from 54% in 2016. This was largely driven by the strong growth in sales in North America, which were up an estimated 55%; the US is now the largest single national market after Germany. The domestic share remains typically high for a machine tool maker. Other strong national markets include France (perhaps helped by the new regional presence) and Russia.

Core CNC HSM machines drive business

There were distinct differences in the contributions from DATRON’s product areas to financial performance. The main driver was the core CNC HSM machines segment, where the performance broadly mirrored the results for the group as a whole with turnover growth of 12% to €27.5m and order inflow growth of 16%. Again, the split across the two halves saw a decline in turnover in H217 (5%), but a powerful (25%) improvement in order inflow. CNC HSM machines accounted for 270 of the 370 machines of all types sold in the year – 150 of these were the higher-end MXCube and 120 the compact neo range.

The replacement tools segment was another noteworthy performer with a 14% rise in turnover to €10.4m, in this case spread evenly across the two halves. Here, sales of tools for third-party manufacturers’ machines continue to grow in importance, especially in sales of tools for dental applications where sales of tools for third-party machines now account for half the total. This compares with only a 10th of CNC HSM tools sold for third-party machines. The expanding installed base of machines (principally CNC HSM) helped drive a 14% increase in after sales and other revenue.

There were no new product launches in either of the smaller machine segments, dental and dispense systems. Second-half sales in dental machines showed a 77% rise in turnover and 115% in order inflow, albeit from low bases. The biennial dental fair in the spring gave its accustomed fillip to business but it is possible that DATRON is reaping the first fruits of its strategic decision to concentrate on high-end machines. Turnover in dispense systems fell 46% in 2017.

Strong outlook for 2018

The most important feature of 2018 at a product level will be the full-scale roll-out of the ‘next’ tablet-based control system. It should drive growth in the CNC HSM machine segment. Initially, the ‘next’ system will be offered exclusively on DATRON’s own machines but may ultimately be made available for third-party machines.

Management expects 2018 to be another year of growth and guides to turnover of €55m, EBIT of €5.0m and EPS of €0.87. According to management, there will be little expansion of the cost base, so there will be a straightforward overhead recovery effect on trading margin which is guided to expand to 9.1% from 7.9% in 2017.

Management sees potential for further growth in 2019 and holds out the prospect of returning to a pre-economic crisis 10% EBIT margin, even if sales growth decelerates to €60m for the year.

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