Kendrion — CMD confirms strategic direction and targets

Kendrion (AMS: KENDR)

Currency in EUR

Last close As at 25/01/2023

EUR16.70

0.10 (0.60%)

Market capitalisation

EUR248m

Research: Industrials

Kendrion — CMD confirms strategic direction and targets

At its capital markets day (CMD) on 8 September, Kendrion reiterated its financial targets for 2025 (originally set in September 2020) and confirmed its strategic direction. The Industrial division is continuing strong growth in revenues and profitability (despite market challenges), while Automotive still is affected by supply chain constraints, inflation and volatile demand. The long-term growth outlook for Kendrion remains strong, based on the favourable trends of electrification and green energy. The average of three valuation methods points at a value per share of €21.7.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

Kendrion

CMD confirms strategic direction and targets

Capital markets day

Industrial engineering

30 September 2022

Price

€13.9

Market cap

€210m

Net debt (€m) at 30 June 2022

146

Shares in issue

15.1m

Free float

44%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.5)

(11.0)

(36.5)

Rel (local)

(0.3)

(6.3)

(22.3)

52-week high/low

€22.4

€14.0

Business description

Kendrion develops, manufactures and markets high-quality actuators for industrial (53% of revenues) and automotive applications (47%). The geographical spread of revenues is Germany 39%, other Europe 30%, the Americas 16% and Asia 15%.

Next events

8 November 2022

Q322 trading update

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

At its capital markets day (CMD) on 8 September, Kendrion reiterated its financial targets for 2025 (originally set in September 2020) and confirmed its strategic direction. The Industrial division is continuing strong growth in revenues and profitability (despite market challenges), while Automotive still is affected by supply chain constraints, inflation and volatile demand. The long-term growth outlook for Kendrion remains strong, based on the favourable trends of electrification and green energy. The average of three valuation methods points at a value per share of €21.7.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/20

396.4

44.6

0.79

0.40

8.3

17.5

12/21

463.6

55.8

1.39

0.70

8.2

10.0

12/22e

500.4

57.0

1.48

0.74

6.4

9.4

12/23e

536.7

68.6

1.96

0.98

5.2

7.1

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Focus remains on electrification and green energy

At its CMD, Kendrion showed many market segments where it can grow strongly and confirmed its target of ≥ 5% pa organic revenue growth on average until 2025. For Industrial Brakes, it expects 6% annual growth in the existing markets wind power, automation and robotics, while adding high growth segments such as automated guided vehicles and collaborative robots. Automotive is currently facing tough market conditions, but IHS Markit expects a recovery to 7% growth in global car production in both 2023 and 2024. To put more focus on e-mobility, Kendrion will split Automotive into ‘E’ and ‘Core’ (internal combustion engine related). Kendrion also aims to strongly grow in China and the doubling of capacity by Q123 will support annual growth of at least 20% per year, according to management.

On track for >15% EBITDA margin in 2025

In the first two financial years of its strategic plan 2020–25, Kendrion has been very unlucky to be confronted with the COVID-19 pandemic and the supply chain constraints. Driven by the strong performance in Industrial, Kendrion managed to compensate for the declines in Automotive. We expect that the positive underlying trends and the enhanced growth profile to result in accelerating organic revenue growth to 5% in FY22 and 7–8% in 2023 and 2024. EBITDA margin is expected to continue to improve towards the targeted ≥ 15% in 2025, driven by operating leverage and cost savings within Automotive. Our estimates assume a 60bp lower margin in FY22, followed by a recovery of 140bp in 2023.

Valuation: Undervalued industrial player

Kendrion is valued at a 2022e EV/EBITDA of 6.4x and a P/E of 9.4x. The average of historical multiples, DCF and peer comparison points at a value per share of €21.7 (from €22.2 in our previous update due to lower peer multiples). Kendrion is trading at a discount to peers of 17% on 2022e EV/EBITDA, which could diminish over time as the company demonstrates accelerating growth and higher profitability.

Investment summary

Company description: Specialist in smart actuators

With its origin in Germany, which is the base for electromagnetic systems, Kendrion focuses on smart actuators. Its revenues are evenly split between industrial and automotive applications, with profitability levels in Industrial being clearly higher than in automotive. As one of the global market leaders in actuators, the company is spending 6–7% of revenues per annum on R&D. The company targets growth segments by developing new technologies in, for example, robotics, inductive heating and acoustic vehicle alerting systems that are mandatory for each electric vehicle.

Valuation: Upside on three valuation methods

Kendrion’s share price has taken a hit of around 30% over the past six months, mainly driven by the investment climate turning negative under inflationary pressure, but also specifically the negative trends within the automotive sector. The anticipated after-pandemic recovery in automotive has been delayed due to persistent supply chain constraints. However, IHS Markit expects a recovery in global car production to 7% growth in both 2023 and 2024, which should trigger a rebound in revenues and particularly margins at Kendrion. The Industrial division will continue to benefit from good growth in segments such as wind power, automation and robotics, while entering new niche segments such as industrial heating solutions. Accelerating growth and improving margins should be positive catalysts for Kendrion’s share price and help narrow the current valuation gap of 17% to peers. We think that Kendrion is still seen as an automotive supplier, even though Industrial represents more than 70% of group EBITDA. The average of three valuation methods – historical multiples (€22), DCF (€24) and peer comparison (€19) – point at a value per share of €21.7, while the company also offers a dividend of around 5%. Our model is based on organic growth only, although the company has been active in M&A over the past few years.

Financials: On track for financial targets

In FY20–21, Kendrion’s group revenue was affected by the COVID-19 pandemic and the supply chain constraints. In this period, Industrial has shown strong growth while Automotive faced very challenging markets. As of 2022, we expect accelerating revenue growth and a continuation of the margin improvement, driven by the fading effect of the pandemic and positive trends towards electrification in both automotive and industry pushing up underlying demand. For FY22 we expect 5% organic revenue, followed by 7–8% in FY23–24 with EBITDA margin further improving towards 14% in FY24. This all delivers a CAGR of 23% in normalised EPS for the period FY22–24.

The company’s net debt of €146m in H122 reflects a net debt/EBITDA ratio of 2.6x, which is well within the covenants of below 3.25x. The company’s financial position offers sufficient room for the financing of organic revenue growth and dividend payments. However, we do not expect major M&A activity in the short term due to the relatively high net debt and low share price.

Sensitivities: Upside and downside risks

Kendrion is generally dependent on the economic cycles in its industrial and automotive segments. Triggers to Kendrion’s investment case and therefore our forecasts would be a faster recovery in automotive than currently anticipated; a faster increase in the penetration of electric vehicles; an acceleration in the electrification trend; and a greater government push towards green energy. Risks to the investment case include prolonged supply chain constraints; consistent inflationary pressures; a sustained Chinese lockdown; a recessionary environment; increased competition in its chosen niche segments; and the emergence of alternative products.

Company description: Global specialist in actuators

Kendrion specialises in the development, production and marketing of actuators for a wide range of industrial and automotive applications. An actuator is a mechanical device that converts (electric) energy into force or motion. Kendrion products are used in applications for wind power, robots, factory automation, electric vehicles, energy distribution and industrial heating processes. Kendrion realised revenues of €464m in FY21 and is one of the larger players globally.

Exhibit 1: Examples of Kendrion products

Permanent magnet single-disc brake

Spring applied brake for servo motors

Valves for active damping

Source: Kendrion

Focus on industrial and automotive applications

For many years, Kendrion has been active in the market segments for industrial and automotive applications. Industrial represented 53% of H122 revenues and can be split into Industrial Brakes (29% of group revenues) and Industrial Actuators & Controls (24%). Within Industrial Brakes, Kendrion provides electromagnetic brakes for electromotors and focuses on high-growth areas such as automation (including collaborative and medical robots), wind power and intra logistics (automated guided vehicles). Industrial Actuators & Controls focuses on applications that are based on electromagnetic actuators, control technology and fluid technology in market segments such as medical, energy efficiency, manufacturing automation and security systems. Automotive focuses on advanced valve technology, smart actuation and control technology and offers solutions for passenger cars (two-thirds of Automotive) and commercial vehicles (one-third). At its CMD, the company announced that it will split Automotive into Core and E (to focus on E-mobility).

The Industrial division normally performs better than Automotive, reporting a higher EBITDA margin in FY21 of close to 17% versus 7%, and this difference further widened in H122.

Exhibit 2: H122 revenue spread of activities

Exhibit 3: FY21 EBITDA spread of activities

Source: Kendrion

Source: Kendrion

Exhibit 2: H122 revenue spread of activities

Source: Kendrion

Exhibit 3: FY21 EBITDA spread of activities

Source: Kendrion

The products of Kendrion are used in many different applications, in both the Industrial and Automotive segments. A list of these applications is shown in Exhibit 4.

Exhibit 4: Overview of applications

Industrial

Automotive

Energy generation and distribution

Active suspension systems

Food and beverage industry

Fuel systems

Industrial automation

Mobile hydraulics

Intralogistics

Acoustic vehicle alerting systems

Medical equipment

Thermal management

Robotics

Sensor cleaning systems

Textile machinery

Transmission systems

Wind Power

Industrial

Energy generation and distribution

Food and beverage industry

Industrial automation

Intralogistics

Medical equipment

Robotics

Textile machinery

Wind Power

Automotive

Active suspension systems

Fuel systems

Mobile hydraulics

Acoustic vehicle alerting systems

Thermal management

Sensor cleaning systems

Transmission systems

Source: Kendrion

Kendrion’s geographical spread shows that Europe is its largest region, accounting for almost 70% of total revenues, while the Americas and Asia represent the remaining 30% (see Exhibit 5). When looking at the company’s two divisions, Automotive is relatively more exposed to the Americas and Industrial is relatively more exposed to Asia (partly due to the acquisition in early 2020 of INTORQ, which has a stronger presence in China).

Exhibit 5: Geographical spread of revenues, FY21

Total revenues

Industrial

Automotive

Source: Kendrion

Exhibit 6 shows examples of the company’s customers in each division. Within Industrial, the company has longstanding relationships with, for example, Lenze, Schindler and Siemens. Within Automotive, customers include Continental, Daimler Group and Volkswagen Group. ThyssenKrupp Bilstein was the company’s first customer for its active damping systems. In FY21, three customers accounted for over 5% of group revenues: Siemens within Industrial, and Volkswagen Group and ThyssenKrupp Bilstein within Automotive. Customers in Automotive tend to be larger than in Industrial, where Kendrion has a large roster of many smaller customers.

Exhibit 6: Examples of customers per division

Industrial

Automotive

ASML

Continental

Collins Aerospace

Daimler Group

Eaton Corporation

Danfoss

Euchner

FCA

Fresenius

Ford

Lenze

Great Wall Motors

Oerlikon

Hyundai Kia

Schindler

KYB

Siemens

Marelli

ST Drives Stoll

ThyssenKrupp Bilstein

Volkswagen Group

ZF Friedrichshafen

Industrial

ASML

Collins Aerospace

Eaton Corporation

Euchner

Fresenius

Lenze

Oerlikon

Schindler

Siemens

ST Drives Stoll

Automotive

Continental

Daimler Group

Danfoss

FCA

Ford

Great Wall Motors

Hyundai Kia

KYB

Marelli

ThyssenKrupp Bilstein

Volkswagen Group

ZF Friedrichshafen

Source: Kendrion

CMD confirms strategic direction and financial targets

At its CMD on 8 September 2022, Kendrion confirmed its strategic direction and financial targets, which it set at its CMD in September 2020. Exhibit 7 shows the so-called strategic house of Kendrion, with the focus on the growth areas Automotive and Industrial Brakes and the cash engine Industrial Actuators & Controls. Throughout the company, the aim is to strongly expand in China. Below we briefly summarise the building blocks of the company’s growth strategy.

Industrial Brakes – grasping the growth opportunities in logistics, robotics and wind power.

Industrial Actuators and Controls – focusing on selective niche markets where it can realise above average returns, such as inductive heating systems and security systems.

Automotive – benefiting from trends such as autonomous driving, connected, electrification and shared mobility (so-called ACES).

China – continuing strong growth path with Kendrion expecting at least 20% revenue growth per annum until 2027, with opportunities in all three product segments. The company is building a new facility in China, which more than doubles capacity towards 28,000m2. This factory is expected to be operational in Q123 and has the capacity for annual revenues of c €100m.

Exhibit 7: Kendrion’s strategic house

Source: Kendrion

Splitting Automotive into Core and E

One of the news items of the CMD was the organisational change within the Automotive division, into Automotive Core and Automotive E, which we consider as positive because the company’s development in the new growth area of e-mobility can be better tracked. The Automotive division will be split into:

Core (72% of divisional revenues) comprises existing technologies for vehicles with an internal combustion engine, with the focus on cash flow generation. The company aims for a lean, flexible and simple organisation, which includes the allocation of product groups to dedicated production plants.

E (28% of divisional revenues) will focus on the rapid developments in the e-mobility trends autonomous, connected, electrified and shared mobility. The company aims to add new customers and expand its portfolio with existing clients in the fast-growing market for electric vehicles, where IHS Markit expects a CAGR of 25% in the period 2022–27. Kendrion has three focus segments, being vehicle sound identity, active suspension and sensor cleaning. The last one is still in the design phase and hardy generates revenues yet. Kendrion aims to add more product groups over the next few years.

The change in organisation will be effective in January 2023 and both automotive segments will have their own P&L and key performance indicators. Kendrion will report the revenue developments separately. The change in organisation will deliver €4m in cost savings, mainly the result of Core not needing several supporting functions any longer, such as R&D and industrial engineering. To realise these savings, the company expects to incur €6m in one-off costs.

Exhibit 8: Automotive Core and E

Source: Kendrion CMD presentation

Financial targets for 2025 confirmed

At its CMD, Kendrion confirmed the financial targets for the period 2019–25, which it set two years ago. Exhibit 9 shows the targets and the reported results in the past three years.

Exhibit 9: Kendrion’s financial targets for 2025

Key performance indicators

Target 2025

Realised 2019

Realised 2020

Realised 2021

Organic revenue growth

>5% on average

-9%

-17%

16%

EBITDA margin

>15%

10.6%

11.3%

12.0%

Return on invested capital (ROIC)

>25%

11.7%

10.8%

15.5%

Pay-out ratio

35–50%

0%

50%

50%

Source: Kendrion

Kendrion is keeping its organic revenue growth target of 5% pa or more on average, despite the flat average organic growth in FY20–21, which was obviously affected by the COVID-19 pandemic and supply chain constraints. The company needs a CAGR of 8% in FY22–25 to realise its target. During the CMD, management was rather confident in achieving this target, based on the many new projects it is involved in. Given the long-term positive trends that support the growth of the company, we think the revenue target is achievable, except in a recessionary environment.

Exhibit 10: Kendrion’s path towards the 2025 revenue target (€m)

Source: Kendrion. Note: * FY19 revenue pro forma including INTORQ with €54.5m.

The EBITDA margin target of at least 15% in 2025 was also maintained, which compares to the margin of 12.0% in FY21 (and 10.6% in FY19). According to management, the anticipated improvement of >300bp will come from operating leverage (180–200bp) and cost optimisations in Automotive Core (120–130bp). The cost savings in Automotive amount to €8m, because of the organisational change into Core and E (€4m) and the closure of the plant in Austria, which will be finalised in Q422 (€4m). Industrial is reporting solid margins of above 17% and we expect further upside towards almost 18% in 2025. Recovery in Automotive is therefore key for Kendrion to realise the targeted 15% margin and we expect an improvement in this division towards almost 12.5% in 2025 versus 7.2% in FY21 (and 5.0% in H122).

M&A remains on the agenda

At its CMD, the company commented that M&A remains on the company’s agenda. Management did not express a preference for any segment or activity; it is looking for companies in general with a strategic and cultural fit. Management commented that its healthy balance sheet supports further deals, but we think that given the current net debt/EBITDA of 2.6x and the company’s relatively low share price, M&A activity will be at a lower level in the short term.

Sustainability targets

As part of its overall strategic plan, Kendrion has set out a global sustainability programme, which aims to reduce energy consumption and emissions. Exhibit 11 shows the targets that were set for 2023 and the good progress made until H122. The overall focus is on energy efficiency, fuel efficiency and lowering weight of vehicles, and sustainable products (including safety and medical products) now make up 45% of total revenues.

Exhibit 11: Kendrion’s sustainability targets 2019–23

Realised by H122

Target 2023

Relative reduction in energy consumption

-11%

-15%

Relative reduction in CO2 emissions

-26%

-15%

Source: Kendrion

Market expectations per division

The main major trends that will determine Kendrion’s growth path over the next few years are electrification and clean energy, with the underlying global aim to reduce energy usage and carbon dioxide (CO2) emissions, while increasing the overall comfort and safety of vehicles. Below we describe the growth prospects for the different activities of Kendrion.

Industrial: High growth with solid profitability

The Industrial division has been Kendrion’s star performer in recent years and both segments have good growth prospects for the next few years.

Industrial Brakes: Two years ago, Kendrion expected revenue growth of >5% on average for Industrial Brakes. At the CMD, the updated growth profile shows growth in existing markets of 6% per annum (see Exhibit 12) and in addition the company targets emerging market segments such as logistics automated guided vehicles, collaborative robots and railway. As Kendrion aims to outperform the market, the company’s internal budgets seem to assume much higher growth rate than the 6% for its existing markets.

Exhibit 12: Growth forecasts for Industrial Brakes’ existing market segments

Source: Kendrion CMD presentation

Industrial Actuators & Controls comprises many different product and market combinations, making it difficult to come to an overall growth expectation for this segment. These activities are focused on selective niche markets where the company can realise growth against above average returns. At the CMD, many interesting segments were presented and Exhibit 13 shows a few examples of niche segments with an attractive revenue growth profile while realising attractive EBITA margins of 15%.

Exhibit 13: Industrial Actuators & Controls

Source: Kendrion CMD presentation

Automotive: Focus on the high-growth e-mobility segment

The automotive market was expected to strongly recover from the impact of the COVID-19 pandemic in 2020, but the global supply chain constraints in 2021 caused a further delay in this recovery. IHS Markit reported a decline of 18% in global car production in 2020 followed by growth of only 5% in 2021. Despite the ongoing supply chain constraints, IHS Markit expects growth of 4% in 2022 followed by 7% in both 2023 and 2024 when the constraints might have eased.

For the period 2022–27, IHS Markit expects a CAGR of 3.5% in global car production. For Kendrion’s Core segment, the development of the internal combustion engine is important. There will be an avoidable decline in internal combustion engines, but according to IHS Markit this decline is limited to a CAGR 1% until 2027, due to the still expected after-pandemic recovery. A much stronger CAGR of 25% is expected for electric vehicles, which is the focus area of Kendrion’s E segment. With car manufacturers and suppliers increasingly focusing their R&D efforts on the high growth electric vehicle segment, we consider it positive that Kendrion has split its automotive division into Core and E so the development of both segments can be closely followed. Taking the revenue contribution of Core and E, this boils down to potential growth for Kendrion’s automotive division of 7% on average per annum until 2027.

Financials

Our assumptions remain broadly similar to our estimates in the H122 update and we expect the trends we have seen in the first half to continue in the second half, that is a strong Industrial and a weaker Automotive division.

Earnings: An increasing contribution from new projects

Like all industrial and automotive players, Kendrion faced difficult market conditions in H122, such as inflation, geopolitical uncertainty, volatility in demand, supply chain constraints and lockdowns in China. Group revenue increased 9.5% to €257m, with 5% organic growth. Growth slowed down during the second quarter, partly due to the pandemic related shutdowns in China (according to management impacting revenues by €3.5m). Organic revenue growth in H122 in Industrial was 16%, while Automotive showed a decline of 4%. Kendrion expects that markets will remain volatile and that supply chain constraints will continue for the foreseeable future. After the H122 results, we have become more cautious about the pace of recovery within the automotive segment given the many uncertainties and continued volatile demand. We estimate 8% group revenue growth for FY22 after the 9.5% in H122 and this includes the contribution of 3T and a small positive currency effect (largely US dollars). For the years 2023 and 2024, we expect revenue growth of 7–8%, driven by the energy transition and accelerating electrification, while in addition the anticipated recovery in automotive will contribute to revenue growth. New projects will be ramped up and the doubling of capacity in China will also contribute to growth.

After the margin decline of 170bp in H122, we expect a decline of 60bp in the group EBITDA margin to 11.4% in FY22, followed by a recovery of 140bp to 12.8% in FY23, driven by operating leverage, the easing of the shortage in materials and the contribution of cost savings. The closure of the plant in Austria will lower costs by €4m, while the change in organisation within the Automotive division will deliver €4m in savings (against one-off costs of €6m in FY22). Despite the short-term uncertainties, we still see the opportunity for Kendrion to realise its target for FY25, driven by operating leverage and cost savings, and our current estimates assume a margin of 15.2% in 2025.

Exhibit 14: Divisional forecasts

Divisions (€m)

2020

2021

2022e

2023e

2024e

Industrial

190.3

231.5

270.6

289.5

309.8

Automotive

206.1

232.2

229.9

247.1

271.8

Total revenues

396.4

463.7

500.5

536.7

581.6

Industrial

24%

22%

17%

7%

7%

Automotive

-20%

13%

-1%

8%

10%

Total revenue growth (%)

-4%

17%

8%

7%

8%

Industrial

-11%

20%

12%

7%

7%

Automotive

-20%

13%

-2%

8%

10%

Total organic revenue growth (%)

-17%

16%

5%

7%

8%

Industrial

29.1

39.0

47.0

51.1

55.0

Automotive

15.5

16.8

10.0

17.5

26.3

Total EBITDA normalised

44.6

55.8

57.0

68.6

81.3

Industrial

15.3%

16.8%

17.4%

17.6%

17.8%

Automotive

7.5%

7.2%

4.4%

7.1%

9.7%

Total EBITDA margin (%)

11.3%

12.0%

11.4%

12.8%

14.0%

Source: Kendrion, Edison Investment Research

Below the EBITDA level, we expect higher cash flows to gradually drive down financial expenses (despite the upward pressure from the increasing interest rates on around half of the outstanding debt), and we do not anticipate major changes in the company’s tax rate of around 28%. All in all, our estimates point at a CAGR in EPS of 23% for FY22–24.

Improving cash flows

Over the past 12 months, free cash flows have been affected by higher inventory levels, for buffer stocks to cope with the supply chain constraints and temporarily buffer inventories in FY22 to facilitate the move of equipment from the plant in Austria to Germany and Romania.

Maintenance capex is expected to remain relatively stable as a percentage of revenues. The additional capex for the new factory in China is around €20m, of which €14m will fall in FY22. The new factory will almost double Kendrion’s capacity in China from Q123.

Kendrion’s pay-out ratio has been around 50% of normalised net profit in recent years and we expect the company to maintain this level over the next few years. This reflects a cash dividend of €10–15m over the next three years, but the cash out will be most likely be lower as shareholders also opt for stock dividends.

With accelerating revenue growth and improving margins, we estimate free cash flow to increase to €25m in 2023 and €32m in 2024.

Exhibit 15: Kendrion cash flow statement

(€m)

2020

2021

2022e

2023e

2024e

Cash flow from operations

41.8

27.8

35.7

51.1

59.6

Cash flow from investments

(94.2)

(48.8)

(40.8)

(25.9)

(27.1)

Cash flow from financing

58.3

26.6

(10.4)

(21.2)

(24.8)

Change in cash

5.9

5.6

(15.5)

4.0

7.7

Free cash flow

25.8

(2.2)

(5.1)

25.2

32.4

Source: Kendrion, Edison Investment Research

Financial position is sufficient for growth plan

In H122, net debt increased by €8.6m to €145.6m, mainly due to the cash portion of the dividend payment. Net debt/EBITDA slightly increased by 20bp to 2.6x on an annualised basis versus Q1, which is, however, well within the covenant of below 3.25x. At the CMD, management commented to expect a positive free cash flow for the full year; our estimates currently assume a net debt/EBITDA level of 2.5x at year-end.

Driven by the expected increase in free cash flow towards €32m in 2024, net debt will gradually decline over the next few years, resulting in a solid net debt/EBITDA of 1.4x in 2024. Kendrion’s financial position offers sufficient room for organic expansion and dividend payments in line with its dividend policy of a pay-out ratio of 30–50% (in recent years the pay-out has been 50%).

As discussed previously in this note, the current net debt/EBITDA multiple of 2.6x and relatively low share price might limit the company in making relatively large acquisitions in the short term, but the expected declining net debt will gradually offer more room for M&A.

Valuation

For the valuation of Kendrion we use three methods: historical multiples, discounted cash flow (DCF) and peer comparison. The average of these three valuation methods points at a value per share of around €21.7. On top of this, the company offers an estimated dividend yield of 5%, based on a pay-out ratio of 50% of normalised net profit.

Exhibit 16: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2022e EV/EBITDA in line with historical multiples

22.2

DCF

Terminal growth 1.5%, EBITA margin 7.5%

23.9

Peer group

2022e EV/EBITDA in line with peers

18.8

Average value per share

21.7

Current share price

13.9

Source: Edison Investment Research

Historical multiples

When looking at the EV/EBITDA for 2022e, Kendrion is valued at a discount of 26% compared to its historical valuation of 8.6x (which is based on the nine years after Kendrion became completely focused on electromagnetic systems). The company’s current EBITDA margin (2022e: 11.4%) is in line with its nine-year average of 11.6% and we expect an improvement over the next few years. We believe that this equal level of profitability should be reflected in its valuation. If we assume a valuation in line with its average historical EV/EBITDA multiple for 2022e, the value per share would be €22.2.

Exhibit 17: Historical multiples

Historical valuation
(eight years)

Current valuation

Premium/(discount)
versus average

Average

Min

Max

2021

2022e

2023e

2022e

2023e

EV/sales

1.0

0.9

1.4

1.0

0.7

0.7

-27%

-33%

EV/EBITDA

8.6

6.5

10.5

8.2

6.4

5.2

-26%

-40%

P/E

18.2

12.4

23.1

15.1

9.4

7.1

-48%

-61%

Assumed premium, EV/EBITDA

0%

0%

Value per share, €

22.2

29.3

Source: Kendrion, Edison Investment Research

DCF

Our discounted cash flow model is based on the following assumptions:

Our model includes organic revenue growth only, although we do expect the company to make acquisitions from time to time.

A terminal revenue growth rate of 1.5% as the proportion of higher-growth segments is increasing.

A terminal EBITA margin of 7.5% or an EBITDA margin of around 12.5%, which is well below Kendrion’s target of at least 15% for 2025. If Kendrion succeeds in realising its target there is upside to our terminal margin assumption, which is essentially our ‘mid-cycle’ estimate.

An effective tax rate of 28%, which reflects Kendrion’s country mix.

We use a beta of 1.25 to reflect the relatively low liquidity of the shares.

We set a risk-free rate and market equity risk premium of 3.0% and 5.0%, which deliver a WACC of 8.0%.

Our DCF model points at a fair value per share for Kendrion of €23.9. We show sensitivity analyses in the following exhibits, with fair value outcomes under different scenarios for terminal growth rates, EBITA margins and WACC.

Exhibit 18: Kendrion sensitivity analysis, WACC versus terminal growth rate

Value per share, €

Terminal growth rate

0.5%

1.0%

1.5%

2.0%

2.5%

WACC

7.0%

26.3

28.1

30.3

33.0

36.2

7.5%

23.5

25.1

26.9

29.0

31.5

8.0%

21.2

22.4

23.9

25.6

27.6

8.5%

19.1

20.2

21.4

22.8

24.4

9.0%

17.3

18.2

19.2

20.4

21.7

Source: Edison Investment Research

Exhibit 19: Kendrion sensitivity analysis, WACC versus EBITA margin

Value per share, €

EBITA margin

6.5%

7.0%

7.5%

8.0%

8.5%

WACC

7.0%

26.1

28.2

30.3

32.5

34.6

7.5%

23.0

24.9

26.9

28.8

30.7

8.0%

20.5

22.2

23.9

25.6

27.3

8.5%

18.3

19.8

21.4

22.9

24.5

9.0%

16.4

17.8

19.2

20.6

22.0

Source: Edison Investment Research

Peer comparison

When looking for a peer group for Kendrion, it is difficult to find any company that matches its profile. As the company has two divisions, we have made two peer groups to reflect the industrial and the automotive exposure. Industrial companies are typically valued at higher multiples when compared to automotive (and that seems to be caused by the level of visibility and profitability) and for Kendrion we take the blended average based on the revenue split of the two divisions. Kendrion is trading at a discount to this industrial and automotive universe of 17%, based on EV/EBITDA for 2022e. We expect that Kendrion will gradually close the growth profile and margin gap to peers as it is strongly benefiting from the growth trends of electrification and green energy. We believe that this should justify a valuation in line with its peers and this assumption would imply a value per share for Kendrion of €18.8.

Exhibit 20: Peer comparison

Company name 

Currency

Share

price

Market cap (local FX)

EV/SALES (x)

EV/EBITDA (x)

EBITDA margin

2021e

2022e

2023e

2021e

2022e

2023e

2022e

Aalberts

33.9

3,694

2.1

1.5

1.4

10.6

7.4

7.0

20%

Emerson Electric

US$

75.02

44,359

3.4

2.8

2.6

14.8

11.1

10.3

23%

SKF

NOK

149.85

67,410

1.4

1.0

0.9

8.3

6.4

5.9

17%

TKH

33.24

1,343

1.5

1.1

1.1

9.7

7.3

7.1

15%

Industrial average

2.1

1.6

1.5

10.9

8.0

7.6

19%

BorgWarner

US$

33.54

7,943

1.1

0.7

0.7

7.3

5.1

4.4

14%

Continental AG

47.95

9,450

0.8

0.5

0.5

6.4

4.8

3.6

11%

ElringKlinger

6.3

399

0.8

0.6

0.5

5.7

7.2

4.4

8%

Aptiv

US$

85.94

23,284

2.8

1.6

1.4

20.9

12.1

9.4

13%

Automotive average

1.4

0.8

0.8

10.1

7.3

5.5

11%

Universe average

1.7

1.2

1.1

10.5

7.7

6.5

15%

Kendrion

13.9

210

1.0

0.7

0.7

8.2

6.4

5.2

13%

Premium/(discount)

-43%

-41%

-42%

-22%

-17%

-20%

Assumed premium/(discount)

0%

0%

0%

0%

Implied value per share (€)

30.4

30.7

18.8

19.9

Source: Refinitiv, Edison Investment Research. Note: Prices as at 29 September 2022.


Exhibit 21: Financial summary

€ m

2019

2020

2021

2022e

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

412.4

396.4

463.6

500.5

536.7

581.6

Gross Profit

193.3

191.0

225.8

243.2

262.4

285.0

EBITDA normalised

43.8

44.6

55.8

57.0

68.6

81.3

EBITDA reported

38.1

40.2

51.7

48.6

68.6

81.3

Depreciation & Amortisation

(24.0)

(25.7)

(23.9)

(22.8)

(24.6)

(24.7)

EBITA normalised

19.8

18.9

31.9

34.2

44.0

56.5

Amortisation of acquired intangibles

(2.2)

(4.4)

(3.9)

(4.8)

(4.8)

(4.8)

Exceptionals (Edison definition)

(5.7)

(4.4)

(4.1)

(8.4)

0.0

0.0

EBIT reported

11.9

10.1

23.9

21.0

39.2

51.7

Net Interest

(0.9)

(4.4)

(3.7)

(3.5)

(3.1)

(2.5)

Participations

0.0

0.0

(0.1)

0.0

0.0

0.0

Profit Before Tax

11.0

5.7

20.1

17.5

36.1

49.3

Reported tax

(2.7)

(1.4)

(5.7)

(4.9)

(10.1)

(13.8)

Profit After Tax

8.3

4.3

14.4

12.6

26.0

35.5

Net income (normalised)

12.6

11.7

20.6

22.3

29.6

39.1

Net income (reported)

8.3

4.3

14.4

12.6

26.0

35.5

Average number of shares (m)

13.5

14.8

14.8

15.1

15.1

15.1

Total number of shares (m)

14.9

14.9

14.9

15.1

15.1

15.1

EPS normalised before amortisation (€)

0.94

0.79

1.39

1.48

1.96

2.58

EPS reported (€)

0.62

0.29

0.97

0.83

1.72

2.35

DPS (€)

0.00

0.40

0.70

0.74

0.98

1.29

Revenue growth

-8.1%

-3.9%

17.0%

8.0%

7.2%

8.4%

Gross Margin

47.4%

48.4%

48.3%

48.6%

48.9%

49.0%

EBITDA Margin

10.6%

11.3%

12.0%

11.4%

12.8%

14.0%

Normalised Operating Margin

4.8%

4.8%

6.9%

6.8%

8.2%

9.7%

BALANCE SHEET

Fixed Assets

244.8

299.6

324.5

337.7

334.2

331.8

Intangible Assets

115.5

159.1

183.4

181.6

179.0

176.4

Tangible Assets

111.4

118.7

121.9

136.9

136.0

136.2

Investments & other

17.9

21.8

19.2

19.2

19.2

19.2

Current Assets

113.2

129.5

166.3

168.0

177.0

198.3

Stocks

56.3

61.7

79.7

85.5

91.1

98.2

Debtors

42.9

47.2

56.8

61.3

65.8

71.3

Other current assets

6.9

7.6

11.2

12.1

13.0

14.1

Cash & cash equivalents

7.1

13.0

18.6

9.1

7.1

14.8

Current Liabilities

73.8

87.9

97.6

104.3

111.0

119.2

Creditors

41.3

44.0

51.6

55.7

59.7

64.7

Other current liabilities

26.9

31.9

33.2

35.8

38.4

41.7

Short term borrowings

5.6

12.0

12.8

12.8

12.8

12.8

Long Term Liabilities

80.7

137.8

170.2

176.2

160.2

150.2

Long term borrowings

48.9

104.2

136.4

136.4

126.4

116.4

Other long term liabilities

31.8

33.6

33.8

39.8

33.8

33.8

Shareholders' equity

203.5

203.4

223.0

225.2

240.0

260.7

Balance sheet total

358.0

429.1

490.8

505.7

511.1

530.0

CASH FLOW

Op Cash Flow before WC and tax

36.1

40.6

54.6

54.6

62.6

81.3

Working capital

13.0

5.4

(17.4)

(4.5)

(4.3)

(5.4)

Tax

(6.1)

(1.3)

(6.2)

(4.9)

(10.1)

(13.8)

Net interest

(2.1)

(2.9)

(3.2)

(3.5)

(3.1)

(2.5)

Net operating cash flow

40.9

41.8

27.8

41.7

45.1

59.6

Capex

(20.0)

(16.0)

(30.0)

(40.8)

(25.9)

(27.1)

Acquisitions/disposals

0.1

(78.2)

(18.8)

0.0

0.0

0.0

Equity financing

23.3

0.0

0.0

0.0

0.0

0.0

Dividends

(8.1)

0.0

(4.3)

(10.4)

(11.2)

(14.8)

Other

(3.1)

(3.4)

4.0

0.0

0.0

0.0

Net Cash Flow

33.1

(55.8)

(21.3)

(9.5)

8.0

17.7

Opening net debt/(cash)

80.5

47.4

103.2

124.5

134.0

126.0

Closing net debt/(cash)

47.4

103.2

124.5

134.0

126.0

108.3

Source: Kendrion, Edison Investment Research

Contact details

Revenue by geography (FY21)

Kendrion N.V.

Vesta Building - 5th floor

Herikerbergweg 213
1101 CN Amsterdam
The Netherlands
+31(0)850731500
www.kendrion.com

Contact details

Kendrion N.V.

Vesta Building - 5th floor

Herikerbergweg 213
1101 CN Amsterdam
The Netherlands
+31(0)850731500
www.kendrion.com

Revenue by geography (FY21)

Management team

CEO: Joep van Beurden

CFO: Jeroen Hemmen

Mr Joep van Beurden has been the company’s CEO since December 2015. In his first three years he led the company’s strategy of 'simplify, focus and grow’, which resulted in fewer plants, fewer management layers and better margins. Before 2015, Joep van Beurden was CEO of UK-listed CSR for about eight years and CEO of NexWave for about three years. Before that he had roles at Royal Dutch, Philips, Canesta and McKinsey.

Mr Jeroen Hemmen was appointed CFO in July 2019. He joined Kendrion in 2005 and occupied several financial roles such as group treasurer, group controller, finance director industrials and finance director automotive. Before 2005, Jeroen Hemmen held financial planning and treasury roles at Rabobank and AVEBE.

Management team

CEO: Joep van Beurden

Mr Joep van Beurden has been the company’s CEO since December 2015. In his first three years he led the company’s strategy of 'simplify, focus and grow’, which resulted in fewer plants, fewer management layers and better margins. Before 2015, Joep van Beurden was CEO of UK-listed CSR for about eight years and CEO of NexWave for about three years. Before that he had roles at Royal Dutch, Philips, Canesta and McKinsey.

CFO: Jeroen Hemmen

Mr Jeroen Hemmen was appointed CFO in July 2019. He joined Kendrion in 2005 and occupied several financial roles such as group treasurer, group controller, finance director industrials and finance director automotive. Before 2005, Jeroen Hemmen held financial planning and treasury roles at Rabobank and AVEBE.

Principal shareholders

(%)

Teslin Capital Management

15.1%

Kempen Capital Management

10.1%

T. Rowe Price

7.1%

FIL

6.3%

Invesco

5.4%

Cross Options

5.4%

Add Value

3.2%

Midlin

3.1%


General disclaimer and copyright

This report has been commissioned by Kendrion and prepared and issued by Edison, in consideration of a fee payable by Kendrion. 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.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Kendrion and prepared and issued by Edison, in consideration of a fee payable by Kendrion. 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 2022 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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