DVS TECHNOLOGY — FY21 margins expected to exceed FY19

DVS Technology (DB: DIS)

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17.00

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Research: Industrials

DVS TECHNOLOGY — FY21 margins expected to exceed FY19

DVS TECHNOLOGY’s FY20 results were obviously affected by the coronavirus pandemic, with revenues declining by 26% to €194m. After an operating loss of €1.5m in the first half, the company reported positive EBIT of €4.3m for FY20, driven by the benefits of several cost measures taken in the first half, which included a reduction in staff numbers. FY21 guidance is for an 11% increase in revenues and a 180bp improvement in the EBIT margin to 3.9%. Future Mobility is becoming more important in the company’s revenue mix (37% of order intake in FY20) and we expect DVS TECHNOLOGY to benefit from the continuing market transformation towards e-mobility.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

DVS TECHNOLOGY

FY21 margins expected to exceed FY19

Industrials

Scale research report - Update

13 July 2021

Price

€16.60

Market cap

€161m

Share price graph

Share details

Code

DIS

Listing

Deutsche Börse Scale

Shares in issue

9.7m

Net debt at 31 December 2020

€66m

Business description

Besides engineering and manufacturing machine tools, as well as grinding and honing tools, DVS TECHNOLOGY operates two production sites where automotive parts are machined in series production exclusively on DVS machines. The company has three business units: Machine Tools & Automation, Tools & Components and Production.

Bull

Strong market position.

Few strategic threats.

Growth in contract manufacturing and tooling.

Bear

Very low free float of 2%.

Several loss-making subsidiaries.

Development of traditional automotive industry.

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

DVS TECHNOLOGY’s FY20 results were obviously affected by the coronavirus pandemic, with revenues declining by 26% to €194m. After an operating loss of €1.5m in the first half, the company reported positive EBIT of €4.3m for FY20, driven by the benefits of several cost measures taken in the first half, which included a reduction in staff numbers. FY21 guidance is for an 11% increase in revenues and a 180bp improvement in the EBIT margin to 3.9%. Future Mobility is becoming more important in the company’s revenue mix (37% of order intake in FY20) and we expect DVS TECHNOLOGY to benefit from the continuing market transformation towards e-mobility.

FY20 results show impact of the pandemic

DVS TECHNOLOGY’s FY20 results were affected by the coronavirus pandemic, with a 26% revenue decline. The second half showed minimal recovery compared to the first half with a revenue decline of 24% after the 28% decline in H120. The global machine tool market showed a decline of 20%, with a 35% decline in Germany (source: VDW, the German Machine Tool Builders' Association). The EBIT margin declined 150bp to 2.1%, which is a clear improvement after the loss in H120. Several measures taken after the start of the pandemic, including a reduction in staff numbers, contributed to this improvement.

Guidance for FY21 is for growth and margin recovery

Although order intake in 2020 was 16% lower y-o-y, management is relatively optimistic for 2021, expecting revenues to be 11% higher at €215m. This is below the level in 2019 and the company commented that it might take three to four years for the automotive sector to fully recover to pre-pandemic levels. The EBIT margin is anticipated to improve by 180bp to 3.9%, driven by further cost savings and operating leverage, and will thereby exceed the reported level of 3.6% in 2019.

E-mobility should drive long-term growth

The e-mobility segment is steadily becoming more important to the company and represented 37% of order intake in FY20, up from 34% in H120. DVS TECHNOLOGY will clearly benefit from the transformation towards e-mobility as it offers products and services for this segment in all of its three business areas (machines, tools and production). In the short term, however, uncertain market conditions and a slow recovery in the traditional automotive sector will influence its financial performance. The free float is only 2% and there are currently no consensus estimates available for DVS TECHNOLOGY.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

246.9

13.6

0.75

0.25

22.1

1.5

12/18

264.0

14.6

0.89

0.25

18.7

1.5

12/19

261.6

5.1

0.56

0.00

29.6

N/A

12/20

193.8

(1.3)

(0.13)

0.00

N/A

N/A

Source: DVS TECHNOLOGY

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.

Review of FY20 results

DVS TECHNOLOGY consists of 15 operationally independent production companies in the machine tool and abrasives industry, as well as three international sales and service companies. DVS TECHNOLOGY is split into three divisions, as shown in Exhibit 1. DVS Machine Tools is involved in the production of high-precision machine tools and automation units and associated services (technical services, spare parts, overhauls/repairs), DVS Production consists of series production/system suppliers of automotive and commercial vehicle components on DVS machine tools, and DVS Tools & Components focuses on the customised development, production and distribution of tools and abrasives. Several smaller units are grouped in ‘Other’, which represented 4% of total revenues in FY20.

Geographically, home country Germany is still the largest revenue generator, representing 43% of total revenues in FY20 (see Exhibit 2). The company realises 25% of revenues in the rest of Europe, 24% in Asia and the remaining 8% in the US. In 2020, revenue declines were the largest in the rest of Europe and the US.

Exhibit 1: Revenues split by segment, FY20

Exhibit 2: Revenues split by geography, FY20

Source: DVS TECHNOLOGY

Source: DVS TECHNOLOGY

Exhibit 1: Revenues split by segment, FY20

Source: DVS TECHNOLOGY

Exhibit 2: Revenues split by geography, FY20

Source: DVS TECHNOLOGY

DVS TECHNOLOGY’s FY20 results were clearly affected by the coronavirus pandemic, with revenues declining by 26% to €194m after a decline of 28% in the first half. The decline was larger than company guidance at the time of the first half results, ie a decline of 19%. The global machine tool market showed a decline of around 20% in 2020, according to VDW, with a drop in production and turnover of 35% in the machining segment in Germany which is relevant for DVS TECHNOLOGY.

In order to mitigate the effects of the coronavirus pandemic, DVS TECHNOLOGY took extensive measures in H120 such as strengthening liquidity management with the focus on working capital (eg machine leasing expenses were suspended for three to six months), short-time working was introduced in Germany, and personnel and cost adjustments were made (the number of staff was reduced by 102 to 1,332 in 2020).

As a result of the lower revenues, EBITDA declined by 33% to €13.5m after a much stronger decline of 72% in the first half. This reflects an improvement in profitability in the second half. The results were supported by €2.5m by making use of Kurzarbeit (short-time working facility). The decline in FY20 EBITDA margin was 90bp y-o-y after the decline of 460bp in the first half. DVS TECHNOLGY (and other German companies) calculates the EBITDA margin on the basis of total operating income, which can be affected by swings in inventories and capitalised own work.

EBIT dropped by 56% to €4.3m after a loss of €1.5m in the first half. The EBIT margin declined by 150bp y-o-y to 2.1%. Both DVS Production South and DVS Production GmbH were restructured in 2020 and generated profits again after being loss-making in 2019. However, subsidiary Buderus (grinding technology) was again loss-making and reported a loss of €4.4m. This company represents around 10% of total revenues. Due to an improvement in incoming orders, DVS TECHNOLOGY expects higher revenues from Buderus in 2021 and a reduced loss before tax of €1m, followed by break-even in 2022.

DVS TECHNOLOGY reported a loss before tax of €1.3m, but this included a charge of €2.3m related to the sale of one of its associates (Heyligenstaedt Werkzeugmaschinen). Adjusted for this, pre-tax profit (PBT) would have been €1.0m, thereby exceeding company guidance of break-even at PBT level. The reported loss per share was €0.13 compared to a profit of €0.56 per share in FY19.

Exhibit 3: FY20 results DVS TECHNOLOGY

€m, HGB accounting

FY19

FY20

% change

Revenue

261.6

193.8

-26%

Change in inventory

(2.5)

(0.6)

Capitalised own work

3.7

4.9

Total operating income

262.8

198.1

-25%

Other income

3.7

6.4

70%

Total income

266.5

204.5

-23%

Cost of materials

(113.8)

(83.3)

-27%

Personnel costs

(85.9)

(73.0)

-15%

Other operating costs

(46.6)

(34.8)

-25%

EBITDA

20.2

13.5

-33%

EBITDA margin (based on total operating income)

7.7%

6.8%

Depreciation

(10.6)

(9.2)

-13%

EBIT reported

9.6

4.3

-56%

EBIT margin (based on total operating income)

3.6%

2.1%

Net interest

(4.5)

(5.6)

N/A

Profit before tax (PBT)

5.1

(1.3)

N/A

PBT margin (based on total operating income)

1.9%

-0.7%

Tax

(5.1)

(0.0)

N/A

Net profit

0.0

(1.3)

N/A

Minorities

5.4

(1.4)

N/A

EPS (€)

0.56

(0.13)

N/A

Source: DVS TECHNOLOGY, Edison Investment Research

Outlook

Order intake declined by 16% y-o-y in 2020 to €188m, resulting in an order book of €95m, which reflects a decline of 8% y-o-y. This level ensures capacity utilisation in the first half of 2021. Build-up of the order intake over the company’s three market segments is shown in Exhibit 4. The e-mobility segment is steadily becoming more important to the company and now represents 37% of total order intake, up from 34% in the first half (the company started to provide this figure in 2020 so no comparable figure is available for 2019). Automotive was hit hard in the first half of 2020 and its share of total revenues declined further from 31% in H120 to 28% in FY20. Non-automotive has remained stable as a percentage of total revenues. This segment includes for instance agriculture, energy (windmills) and aircraft engines.

Exhibit 4: Order intake by market segment

Percentage of total

H120

FY20

Future Mobility

34%

37%

Automotive

31%

28%

Non-automotive

35%

35%

Total order intake, %

100%

100%

Total order intake, €m

85.5

187.6

Source: DVS TECHNOLOGY

With regards to its guidance for 2021, management commented in its annual report that market conditions are still uncertain with the prolonged effect of the coronavirus pandemic and that it might take three to four years for the automotive market to fully recover to pre-corona levels.

VDW expects a modest rebound in the machine tool market in 2021 with an estimated 6% growth in production. DVS TECHNOLOGY anticipates an increase in revenues of 11% to €215m, which is still well below the level of €262m in 2019. Driven by the effects of cost savings and operating leverage, the EBIT margin is expected to improve by 180bp y-o-y to 3.9%, which exceeds the 3.6% reported in 2019.

Looking beyond the coronavirus crisis, management expects the transformation to e-mobility will continue to be of great importance. In all of its three business areas, DVS TECHNOLOGY offers products and services for e-mobility (machines, tools, production).

Financials

Despite lower results, DVS TECHNOLOGY reported cash flow from operations of €9.4m. Capex was well below the 2019 level due to the pandemic and for 2021 the company anticipates a modest level of capex of €5m, which compares to cash flow from investments of €4.9m in 2020. The equity ratio increased by 70bp y-o-y to 51.8% and net debt remained stable at €66m at the end of FY20.

Due to the decline in results, net debt/EBITDA increased from 3.3x in 2019 to 4.9x in 2020. Due to the severe impact of the pandemic, the company agreed with its banks that the financial covenants were partially suspended from the beginning of April 2020 to the end of June 2021, and a so-called covenant holiday period has been agreed. Management assumes that its current financial resources will be sufficient to meet its payment obligations.

Exhibit 5: DVS TECHNOLOGY Balance sheet

€m

FY19

FY20

Fixed assets

93

86

Current assets

151

150

Cash

9

10

Balance sheet total

253

246

Equity

129

127

Interest-bearing debt

77

76

Other liabilities

47

43

Equity ratio

51.1%

51.8%

Net debt

67

66

Net debt/EBITDA (x)

3.3

4.9

Source: DVS TECHNOLGY

DVS TECHNOLOGY’s shareholder base has not changed in recent years, with 98% currently in the hands of shareholders holding a stake of more than 5% each. The shareholder base remains dominated by the Rothenberger family, which remains on board as a long-term investor.

Exhibit 6: Shareholders DVS TECHNOLOGY

Shareholder

Stake

Rothenberger 4xS Vermögensverwaltung

65.8%

Günter Rothenberger Beteiligungen

17.6%

FWI Fritz Werner International

7.9%

Maschinenfabrik Heid

6.8%

Total of more than 5% stakes

98.1%

Free float

1.9%

Source: DVS TECHNOLOGY


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