Kendrion — Higher visibility on realising FY25 targets

Kendrion’s Q423 results showed comparable trends with Q323. Despite 4.5% y-o-y higher average sales prices, group revenues declined 6% y-o-y organically, which was caused by a decline of 17% yoy in Industrial, while Automotive showed further growth of 6% y-o-y. FY23 revenues were flat at €518.5m, with organic growth of 1% y-o-y and a negative currency effect of 1% y-o-y.

Industrial (49% of revenues) reported 18% y-o-y lower revenues in Q423, mainly due to the decline of 30% y-o-y in Industrial Brakes, whereas the decline in Industrial Actuators & Controls was limited to 2% y-o-y.

After Industrial Brakes showed an impressive 20% y-o-y revenue growth in both FY21 and FY22, Kendrion expanded the capacity of this activity in anticipation of further market growth. In 2023, however, markets were weaker than expected, particularly in Germany and China. The company’s products are mostly integrated in electromotors for segments such as robotics and automated warehouses, and these market segments were under pressure. Kendrion also felt the impact of destocking, particularly in H223, with organic revenues down 28% y-o-y in both Q3 and Q4. During the analyst meeting, management commented that the market for Industrial Brakes is now stabilising at the Q323 and Q423 level, while the destocking effect seems to be over.

Industrial Actuators & Controls performed relatively well despite weaker markets. Organic revenues were down only 1% y-o-y in Q4 after -2% y-o-y in Q3. Kendrion is positive about 3T, an electronics and embedded systems expert acquired in September 2021, which showed 23% revenue growth in FY23. This helped the divisional margins as 3T carries higher margins. There were further positive developments in markets for medical devices and washing machines (locks and valves), beverage dispensing systems and inductive heating systems. The company also mentioned its cooperation with Dürr Dental, with the first water/air supply units for dental chairs sold.

Automotive (51% of revenues) further recovered and showed 5% y-o-y revenue growth in Q423. With weaker market conditions, Automotive Core showed flat revenues in Q423, helped by higher sales prices (6% for the full year). Revenues in Automotive E rose 16% y-o-y in Q4, which is an improvement compared to the 7% growth in Q323. The new plant in China successfully started operations in Q323, and management commented that two of the six new projects had already contributed a couple of million euros in the fourth quarter, explaining the reported acceleration in revenue growth in Automotive E. Volumes from existing sound and suspension programs also increased.

During the year, input price pressure eased somewhat and price increases in Automotive offset the negative mix effect (ie larger decline in higher-margin Industrial), resulting in a flat gross margin in Q423 (FY23: -120bp to 46.9%).

Normalised EBITDA in Q423 declined 14% y-o-y to €10.3m, with gross profit down 8% yoy and opex 7% y-o-y lower (with cost savings offsetting wage inflation). The EBITDA margin was 70bp lower yearonyear at 8.6%, comparable to the decline of 70bp in Q323. Part of the decline in EBITDA margin was caused by the effect of price increases. In FY23, normalised group EBITDA declined 7% yoy, with Industrial’s EBITDA margin down 310bp to 14.1%, while Automotive improved its margin by 240bp to 6.5%.

In Q423, Kendrion recorded €2.4m exceptional items, which included €1.5m in restructuring costs for Industrial Brakes to lower the fixed cost base by more than €1m. The Q422 results included a large impairment related to Automotive.

Free cash flow in Q423 was a positive €16.3m, almost equal to Q422’s free cash flow. As a result, net debt declined by €15m to €145m versus Q3. Working capital as a percentage of revenues declined from 12.7% in FY22 to 12.3% in FY23 and in the analyst meeting management commented that 12% is a good target for the next few years. Net debt/EBITDA decreased by 20bp to 2.7x versus Q3, which is well within the covenant of below 3.25x. Kendrion successfully extended its revolving credit facility of €102.5m by one year to April 2027.

Kendrion expects the current lower economic activity levels to persist in the first half of 2024 but anticipates improvements in the second half, with continued growth in Automotive for the full year. At the time of the Q323 results, management said it had taken cost-saving measures, including short-term work in Germany, which could deliver savings of around €1m per quarter. During Q423, it took further measures to lower the fixed cost base in Industrial Brakes by around €1m.

Kendrion remains positive about its order book, supported by €230m of new nominations for Automotive E, comprising nine new projects, of which six are in China. It ramped up two new projects in China in Q423 and will ramp up another four projects during FY24. These projects are for its sound and suspension products and management sees high potential for its third group of products within Automotive E, smart actuation, with an order pipeline of €1.3bn. In Europe, it has received the first order for sensor cleaning, planned to be launched in 2025.

Kendrion also received €70m in contract extensions within Automotive Core, which will further optimise its profitability as production lines for these extensions are already fully depreciated. Exhibit 3 shows the new nominations in automotive over the period 2019–23, with a good book-to-bill ratio of 3.2x for Automotive E in FY23.

In 2020, Kendrion set financial targets for the FY19–25 period: organic revenue growth of at least 5% on average per year, an EBITDA margin of at least 15% in FY25 (10.2% in FY23) and a return on invested capital of at least 25% in FY25 (FY23: 13.5%). At the Q323 results, management commented that it needed a return to a more stable economic environment in the next few years to realise these targets. Currently, management seems more optimistic about achieving these targets, assuming there will be no negative surprises from external developments. During the analyst call, management commented that visibility is much better compared to a few months ago.

Kendrion’s revenue growth target points to a revenue level of €636m in FY25, with the base revenue of €467m in FY19 (including INTORQ), annual organic revenue growth of 5%, the contribution of 3T, with revenues of €12m at the time of the acquisition, and by assuming a levelling out over the years of the impact of currencies. Given FY23 revenues of €518.5m, the company needs a revenue CAGR of 10% for FY24–25. The EBITDA margin improvement from 10.2% in FY23 to 15% in FY25 assumes an EBITDA level of €95m by FY25, versus €53.1m in FY23.

Below we summarise the factors that could help Kendrion in realising its FY25 targets:

Kendrion’s share price has been under pressure in recent months, we think partly due to concerns about a potential covenant breach. Management, however, is very confident that its leverage ratio will stay within covenants of <3.25x, even with paying a normal dividend. We estimate €4.5m in cash dividend paid in FY24, which is based on 30–35% on average chosen as stock dividend. In H124, Kendrion will face a strong comparison base, but it expects to be significantly lower on its leverage ratio in the second half. The focus remains on strict cost control and working capital management, with room for lower inventories in Automotive (estimated at €3–4m). Capex is expected to be around depreciation in FY24 and, as previously mentioned, the company aims to sell the building of its closed plant in Austria, which might bring in an additional €2m in cash. On our new estimates we assume a net debt/EBITDA level of 2.1x in FY24, thus the recent concerns about a covenant breach were, in our view, misplaced.

We have made minor changes to our revenue and EBITDA estimates for FY24 and FY25. Due to the somewhat lower-than-expected basis in FY23 we have lowered our revenue forecast by 1–2% for FY24–25. For Industrial, we now expect flat revenues in FY24 with lower revenues in the first half, due to the comparison base, and a recovery in the second half. Within Automotive, we have raised our revenue growth forecast for Automotive E to 35% in FY24 and 30% in FY25 (previously 20% in both years), driven by the ramp up in new projects, while we have lowered our revenue growth estimates for Automotive Core to -1% (volume decline partly compensated for by price increases) and -3%, respectively (previously 0% in both years). In FY24 we expect 4.5% group revenue growth and 8% in FY25, driven by the energy transition and accelerating electrification.

We have raised our FY24–25 EBITDA margin estimates by 40bp for each year, due to the faster-than-expected EBITDA contribution from Automotive E and the company’s reassuring comments on Industrial returning to healthy margins in FY24.

Our new estimates are still below the company’s ambition for the period until 2025 as we are more cautious about the potential economic rebound and the pace of ramping up of new projects (timing wise contributing to FY25 or later).

For the valuation of Kendrion we use three methods: historical multiples, discounted cash flow (DCF) and peer comparison. We have rolled over our valuation methods by one year and the average now points to a value per share of €18.6 (previously €15.5). On top of this, the company offers a dividend yield of around 4%, based on a pay-out ratio of 50% of normalised net profit.

When looking at EV/EBITDA multiples for 2024e, Kendrion is valued at a discount of 35% compared to its historical valuation of 8.0x (average of the last 10 years). As Kendrion’s revenue growth and EBITDA margin development are currently slower than we had anticipated, with the FY23 EBITDA margin of 10.2% below its 10-year average of 11.5%, we believe that a discount of 15% to its historical valuation is justified (previously 10% as for higher revenue growth). This assumption gives a value per share of €18.9 (versus €16.0 per share previously).

Our DCF model is based on the following (unchanged) assumptions:

We have rolled over our DCF by one year, which now points at a value per share for Kendrion of €19.7 (previously €16.1). We show sensitivity analyses in the following exhibits, with fair value outcomes under different scenarios for terminal growth rates, EBITA margins and WACC.

When looking for a peer group for Kendrion, it is difficult to find any company that matches its profile. As Kendrion 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 (2024e 8.4x) when compared to automotive (2024e 4.4x) and that seems to be caused by the level of visibility and profitability. For Kendrion we take the blended average based on the revenue split of the two divisions (which coincidently is currently almost 50–50%). Kendrion is trading at a discount to this industrial and automotive universe of 18%, based on EV/EBITDA for 2024e (previously we used 2023e multiples). 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 this should justify a valuation in line with its peers and this assumption would imply a value per share for Kendrion of €17.1 (previously €14.3).

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 €519m in FY23 and is one of the larger players globally.

For many years, Kendrion has been active in the market segments for industrial and automotive applications. Industrial represented 49% of FY23 revenues and can be split into Industrial Brakes (25% 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 electricity distribution, control technology, industrial locks, nuclear power and inductive heating. Automotive focuses on advanced valve technology, smart actuation and control technology. Since 2023, this division is split between Core (combustion related, 68% of Automotive) and E (EV related, 32%).

Profitability is typically higher in Industrial and Kendrion expects Industrial to realise an EBITDA margin above the 15% level (assuming normalised market conditions), while Automotive achieves EBITDA margins below the 15% level.

Kendrion’s products are used in many different applications, in both the Industrial and Automotive segments. A list of these applications is shown in Exhibit 14.

Kendrion’s geographical spread shows that Europe is its largest region, accounting for 70% of total revenues, while the Americas and Asia represent the remaining 30% (see Exhibit 15). When looking at the company’s two divisions, Automotive is relatively more exposed to the Americas and Industrial is relatively more exposed to Asia.

Exhibit 16 shows examples of the company’s customers in each division. Within Industrial, the company has longstanding relationships with, for example, Lenze 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 FY23, two customers accounted for over 5% of group revenues: 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.