Kendrion — Industrial continues strong growth path

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 — Industrial continues strong growth path

Kendrion’s H122 results were affected by the challenging market conditions, such as supply chain constraints, volatile demand, inflation and lockdowns in China. The Industrial division is performing very well by showing ongoing revenue growth and higher margins, but the Automotive division is facing declining car production and demand volatility. The short-term outlook remains uncertain, but the long-term growth potential is still based on favourable trends such as green energy and electrification. On lower estimates, the average of three valuation methods points to a fair value of €22.2 per share.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

Kendrion

Industrial continues strong growth path

H122 results review

Industrial engineering

30 August 2022

Price

€15.36

Market cap

€229m

Net debt (€m) at 30 June 2022

146

Shares in issue

14.9m

Free float

44%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.3

(9.5)

(35.1)

Rel (local)

4.7

(9.0)

(26.8)

52-week high/low

€24.35

€14.34

Business description

Kendrion develops, manufactures and markets high-quality actuators for industrial applications (53% of revenues) and automotive applications (47%). The geographical spread of FY21 revenues was Germany 39%, other Europe 30%, the Americas 16% and Asia 15%.

Next events

Capital markets day

8 September 2022

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

Kendrion’s H122 results were affected by the challenging market conditions, such as supply chain constraints, volatile demand, inflation and lockdowns in China. The Industrial division is performing very well by showing ongoing revenue growth and higher margins, but the Automotive division is facing declining car production and demand volatility. The short-term outlook remains uncertain, but the long-term growth potential is still based on favourable trends such as green energy and electrification. On lower estimates, the average of three valuation methods points to a fair value of €22.2 per share.

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

20.9

12/21

463.6

55.8

1.39

0.70

8.2

15.1

12/22e

500.4

56.9

1.50

0.75

6.8

10.3

12/23e

536.5

70.0

2.06

1.03

5.3

7.5

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

Strong Industrial cannot compensate for Automotive

Due to the many challenges in its markets, Kendrion faced a slowdown in revenue growth during H122 with group organic growth of 9% in Q1 and 2% in Q2. This was due to the weak automotive market, which showed a decline in car production in Europe of 12% (source: IHS Markit). Strong organic revenue growth in Industrial of 16% compensated for the 4% decline in Automotive revenues, but the decline of 52% in Automotive EBITDA could not be compensated for by the (again) higher results in Industrial, resulting in a decline of 4% in group EBITDA in H122.

Short-term uncertainty, long-term great potential

Kendrion expects that markets will remain volatile for the foreseeable future, with ongoing material shortages (particularly in semiconductors) and pressure from higher raw material prices. We have lowered our estimates after the lower-than-expected results in automotive, while we are also more cautious about the pace of recovery in this market segment. We expect 8% group revenue growth in FY22 (was 10%) followed by 7–8% in FY23–24 (unchanged). For the medium to long term, Kendrion remains very positive about its growth opportunities with, for instance, a lot of interest in its automotive product lines sound, suspension and sensor cleaning products. Driven by green energy and electrification trends, we still believe that Kendrion should be able to realise accelerating revenue growth and increasing EBITDA margins towards the targeted at least 15% by 2025.

Valuation: Still upside on lower estimates

Compared to its peers, Kendrion is valued at a 14% discount based on 2022e EV/EBITDA, but we think that this can diminish over time as the company demonstrates improving growth levels and higher margins. Due to our lowered estimates, the average of historical multiples, discounted cash flow and peer comparison points at a value of €22.2 per share (down from €26.0).

H122 results: Industrial up, Automotive down

Kendrion’s H122 results showed a slowdown in growth in Q2, affected by the continuing difficult market conditions, such as inflation, geopolitical uncertainty, volatility in demand, supply chain constraints and lockdowns in China. Revenues increased 9.5% y-o-y, with recently acquired 3T (industrial control technology) contributing 2.5% and currencies having a positive effect of 2%.

Exhibit 1: Kendrion results

€m

Q221

Q222

Change (%)

H121

H122

Change (%)

Industrial

N/A

N/A

111.6

136.1

22%

Automotive

N/A

N/A

123.0

120.7

-2%

Total revenues normalised

119.3

126.9

6%

234.6

256.8

9%

Industrial

21%

11%

14%

16%

Automotive

67%

-5%

29%

-4%

Total organic revenue growth

41%

2%

22%

5%

.

Industrial

N/A

N/A

19.1

24.4

28%

Automotive

N/A

N/A

12.8

6.1

-52%

Total EBITDA normalised

15.8

13.7

-13%

31.9

30.5

-4%

Industrial

N/A

N/A

17.1%

17.9%

Automotive

N/A

N/A

10.4%

5.1%

Total EBITDA margin

13.3%

10.8%

13.6%

11.9%

.

EBIT reported

8.8

6.4

-27%

17.9

14.5

-19%

Net profit reported

5.4

3.7

-31%

11.3

8.8

-22%

Net profit normalised

6.1

5.3

-13%

12.5

12.9

3%

EPS reported (€)

0.36

0.25

-31%

0.77

0.59

-23%

EPS normalised (€)

0.41

0.35

-13%

0.84

0.86

3%

Source: Kendrion, Edison Investment Research

Organic revenue growth in H122 was 5% y-o-y, with 9% growth in the first quarter slowing down to 2% in the second quarter. Kendrion estimates the impact of the factory shutdowns in China at €3.5m in revenues or 3% in growth for the group in Q2. Adjusted for this, organic growth in Q2 would have been 5%. To counter the impact of higher input prices, Kendrion has raised its prices, which had an impact on Q2 revenues of 6% after an effect of 4–5% in Q122. Overall volumes therefore only showed a modest decline in H122.

As in Q1, growth in Q2 was fully driven by the excellent performance of Industrial (53% of group revenue) where the company benefits from the electrification and clean energy trends. This division showed 22% revenue growth in H122, with 16% growth in Q2 following the 28% in Q1. Automotive (47% of group revenue) is still facing declining car sales, with, according to IHS Markit, a 2% y-o-y decline globally and a 12% y-o-y decline in Europe (which is the most important market for Kendrion). Kendrion is performing better than the European market with a smaller reported decline of 2% in H122 (which is organically -4% and including price increases of 6%), which is driven by new orders Kendrion won in 2019 and 2020.

Within Industrial, Industrial Brakes (29% of total revenues) continued to benefit from good demand in segments such as wind power and robotics, and reported revenue growth of 19% y-o-y in H122, after 24% growth in Q1. Industrial Actuators and Controls (IAC, 24% of revenues) reported 25% revenue growth (after 34% growth in Q1) including 3T’s contribution of 12% (or €6m).

Kendrion’s activities in China (around 10% of group revenues) were affected by lockdowns, which resulted in a plant closure of around six weeks. According to management, this reduced revenues by €3.5m, or 3% of group revenues. The construction of the new factory, which will double capacity towards more than 27,000 square metres, was not further delayed by these lockdowns and management expects the plant to be fully operational in Q123.

Despite all the challenges in the market, Kendrion managed to increase its gross margin by 40bp yoy to 49%, helped by the increased sales prices and the higher revenue share of higher-margin Industrial Brakes. Staff costs and other opex increased 7.5% organically, resulting in a decline in normalised EBITDA of 4% y-o-y to €30.5m in H122, driving a margin decline of 170bp to 11.9%. These higher costs were caused by higher energy costs (according to management +€1.5m), staff inefficiencies within Automotive (due to order volatility), higher R&D costs in Automotive and the higher production levels in Industrial. According to management, the lockdowns in China had an impact of €1m on EBITDA, or 40bp. The decline in EBITDA margin was fully due to lower margins in Automotive (-540bp to 5.0%) while Industrial further increased its margin by 80bp y-o-y to a solid 17.9%. Within Automotive, Kendrion is on schedule to finalise the closure of the factory in Austria (with production lines being transferred to Germany and Romania), which should result in annual savings of €4m (of which we estimate €2m is already realised).

Free cash flow in H122 was a negative €8m. Capex was €7m higher at €16.5m and included €5.3m for the new factory in China. Inventories were €15m higher than in H121, of which €5m was related to temporary buffer stocks in relation to the relocation of the production lines of its Austrian plan. At the analyst meeting, management commented it would aim for a lower increase in inventories for the full year, which we estimate will result in a positive free cash flow.

In Q2, 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.

Foreseeable future uncertain; long-term positive

For the foreseeable future, Kendrion expects that markets will remain volatile and that supply chain constraints will continue. Although the company expects upward pressure on raw materials to continue, it also sees some easing of the raw material prices in some segments, which might bring less pressure in the second half.

After the decline of 2% y-o-y globally in car production in H122, IHS Markit (in its May 2022 report) still expects growth of 4% to 83m units for FY22 followed by 8% growth in FY23. For the period 2018–27, IHS Markit expects no growth in global car production but 46% growth in electric vehicle production (at the expense of combustion), which is a focus segment of Kendrion. Management commented at the analyst meeting that there is significant interest in sound, suspension and sensor cleaning products. Management remains very positive about its long-term growth potential, driven by the energy transition and accelerating electrification. Kendrion reiterated its medium-term targets for 2019–25: organic revenue growth of at least 5% on average per year, with an EBITDA margin of at least 15% in 2025 (12.0% in FY21) and return on invested capital of at least 25% in 2025 (FY21: 15.6%).

We have lowered our estimates after the lower-than-expected results in H122, and we have become more cautious about the pace of recovery within the automotive segment given the many uncertainties and continued volatile demand. We have again raised our estimates for the Industrial division, but this is offset by a larger adjustment for the Automotive division. We now expect 8% yoy group revenue growth, down from 10% previously. For FY23–24, we still 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. We have lowered our EBITDA estimates more significantly, due to the lower-than-expected results in Automotive in the first half and the expectation of a continuation of the difficult market conditions in the foreseeable future. We now expect a decline of 60bp in the group EBITDA margin to 11.4% in FY22, followed by a recovery of 160bp to 13% in FY23, driven by operating leverage and the easing of the shortage in materials. Despite the short-term uncertainties, we still see the opportunity for Kendrion to realise its targets for FY25. On 8 September, the company will hold a capital markets day to provide insight into its projected growth path for the coming years. Despite our lower estimates, the CAGR in our estimated EPS in 2021–24e is still a solid 25%.

Exhibit 2: Change in estimates

€m

2022e

2023e

2024e

Old

New

Change

Old

New

Change

Old

New

Change

Revenue

512

500

-2.3%

555

537

-3.3%

602

582

-3.4%

EBITDA normalised

63.1

56.9

-9.8%

74.3

70.0

-5.7%

88.1

83.4

-5.3%

EBITDA margin

12.3%

11.4%

13.4%

13.0%

14.6%

14.3%

EBITA margin

7.8%

6.8%

9.0%

8.5%

10.6%

10.1%

Net profit adjusted

26.7

22.4

-16.2%

34.3

30.8

-10.2%

44.9

40.9

-9.0%

EPS adjusted (€)

1.79

1.50

-16.2%

2.30

2.06

-10.2%

3.01

2.74

-9.0%

DPS (€)

0.89

0.75

-16.2%

1.15

1.03

-10.2%

1.50

1.37

-9.0%

Source: Edison Investment Research

Current valuation offers upside

For the valuation of Kendrion, we look at three different valuation methods: historical multiples, discounted cash flow (DCF) and peer comparison (for more details see our initiation report).

Our forecast EV/EBITDA multiple for FY22 shows that Kendrion is trading at a discount of 21% compared to its historical valuation of 8.6. We still assume that a valuation in line with its historical multiples is justified, given that current profitability is in line with the historical average, and this gives a value of €22.3 per share (from €26.5 previously, mainly due to our lower estimates and the increase in net debt). We have left the assumptions in our DCF model unchanged, but our lower estimates have resulted in a value per share of €24.6, versus €27.4 previously.

For the peer group comparison, we also have left our assumption unchanged: a valuation in line with its peers is merited based on the 2022e EV/EBITDA multiple, versus the current discount of 14%. Following the subdued valuations particularly for automotive stocks, this delivers a value per share of €19.6, down from €24.1. The average of these valuation methods points to a valuation of €22.2 per share (previously €26.0).

Exhibit 3: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2022e EV/EBITDA in line with historical multiples

22.3

DCF

Terminal growth 1.5%, terminal EBITA margin 7.5%

24.6

Peer group

2022e EV/EBITDA in line with peers

19.6

Average value per share

22.2

Current share price

15.4

Source: Edison Investment Research

Exhibit 4: Financial summary

€m

2019

2020

2021

2022e

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

412.4

396.4

463.6

500.4

536.5

581.5

Gross Profit

193.3

191.0

225.8

243.2

262.4

284.9

EBITDA normalised

43.8

44.6

55.8

56.9

70.0

83.4

EBITDA reported

38.1

40.2

51.7

54.5

70.0

83.4

Depreciation & Amortisation

(24.0)

(25.7)

(23.9)

(22.8)

(24.6)

(24.7)

EBITA normalised

19.8

18.9

31.9

34.1

45.4

58.7

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)

(2.4)

0.0

0.0

EBIT reported

11.9

10.1

23.9

26.9

40.6

53.9

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

23.4

37.5

51.4

Reported tax

(2.7)

(1.4)

(5.7)

(6.4)

(10.3)

(14.1)

Profit After Tax

8.3

4.3

14.4

17.0

27.2

37.3

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

12.6

11.7

20.6

22.4

30.8

40.9

Net income (reported)

8.3

4.3

14.4

17.0

27.2

37.3

Average number of shares (m)

13.5

14.8

14.8

14.9

14.9

14.9

Total number of shares (m)

14.9

14.9

14.9

14.9

14.9

14.9

EPS normalised before amortisation (€)

0.94

0.79

1.39

1.50

2.06

2.74

EPS reported (€)

0.62

0.29

0.97

1.14

1.82

2.50

DPS (€)

0.00

0.40

0.70

0.75

1.03

1.37

Revenue growth

-8.1%

-3.9%

17.0%

7.9%

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%

13.0%

14.3%

Normalised Operating Margin

4.8%

4.8%

6.9%

6.8%

8.5%

10.1%

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

166.4

182.6

205.1

Stocks

56.3

61.7

79.7

85.5

91.1

98.1

Debtors

42.9

47.2

56.8

61.3

65.7

71.2

Other current assets

6.9

7.6

11.2

12.1

13.0

14.0

Cash & cash equivalents

7.1

13.0

18.6

7.5

12.8

21.6

Current Liabilities

73.8

87.9

97.6

104.3

110.9

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

41.6

Short term borrowings

5.6

12.0

12.8

12.8

12.8

12.8

Long Term Liabilities

80.7

137.8

170.2

170.2

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

33.8

33.8

33.8

Shareholders' equity

203.5

203.4

223.0

229.6

245.6

267.5

Balance sheet total

358.0

429.1

490.8

504.1

516.7

536.9

CASH FLOW

Op Cash Flow before WC and tax

36.1

40.6

54.6

54.5

70.0

83.4

Working capital

13.0

5.4

(17.4)

(4.5)

(4.3)

(5.4)

Tax

(6.1)

(1.3)

(6.2)

(6.4)

(10.3)

(14.1)

Net interest

(2.1)

(2.9)

(3.2)

(3.5)

(3.1)

(2.5)

Net operating cash flow

40.9

41.8

27.8

40.1

52.3

61.4

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)

(15.4)

Other

(3.1)

(3.4)

4.0

0.0

0.0

0.0

Net Cash Flow

33.1

(55.8)

(21.3)

(11.1)

15.3

18.9

Opening net debt/(cash)

80.5

47.4

103.2

124.5

135.6

120.3

Closing net debt/(cash)

47.4

103.2

124.5

135.6

120.3

101.5

Source: Kendrion, Edison Investment Research


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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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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.

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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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