Kendrion — Industrial weaker, Automotive still in recovery

Kendrion (AMS: KENDR)

Last close As at 04/03/2024

EUR12.30

−0.08 (−0.65%)

Market capitalisation

EUR182m

More on this equity

Research: Industrials

Kendrion — Industrial weaker, Automotive still in recovery

Kendrion’s segments showed opposite trends in Q323 with Industrial Brakes hard hit by weaker economies in Germany and China and Automotive still in recovery mode with continued high single-digit organic revenue growth. On 6% lower group revenues EBITDA declined 12% with a 70bp lower margin at 10.5%. Kendrion expects the challenging market conditions to continue in Q423 and H124 and has taken measures to protect its profitability. We have lowered our revenue estimates for FY23–25 by 5–8% and EBITDA estimates by 12–18%. The unweighted average of our three valuation methods points to a fair value of €15.5 per share.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

kendrion010

Industrials

Kendrion

Industrial weaker, Automotive still in recovery

Q323 results review

Industrial engineering

13 November 2023

Price

€10.96

Market cap

€167m

Net debt (€m) at 30 September 2023

160

Shares in issue

15.3m

Free float

38%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.9)

(32.9)

(29.4)

Rel (local)

(11.8)

(30.0)

(34.3)

52-week high/low

€19.6

€10.66

Business description

Kendrion develops, manufactures and markets high-quality actuator products for industrial applications (50% of 9M23 revenues) and automotive (50%). The geographical spread of FY22 revenues was Germany 39%, other Europe 30%, the Americas 16% and Asia 15%.

Next events

Q423 results

28 February 2024

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

Kendrion’s segments showed opposite trends in Q323 with Industrial Brakes hard hit by weaker economies in Germany and China and Automotive still in recovery mode with continued high single-digit organic revenue growth. On 6% lower group revenues EBITDA declined 12% with a 70bp lower margin at 10.5%. Kendrion expects the challenging market conditions to continue in Q423 and H124 and has taken measures to protect its profitability. We have lowered our revenue estimates for FY23–25 by 5–8% and EBITDA estimates by 12–18%. The unweighted average of our three valuation methods points to a fair value of €15.5 per share.

Year
end

Revenue
(€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/21

463.6

55.8

1.39

0.69

8.2

15.1

12/22

519.3

57.4

1.45

0.72

6.7

10.7

12/23e

523.2

54.4

1.13

0.56

6.0

9.7

12/24e

547.9

61.4

1.53

0.76

5.2

7.2

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

Industrial Brakes hit hardest by weaker markets

The revenue decline of 6% y-o-y in Q323 was below our expectations as we had anticipated growth in the quarter. Market conditions have deteriorated and Industrial Brakes, in particular, was hard hit, showing a 30% y-o-y decline in revenues, whereas Industrial Actuators & Controls did relatively well with a decline of only 3% yo-y (a more balanced product portfolio and less dependent on China). Automotive compensated for the decline in Industrial by reporting 9% organic revenue growth, which was largely price related (to cover input pressure). Despite the higher gross margin, helped by 5% higher prices and product mix, and flat operating costs, as cost savings compensated for wage inflation, EBITDA declined 12% y-o-y.

Cautious in short-term outlook

Net debt/EBITDA slightly increased to 2.9x, which is still within the covenant of 3.25x. The company’s focus is on strict cost control, working capital management and prudent investment to keep its financial position healthy. We estimate net debt/EBITDA of 2.7x at year-end, driven by good cash flow generation in Q423. Kendrion expects trading conditions to remain challenging in Q423 and H124 and has taken measures to protect its margins. We have lowered our estimates for FY2325, mainly to reflect the slowdown in Industrial, while we expect continued growth in Automotive, driven by electric vehicle-related projects. Our new estimates for FY23–25 reflect a revenue CAGR of 5%, an EBITDA CAGR of 10% and a normalised EPS CAGR of 16%.

Valuation: Upside towards €15.5 per share

The company is trading at an FY23e EV/EBITDA multiple of 6.0x and a P/E of 9.7x. For the valuation of Kendrion we look at three methods: historical multiples, discounted cash flow (DCF) and peer comparison. On lower estimates and lower peer multiples, the average of these methods now points to a value of €15.5 per share (versus €21.5 previously).

Q323: Industrial weaker, Automotive still in recovery

Kendrion’s Q323 results showed a rapid deterioration in several Industrial segments while Automotive still seems to be in recovery mode. Group revenues declined 6% y-o-y with an organic decline of 5% and a negative currency impact of 1%. Higher average sales prices contributed 5% yo-y to revenues, which was expected and at the same level as in Q223. In H123, the company further increased its prices to compensate for the prolonged input pressure (material cost and wage inflation), with the full effect in the second half. During the analyst call, management commented on the challenging market conditions in the quarter, which it had warned about at the Q223 results, pointing to the risk of recession, the lacklustre economy in China and the weaker German machine-building industry. Weaker market conditions in Germany and China were indeed the main reasons for the decline in revenues in Q323.

A ransomware attack in August 2023 did not have a substantial financial impact, according to the company, other than external consulting costs and a temporary increase in working capital (customers could not be invoiced for one week). Kendrion was able to resume production within one week.

Exhibit 1: Kendrion Q323 results

€m

Q122

Q123

Change

Revenues

132.9

124.5

-6%

Gross margin

47.3%

48.7%

EBITDA normalised

14.9

13.1

-12%

EBITDA margin

11.2%

10.5%

Depreciation

(6.0)

(5.7)

-5%

Amortisation, acquisition related

(1.2)

(0.8)

-33%

EBIT normalised

7.7

6.6

-15%

EBIT margin

5.8%

5.3%

Non-recurring items

(1.6)

(0.8)

EBIT reported

6.1

5.8

-5%

Financial income and expenses

(0.5)

(2.2)

Pre-tax income

5.6

3.6

-36%

Taxes

(1.6)

(1.2)

-25%

Net profit

4.0

2.4

-40%

Net profit normalised for amortisation and non-recurring

6.1

3.6

-41%

Shares outstanding, average

15.1

15.3

1%

EPS – reported (€)

0.27

0.16

-41%

EPS – normalised (€)

0.40

0.24

-42%

Source: Kendrion

After four quarters of lower gross margin, Kendrion managed to increase its gross margin in Q3 by 140bp to 48.7%, driven by the 5% higher average sales prices and its product mix. According to management, this mix is not related to the split between Industrial and Automotive but due to several activities throughout the company which have higher margins realising above-average growth. For example, subsidiary 3T in the Netherlands showed a strong performance and it clearly has higher margins as it focuses on industrial control technology rather than production.

Last year’s cost-saving measures in Automotive and this year’s reduction in discretionary operating costs compensated for continued wage inflation, resulting in flat operating expenses, after an increase of 3.3% in H123. This flat opex and the 3% lower gross profit have led to a 12% decline in EBITDA to €13.1m, or a margin decline of 70bp to 10.5%.

Normalised net profit declined by 41% yo-y to €3.6m, mainly due to higher financing costs because of the higher interest rates and net debt. This brings the 9M23 normalised net profit to €13.6m, a decline of 28%.

Net debt remained stable at around €160m compared to the end of Q223, as the free cash flow of €3m was offset by higher lease liabilities. Net debt/EBITDA slightly increased to 2.9x and although this still is within the covenant of 3.25x, the development of this ratio will be closely watched. During the analyst meeting, management said it would focus on strict cost control, working capital management and prudent investment to keep its financial position healthy. The ransomware attack had a temporary negative effect on working capital as customers could not be invoiced for one week, but payments were received in October, thereby helping Q4 cash flow (we estimate several million euros). Kendrion still expects a positive free cash flow for the full year after the decline of €9.5m in 9M23 and we estimate the net debt/EBITDA level to slightly decline to 2.7x by year-end. The company is still planning to sell its building in Austria, where last year production was transferred to two other Kendrion locations. This could bring in an estimated €2–3m cash, helping to bring down net debt further.

Divisional performances

Kendrion’s segments showed opposite trends in Q3 with Industrial hard hit by weaker economies in Germany and China, and Automotive still in recovery mode with continued high single-digit organic revenue growth (although largely price driven).

Industrial Brakes showed a significant drop of 30% y-o-y in revenues, an impact of the weaker German and Chinese economies, particularly in the wind power and industrial automation segments. At the time of the H123 results, Kendrion had anticipated a recovery in China, but this has not occurred. The comparison base was also strong as this activity showed 28% y-o-y growth in Q322. During the analyst call, management commented that there were no major differences in growth between the months within the quarter. Kendrion had seen destocking effects during the year and management stated that this effect is now behind it. The company has kept its market share and management does not anticipate further market deterioration, so we assume the performance in Q423 should potentially be better than in Q3.

Industrial Actuators & Controls did relatively well as it has a more balanced portfolio and less exposure to China compared to Industrial Brakes. Revenues in Q3 declined 3% y-o-y but are up 3% y-o-y year-to-date. The good performance in the market segments control technology, aviation and medical was offset by weaker industrial automation.

Exhibit 2: Kendrion’s segment revenues in Q323

Revenues, €m

Q322

Q323

Change

Change currencies

Change organic

Industrial Brakes

40.1

28.2

-30%

-2%

-28%

Industrial Actuators & Controls

32.5

31.5

-3%

-1%

-2%

Industrial total

72.6

59.7

-18%

-2%

-16%

Automotive Core (combustion related)

43.8

47.2

8%

-2%

10%

Automotive E (electric vehicle related)

16.5

17.6

7%

-1%

8%

Automotive total

60.3

64.8

7%

-2%

9%

Source: Kendrion, Edison Investment Research

Automotive continued its high single-digit organic revenue growth path of the past few quarters by reporting 9% y-o-y growth. The organic revenue growth in Core of close to 10% was largely driven by price increases, while the organic growth in Automotive E of 8% was largely volume driven. With new projects ramping up in Automotive E this segment should show accelerating growth from Q423. In previous analyst calls, management has indicated that these projects have combined annualised revenues of around €20m or over 30% compared to reported FY22 segment revenues.

The lacklustre Chinese economy affected Kendrion’s performance year-to-date. China is one of Kendrion’s strategic growth areas and the company’s new plant has been operational since July 2023, offering room for revenue growth of around €50m to €100m in the next three to four years. As previously communicated, the company is ramping up seven new projects in Automotive E in China and management expects a modest contribution from these projects to revenues in Q423 and a substantial contribution in FY24, which should lead to growth in the overall Automotive division.

Cautious in short-term outlook

Kendrion expects the challenging market conditions to continue in Q423 and into H124. Based on public information and the company’s own visibility, the fourth quarter will be difficult. Kendrion is also cautious about the first half of next year (although visibility does not reach that far) and management is preparing for the challenging market conditions to continue.

We have lowered our estimates for FY23–25, mainly in the Industrial division. Group revenue growth is lowered by 5–8% and EBITDA by 12–18%. Our FY23 revenue estimate is lowered by 5% and now assumes 1% y-o-y growth after the 2% y-o-y reported growth in 9M23. For Automotive we estimate 8% growth and for Industrial a decline of 5%.

Based on 5% growth in Automotive Core and 20% in Automotive E, we estimate organic revenue growth in Automotive at >9% in both FY24 and FY25. For Industrial we now expect no revenue growth in FY24, with the second half compensating for an anticipated decline in the first half (also due to comparison base), followed by a recovery in FY25. These divisional forecasts boil down to 5% revenue growth at group level in FY24, followed by 9% in FY25.

Our new estimates for FY23–25 reflect a CAGR in revenues of 5%, in EBITDA of 10% and in normalised EPS of 16%.

The company did not reiterate its medium-term targets, which are an average organic revenue growth of at least 5% in the FY19–25 period and an EBITDA margin of 15% by 2025. During the analyst meeting, management stated that it stood by its comments made at the H123 results that these targets are still within reach, but the company will need more favourable economic conditions than those of the past three years. Management remains positive about the company’s long-term outlook, driven by electrification and green energy trends.

Exhibit 3: Change in estimates

€m

2023e

2024e

2025e

Old

New

Change

Old

New

Change

Old

New

Change

Sales

551.2

523.2

-5.1%

592.1

547.9

-7.5%

639.1

596.0

-6.7%

EBITDA normalised

61.6

54.4

-11.7%

74.8

61.4

-18.0%

91.0

77.3

-15.1%

EBITDA margin

11.2%

10.4%

12.6%

11.2%

14.2%

13.0%

EBITA margin

6.6%

5.9%

8.3%

6.8%

10.1%

8.9%

Net profit normalised

20.8

17.1

-17.5%

30.7

23.4

-24.0%

42.3

34.9

-17.4%

EPS normalised (€)

1.37

1.13

-17.5%

2.01

1.53

-24.0%

2.77

2.29

-17.4%

DPS (€)

0.68

0.56

-17.5%

1.01

0.76

-24.0%

1.39

1.14

-17.4%

Source: Edison Investment Research

Valuation

For the valuation of Kendrion, we look at three different valuation methods: historical multiples, DCF and peer comparison (see our outlook note for more details).

Historical valuation: based on our forecast 2023e EV/EBITDA multiple, Kendrion is trading at a discount of 27% compared to its historical valuation of 8.2x (last nine years). As Kendrion’s FY23e EBITDA margin of 10.4% is currently below its nine-year average of 11.6%, we think that a discount of 10% to its historical valuation is justified. This assumption gives a value per share of €16.0 (down from €20.2 per share previously).

DCF valuation: we have made one change to our model assumptions by raising the market equity risk premium from 5% to 6% to reflect the current uncertain economic environment and the low visibility in both of the company’s divisions. This increases the WACC from 8.4% to 9.4% and, combined with our lower estimates, this reduces the DCF fair value to €16.1 (€23.4 previously).

Peer group comparison: we have not changed our assumption that a valuation in line with its peers is merited based on the 2023e EV/EBITDA multiple, versus the current discount of 13%. As peer multiples have come down in recent months, this assumption delivers a value per share of €14.3, down from €20.9.

The unweighted average of these valuation methods points to a valuation of €15.5 per share (previously €21.5).

Exhibit 4: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2023e EV/EBITDA at 10% discount to its historical multiples

16.0

DCF

Terminal growth 1.5%, terminal EBITA margin 7.5%

16.1

Peer group

2023e EV/EBITDA in line with peers

14.3

Average value per share

15.5

Current share price

11.0

Source: Edison Investment Research

Exhibit 5: Financial summary

€m

2020

2021

2022

2023e

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

396.4

463.6

519.3

523.2

547.9

596.0

Gross Profit

191.0

225.8

249.3

246.3

260.7

286.5

EBITDA normalised

44.6

55.8

57.4

54.4

61.4

77.3

EBITDA reported

40.2

51.7

(6.6)

53.4

61.4

77.3

Depreciation & Amortisation

(25.7)

(23.9)

(23.3)

(23.5)

(23.9)

(24.3)

EBITA normalised

18.9

31.9

34.1

30.8

37.5

53.0

Amortisation of acquired intangibles

(4.4)

(3.9)

(4.7)

(3.2)

(3.2)

(3.2)

Exceptionals (Edison definition)

(4.4)

(4.1)

(64.0)

(1.0)

0.0

0.0

EBIT reported

10.1

23.9

(34.6)

26.6

34.3

50.8

Net Interest

(4.4)

(3.7)

(5.1)

(7.6)

(6.5)

(5.9)

Participations

0.0

(0.1)

0.0

0.0

0.0

0.0

Profit Before Tax

5.7

20.1

(39.7)

19.0

27.8

45.0

Reported tax

(1.4)

(5.7)

(6.6)

(5.2)

(7.7)

(12.2)

Profit After Tax

4.3

14.4

(46.3)

13.8

20.2

32.7

Net income (normalised)

11.7

20.6

21.7

17.1

23.4

34.9

Net income (reported)

4.3

14.4

(46.3)

13.8

20.2

33.7

Average number of shares (m)

14.8

14.8

15.0

15.2

15.3

15.3

Total number of shares (m)

14.9

14.9

15.1

15.3

15.3

15.3

EPS normalised before amortisation (€)

0.79

1.39

1.45

1.13

1.53

2.29

EPS reported (€)

0.29

0.97

(3.09)

0.91

1.32

2.21

DPS (€)

0.40

0.69

0.72

0.56

0.76

1.14

Revenue growth

-3.9%

17.0%

12.0%

0.8%

4.7%

8.8%

Gross Margin

48.4%

48.3%

48.1%

47.1%

47.6%

48.1%

EBITDA Margin

11.3%

12.0%

11.1%

10.4%

11.2%

13.0%

Normalised Operating Margin

4.8%

6.9%

6.6%

5.9%

6.8%

8.9%

BALANCE SHEET

Fixed Assets

299.6

324.5

278.5

278.7

279.8

282.0

Intangible Assets

159.1

183.4

126.5

125.4

124.3

123.1

Tangible Assets

118.7

121.9

131.6

132.9

135.2

138.4

Investments & other

21.8

19.2

20.4

20.4

20.4

20.4

Current Assets

129.5

166.3

198.1

192.5

201.6

222.3

Stocks

61.7

79.7

85.1

85.7

89.2

96.4

Debtors

47.2

56.8

58.8

62.8

65.8

71.5

Other current assets

7.6

11.2

16.4

16.9

17.7

19.3

Cash & cash equivalents

13.0

18.6

37.8

27.0

28.9

35.0

Current Liabilities

87.9

97.6

104.8

107.0

115.8

129.7

Creditors

44.0

51.6

54.9

52.6

55.0

59.9

Other current liabilities

31.9

33.2

38.4

37.9

39.3

42.3

Short term borrowings

12.0

12.8

11.5

16.5

21.5

26.5

Long Term Liabilities

137.8

170.2

196.8

185.8

175.8

165.8

Long term borrowings

104.2

136.4

166.6

156.6

146.6

136.6

Other long term liabilities

33.6

33.8

30.2

29.2

29.2

29.2

Shareholders' equity

203.4

223.0

175.0

178.3

189.8

208.7

Balance sheet total

429.1

490.8

476.6

471.1

481.4

504.2

CASH FLOW

Op Cash Flow before WC and tax

40.6

54.6

52.1

52.4

61.4

77.3

Working capital

5.4

(17.4)

(4.9)

(8.0)

(3.4)

(6.7)

Tax

(1.3)

(6.2)

(5.2)

(5.2)

(7.7)

(12.2)

Net interest

(2.9)

(3.2)

(4.1)

(7.2)

(6.6)

(6.0)

Net operating cash flow

41.8

27.8

37.9

31.9

43.7

52.4

Capex

(16.0)

(30.0)

(37.7)

(26.9)

(28.2)

(29.6)

Acquisitions/disposals

(78.2)

(18.8)

(0.2)

0.0

0.0

0.0

Equity financing

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

0.0

(4.3)

(7.1)

(10.9)

(8.6)

(11.7)

Other

(3.4)

(2.1)

(2.6)

0.0

0.0

0.0

Net Cash Flow

(55.8)

(27.4)

(9.7)

(5.8)

6.9

11.1

Opening net debt/(cash)

47.4

103.2

130.6

140.3

146.1

139.2

Closing net debt/(cash)

103.2

130.6

140.3

146.1

139.2

128.1

Source: Kendrion accounts, Edison Investment Research


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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.

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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.

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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.

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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