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Research: Industrials
Strong H1 results (EBITDA +42%) and recent major orders in the LCV and rail transport segments reinforce confidence in confirmed positive profit guidance for 2017. Moreover, it is particularly encouraging that well-defined strategic development looks increasingly to be paying off, with the current 2016/17 €6m bumper capex affording capacity expansion, efficiency gains and a more diversified revenue base. Finances remain secure (net debt/EBITDA of 1.3x for the last 12 months), allowing ample room for further investment.
Delignit |
Investment paying off
Materials |
Scale research report - Update
12 September 2017 |
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Strong H1 results (EBITDA +42%) and recent major orders in the LCV and rail transport segments reinforce confidence in confirmed positive profit guidance for 2017. Moreover, it is particularly encouraging that well-defined strategic development looks increasingly to be paying off, with the current 2016/17 €6m bumper capex affording capacity expansion, efficiency gains and a more diversified revenue base. Finances remain secure (net debt/EBITDA of 1.3x for the last 12 months), allowing ample room for further investment.
Pleasing H1
The half to June combined continued buoyancy (revenue +11%) with a significant improvement in profitability (EBITDA margin 9% against 7% y-o-y). While Automotive, Delignit’s principal sector, was to the fore (+12%) thanks, as in 2016, to strong OEM business and new orders from carmakers, Technological Applications managed to improve on a demanding comparative. Again, as previously, exports were the driver, justifying the company’s strategic broadening. The step-change in trading profit (+65%) reflected investment-led economies of scale, with material costs and depreciation respectively up just 4% and 7%.
More growth to come – 2017 forecasts maintained
Management expects more of the same in the second half. Positive conditions apart, Automotive should benefit materially from follow-up work from 2016 as well as new orders, while Technological Applications has newly won contracts for floor solutions for trains from the European subsidiary of an Asian group. Confirmed full-year guidance is for 10-15% higher sales and EBITDA margin of 7.5-8.3% against 7.5% in 2016. Clear EBITDA margin outperformance (9%) in H1 on such volume enhancement suggests that this full-year forecast may well prove cautious.
Valuation: Not cheap
Recent share price consolidation (flat over the past two months) after sharp c 30% appreciation in June suggests that the market is awaiting further evidence of Delignit’s strong growth prospects. The stock is now trading at an FY16 P/E ratio of c 33x – a premium to both its wood processing and automotive supplier peer group. Management guidance (no consensus data available) for FY17 suggests an EV/EBITDA multiple of 12.2-14.2x, which, even if cautious, is well ahead of the 5.9x peer average.
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Historical financials
Source: Delignit accounts, Edison Investment Research |
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 H117 results
Exhibit 1: Analysis of half-yearly revenue and profit
Year end December (€m) |
H116 |
H216 |
FY16 |
H117 |
FY17 F/C |
|
REVENUE |
24.4 |
24.2 |
48.6 |
27.1 |
53.5 – 55.9 |
|
Change (%) |
+6% |
+13% |
+9% |
+11% |
+10-15% |
|
Automotive |
35.2 |
|||||
Change |
+1% |
+8% |
+12% |
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Technological applications |
13.3 |
|||||
Change |
+22% |
+12% |
+8% |
|||
Germany |
17.4 |
16.6 |
34.0 |
16.6 |
||
Change |
+1% |
+2% |
+1% |
-5% |
||
Exports |
7.0 |
7.6 |
14.6 |
10.5 |
||
Change |
+23% |
+46% |
+34% |
+50% |
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Other income |
0.5 |
0.4 |
0.9 |
0.3 |
||
Total income |
24.9 |
24.6 |
49.5 |
27.4 |
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Material costs |
(14.9) |
(14.0) |
(28.9) |
(15.5) |
||
Labour costs |
(6.6) |
(6.9) |
(13.5) |
(7.6) |
||
Other operating costs |
(1.7) |
(1.7) |
(3.4) |
(1.8) |
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EBITDA |
1.7 |
2.0 |
3.7 |
2.5 |
4.0 – 4.6 |
|
Margin |
7.0% |
8.1% |
7.5% |
9.0% |
+7.5 – 8.3% |
|
Depreciation |
(0.7) |
(0.7) |
(1.4) |
(0.7) |
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EBIT |
1.1 |
1.3 |
2.4 |
1.7 |
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Net interest |
(0.1) |
(0.1) |
(0.2) |
(0.1) |
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Pre-Tax Profit |
1.0 |
1.1 |
2.1 |
1.6 |
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Taxation |
(0.3) |
(0.4) |
(0.7) |
(0.5) |
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Net income |
0.7 |
0.7 |
1.4 |
1.1 |
Source: Delignit accounts
While Delignit’s H1 performance was much as expected, it was no less impressive. Strong top-line growth across the board at much higher margin was accompanied by a further surge in export business (c 40% of group sales against c 30% y-o-y) and consequent successful diversification. The main activity, Automotive, saw double-digit growth thanks to continued OEM demand and additional orders from car makers. Notwithstanding positive macro conditions, such buoyancy is justifiably attributed by management to early signs that its record investment (€6m) last year and this is paying off in terms of both customised system solutions and expanded product applications.
Good control of costs (see Exhibit 1) elicited material margin gain, notably an EBITDA margin of 9% against 7% in H116. With depreciation and finance costs broadly unchanged, the revenue boost was yet more evident further down the line (pre-tax profit up 70%).
H2 confidence
Maintained trading momentum and H1 EBITDA margin (9%) well ahead of full-year guidance give confidence that management expectations should be met, if not exceeded. As shown above, even management’s worst-case EBITDA outturn in H2 (€1.5m) would imply c 6% margin, which the company has comfortably achieved throughout the last five years. Even their best-case EBITDA outturn (€2.1m) may prove cautious as the assumed margin would only be on a par with that of H216. This would seem to contradict management’s conviction that economies of scale from the ongoing investment programme should only boost margins.
Balance sheet and cash flow
Cash flow was slightly negative in H117 as a result of continued historically high capex and increased stocks. Nevertheless period end net debt of €5.8m ensures that Delignit remains lowly borrowed with minimal interest cover.
Valuation
As there are no companies that match closely Delignit’s profile, we have identified for peer comparison four wood processing companies, even if with lower exposure to the automotive sector (Westag & Getalit, Pfleiderer, Surteco and Ober) as well as four automotive suppliers (Grammer, Progress Werk, SHW and Delfingen) offering products such as seat covers, insulation, components and systems for car interiors.
As consensus forecasts for Delignit are not available, we have conducted a comparative analysis based on the last two reported years, as well as management’s EBITDA margin guidance for 2017. After the Q2 share price rally Delignit trades at a marked premium to the blended peer group on trailing P/E (84%) and trailing EV/EBITDA (127%). This suggests that the company’s robust growth outlook is priced in. Management’s newly confirmed guidance for the full-year implies EV/EBITDA of 12.2-14.2x, well ahead of the 5.9x peer average.
Exhibit 2: Peer group comparison
Market cap |
P/E (x) |
EV/EBITDA (x) |
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(€m) |
2016 |
2017e |
2016 |
2017e |
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Wood processing companies |
|||||
Westag & Getalit |
137 |
18.3 |
17.3 |
5.7 |
N/A |
Pfleiderer |
661 |
44.4 |
19.7 |
8.2 |
5.9 |
Surteco |
385 |
16.5 |
14.6 |
7.0 |
6.8 |
Ober |
18 |
14.1 |
N/A |
7.6 |
N/A |
Automotive suppliers |
|||||
Grammer |
568 |
11.3 |
10.7 |
5.9 |
5.8 |
Progress Werk |
136 |
14.3 |
11.4 |
5.8 |
5.5 |
SHW |
228 |
17.9 |
N/A |
5.2 |
N/A |
Delfingen |
96 |
13.3 |
N/A |
7.5 |
5.6 |
Peer group average |
18.8 |
14.7 |
6.6 |
5.9 |
|
Delignit |
51 |
34.6 |
N/A |
15.0 |
12.2-14.2 |
Premium (discount) to peer group |
84% |
N/A |
127% |
124% |
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Source: Company accounts, Bloomberg, company guidance. Note: Prices as of 4 September 2017.
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 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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Issues with revenue recognition have led to the reversal of two contracts worth £2.9m in FY17, reducing expected growth from 40% to 29%. We have revised our FY17 estimates accordingly, resulting in a 76% cut to our FY17 EPS forecast. We have withdrawn our FY18 and FY19 forecasts pending clarity on underlying growth rates. The CEO has resigned; interim CFO Simon Herrick will also take on the CEO role until a new CEO is appointed.