Blue Cap — Locking in growth

Blue Cap (DB: B7E)

Last close As at 12/12/2024

26.60

−0.20 (−0.75%)

Market capitalisation

117m

More on this equity

Research: Industrials

Blue Cap — Locking in growth

Blue Cap is gearing up for further expansion by joining forces with like-minded counterpart, PartnerFonds, its new major shareholder (44%) and planned merger partner. Meanwhile it continues to please, both in terms of trading and its eye for transformative investment. H217 delivered strong momentum, notably at reinvigorated Neschen, with EBITDA up by a quarter (likely doubling y-o-y, as in H1, but for sale of Biolink). For 2018, guidance of progress across the board is complemented by the largest purchase to date (Knauer-Uniplast) and associated turnaround potential. Dividend initiation despite continued investment marks Blue Cap’s success.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Industrials

Blue Cap

Locking in growth

Financials

Scale research report - Update

20 June 2018

Price

€24.80

Market cap

€100m

Share price graph

Share details

Code

B7E

Listing

Deutsche Börse Scale

Shares in issue

4.0m

Net debt at end December 2017

€11.3m

Business description

Blue Cap is a Munich-based industrial holding company, investing in medium-sized manufacturing companies with a turnover range of €10-100m.

Bull

Proven business model and management.

Strong finances set for boost from transformative transactions.

Economic downturn enhances buying opportunities.

Bear

Execution risk in resolving problems.

Valuation risk in identifying acquisitions.

Dependence on economic conditions, mitigated by diverse business and geographical mix.

Analyst

Richard Finch

+44 (0)20 3077 5700

Blue Cap is gearing up for further expansion by joining forces with like-minded counterpart, PartnerFonds, its new major shareholder (44%) and planned merger partner. Meanwhile it continues to please, both in terms of trading and its eye for transformative investment. H217 delivered strong momentum, notably at reinvigorated Neschen, with EBITDA up by a quarter (likely doubling y-o-y, as in H1, but for sale of Biolink). For 2018, guidance of progress across the board is complemented by the largest purchase to date (Knauer-Uniplast) and associated turnaround potential. Dividend initiation despite continued investment marks Blue Cap’s success.

H217 shows bumper first half was no fluke

Although H1 seemed a hard act to follow, the half to December broadly matched its doubling of EBITDA, after adjusting for the absence of Biolink profit (our estimate €2m). €11.2m for the full year comfortably beat the post-H1 consensus forecast of €9m, which had appeared cautious. Turnaround at newly included Neschen was again the driver but existing operations were enhanced in Adhesives, Medical Technology and Precious Metals Recycling. While post-H1 guidance did not quantify expected sales growth, it is creditable that H2 divisional trends were as management had indicated and consensus for FY17e of €140m was exceeded. Biolink’s sale for c €39m drove sharply lower net debt (€11m vs €40m in 2016).

Forecasts raised on another breakthrough deal

Despite optimism about organic growth, the purchase of Knauer should allow a step-change in returns, given its size (c €70m sales pa) and Blue Cap’s success in turning around temporarily distressed businesses such as Biolink and Neschen. Knauer is a long-established manufacturer of plastic packaging for the food industry (c three billion pots pa), indeed a leader in the dairy sector (yogurt). The deal typifies Blue Cap’s growing focus on larger companies (revenue €30m+ per year), as does its current disposal of small-cap WISAP to a strategic Chinese investor.

Valuation: Attractive

Blue Cap is securing growth opportunities, both now and for the longer term. Value creation at Biolink and Neschen justifies optimism about Knauer, while the proposed PartnerFonds tie-up could bring scale and similar corporate targets. Despite selling his 44% stake, Blue Cap’s founder remains CEO and will be the largest individual shareholder in PartnerFonds.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

Net Profit
(€m)

EPS
(€)

DPS
(€)

EV/EBITDA
(x)

12/16

96.6

6.8

1.2

0.3

0.00

20.6

12/17

141.8

11.2

39.9*

10.0

1.00

9.9

12/18e

181.0

12.7

4.9

1.2

0.75

9.8

12/19e

216.0

15.4

6.3

1.6

1.00

8.3

Source: Blue Cap accounts, Bloomberg consensus estimates. Note: *Including €37m exceptional gain on the June 2017 disposal of Biolink.

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 2017 results

Exhibit 1: Revenue and EBITDA

Source: Blue Cap accounts, Bloomberg consensus estimates

By any measure 2017 was a success for Blue Cap. A sharp pick-up in revenue (+47%) after several years of consolidation drove an even steeper improvement in EBITDA despite the mid-year disposal of Biolink (we estimate €2m profit forgone). In addition, the exit multiple of Biolink at an assumed chemical industry premium (c 12x 2016 EBITDA) confirmed Blue Cap’s turnaround skills and readiness to deal at the right price. Net profit of almost €40m, driven by gain on sale of Biolink, prompted the initiation of dividends and a sustainable payout policy. Strong finances (net debt of €11m or only 1x FY17 EBITDA) gave plenty of scope for profitable reinvestment.

Exhibit 2: Analysis of revenue and profit

€m

H116

H216

FY16

H117

H217

FY17

2018e

Guidance: FY18 vs FY17

Revenue

Coating technology:

Neschen*

-

3.8

3.8

30.1

29.2

59.3

Higher

Biolink**

8.3

7.8

16.1

9.3

-

9.3

-

Total Coating technology

8.3

11.6

19.9

39.4

29.2

68.6

Lower

Adhesive technology

19.0

17.7

36.7

18.0

17.7

35.7

Higher

Change

-5%

Flat

-3%

Knauer***

-

-

-

-

-

-

C 40

Production technology

7.2

12.9

20.1

5.4

9.3

14.7

Higher

Change

-25%

-28%

-27%

Precious metals recycling****

4.3

7.1

11.4

6.4

6.0

12.4

Higher

Medical technology

4.2

4.3

8.5

5.2

5.0

10.2

Higher******

Consensus

Total revenue

42.9

53.7

96.6

74.4

67.4

141.8

181.0

Change

73%

25%

45%

28%

EBITDA

3.7

3.1

6.8

7.4

3.8

11.2

12.7

Margin

8.6%

5.8%

7.0%

9.9%

5.6%

7.9%

7.0%

EBIT

2.6

2.0

4.6

6.0

2.5

8.5

9.0

Net profit

1.1

0.1

1.2

39.0*****

0.9

39.9

4.9

Source: Blue Cap accounts, consensus estimates, Edison Investment Research. Note: *From December 2016. **Sold June 2017. ***From May 2018. ****From February 2016. *****Including €37m profit on sale of Biolink at end June 2017. ******Does not take account of proposed sale of WISAP, due by end Q3.

Given our H1 results review, we focus here on the second half performance. Integration of Neschen (c 75% of revenue) was, predictably, the key factor. Apart from a continued commitment to graphics, documents and industrial applications, Neschen brought a new sales channel to Blue Cap through its international Filmolux subsidiaries. Its H2 revenue was effectively flat, with management’s focus on making a decent return on the consensus estimated purchase price of €15m through efficiencies from the elimination of substantial consulting expenses, the revision of insurance and energy contracts and leases, and organisational streamlining.

Elsewhere, as shown in Exhibit 2, overall top-line performance in H2 was also steady. Medical Technology again stole the show with a double-digit percentage rise in revenue, while Adhesives’ profit (if not revenue) benefited from cutting low-margin product. Management admits disappointment at Production Technology (sales down 28%) owing largely to project delays at Gämmerler and consolidation at SMB-David.

Adding back our €2m estimate of aforementioned Biolink forgone profit to H2 EBITDA gives €5.8m, vs €3.1m in H216, hence our reference to broadly a doubling of notional EBITDA on a par with the gain in H1, albeit in both halves flattered by the first full inclusion of Neschen.

Ever bolder acquisitions raise the stakes

Just as the integration of Neschen was the operational story of 2017, so the focus is now on absorbing Knauer. Financial detail is scarce as Knauer is private, but Blue Cap disclosure of a “low double-digit” € millions consideration paid for annual revenue of c€68m suggests similar, if slightly larger than Neschen. Management appears confident about the benefits of reorganisation and efficiencies but points out that these are early days and measures still have to be finalised. Savings apart, it expects synergies with its own adhesives and coating as well as expansion of Knauer in the food sector and new markets eg pharma and medical. As shown in Exhibit 2, our assumption of c €40m revenue in 2018 for Knauer (included from mid-May) suggests consensus expectation of c 5% higher sales from the rest of Blue Cap, thereby recouping an estimated €9m in Biolink revenue forgone in the first half. This is consistent with recent guidance of top-line growth in all divisions on a like-for-like basis. We note that this does not take account of the newly announced proposal to sell Medical Technology’s WISAP to a Chinese specialist in endoscopic devices. Completion is not expected until late Q3, so the transaction should not be material to overall 2018 trading profit.

Balance sheet and cash flow

Exhibit 3: Net debt and net debt/EBITDA

Source: Blue Cap accounts, Bloomberg consensus estimates, Edison Investment Research

The disposal of Biolink for €39m led to a significant y-o-y reduction in net debt at end 2017. Exhibit 3 shows this (€11.3m) to be historically low for Blue Cap and reinvestment, namely in Knauer, duly followed. Further significant scope for spend is indicated by consensus forecasts, possibly enhanced by WISAP proceeds. This explains management’s reversal now of its longstanding policy not to pay a dividend, preferring to reinvest to fund expansion.

Valuation

Even after recent share price appreciation (c 50% since April), Blue Cap is still attractively rated at under 10x 2018e consensus EV/EBITDA. The company has a proven business model and strategy, highly experienced and stable management, and a visible record of financial success and prudence (eg borrowing and dividend policy). There is enthusiasm about the company’s latest deal of size (Knauer) and clear opportunity for more of the same. This is reinforced by the new collaboration with PartnerFonds, which shares its "buy, hold & develop" strategy, targeting medium-sized industrial companies in the DACH region.

NAV (fair value of the portfolio companies included in the businesses less net debt), published for the first time by Blue Cap, was €102m at December 2017. This is similar to the current market cap but of course excludes Knauer as well as non-operating assets and liabilities of group holding and real estate companies. Including these assets, the NAV valuation would be even higher

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Blue Cap

View All

Latest from the Industrials sector

View All Industrials content

Majestic Wines — Naked ambition

The CEO’s ambitious transformation programme is delivering results and Majestic is now in good shape to execute on plans to double its expenditure on new customer recruitment at an attractive expected future payback of 4.7x for every £1 invested. FY18 results demonstrated that the entrepreneurial Naked Wines division is the clear growth engine, providing opportunity to reduce UK earnings exposure and accelerate online sales.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free