Schaltbau Holding — Long term growth potential remains intact

Schaltbau Holding reported results for 9M21, which showed a slowdown in growth when compared to H121. The main reasons for this are the impact of delivery bottlenecks in the global material supply chain and delays in the awarding of projects in Rail due to the prolonged pandemic. The company still reports segment revenues according to the split in brands: Pintsch (rail infrastructure), Bode (rail and bus entrance systems), Schaltbau GmbH (DC components for rail and new energy, new industry and e-mobility) and SBRS (rail refurbishment and fast charging for e-mobility). When presenting itself as a whole, the company splits the activities in only two divisions: Rail (68% of FY20 revenues) comprises Pintsch, Bode and part of SBRS (rail refurbishment); and DC Power (32% of FY20 revenues) comprises Schaltbau GmbH and part of SBRS (e-mobility fast charging).

Overall revenue growth of 3% in 9M21 was driven by the DC Power division. The Schaltbau GmbH segment is recovering from the impact of coronavirus last year and reported 7% growth in 9M21, but the supply bottlenecks for primary products affected growth in Q3 resulting in 3% lower revenues in this quarter after 12% growth in H121. Underlying demand remains very healthy given the 18% y-o-y higher order intake in 9M21 at Schaltbau GmbH. Momentum in the relatively small segments new energy (eg energy storage for solar and wind) and new industry (eg battery powered forklifts and industrial trucks) remained strong with continued healthy revenue growth of 38% y-o-y in 9M21 after 36% y-o-y in H121. SBRS reported strong revenue growth of 75% y-o-y, driven by 83% y-o-y growth in fast e-mobility charging and a large rolling stock refurbishment project.

The Rail division is still in decline, which is mainly due to project delays caused by the prolonged pandemic. The decline in Rail revenues from projects was partly compensated for by continued strong growth in higher-margin after sales, with Rail after sales revenues up 25% in 9M21 to €56m after 18% growth in H121. Pintsch showed a modest decline in revenues of 2% yoy, which was also influenced by one-off revenues of €0.9m in Q120 related to the terminated PSD project in Brazil. Management expects a much stronger Q4 for Pintsch, which is fuelled by the good order intake in particularly level crossings. The Bode segment reported a decline in revenues of 6% y-o-y, with a decline of 12% y-o-y in Q3, due to market-related project delays and material bottlenecks.

EBIT was 3% y-o-y higher at €19.2m in 9M21 after strong growth of 42% y-o-y to €13.6m in H121. EBIT included costs of €1.6m related to the Carlyle takeover process in Q3 and the underlying EBIT of €20.8m in 9M21 reflects growth of 11% y-o-y. Even after considering non-recurring costs relating to the Carlyle deal, this still reflects a decline in underlying EBIT from €9.1m in Q320 to €7.2m in Q321, which was mainly caused by the shortage in materials and project delays. The reported EBIT margin in 9M21 was stable at 5.0% but the underlying margin showed an improvement of 50bp to 5.5%. This improvement is largely driven by the margin recovery of 260bp to 3.7% at Bode in 9M21, which was fuelled by the strong growth in after sales, lower overheads and productivity gains in production and logistics. Margins at Schaltbau GmbH in 9M21 were lower compared to last year, caused by the sharp increase in material and transport costs due to inflation and the contribution of a one-off item of €0.9m in Q220. Margins at SBRS in 9M21 were also lower, due to the contribution of a large low-margin rolling stock refurbishment project. When adjusted for this project, according to management, the EBIT margin of SBRS was better than last year.

Net profit increased more strongly when compared to growth in EBIT, which is mainly due to the recognition of deferred tax assets on tax losses and interest amounts available for carry forward in Germany, resulting in a tax benefit of €1.5m in 9M21. The company’s financial position is strong with the equity ratio at 38% and net debt/EBITDA at 1.1x.

In 9M21, Schaltbau’s overall order intake declined 4% y-o-y to €385m, following an increase of 3% in H121. The main reason for this is the impact of the prolonged pandemic, which caused order delays in Rail and particularly at Bode (order intake -20% y-o-y). According to management, underling market trends remain positive and a catch up in order intake at Bode is expected in Q421 towards €100m after the reported intake of €167m in 9M21. Pintsch is benefiting from higher order volumes in level crossing technology and management expects a very strong Q4 revenue level this year. At Schaltbau GmbH momentum in the relatively new segments of new energy and new industry remains very positive given the 48% y-o-y increase in order intake in 9M21 to €23m. Schaltbau GmbH also announced that it has been nominated as supplier to a second e-automotive manufacturer (e-buses) and mentioned a strong increase in the number of sample deliveries in the e-mobility automotive market. Schaltbau is building a new factory in Germany to fulfil the increasing demand from the relatively new segments. According to management, the construction is on schedule and the factory should be operational in autumn FY22 (groundwork is completed, shell building is ongoing). SBRS is benefiting from continued strong order intake in the e-mobility fast-charging business (+24% y-o-y).

Despite the continued challenging market conditions, Schaltbau Holding reiterated its FY21 guidance of revenues of €520–540m (+3.5–7.5% versus FY20) and reported an EBIT margin of around 5%, up from 4.3% last year. The FY20 reported EBIT included a one-off charge of €5m (impairment charge at Schaltbau GmbH in Q420) and management also expects that the FY21 EBIT will include a charge of around €5m for costs related to the Carlyle takeover offer. The guidance for order intake in FY21 of €550–580m is also maintained, assuming an intake of €165–195m in Q4, of which €100m should come from a catch-up at Bode according to management.

We have lowered our FY21 estimates to incorporate the effect of the supply chain bottlenecks and the project delays caused by the prolonged pandemic. We now forecast revenue of €525m (was €533m), at the lower end of management’s guidance range. Our estimate for reported FY21 EBIT margin is lowered to 4.9% (was 5.5%) but now includes €5m of one-offs related to the Carlyle takeover process. Our estimates still reflect an underlying improvement in normalised EBIT margin of 60bp to 5.9% after we have raised our underlying EBIT margin by 40bp mainly due to the positive margin recovery at Bode. We expect revenue growth to accelerate after 2021 and the EBIT margin to improve to 7.4% in 2023 (driven by revenue growth, operating leverage and efficiency gains).

In March 2021, Schaltbau set financial goals for 2026: revenues of €750–800m (a CAGR of 7–8%) and a high single-digit EBIT margin, aimed at outperforming the 6–8% range realised by its selected peer group. The main driver for the overall margin improvement is the potential margin recovery at Bode, where management expects that it should be possible to realise an EBIT margin in the range of 6–8% in 2026 at the latest, which is a clear improvement from the reported 1.6% in 2020. Exhibit 2 shows the company’s plans to improve Bode’s EBIT margin to 6–8% in 2026 at the latest.

In our previous reports we valued Schaltbau Holding using three different methods: historical multiples, discounted cash flow (DCF) and peer comparison. Our last valuation of 6 August 2021, after the half year results, came out at €45 per share.

On 7 August 2021, Carlyle announced a voluntary public takeover offer for Schaltbau Holding of €53.50 in cash, which offered a solid premium of 32% versus the closing price of 6 August and a premium of 44% when compared to the average share price of the three months prior to 6 August. About 69% of the voting rights (fully diluted) were already secured by irrevocable undertakings (which reflected all of the known institutional investors at that date). The offer memorandum was published on 25 August and the transaction was closed and settled on 25 October with Carlyle holding 78.2% of the total share capital.

The delisting offer is planned to be published in early November and shareholders will have another four weeks to tender their shares at the price of €53.50 in cash. Delisting of the Schaltbau shares is expected by the end of 2021 or early 2022.