PIERER Mobility — Market dynamics remain favourable

Following a resilient H120 performance in the face of the pandemic, PIERER Mobility saw a strong recovery in trading performance in H220 as demand for powered two-wheelers (PTWs) remained very high. While economic disruption due to lockdowns continued, the trends towards private transport and leisure activity benefited demand for both e-bikes and motorcycles, especially in the off-road segment. In part the availability of funding was driven by changes to spending patterns as areas such as travel reduced sharply. The performance more than compensated for the disrupted H120, including the temporary eight-week suspension of production in Austria. Record revenues and a stronger than expected operating margin augmented strong cash flow management and leaves PIERER well positioned to benefit from the positive demand momentum, despite ongoing COVID-19 lockdowns in various markets as it enters FY21. Key financial highlights were:

As can be seen from Exhibit 1, the H220 performance showed significant year-on-year improvement in total group revenues (+22%), EBITDA (+23%), EBIT (+24%) and profit after tax (+19%). After a proportionately larger minority charge, net income was flat on H219.

Free cash improved 74% to an inflow of €166.0m (FY19: €91.6m) before the €40.5m consolidation and recapitalisation of KTM Motohall. Management had guided for free cash flow to be around €130m in December 2020 and the additional improvement seems to have been due to working capital declines, primarily in motorcycle dealership inventories where an anticipated rebuild of stock levels was deferred due to the continued strong levels of demand. We still expect dealership inventories to return to more normal levels in 2021, as reflected in management guidance for aggregate free cash flow for 2020 and 2021 of €200m.

A €13.7m cash dividend was paid to the minority shareholder in KTM AG (Bajaj 48%) and the anticipated return of this in H220 does not appear to have occurred, presumably due to the stronger than expected overall cash performance.

H220 saw a strong recovery in motorcycle performance following the lockdown disruptions that shut dealerships in many countries in the first half. After a 29% decline in H120 revenues to €529.4m, H220 revenues grew 16% to €884.6m. Some 30k units were lost because of the eight-week production shutdown in H120 in Austria, but around half of that was recovered through higher year-on-year output in H220. Full year production in Austria was 142k motorcycles. Following the accelerated takeover that was completed in July, GASGAS added 3,433 units from its Girona, Spain, facility. GASGAS with its strong MotoX presence becomes the third major motorcycle brand in the PIERER portfolio alongside KTM and HUSQVARNA and is positioned as entry level models for a younger rider demographic.

Motorcycle demand recovered very strongly in KTM’s major markets of Europe, North America and Australasia throughout H220, with an aggregate increase of almost 25% following a year-on-year decline of 7.5% in H120. Even the Indian market rose by 11% in H220 year-on-year following a near 44% decline in H120.

PIERER continued to outperform the major markets despite the pandemic, increasing market share in all of its main territories. In addition, the share increased in each market in both H120 and H220. The market share of its main addressable markets globally rose by 177bps to 13.1%. In India the market share improved 104bps to 8.2%.

The European market recovered strongly following the H120 decline to finish the year up 4%. While higher-volume countries such as France, Italy, Spain, the UK and Austria did not fully recover, strong demand continued in the largest market, Germany (+30%) and Sweden (+23%). Overall PIERER Mobility brands saw registrations in Europe rise by almost 15% to 85.2k (FY19: 74.3k) units. Market share rose to 13.3%.

In North America, PIERER’s brands achieved healthy growth in market share to 11.9% (+221bp), with registrations increasing by 31% to 53.5k motorcycles, driven primarily by strong off-road demand. The US market grew for the first time since 2015. In the smaller Australia and New Zealand market, the strong growth apparent in H120 accelerated in H220 and PIERER Mobility brands increased registration by 43% in FY20, representing an FY20 market share of 19.3%, exceeding 20% in H220.

Demand in India bounced backed strongly with sales increasing by almost 11% in H220 year-on-year following a 44% decline in H120. Again, KTM and HUSQVARNA units distributed by KTM outperformed the market in both halves, although recording a full-year decline of 6%. Licence fee models produced and distributed by Baja Auto were also down by 7%, still outperforming the market and benefiting from the first HUSQVARNA models produced in Chakan, India, as well as new KTM model launches. The total India volume for KTM and HUSQVARNA of around 125.5k units in 2020 is expected by management to grow rapidly to around 200k units in 2022, of which around 120k will be licenced production, double the 2020 level.

Wholesales to dealers fell by just 3.5% to 270,407 motorcycles (including 8,648 GASGAS bikes) in FY20 following the 33% H120 fall, as production resumed to meet demand following the eight-week production stoppage in Austria from mid-March to manage COVID-19 and supply chain disruption at suppliers. PIERER’s extensive global dealership network now totals almost 3,300 dealers.

The newly formed e-bike business operates as PIERER E-Bikes selling under the Husqvarna, RRaymon and GASGAS brands. The currently European business is fully consolidated in the income statement for the first time in FY20. It sells through a largely independent dealership network of around 1,280 dealers in a European e-bike market estimated by PIERER Mobility at 3.4m units and expected by management to grow to 5m units by 2025. Management has been extending the dealership reach beyond the traditional DACH (Germany, Austria and Switzerland) selling region, in order to increase European share. It is also increasing the number of its own motorcycle dealerships that sell the e-bikes with 140 accredited in 2020, which will extend to 340 in 2021. We also expect PIERER to use its global motorcycle dealership network to help facilitate expansion into markets such as the US in 2022. Management maintains its target of 250k unit sales by 2025 generating revenues of approximately €500m. FY20 revenues of €112.5m exceeded guidance of €110.0m but this had been originally set at €100m earlier in the year.

In FY20 PIERER e-bikes sold 56,064 Husqvarna and R-Raymon e-bikes entirely in Europe, an increase of around a third on FY19. The GASGAS e-bike brand will be added alongside the pan European roll-out in the current year. Production is carried out by a supplier in Bulgaria where there are no perceived capacity constraints at present, enabling a strong ramp up in volumes sold.

The market opportunity is also growing rapidly as reflected in management estimates shown below.

The encouraging trends seen in the major markets have continued and while renewed lockdowns have been apparent in many markets in January, we think the main drivers remain supportive. These include a shift in attitudes towards public transport and the relative freedom for individuals offered by PTWs. Off-road and e-bike demand has been particularly strong, according to the company, benefiting from a trend towards healthy lifestyles as well as changes to income allocation (eg lower holiday spend).

We have modestly increased our earnings estimates, as shown in Exhibit 6. We have assumed slightly increased motorcycles sales with a volume increase of over 20% on FY20 as production recovers to above FY19 levels to meet strong demand and rebuild dealership inventories.

We have also assumed a slight acceleration in the e-bikes development as demand appears to be driving performance at least in line with management’s plan, and the target for 2025 looks increasingly attainable. Our ebike revenues continue to track below that goal.

We have also shown our expectations for e-motorcycles revenues for the first time. There were already €10.5m of revenues in 2020, which relate to existing smaller e-motorcycles for children that KTM produces. From 2022, e-scooter revenues from the launch in Europe of the first HUSQVARNA model based on a Bajaj platform will be sold in Europe.

Overall, we continue to expect the positive momentum from H220 to be maintained in FY21 despite the pandemic. Our revenue expectations increase by 2.1% in FY21. We also introduce our FY22 estimates, showing further growth of around 10% in group revenues.

At present Baja Auto holds a 48% stake in PIERER Mobility’s motorcycle operating subsidiary, KTM AG. However, in order to participate in the expected growth of e-mobility, which is external to KTM, it is being proposed that the ownership structure should be simplified. It is being proposed that Bajaj exchanges its current holding in KTM for participation in a parent entity of PIERER Mobility.

To facilitate the proposed transaction, PIERER Industrie has already created a new holding company, PTW Holdings, and transferred a 60% holding in PIERER Mobility to it. Bajaj would transfer its interest in KTM AG as a payment in kind into PTW Holdings in exchange for new PIERER Mobility shares held by PTW. PIERER Mobility has also sold the treasury shares (0.86% of the existing capital) in the market, becoming part of the free float.

The result of the current structure and an example of the new structure are shown below:

The proposed change would result in an increase in the capital of PIERER Mobility depending on the valuation placed on the Bajaj stake in KTM AG. As the stake is being used as a payment in kind to access the overall future potential e-mobility of PIERER Mobility, we would expect Bajaj’s indirect holding through PTW Holdings to be smaller than the current 48% held in KTM.

PIERER Industrie would retain control through at least a 51% share in the main shareholder, PTW Holdings, providing for the appointment of the majority of board members.

In our view, from a free-float shareholder’s perspective the proposed transaction would mean:

Clearly the ultimate proposition depends on the value placed on the Bajaj stake.

From the documentation submitted ahead of the EGM, a range of between around €600m (requiring a 39.55% capital increase in PMAG) and €760m (requiring a 49.78% capital increase, used in Exhibit 8) is implied for Bajaj’s KTM stake, which compares to a book value of just over €300m and implies an FY21 P/E of between 12.1x and 15.4x (value/FY21 estimated minority share of net income) for the stake. As the amount is core to the negotiation it is unclear whether these are mere indications or likely values as Bajaj is undoubtedly making its own value assessment.

Assuming the more conservative higher value we calculate the following impacts:

This takes no account of the future potential for e-motorcycles where we expect a meaningful revenue stream to be established beyond 2025.