Datron — Market headwinds persist

Datron (DB: DAR)

Currency in

Last close As at 30/01/2023

0.30 (2.61%)

Market capitalisation

48m

Research: Industrials

Datron — Market headwinds persist

Datron’s subdued performance in H120 (sales down 17% y-o-y to €22m, and EBIT down 82% y-o-y) reflects the challenging market situation exacerbated by the COVID-19 outbreak. Its guidance released in August 2020 implies broadly comparable sales and order intake in H220 vs H120 and assumes persistent pressure on the EBIT margin (1–3% for the full year vs 1.5% in H120 and 7.2% in FY19). Having said that, Datron retains a solid balance sheet, with a net cash position of €9.4m at end-H120 (vs €8.5m at end-FY19).

Anna Dziadkowiec

Written by

Anna Dziadkowiec

Analyst

Industrials

DATRON

Market headwinds persist

Industrials

Scale research report - Update

3 September 2020

Price

€7.25

Market cap

€29m

Share price graph

Share details

Code

DAR

Listing

Deutsche Börse Scale

Shares in issue

4.0m

Net cash at end-H120

€9.4m

Business description

DATRON is a long-established provider of innovative CNC milling machines, dental milling machines, dosing machines and milling tools.

Bull

Solid balance sheet with minor debt position.

Technologically advanced and innovative.

Recurring income from after sales has been increasing over recent years.

Bear

COVID-19 has exacerbated the existing issues of the sector.

Subdued management guidance for 2020.

Small size relative to global market.

Analysts

Milosz Papst

+44 (0) 20 3077 5700

Anna Dziadkowiec

+44 (0) 20 3077 5700

Datron’s subdued performance in H120 (sales down 17% y-o-y to €22m, and EBIT down 82% y-o-y) reflects the challenging market situation exacerbated by the COVID-19 outbreak. Its guidance released in August 2020 implies broadly comparable sales and order intake in H220 vs H120 and assumes persistent pressure on the EBIT margin (1–3% for the full year vs 1.5% in H120 and 7.2% in FY19). Having said that, Datron retains a solid balance sheet, with a net cash position of €9.4m at end-H120 (vs €8.5m at end-FY19).

H120 results reflect demand pressures

Datron’s EBIT fell to €0.3m in H120 from €1.9m a year earlier despite lower material costs (down 20% y-o-y) and the shortening of working hours, aimed at reducing personnel costs (down 10% y-o-y). EBIT margin declined to 1.5% from 7.0% in H119 and EPS was €0.07 vs €0.32 a year earlier. Order intake fell 23% yoy to €20.3m, with Q220 being clearly below the Q120 levels. That said, Datron outperformed the German machine tools industry in H120, which posted a 26% yoy decline of sales and a 35% drop in order intake in the period, according to the German Machine Tool Builders’ Association (VDW).

Muted management guidance in a distressed market

The company announced in August 2020 that it expects both the full-year order intake and sales to reach €36–40m, an EBIT margin of 1–3% and EPS at €0.06–0.21. Management guidance assumes there will be no substantial second lockdown and supply chains will remain uninterrupted through the year. Subdued company guidance is in line with the sentiment in the German mechanical engineering sector, where the order situation remains under pressure That said, order intake saw an improvement in June vs April and May levels, according to VDW.

Valuation: Affected by subdued outlook

Datron is trading at a 2020e P/E multiple of 53.7x on the midpoint of its full-year guidance. The company’s share price has fallen c 34% in 2020 to date, which we believe reflects the subdued outlook as exhibited by the company’s forecasts and broader market sentiment.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

45.7*

2.9

0.52

0.2

13.9

2.8

12/17

50.2

3.9**

0.99

0.2

7.3

2.8

12/18

55.7

5.1

0.87

0.2

8.3

2.8

12/19

53.8

3.9

0.70

0.1

10.4

1.4

Source: Datron data. Note: *Parent company only. **Excludes exceptional gains of €0.9m on sale of business and €0.4m on consolidation.

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.

H120 results decline amid lower sales

Datron posted a 17% y-o-y decline in revenues to €22.0m in H120, though outperforming the German machine tools industry, which recorded a 26% y-o-y drop in total sales over the period, according to the VDW. The largest segment, Datron machines, posted a 22% y-o-y decline in revenues to €12.9m after the company sold around 110 machines in the period (vs 160 in H119). CNC/Dental milling tools and the ‘After sales and other’ segments posted milder year-on-year sales reductions of 12% and 8%, respectively. We note that the latter represented c 18% of Datron’s sales in H120 (vs 16% in H119), which is important given their recurring nature.

H120 saw a deterioration in sales in all major regions, including the core German market (sales down 22% y-o-y to €10.1m) as well as the EU ex-Germany (down 24% y-o-y to €6.1m) and the US/Canada (down 22% y-o-y to €1.9m). Despite the relative weakness of Russia, revenues in Europe (outside the EU) increased 35% y-o-y to €2.3m, driven by higher sales in Norway.

In H120, Datron was able to reduce its operating expenses by c 14% y-o-y to €21.9m in H120, assisted by lower material expenses as well as a drop in personnel costs after the company shortened working hours in Q220 due to the COVID-19 outbreak. Datron highlights that these flexible working arrangements allowed it to maintain headcount at a broadly unchanged level in the period (278 at end-H120 vs 282 at end-FY19). Nevertheless, EBIT margin declined to 1.5% in H120 (vs 7.0% in H119) and EPS was €0.07 (vs €0.32 in H119).

Datron retained a solid balance sheet, with cash of €10.1m at end-H120 (vs €9.4m at end-FY19) and a minor debt position of €0.8m (€0.9m). In August 2020, the company announced that it intends to buy back up to 60k shares (or c 1.5% of its current share capital) at a price of €7.2 per share in a public offering held between 2 and 16 September 2020. Although the size of the buyback is moderate, we believe it shows management’s confidence in the company’s liquidity position.

Exhibit 1: Financial performance

HGB figures in €000s unless otherwise stated

H120

H119

Change y-o-y

Revenue

21,988

26,584

-17%

o/w Datron machines (mainly CNC milling)

12,941

16,525

-22%

o/w CNC/Dental milling tools

4,780

5,434

-12%

o/w After sales and other

3,948

4,289

-8%

o/w Other*

319

335

-5%

Change in stocks

177

711

-75%

Other operating income

37

127

-71%

Material costs

(9,293)

(11,596)

-20%

Personnel costs

(8,141)

(9,025)

-10%

Other operating costs

(3,789)

(4,322)

-12%

Depreciation

(640)

(608)

5%

EBIT

340

1,871

-82%

Profit before taxes

376

1,880

-80%

Income tax

(100)

(607)

-83%

Other taxes

(7)

(5)

29%

Net income

268

1,268

-79%

Minorities adjustment

38

20

95%

Net income ex-minorities

307

1,287

-76%

EPS (€) – reported

0.07

0.32

-78%

Source: Datron accounts, Edison Investment Research. Note: *Other revenues as per BiLRUG (the German Accounting Directive Implementation Act)

Datron’s order intake was down 23% y-o-y to €20.3m in H120, but visibly ahead of the German machine tools industry, which saw a 35% y-o-y decline in total order intake over the same period, according to VDW. The COVID-19 pandemic has clearly exacerbated the existing issues of the German machine tools industry as exhibited by a 46% y-o-y decline of the total order intake in the sector in Q220, compared with a 25% y-o-y fall in Q120. In Q220, Datron posted a 33% y-o-y drop in order intake vs a 16% y-o-y decline in Q120.

H220 caution in an uncertain market

Datron released its new full year guidance in August 2020 after it withdrew its previous forecasts in March 2020 due to the COVID-19 outbreak. For FY20, the company guides to a total order intake of €36–40m (vs €53.2m in FY19) and total revenues of €36–40m (€53.8m). This implies revenues and order intake in H220 broadly comparable to the H120 levels, which we believe is a conservative assumption given that June figures suggest a gradual recovery of new orders in the broader market according to VDW (see more details below). Datron anticipates an EBIT margin of 1.0–3.0% (vs 7.2% in the previous year and 1.5% in H120) and gives a wide range for EPS expectations of €0.06–0.21 (vs €0.70 in FY19). The company’s guidance assumes no substantial lockdown and uninterrupted supply chains through the rest of the year.

The results of a survey conducted by the German Mechanical Engineering Industry Association (VDMA) in July 2020 suggest that the order situation in the mechanical engineering sector remains ‘very tense’ and more than half of the 640 member companies expect sales to be lower by 10% to 30% in 2020. At the same time, their expectations for Q320 have improved slightly recently and the majority anticipate a slight sales growth in 2021. According to VDW, the downturn in the level of orders triggered by the COVID-19 pandemic appears to have bottomed out and the market saw a noticeable improvement in new orders in June 2020 compared to the two previous months. VDW also highlights that the relevant industrial indicators have shown positive signals recently, including JP Morgan Global Manufacturing PMI, which was 50.3 in July 2020 vs 39.3 in April 2020 when it plunged to its lowest level since the global financial crisis 2008/09. VDW acknowledges however that the machine tool industry is a late-cycle capital goods sector and it might take it longer to recover than other sectors, eg retail sales.

Valuation

Datron’s specialisation in milling machines and tools makes for a difficult comparison with listed peers, which are mainly large international players. We believe Datron’s closest peers is Hermle, a German manufacturer of milling machines, though it is also a much larger company as illustrated by its market capitalisation of €1bn (vs Datron’s €29m) and annual sales of €463m in 2019 (vs c €54m in FY19).

There is no consensus for Datron but based on the mid-point of the company’s guidance released in August 2020 its shares trade at P/E of 53.7x. This compares with an FY20e P/E of 30.0x for Hermle (ie for its listed non-voting preferred shares), but we note that its full-year FY20 consensus includes estimates of one analyst only. Datron’s LTM P/E multiple is 16.1x, compared to 15.3x for Hermle, while the dividend yields (based on historical pay-outs from FY19 earnings) stand at 1.4% for the former and 2.4% for the latter.

Hermle has posted a 31% y-o-y drop in sales to c €161m in H120 and its order intake was down 46% y-o-y at c €119m. In August 2020, Hermle confirmed that its revenues might decline by c 50% y-o-y in FY20 and EBIT is likely to deteriorate disproportionally, affected by the COVID-19 crisis.

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