paragon — Navigating the road to growth

paragon (FRA: PGN)

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Research: Industrials

paragon — Navigating the road to growth

While we believe H223 represents a pause in growth at paragon’s ongoing automotive operations, we are cutting our near-term EBITDA margin contribution from the Electronics segment. As a result, we lower our FY23e and FY24e sales estimates by 2% and 3% and EBITDA by 25% and 17% respectively, reducing our DCF valuation to €9.4/share.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

paragon_resized

Industrials

paragon

Navigating the road to growth

Q323 results update

Automobiles and parts

7 December 2023

Price

€3.97

Market cap

€18m

Adjusted net debt (€m) at 30 September 2023
(excluding lease liabilities of €15.7m)

49.0

Shares in issue

4.5m

Free float

50%

Code

PGN

Primary exchange

Frankfurt XETRA

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.7)

(26.1)

(31.0)

Rel (local)

(16.1)

(30.2)

(40.6)

52-week high/low

€6.38

€3.71

Business description

Based in Delbrück, Germany, paragon designs and supplies automotive electronics and solutions, selling directly to OEMs, including sensors, interior and body kinematics. It has production facilities in Germany, Croatia and China.

Next events

FY23 results

February 2024

Analysts

Andy Chambers

+44 (0)20 3077 5700

Johan van den Hooven

+44 (0)20 3077 5700

paragon is a research client of Edison Investment Research Limited

While we believe H223 represents a pause in growth at paragon’s ongoing automotive operations, we are cutting our near-term EBITDA margin contribution from the Electronics segment. As a result, we lower our FY23e and FY24e sales estimates by 2% and 3% and EBITDA by 25% and 17% respectively, reducing our DCF valuation to €9.4/share.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/21

135.4

(3.5)

(0.72)

0.0

N/A

0.0

12/22

160.3

(7.9)

(1.15)

0.0

N/A

0.0

12/23e**

161.5

(5.0)

(0.60)

0.0

N/A

0.0

12/24e**

172.1

5.8

0.84

0.0

4.7

0.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **continuing businesses only

Increased challenges in H223

paragon sales in the first nine months of 2023 rose 2.9% y-o-y to €122m. Due to seasonal summer shutdowns at customer plants, and the ending of a specific sensor supply contract in Q223, Q323 sales were 6.6% lower at €35.4m. EBITDA for the nine-month period was €16.3m including the gain on the asset sale to Clarios, or €23.8m including the EBITDA contribution from semvox. The ongoing Electronics and Mechanics activities contributed c €11.3m, including c €3.2m in Q323. Adjusted net debt was reduced to €49.0m, and on 6 November management commenced a buyback programme for up to €20.2m nominal of the Eurobond.

Significantly reducing our expectations

Management recently revised guidance to adjust for the disposal of most of the batteries business to Clarios and the longer than expected production stops at some automotive plants. It reduced FY23 sales expectations to €160–170m and it provided EBITDA guidance for FY23 of €25–27m, which includes the gains from the asset sale to Clarios of c €5m and €7.5m from the semvox disposal. The implied EBITDA guidance for the continuing business is c €13–15m (c €2–3m in Q423). The relatively low expectation reflects the ending of sensor supply to a well-established car model in Q223, which being more mature tends to carry higher margins. Management also anticipates extended customer year end shutdowns. The transition of older products to newer ones carrying lower initial margins is a consistent feature in the Electronics segment and while management expects volumes to build from Q224, we are substantially reducing our FY24 estimates.

Valuation: Lower growth trajectory impacts value

paragon has been successful in reducing net debt but the disposal of two businesses in FY23 has removed major components from the group’s growth potential. We still expect the strategy to deliver growth from both continuing segments as the global reach of paragon’s products increases, but at least initially at a lower profit and cash flow rate than we have been anticipating. We have adjusted our DCF valuation to reflect the lower assumed profitability and while it still indicates significant potential the value reduces to €9.4/share (from €18.5/share).

More challenging Q323 trading environment

Q323 was a more challenging period for paragon, as shown in Exhibit 1 below. The disposal of part of the battery assets to Clarios during the period helped to mask this as the asset gain was included in other operating income, which management includes when calculating earnings levels from gross margin to net income. We estimate this gain to be around €5m and have excluded it from the numbers below to reflect more accurately the ongoing economic performance of the group’s activities during the period.

In its Q223 report management indicated that a long-running supply contract in the sensors business had been terminated towards the end of the period as the manufacturer ceased production of that specific model. The financial impact of this was reflected in the sensor unit sales decline in Q323 of 29% y-o-y, with the loss of more mature (and thus higher margin) product sales also serving to depress the Electronics division’s EBITDA margin.

More generally, the period saw extended summer shutdowns at the manufacturing plants of some automotive producers as customers sought to adjust inventory levels to more closely match demand. The effect of this destocking was to constrain sales volumes across the group, with Interior reporting an 8% y-o-y decline in volumes and the Mechanics division only growing by 2%. Growth in the relatively small Power unit compensated in part for the decline in the other Electronics segments.

Exhibit 1: paragon Q323 results summary

3 months to Sept (€m)

Q322

Q323

Change

Revenues by activity

- Sensors

12.2

8.7

-28.6%

- Interior

12.6

11.6

-8.0%

- Power

0.8

2.6

205.2%

Electronics

25.6

22.9

-10.8%

Mechanics

12.2

12.5

2.1%

Group revenues

37.9

35.4

-6.6%

Gross profit*

18.7

19.1

2.0%

Gross margin

49.4%

53.9%

9.3%

Electronics*

4.6

2.6

-43.7%

Mechanics

1.0

0.6

-41.5%

EBITDA*

5.6

3.2

-43.3%

EBITDA margins

Electronics

18.1%

11.4%

-36.9%

Mechanics

7.9%

4.5%

-42.8%

Group EBITDA margin

14.8%

9.0%

-39.3%

EBIT continuing*

(1.2)

(0.7)

-44.0%

PBT continuing*

(4.2)

(2.6)

-38.3%

Net income*

(1.9)

(2.0)

6.1%

EPS (€) - continuing

(0.42)

(0.44)

6.1%

Adjusted net debt

(89.6)

(49.0)

-45.4%

Source: Company reports. Note: *Excludes Q323 estimated €5m gain on the battery asset disposal to Clarios.

As a result, group sales fell by almost 7% y-o-y to €35.4m and EBITDA for the ongoing group was 43% lower at €3.2m, although this was boosted by the asset disposal to a reported €8.2m. The ongoing EBITDA margin for the period was 9.0% reflecting lower overhead recovery and the adverse margin mix in sensors following the termination of the supply contract.

The asset sale did however benefit cash flow and was a large element in the adjusted net debt (excluding leases) reduction of €10.9m to €49.0m during the quarter. With the proceeds of the disposal of semvox in H123, adjusted net debt has fallen from €86.0m at the end of FY22.

The lower adjusted net debt resulted in a significant reduction in Q323 net finance charges.

The results for the nine months are shown in the table below with the strong start to the year moderated by the Q323 performance. Again, we have excluded the estimated €5m asset gain from the other operating expenses.

Exhibit 2: paragon nine months results summary (ongoing activities)

9 months to September (€m)

2022

2023

Change

Revenues by activity

- Sensors

37.2

32.1

-13.9%

- Interior

41.1

39.9

-3.0%

- Power

1.2

6.3

415.8%

Electronics

79.6

78.3

-1.6%

Mechanics

39.0

43.7

12.0%

Group revenues

118.6

122.01

2.9%

Gross profit*

60.7

60.5

-0.2%

Gross margin

51.1%

49.6%

-3.0%

EBITDA by division

Electronics*

10.7

8.9

-16.8%

Mechanics

1.3

2.4

79.1%

EBITDA*

12.0

11.3

-6.3%

EBITDA margins

Electronics

13.5%

11.4%

-15.4%

Mechanics

3.4%

5.4%

59.9%

Group EBITDA margin

10.1%

9.2%

-8.9%

EBIT continuing*

(1.2)

0.5

-141.5%

PBT continuing*

(7.1)

(8.8)

24.0%

Net income continuing*

(5.6)

(7.6)

36.9%

EPS (€) – continuing

(1.23)

(1.68)

36.9%

FCF

5.8

(7.7)

-233.7%

Source: Company reports. Note: *Excludes Q323 estimated €5m gain on the battery asset disposal to Clarios.

We note that in its Q323 presentation of historical EBITDA, the company has included one off impacts in 2022 totalling c €3.5m. For comparability, we have added those back to our numbers as they were previously treated as exceptional items.

Bond buyback programme commenced

Management initiated a buyback programme on 6 November 2023 for up to €20.2m nominal of the Eurobond. The regulatory constraints on volumes that can be repurchased mean that the impact is relatively limited, with only around €70,000 nominal bought back in the first three weeks at a cost of c €52k. The programme could run to 5 July 2025 and will probably not achieve the target redemption. However, we would not be surprised to see the company explore alternative financing to partially (or even fully) redeem the Eurobond ahead of maturity in 2027.

In any event the lower net debt means the group leverage ratio is below 2.5x, triggering a significant reduction in interest payable in FY24 as the coupon falls from 9.25% to 7.5%. The net interest charge should fall from more than €10m (including H123 semvox bridge financing costs) to below €4m in FY24m, a significant boost to profit before tax.

Family shareholding restored

The other major corporate news of the period has been the restoration of the Frers family shareholding, repurchasing the stock previously acquired by ElectricBrands. As a result, the family once again owns 50% plus 1 share of the KGaA capital.

The two companies have also entered into a supply agreement of battery packs for ElectricBrands’ new electric vehicles (including the XBUS which is scheduled to go into production in 2025).

Outlook

With the restoration of the original share ownership structure restored and the debt reduction now essentially complete, management can now fully focus on the growth strategy for the continuing activities. The core elements of the strategic evolution remain unchanged, with continued investment in innovative technology development for auto manufacturers, increasing applications further down the customer product segments, geographic expansion serving both existing and new customers continues, initially extending the product offering in China but also entering the US. In India and Korea, the company is looking for joint venture partners to extend its sales organisation. We expect to hear more about the updated five-year prospects for the group in December.

In the near term we have adjusted our FY23 estimates to reflect the most recent management guidance which implies the ongoing activities should generate an EBITDA of around €15m in FY23. Our assumption for Electronics margins has been reduced and while we do expect these to improve over the medium term, as new contract volumes increase in FY24 we expect some ongoing dilution. We expect the Mechanics activity to continue to grow its contribution in FY24.

As a result, we are reducing our EBITDA estimates for FY23 and FY24 by 25% and 17% respectively, which drops through to PBT, net income and cashflow.

Exhibit 3: paragon – revisions to earnings estimates

Year to Dec (€m)

2023e

2024e

 

Prior

New

% change

Prior

New

% change

Electronics

105.7

102.5

-3.1%

113.1

107.2

-5.2%

Mechanics

59.0

59.0

0.0%

64.9

64.9

0.0%

Total group

164.7

161.5

-2.0%

178.0

172.1

-3.3%

Electronics

17.4

12.3

-29.5%

19.2

15.0

-21.9%

Mechanics

3.5

3.5

0.0%

5.2

5.2

0.0%

HQ, other and intersegment

0.0

0.0

0.0

0.0

EBITDA (pre PPA amortisation)

21.0

15.8

-24.5%

24.4

20.2

-17.3%

Underlying PBT

1.1

(5.0)

N/A

10.3

5.8

-43.7%

EPS - underlying continuing (€)

0.38

(0.60)

N/A

1.56

0.84

-46.3%

DPS (€)

0.0

0.0

 

0.0

0.0

 

Net cash/(debt)

(42.2)

(46.6)

10.3%

(35.9)

(43.4)

20.7%

Source: Edison Investment Research estimates

Valuation

The significantly lower near-term profit expectation results in a substantial cut in our DCF valuation despite the lower risk due to the debt reduction programme, and the initiation of the bond buyback programme. The calculated WACC of just 6.7% reflects the gross debt cost of 8.5% and a still relatively high equity risk premium of 12% and we continue to assume a terminal growth rate of zero. As a result, the DCF value drops to €9.4/per share from €18.5/share previously. The sensitivity to WACC and terminal growth rate is shown below.

Exhibit 4: Sensitivity analysis

WACC

5.0%

5.5%

6.0%

6.5%

6.7%

7.0%

7.5%

8.0%

8.5%

Terminal growth rate

0%

17.8

14.8

12.3

10.2

9.4

8.4

6.9

5.5

4.3

1%

18.0

15.0

12.5

10.4

9.6

8.6

7.0

5.7

4.5

2%

18.3

15.3

12.7

10.6

9.8

8.8

7.2

5.8

4.6

3%

18.6

15.5

12.9

10.8

9.9

8.9

7.3

5.9

4.7

Source: Edison Investment Research

Exhibit 5: Financial summary

€m

2020

2021

2022

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

127.2

135.4

160.3

161.5

172.1

Cost of Sales

(69.2)

(72.1)

(94.2)

(92.0)

(96.4)

Gross Profit

58.0

63.4

66.1

69.4

75.7

EBITDA

 

 

13.8

15.1

11.6

15.8

20.2

Operating Profit (before amort. and except).

6.6

8.4

4.8

9.0

13.2

Intangible Amortisation

(6.0)

(6.0)

(5.0)

(3.6)

(3.6)

Exceptionals

(11.2)

(4.2)

(2.9)

3.4

(1.6)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

(10.6)

(1.8)

(3.1)

8.8

8.0

Net Interest

(6.5)

(5.9)

(7.7)

(10.3)

(3.8)

Profit Before Tax (norm)

 

 

(6.0)

(3.5)

(7.9)

(5.0)

5.8

Profit Before Tax (FRS 3)

 

 

(17.2)

(7.7)

(10.7)

(1.6)

4.2

Tax

9.6

0.5

2.1

1.3

(1.6)

Discontinued

(37.1)

(4.2)

5.3

7.0

0.0

Profit After Tax (norm)

3.6

(3.2)

(5.2)

(2.7)

3.8

Profit After Tax (FRS 3)

(44.7)

(11.4)

(3.4)

6.8

2.6

Average Number of Shares Outstanding (m)

4.5

4.5

4.5

4.5

4.5

EPS - normalised (€)

 

 

0.79

(0.72)

(1.15)

(0.60)

0.84

EPS - normalised fully diluted (€)

 

 

0.79

(0.72)

(1.15)

(0.60)

0.84

EPS - (IFRS) (€)

 

 

(9.87)

(2.52)

(0.74)

1.50

0.58

Dividend per share (€)

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

45.6

46.8

41.3

43.0

44.0

EBITDA Margin (%)

10.8

11.2

7.2

9.8

11.7

Operating Margin (before GW and except.) (%)

5.2

6.2

3.0

5.6

7.7

BALANCE SHEET

Fixed Assets

 

 

143.1

115.0

75.6

68.8

67.6

Intangible Assets

81.5

76.4

43.1

41.1

40.2

Tangible Assets

47.0

36.2

25.7

20.9

20.6

Right of use asset

13.1

1.8

5.1

5.1

5.1

Investments

1.5

0.6

1.6

1.6

1.6

Current Assets

 

 

57.4

44.7

97.0

51.5

53.4

Stocks

27.3

24.0

25.2

22.6

23.3

Debtors

11.6

10.9

7.7

7.8

8.0

Cash

5.7

1.5

18.1

6.1

6.1

Other

12.7

8.4

46.0

15.0

16.0

Current Liabilities

 

 

(90.6)

(125.5)

(99.6)

(42.2)

(43.5)

Creditors

(41.3)

(31.9)

(47.8)

(42.2)

(43.5)

Short term borrowings

(49.3)

(93.6)

(51.8)

0.0

0.0

Long Term Liabilities

 

 

(96.6)

(30.9)

(72.3)

(70.6)

(67.4)

Long term borrowings

(67.6)

(10.2)

(52.3)

(52.7)

(49.5)

Lease liabilities

(18.7)

(12.1)

(16.0)

(14.0)

(14.0)

Other long term liabilities

(10.4)

(8.6)

(4.0)

(4.0)

(4.0)

Net Assets

 

 

13.2

3.3

0.7

7.4

10.1

CASH FLOW

Operating Cash Flow

 

 

11.6

18.7

17.9

7.4

18.0

Net Interest

(6.5)

(5.9)

(7.7)

(10.3)

(3.8)

Tax

9.6

0.2

2.7

2.3

(2.0)

Capex

(7.7)

(15.0)

(7.7)

(5.3)

(9.0)

Acquisitions/disposals

0.0

8.4

0.0

0.0

0.0

Financing

1.9

4.7

8.4

45.5

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

8.9

11.1

13.6

39.5

3.2

Opening net debt/(cash)

 

 

117.4

111.2

102.3

86.0

46.6

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(2.7)

(2.2)

2.7

0.0

(0.0)

Closing net debt/(cash) (excluding leases)

111.2

102.3

86.0

46.6

43.4

Total financial liabilities

 

 

130.0

114.4

102.0

60.5

57.4

Source: Company reports, Edison Investment research estimates


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United Kingdom

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London, WC1R 4PS

United Kingdom

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