Schaltbau Holding — On track for strong margin recovery

In Q121, Schaltbau Holding reported good revenue growth of 4% despite the ongoing impact of the COVID-19 pandemic. Market conditions had a mixed impact on Schaltbau’s different divisions, with Rail reporting lower revenues. The Pintsch segment (rail infrastructure) reported the largest decline in revenues (-16%), but this was partly due to one-off revenues in Q120 related to the terminated PSD project in Brazil and the first quarter is historically the weakest for Pintsch. The pilot project for digital interlocking systems in Germany is on track, which bodes well for revenue growth in coming years. The Bode segment experienced delays in rolling stock orders, particularly in the United States and the UK, which was partly offset by strong growth in aftersales (+29%), resulting in a modest revenue decline of 3%. Revenues in the Components segment increased, although rail-related activities in this segment have not fully recovered from the COVID-19 pandemic yet. Despite this, the Schaltbau GmbH segment reported 7% higher revenues. The SBRS segment had a strong quarter, with revenues up 182% to €11.0m, mainly driven by projects for fast charging in e-mobility.

Despite modest revenue growth, profitability improved strongly in the quarter, with EBIT increasing 59% to €6.1m, resulting in a 170bp higher margin of 4.9%. As expected, the largest part of the margin improvement came from Bode (50% of revenues), which showed a 220bp higher margin at 3.5%, fuelled by a strong increase in service revenues, higher shop floor productivity and lower overhead costs. Schaltbau GmbH reported a 100bp increase in margins, driven by better sales volumes and operating leverage. Pintsch reported EBIT of €0.2m in its historically weakest quarter. This compares with EBIT of €0.7m last year, but this included a positive one-off of €0.9m related to the terminated PSD project in Brazil. SBRS reported a modest 40bp increase in margin to 3.6%, but results included a negative accounting effect of €0.7–0.8m related to a write-down of receivables for a legacy project. Adjusted for this, SBRS’s margin would have been above 10%. For the full year, management expects a reported margin for SBRS of around 8%, more or less equal to the reported 9% in 2020. When adjusting for one-offs at Pintsch last year and SBRS this year, Schaltbau Holding’s overall adjusted EBIT margin would have increased from 2.5% last year to 5.5%.

Net working capital increased by 12% to €142m compared to year-end FY20, caused by the aforementioned project delays and a constrained supply chain. As a result, net debt increased from €80m at end FY20 to €94m in Q121, but net debt/EBITDA (last 12 months) only increased from 1.9x at end FY20 to 2.1x. Management expects working capital to normalise throughout the year, resulting in a decline of around €15m compared with the Q121 level to €125–130m at year-end, reflecting 23–24% of revenues (using the revenue guidance range of €520–540m).

In late April 2021, Schaltbau successfully placed a€60m mandatory convertible bond. The bond will mature on 30 September 2022 and the mandatory conversion at €29 per share will increase the number of shares outstanding by 2.1m to 10.9m (+23%). As previously communicated, about 50–60% of the net proceeds of €57.4m will be used for financing a new plant in Germany, about 15–20% will be used for add-on acquisitions and 25–30% will be used for debt reduction. Planning for construction of the new plant is on track, with the groundwork almost completed. The plant should be operational in autumn 2022.

Due to investments in the new factory, we expect free cash flow to be negative in 2021 and around break-even in 2022, after which it will turn strongly positive. Based on our current assumptions, we expect an improvement in free cash flow to €25m in 2023. The equity ratio was 23% in Q121, but we estimate that it will increase to 35% at end FY21 due to the placement of the mandatory convertible bond.

The overall order intake of €136.5m was 5% lower compared to last year, with management stating that COVID-19 continues to influence its supply chains and is also causing project delays in some segments. Bode showed a decline in order intake of 22% y-o-y to €57m, with delays in rolling stock orders, despite positive customer feedback for its new entry systems. Pintsch is benefiting from high rail project volumes, with more orders from Deutsche Bahn expected (as part of its 10-year investment plan for modernisation of the German railway), which is reflected in the increase in order intake of 29% y-o-y to €25m. Rail is a long-cycle business with order lead times of 12 to 36 months. The order intake for Schaltbau GmbH increased 2% y-o-y to €42m, with a decline in rail components compensated by a strong increase in order intake of 32% y-o-y to €9.6m in the relatively new market segments, new industry and new energy. Examples of new applications are contactors for test bench applications and contactors for electric ferries, which use batteries with a capacity of 4,000kWh. The sales funnel for e-mobility applications looks promising, but first material revenues are not expected before 2023. Components is a short-cycle business with order lead times of between four and eight weeks. SBRS is also the main driver of order intake for Schaltbau Holding, with 25% y-o-y higher order intake of €12.2m.

After the strong start to the year, Schaltbau Holding has reiterated its guidance of revenues of €520–540m (+5.5% at midpoint) and reported EBIT margin of around 5%, up from 4.3% last year. As the FY20 EBIT margin was affected by a one-off charge of €5m, or a 100bp margin effect, margin guidance might be too conservative. On the Q121 analyst call on 29 April, management commented that there is upside potential to the margin guidance, but that it is too early in the year to adjust its guidance, partly because of current uncertain market conditions but also uncertainty about the impact of the material shortage. Management stated that it has received no indication that the material shortage will have a negative impact on profitability in 2021.

We have left our estimates broadly unchanged, apart from some small adjustments at the segment level. For 2021–23, our estimates assume a CAGR in reported EBIT of 26% and in normalised EBIT of 17%. We expect financial expenses to decline gradually due to the anticipated decline in net debt and the tax rate to remain around 30%. All in all, this delivers a CAGR in normalised net profit of 21%, but due to the dilution of the mandatory convertible bond, the CAGR in normalised fully diluted EPS is 13% for 2021–23e.

Schaltbau Holding’s ambition for 2026 is for revenues of €750–800m (CAGR of 7–8%) and a high single-digit EBIT margin, which should be interpreted as outperforming the 6–8% range realised by its selected peer group. An important part of margin improvement is the anticipated margin recovery at Bode, which has shown weak profitability over the past few years (due to inefficiencies and low productivity levels). Management believes it is feasible to realise an EBIT margin in the range of 6–8% for Bode in 2026 at the latest, which compares to the reported 1.6% in 2020 or 2.6% when adjusted for restructuring costs. The building blocks for this recovery are shown in Exhibit 2.

When valuing Schaltbau Holding, we look at three different methods: historical multiples, discounted cash flow (DCF) and peer comparison. See also our recently published initiation note for more details on our valuation. We have not changed our assumptions of historical multiples and DCF, but the peer comparison gives a slightly higher potential value for Schaltbau Holding of €41.3 (versus €38.4 previously), when assuming the same discount. The updated blended average of these three valuation methods points to a valuation of €41.0 per share, up from €40.0 previously (see Exhibit 3).