paragon — Navigating the road to redemption

paragon (FRA: PGN)

Last close As at 20/06/2024

3.02

−0.02 (−0.66%)

Market capitalisation

14m

More on this equity

Research: Industrials

paragon — Navigating the road to redemption

paragon continued its debt reduction programme in Q223 with the disposal of semvox. Operating performance progressed positively with H123 sales rising 7% and EBITDA margin in Q223 exceeding 10%, although the business mix shifted towards Mechanics as new contracts ramped up. Management has maintained FY23 guidance and we have modestly reduced our earnings estimates to reflect the mix change as well as higher interest in FY23. As the debt reduction programme continues into FY24 we expect lower interest charges and improving operational cash flows. Assuming the successful further partial redemption of the Eurobond by January 2024, investor focus should return to the growth potential.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

paragon

Navigating the road to redemption

H123 results

Automobiles and parts

31 August 2023

Price

€5.38

Market cap

€24m

Adjusted net debt (€m) at 30 June 2023 (excludes leases €13.8m)

59.9

Shares in issue

4.5m

Free float

50.7%

Code

PGN

Primary exchange

Frankfurt Xetra

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.3)

(7.6)

11.5

Rel (local)

(3.9)

(7.5)

(9.0)

52-week high/low

€6.38

€3.74

Business description

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

Next events

Q323 results

13 November 2023

Analysts

Andy Chambers

+44 (0)20 3077 5700

Natalya Davies

+44 (0)20 3077 5700

paragon is a research client of Edison Investment Research Limited

paragon continued its debt reduction programme in Q223 with the disposal of semvox. Operating performance progressed positively with H123 sales rising 7% and EBITDA margin in Q223 exceeding 10%, although the business mix shifted towards Mechanics as new contracts ramped up. Management has maintained FY23 guidance and we have modestly reduced our earnings estimates to reflect the mix change as well as higher interest in FY23. As the debt reduction programme continues into FY24 we expect lower interest charges and improving operational cash flows. Assuming the successful further partial redemption of the Eurobond by January 2024, investor focus should return to the growth potential.

Year

end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/21**

135.4

(3.5)

(0.72)

0.0

N/A

N/A

12/22**

160.3

(7.9)

(1.15)

0.0

N/A

N/A

12/23e

173.3

1.7

0.41

0.0

13.1

N/A

12/24e

195.2

11.5

1.76

0.0

3.1

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing – restated for paragon semvox discontinued in FY21/FY22.

Significant leverage reduction achieved in H123

paragon has made great strides in reducing its debt burden, cemented by the disposal of semvox for €38.8m. Adjusted net debt has halved since the end of FY19 to €59.9m and the Swiss franc (CHF) bond has been redeemed. Q223 trading for the continuing businesses delivered a broadly flat year-on-year revenue performance that confirmed a record H123 sales performance of €86.6m. H123 EBITDA rose 26% to €8.1m, a margin of 9.3% for the period, although there was a significant improvement in Q223 to over 10%. Free cash outflow was €5.4m although Q223 saw a €3.6m inflow. Management has retained guidance for FY23 revenues of c €170m delivering EBITDA of €20–25m.

Eurobond early redemption remains key

The plan for the early redemption of €20.2m (nominal) of the Eurobond triggered by the semvox disposal needs to be initiated by January 2024. However, assuming management plans succeed, paragon should be substantially de-risked as it embarks on its growth strategy. More normal financial valuation metrics should become appropriate as growing cash flows reduce leverage further and the company refinances ahead of the FY27 final redemption date, allowing the shares to trade towards cash-based valuations.

Valuation: Further re-rating anticipated

We continue to feel the equity rating does not reflect paragon’s substantial progress with deleveraging. Certainly the early redemption needs to be completed but the leverage ratio should be below 2.5x, reducing the FY24 interest rate for the Eurobond to 7.5%. Once concluded paragon should transition to a more normal equity investment proposition. Our DCF value is reduced to €22.1/share (€23.8/share previously), mainly reflecting repayment of COVID-related tax liabilities of c €10.9m (c €2.4/share). It still implies significant potential for investors as risk declines.

Further progress in Q223

Q223 saw paragon’s ongoing activities deliver a healthy increase in EBITDA with a 10.1% margin on essentially flat revenues. In addition, adjusted net debt (excluding leases) was reduced to €59.9m (FY22: €86.0m) following the completion of the €38.8m semvox disposal. The CHF bond was fully redeemed, interim refinancing repaid and initial repayments of the Eurobond commenced.

The company bore down on operational working capital while starting to repay €10.9m of tax liabilities accrued during the COVID pandemic. Adjusted net debt has been halved over the last 3.5 years with leverage (net debt to EBITDA) falling to 2.6x at the half year and expected by management to be below 2.5x at the year end, a more normal level for an industrial company. As a result of the improved leverage ratio, the interest payable on the Eurobond should fall to 7.5% in FY24 from 9.25% currently. In addition, CEO Klaus Frers appears confident that his family can soon recover control over the shares acquired by Electric Brands (29.9%).

The trading performance confirmed management’s guidance for revenue growth in FY23 to c €170m with EBITDA of between €20m and €25m. The improved trading combined with the deleveraging is progressively de-risking the investment proposition and we expect the re-rating to continue as the growth plan is executed.

Trading performance in H123

The continuing operations of both the Electronics and Mechanics divisions grew sales in H123 with revenues more than offsetting the loss of the €5.8m contribution from semvox in H122. Both divisions grew revenues as the automotive market bounced back strongly following the constraints in H122 from the global semiconductor shortage and other automotive supply chain disruptions exacerbated by the war in Ukraine. Car registrations were up 18% in Europe and 13% in the United States, with China up 9%. However it was the Mechanics (Body Kinematics) segment that contributed the most sales growth, making it the largest business unit during the period for the first time. The key highlights of the H123 results for the ongoing activities are:

Revenues grew 7.3% to €86.6m (H122: €80.7m), another new record level for the first half.

H123 continuing EBITDA rose 26.0% to €8.1m with an improvement in both Electronics and, more significantly, Mechanics. The EBITDA margin was 9.3% (H122: 8.0%).

Exhibit 1: paragon H123 results summary

6 months to 30 June (€m)

Q122

Q222

H122

Q123

Q223

H123

% change

Q1

Q2

H1

– Sensors

12.6

12.5

25.1

12.2

11.2

23.4

-3.5%

-10.1%

-6.8%

– Interior

14.0

14.6

28.5

14.5

13.8

28.3

4.2%

-5.5%

-0.8%

– GB Power

0.4

0.0

0.4

1.5

2.3

3.8

n.m.

n.m.

n.m.

Electronics

26.9

27.0

54.0

28.1

27.3

55.4

4.6%

0.8%

2.7%

Body Kinematics

12.1

14.7

26.8

16.5

14.7

31.2

36.6%

-0.1%

16.5%

Revenues

39.0

41.7

80.7

44.7

41.9

86.6

14.6%

0.5%

7.3%

Gross Profit

19.3

22.7

42.0

20.3

21.2

41.5

5.3%

-6.7%

-1.2%

Gross margin

49.4%

54.4%

52.0%

45.4%

50.5%

47.9%

-8.1%

-100.0%

-7.9%

EBITDA

Electronics

2.8

3.3

6.1

3.8

2.5

6.3

38.1%

-25.0%

3.8%

Body Kinematics

1.0

(0.7)

0.3

0.0

1.8

1.8

-99.0%

-353.1%

423.2%

EBITDA

3.8

2.6

6.4

3.8

4.2

8.1

0.7%

63.1%

26.0%

EBITDA margin

9.8%

6.2%

8.0%

8.6%

10.1%

9.3%

-12.1%

62.2%

17.5%

EBIT

0.4

(0.3)

0.1

0.5

0.7

1.2

27.3%

n.m.%

n.m.

PBT reported

(0.7)

(2.2)

(2.9)

(2.5)

(3.8)

(6.2)

237.0%

72.5%

114.0%

Net income

(0.9)

(2.8)

(3.7)

(2.3)

(3.3)

(5.6)

161.4%

18.3%

52.8%

EPS (€)

(0.20)

(0.62)

(0.81)

(0.51)

(0.73)

(1.24)

161.4%

18.3%

52.8%

Source: Company reports

Electronics’ trading performance in Q223 was adversely affected by the discontinuation of a vehicle by a customer, which adversely affected Sensors’ sales and margin. It was mitigated by the strong growth in the small Power business unit as new battery contracts ramped up.

Mechanics’ positive development reflected new contracts building volumes, notably in China. Its EBITDA margin improved significantly to 12.1% in Q223, higher than the overall Electronics margin of 9.1%. For H123 Electronics achieved an 11.4% margin compared to 5.7% for Mechanics.

EBIT improved modestly to €1.2m compared to break even in H122 but there was a €4.4m increase in net interest to €7.4m, reflecting the higher Eurobond interest rate and cost of interim finance used to secure the April 2023 final CHF bond redemption. As a result, the loss before tax increased to €6.2m (H122 loss: €2.9m). Net loss and loss per share for H123 both increased 53% to €5.6m (H122 net loss: €3.7m) and €1.24/share (H122: €0.81), respectively.

semvox was treated as discontinued, contributing a net profit of €7.0m, which comprised a €1.1m net profit and a €5.9m capital gain.

There was an operating cash outflow from the continuing operations of €5.4m (H122: €10.2m inflow), in part driven by the drop in profits compounded by the increase in cash interest paid as well as starting to repay COVID-related tax deferrals of €10.9m. The company also advanced a further €2.3m to Electric Brands to support future potential business and switched to twice-a-year payments of Eurobond interest.

Following the redemption of the CHF bond in April and the disposal of semvox, adjusted net debt (excluding leases) was reduced by 30.0% during the first half to €59.9m (FY22: €86.0m, Q123: €88.1m). While cash and cash equivalents declined to €0.6m (FY22: €18.1m), management indicated that in part this was a conscious effort to minimise overdraft borrowings and contain interest costs. Lease liabilities totalled €13.8m, down from €16.0m at the start of the year.

Outlook

Modest reduction in estimates reflects mix change

As already stated, management has again maintained guidance for FY23, indicating sales of c €170m with EBITDA of between €20m and €25m. Having increased our FY23 EPS by 50% in our last note in June to reflect the lower core interest charge, we are reducing our FY23 estimate by 64%, reflecting the H123 interest charge, which was higher than we expected. Our FY24 estimate is reduced by just 4%, reflecting the change in operational mix with an increased revenue share for the lower margin Mechanics segment as China volumes grow. However, there is upside potential if Q223 Mechanics EBITDA margin levels of over 10% can be sustained.

Exhibit 2: paragon estimates adjustments

Year to December (€m)

2023e

2023e

 

2024e

2024e

 

 

Prior

New

% change

Prior

New

% change

Electronics

118.7

114.4

-3.6%

136.5

131.5

-3.6%

Mechanics

55.1

59.0

7.1%

59.5

63.7

7.1%

Total group revenues

173.7

173.3

-0.2%

195.9

195.2

-0.4%

 

 

 

 

 

 

Electronics

19.6

18.9

-3.6%

23.2

22.4

-3.6%

Mechanics

3.3

3.5

7.1%

4.8

5.1

7.1%

EBITDA

22.9

22.4

-2.1%

28.0

27.5

-1.8%

PBT

6.5

1.7

-74.1%

12.2

11.5

-6.1%

EPS – underlying continuing (€)

1.14

0.41

-63.5%

1.82

1.76

-3.6%

DPS (€)

0.0

0.0

 

0.0

0.0

 

Net cash/(debt)

(48.8)

(58.9)

20.8%

(42.4)

(57.1)

34.6%

Source: Edison Investment Research estimates

semvox proceeds reduce debt burden significantly

Following final accounts adjustments in July, the sale of semvox to CARIAD raised €38.8m before deal costs of €1.3m. The net cash proceeds are slightly below management’s expectation of c €40m. The company had received €34.5m on completion in Q223 with the final payment of €4.3m received in July, which more than offset the Eurobond half-year coupon payment on 5 July of c €2.3m. Thus the adjusted net debt level is expected to have reduced modestly since the half year, with improved H2 operational cash flow also anticipated.

The net debt reduction (Exhibit 3) is expected to continue although, as the balance of the Eurobond early redemption payment is initiated by January 2024, it seems likely that the H223 debt reduction will be limited. We now expect year-end net debt to be around €59m (before the Clarios batteries deal, see below), reflecting the lower final receipt from the semvox disposal and the tax liabilities repayment. The exact mix of the gross debt is contingent on how the company progresses the Eurobond early redemption, a plan for which appears to be under evaluation.

Exhibit 3: paragon adjusted net debt (excluding leases) reduction

Source: Company reports, Edison Investment Research estimates

Clarios deal for batteries business

On 30 August 2023 paragon announced the disposal for an undisclosed sum of its battery unit to world-leading energy storage company Clarios. The deal involves the sale of production lines alongside the transfer of some engineers and employees to Clarios. paragon will remain a manufacturer of battery management systems for the existing battery range with the potential to develop future business with Clarios. Clarios is to license paragon’s Flow-Shape-Design (FSD) technology for non-traction batteries, with paragon retaining the industrial property rights for FSD for traction batteries.

We believe the assets being transferred should generate revenues in the €5–7m range in FY23. When complete, the deal should help to reduce debt by a further modest amount and will leave paragon focused on its sensors, interiors and kinematics units.

Valuation: An inflection point looms

Our updated capped DCF value is calculated using a slightly lower weighted average cost of capital (WACC) of just below 7.8%, reflecting the higher debt levels than we previously estimated. The result is a fall in our capped DCF value to €22.1/share (€23.8/share previously), with the decline largely reflecting the assumed €10.9m payment of COVID-related tax liabilities we had not previously included, equivalent to over €2/share. As the bond redemptions continue, and with the already reduced leverage lowering the cost of debt to 7.5% in FY24, the equity risk premium should start to reduce from 10% as the risk declines. The table below provides visibility of how adjustment to WACC may affect the value.

Exhibit 4: paragon DCF sensitivity to WACC and terminal growth rate (€/share)

WACC

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Terminal growth rate

0%

34.4

30.1

26.5

23.3

20.4

18.0

15.9

14.0

12.3

1%

34.8

30.5

26.8

23.6

20.7

18.3

16.1

14.2

12.5

2%

35.2

30.9

27.2

24.0

21.0

18.5

16.4

14.4

12.7

3%

35.7

31.3

27.5

24.3

21.3

18.8

16.6

14.7

12.9

Source: Edison Investment Research estimates

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

173.3

195.2

Cost of Sales

(69.2)

(72.1)

(94.2)

(98.8)

(109.3)

Gross Profit

58.0

63.4

66.1

74.5

85.9

EBITDA

 

 

13.8

15.1

11.6

22.4

27.5

Operating Profit (before amort. and except).

6.6

8.4

4.8

15.2

19.8

Intangible Amortisation

(6.0)

(6.0)

(5.0)

(3.5)

(3.5)

Exceptionals

(11.2)

(4.2)

(2.9)

(1.6)

(1.6)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

(10.6)

(1.8)

(3.1)

10.1

14.7

Net Interest

(6.5)

(5.9)

(7.7)

(10.0)

(4.8)

Profit Before Tax (norm)

 

 

(6.0)

(3.5)

(7.9)

1.7

11.5

Profit Before Tax (FRS 3)

 

 

(17.2)

(7.7)

(10.7)

0.1

9.9

Tax

9.6

0.5

2.1

(0.5)

(3.1)

Discontinued

(37.1)

(4.2)

5.3

7.0

0.0

Profit After Tax (norm)

3.6

(3.2)

(5.2)

1.9

7.9

Profit After Tax (FRS 3)

(44.7)

(11.4)

(3.4)

6.6

6.8

Average Number of Shares Outstanding (m)

4.5

4.5

4.5

4.5

4.5

EPS - normalised (€)

 

 

0.79

(0.72)

(1.15)

0.41

1.76

EPS - normalised fully diluted (€)

 

 

0.79

(0.72)

(1.15)

0.41

1.76

EPS - (IFRS) (€)

 

 

(9.87)

(2.52)

(0.74)

1.46

1.50

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

12.9

14.1

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

5.2

6.2

3.0

8.8

10.2

BALANCE SHEET

Fixed Assets

 

 

143.1

115.0

75.6

69.3

69.7

Intangible Assets

81.5

76.4

43.1

39.7

40.2

Tangible Assets

47.0

36.2

25.7

22.7

22.7

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

55.1

60.3

Stocks

27.3

24.0

25.2

24.3

26.4

Debtors

11.6

10.9

7.7

8.7

9.8

Cash

5.7

1.5

18.1

6.1

6.1

Other

12.7

8.4

46.0

16.1

18.0

Current Liabilities

 

 

(90.6)

(125.5)

(99.6)

(34.1)

(34.8)

Creditors

(41.3)

(31.9)

(47.8)

(34.1)

(34.8)

Short term borrowings

(49.3)

(93.6)

(51.8)

0.0

0.0

Long Term Liabilities

 

 

(96.6)

(30.9)

(72.3)

(83.0)

(81.1)

Long term borrowings

(67.6)

(10.2)

(52.3)

(65.0)

(63.2)

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

7.3

14.1

CASH FLOW

Operating Cash Flow

 

 

11.6

18.7

17.9

0.9

21.4

Net Interest

(6.5)

(5.9)

(7.7)

(10.0)

(4.8)

Tax

9.6

0.2

2.7

0.2

(3.5)

Capex

(7.7)

(15.0)

(7.7)

(4.0)

(11.2)

Acquisitions/disposals

0.0

8.4

0.0

0.0

0.0

Financing

1.9

4.7

8.4

40.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

8.9

11.1

13.6

27.1

1.9

Opening net debt/(cash)

 

 

117.4

111.2

102.3

86.0

58.9

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

58.9

57.1

Total financial liabilities

 

 

130.0

114.4

102.0

72.9

71.1

Source: Company reports, Edison Investment Research estimates


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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Healthcare

AFT Pharmaceuticals — Judgment clears AFT of lump sum payment claim

AFT Pharmaceuticals has reported that the Auckland High Court has cleared it of certain contractual breach claims filed by PBL Solutions in April 2020, with the court maintaining that the opportunity for Pascomer (a topical formulation of rapamycin) in non-orphan indications was not under the scope of AFT Orphan Pharmaceuticals’ (AFTO’s) business in its legal case. While the ruling dismissed PBL’s claim for a lump sum payment for the assessed present value of Pascomer’s potential, the legal authority has directed AFT to share 35% of the potential (future) profits, which may arise in orphan or orphan-like indications in as well as outside Asia-Pacific. We note that AFT is pursuing Pascomer in non-orphan indications such as port-wine stains and is in the very early stages of development, hence the ruling does not have a near- to medium-term impact on AFT. Our valuation at NZ$644m, or NZ$6.14 per share, and estimates for AFT are unchanged.

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