PIERER Mobility — Pedal power combination

As of 22 October 2019, PIERER Mobility is the new name for the former KTM Industries headquartered in Wels, Austria. The company listed on the SIX Swiss Exchange in November 2016. It is also listed in Vienna, although this is likely to be terminated once an additional listing on the Frankfurt Stock Exchange (General Standard) completes in Q120 that may improve liquidity. The name change partly reflects an evolving growth strategy that now also targets penetration and growth of urban two-wheeler e-mobility markets. In December 2019 the company took full control of its e-bike division PEXCO, following the purchase of the remaining 60% majority stake previously held by the parent company Pierer Industrie. In 2020 GASGAS in Spain will be added as a third core motorcycle brand following the joint venture (60%) and industrial cooperation agreement.

At the core of its activities, PIERER Mobility is Europe’s largest manufacturer of motorcycles historically focused on the KTM and HUSQVARNA brands, and is adding the Spanish GASGAS brand in 2020. The group has an established track record of strong growth with a product range that emerged from the traditional off-road and sporting roots of the business that still represent around 40% of volumes. It has consistently gained market share with its premium products in developed markets and achieved record unit sales volumes of 280.9k in 2019.

Historic exposure to massive PTW demand in emerging markets such as India and China was limited due to pricing levels and large domestic competitors. However, there is an increasing demand for premium products, which is being addressed through established high-quality partners. Joint ventures with Bajaj Auto in India and CFMOTO in China should lead to significant additional sales volume of HUSQVARNA and KTM products over the next two years as licensed production of further models starts in both countries, although the Chinese ramp up will likely be slow. These will provide the bulk of the growth to the targeted 400k annual group motorbike registrations in 2022.

The move into urban e-mobility markets is a natural progression from the group’s PTW base. Using its branding, third-party manufacture based on efficient and reliable off the shelf technology including motors, sales of e-bikes, electric scooters and eventually electric motorcycles will be targeted at the premium end of the rapidly growing market. The increasing use of internally developed and specified components developed by PIERER Mobility should progressively provide a differentiating factor. Volumes should be incremental to the traditional activities providing significant additional revenue streams from already established European e-bike markets that are growing at well into double-digit rates.

Despite displaying stronger growth dynamics than its PTW peer group, PIERER Mobility continues to trade at a modest discount on an EV/EBITDA basis although it is more closely aligned on an EV/sales multiple and trades at a premium on EV/EBIT. Our DCF valuation of €65.2/share is based on the core business together with the e-motorcycle potential. At present, it takes no account of the e-bike business of PEXCO, which we believe could add a further 15% to the value if our incremental (but conservative) estimates are achieved in the medium to long term.

PIERER Mobility is the PTW subsidiary of Pierer Industrie, which retains a 60.9% stake in the group. Pierer Industrie is an industrial holding company with interests in other well-known specialised engineering activities such as Pankl and SHW, as well as other electronics and software activities. The shares of PIERER Mobility have been listed on the SIX Swiss Exchange since 14 November 2016 and an additional listing in Frankfurt is expected in Q120, following which the listing on the Vienna Stock Exchange is likely to be terminated.

PIERER Mobility is a leading manufacturer of PTWs, focusing on premium motorcycles and two-wheeled electric vehicles. It is the largest sports motorcycle manufacturer in Europe. The company owns a 51.7% stake in KTM (the remaining 48.3% stake is owned by Bajaj Auto), which operates the motorcycles brands KTM, HUSQVARNA Motorcycles (acquired in 2013 from BMW) and the recently acquired GASGAS (in 2019, PIERER Mobility signed an industrial cooperation agreement with the owners of GASGAS Motorcycles; the GASGAS brand will be integrated with PIERER’s commercial platform over 2020). PEXCO is the fully owned e-bike business of the group, which operates with the R RAYMON and HUSQVARNA Bicycles brands.

KTM is the global leader in the off-road motorcycle market segment, where it has a market share of c 70%; this is the market segment where KTM built its reputation and track record. However, over the years, the group has expanded into other segments with the HUSQVARNA and KTM brands; nowadays off-road units represent c 50% of total sales (50% on-road). Overall, the company has a 12% share of its target markets in Europe and 9% in the US (both steadily increasing over time). Its key competitive advantage is the superior technology and quality of the products, well recognised by clients and reflected in strong brands that have been developed with extensive racing activities. The premium quality of the products is reflected in higher prices than competition (c 10%). The company operates globally with sales that are geographically diversified thanks to an ongoing process of internationalisation, with the core European market representing c 40% of the units sold, the US c 20% and India c 25% (as of FY19).

PIERER Mobility has experienced strong sales growth over the last several years and sold 280k units in FY19. The medium-term (2022) company target is to grow volumes to 400k units.

The company’s headquarters are in Wels, Austria and it had an estimated 4,400 employees at the end of 2019. Its manufacturing capacity includes two production sites, one in Austria (Mattighofen) and one in India (Pune, owned and operated by Bajaj Auto). In 2019, 76% of the units sold were produced in Austria and 24% in India by Bajaj Auto. In addition, seven complete knocked-down or complete built-up facilities are operated in China, the Philippines, Malaysia, Brazil, Argentina and Colombia. The company has an extensive commercial global network of 2,956 dealers at the end of 2019 of which more than 2,165 (73%) related to KTM and the rest to HUSQVARNA. In total, 1,200 are in Europe with 650 in North America and around 500 KTM dealers in India and Indonesia.

PIERER Mobility’s strategy is focused on strongly developing its presence in emerging markets (with India as a primary focus) and continuing to strengthen its market share in developed markets (mainly in North America, where its market share has been growing for a number of years, and in Europe, its largest market). To extend the product range, the company continues to invest significantly in R&D activities and leverage its racing know-how and technologies and incorporate it into serial production models. It has accelerated its growth plans in emerging markets thanks to important commercial, manufacturing and technology partnerships with local players. The most important is PIERER's strategic partnership with Bajaj Auto in India (units produced by Bajaj are targeted to grow by a CAGR of 17% in 2017–2022 to 200k). Bajaj Auto, the flagship company of the Bajaj Group, is the second largest motorbike manufacturer in the world and the largest three-wheeler manufacturer, with a total 5.0m units sold between April 2018 and March 2019. In China PIERER Mobility has created a JV with CF Moto that appears well positioned to take advantage of strong growth in the high-end motorcycle market (PIERER Mobility expects 20% pa growth rates in the overall Chinese market).

Longer term, PIERER Mobility is focusing on developing its e-mobility offering, looking to leverage its technology, know-how and commercial channels to establish itself as a global leader in this market and to take advantage of the transition to e-mobility, a strong structural growth trend for the industry. With certain electric models already available and many more to follow, PIERER Mobility is primarily targeting the premium urban mobility (e-bikes, e-scooters) segment, with 3–10kW power range. We believe the recent acquisition of the outstanding majority interest in PEXCO (an e-bicycle manufacturer) shows the importance of this business for the group.

PIERER Mobility is the result of the entrepreneurial career of Stefan Pierer, who founded the PIERER Mobility Group in 1987; he is CEO, majority shareholder and member of the executive board. Friedrich Roithner was appointed CFO in 2010 and has been part of the management team since 2007 after holding various auditing, finance and accounting roles at a leading auditing firm and at Austria Metall. Josef Blazicek, chairman of the supervisory board since 2008, is an entrepreneur and brings a wealth of expertise in capital markets, thanks to his experience in sales, trading and investment banking management at various banks and investment firms.

The global PTW market is estimated by PIERER Mobility to be around 56m units, split broadly evenly between motorcycles and scooters (where PIERER Mobility does not yet participate). Geographically, demand is skewed towards the high populous countries of the emerging markets especially India and China.

PIERER Mobility’s target PTW market has been for motorcycles greater than 120cc that retail for over €2,500. The segment represents six million units accounting for only around 11% of the total global PTW market. The company had a market share of around 9.5% of this market in 2019 with registrations totalling 280.9, up 10% on 2018 and of which 66.2k were through Bajaj.

In 2019, PIERER Mobility’s main markets were less favourable than in 2018, falling by 6.3% overall. North America was down again modestly by 2.7% and India registrations fell by 16.0%.

PIERER Mobility outperformed all regions except Europe where growth in registrations of 6.9% was healthy but slightly below market growth of 8.9%. The company grew registrations in North America, but the main driver of volume growth was in India with a 37.0% increase in registrations. PIERER Mobility’s market shares were 11.8% in Europe (down 20bp), 9.7% in North America (up 60bp) and 7.3% in India up 280bp.

The introduction of Euro 5 emissions regulations from 1 January 2020, equivalent to automotive Euro 6 standards, is a challenge for PTW manufacturers. All new model road-going mopeds and motorcycles registered in Europe from 1 January 2020 must meet these standards, as must existing models from 1 January 2021 although off-road sports bikes have a dispensation until 2025. PIERER Mobility’s product range should prove to be compliant with these requirements.

PIERER Group was early in developing technologies for the e-mobility industry (the first commercial model, the high-performance Freeride E 16kW, was introduced to the market in 2014), but the company has been waiting for the markets to mature before accelerating its commercial and production efforts in this business. As several first movers in the e-bike and e-motorcycle/scooter markets have been accumulating losses while waiting to reach critical mass, PIERER Mobility’s strategy has paid off in our view as the experience of several first-movers makes clear that the challenge for EV manufacturers is to grow profitably, rather than just accelerating the top line. We believe PIERER Mobility is now ready to take on the huge opportunities (and challenges) posed by the largest driver of transformation of the industry in decades.

The adoption of e-bikes and scooters is increasing strongly in Europe, with high growth rates for both markets supported by structural long-term trends. Several drivers support the development of the industry: increased environmental awareness, the need to improve urban traffic, the adoption of environmental policies supporting cleaner transport means and the potential for cost savings compared to combustion engine vehicles and technological improvements.

In particular, regulation is likely to play a key role: in 2011 the European Commission published its Transport White Paper, which included key goals such as achieving virtually CO2-free city logistics by 2030 and phasing out conventionally fuelled cars in urban transport by 2050. The EU has also co-funded several projects to build fast-charging infrastructure. In China regulators have set an ambitious target of electric cars representing 60% of new sales by 2035 (although recently the country experienced a slowdown in electric car sales). In India the announced second phase of ‘Faster Adoption and Manufacturing of Electric Vehicles in India’ introduces incentives for the purchase of electric vehicles, focusing on two/three wheelers and public transportation. It has also proposed (but not yet approved) a target to achieve 100% electric sales for the three-wheeler segment by 2023 and for the two-wheeler market by 2025. This target would drive huge growth for the industry although it appears unrealistic, in our view.

In addition, we believe technology advancements and declining production costs for electric vehicles will support the transition to e-mobility: according to Harley Davidson, electric motorcycles will achieve cost parity with international combustion engine motorcycles as early as 2030. The key driver is the declining cost of batteries thanks to improvements in battery chemistry, new materials and economies of scale and other production efficiencies as the industry matures. Our analysis of battery chemistry and capacity investment suggests that reductions in battery prices are likely to continue. Even conservatively assuming a 10% pa fall in cost (nearly half the historical rate), EVs should reach price parity in most markets by 2024, spurring demand acceleration. We forecast a 10-fold growth in annual battery capacity by 2030 (a 23% CAGR), driven primarily by transport (90% of demand in 2030).

E-bike sales have boomed over the last couple of years and growth forecasts have been revised up significantly. A 2017 forecast by the European Cyclists’ Federation (ECF) for 50 million e-bike sales in the EU in the period 2018–20 has been revised to 150 million for 2019–30 by Cycling Industries Europe, a federation recently founded by ECF. While historically e-bikes have been particularly popular among people over the age of 65, there is now growing demand from younger users, particularly commuters.

The e-bike market is an already well-developed industry (2.6m units sold in Europe in 2018, according to the German industry association, ZIV), which has experienced very strong growth rates (31% CAGR 2006–18). The largest European market, Germany, experienced a 22% CAGR in the period 2015–18 to almost one million units sold in 2018. Despite the recent growth, e-bike sales continue to represent a relatively small percentage of total European bicycles sales, 13% on our estimates. However, there are signs the percentage is likely to increase much more. In the large Dutch market, e-bike sales were higher than traditional bikes sales for the first time in 2018. Many industry experts expect this percentage to continue to increase: Claus Fleischer, CEO of Bosch eBike Systems, anticipates that by 2027 over 50% of new bikes sales in the EU will be e-bikes (>65% in Germany).

In addition to the European e-bike market, on which we expect PIERER Mobility to primarily focus, e-bike sales will continue to grow significantly elsewhere and the size of the potential market is extremely large. According to Deloitte more than 130 million e-bikes will be sold globally over 2020–23 (cumulative).

We consider the e-bike industry very competitive and characterised by low barriers to entry, with a high number of new entrants and incumbents competing against each other. In such an environment, we believe the players with strong brands that offer highly differentiated premium products and have well-established distribution channels offer the most compelling investment opportunities. As such, we see PIERER Mobility as relatively well positioned in the industry as we believe it can leverage on its brands, its global dealer network, its reputation and track record of quality products and its focus on market segments where it is recognised as the global leader (off-road).

In December 2019 PIERER Mobility announced the takeover of the remaining 60% of the shares of PEXCO (it owned a 40% stake previously) for €22m. PEXCO was founded by the Puello family in July 2017 and focuses on manufacturing bikes and e-bikes. It operates through the two brands, R RAYMON and HUSQVARNA Bicycles. The two brands offer several models, from urban to high-performance e-mountain bikes, although the main focus is on high-performance e-bikes. The retail prices range between c €600 for a city bike to c €11,000 for the most advanced e-mountain bike. PIERER Mobility targets very strong growth with c €100m sales in FY20, up from €29m in FY18 (when it sold more than 30,000 units).

While most components of the e-bikes are purchased from external sources (including Shimano and Yamaha drive units and Yamaha and Simplo batteries), we expect the company will internalise more components over the next few years. We see this strategy positively as it should drive a reduction in bottlenecks (in a period of booming demand) and shipping times, an improvement in profitability for PIERER Mobility and an opportunity to leverage the technical know-how of the company and further differentiate the product from the competition.

We have modelled the growth potential assuming strong top-line growth (2019–22 CAGR +24%), driven by rising volumes. However, our revenue estimate for FY23 is around half of the expectation indicated by management and thus we feel our overall assessment is conservative. At a time when most e-mobility players are loss making, we expect PEXCO to break even in FY20 and contribute positively to group EBIT from FY21. We assume EBIT margins gradually converge to average group levels in the medium term (2025).

Compared to e-bikes, the e-scooter/motorcycle market is at an earlier stage of development. According to the EIA, China is by the far the largest electric motorcycle market, with the large majority of the electric two/three wheelers in the world (300 million on the road) estimated to be in China. In China electric two-wheeler sales were 27 million in 2017 according to China Investment Corporation (CIC), ‘hundreds of times larger than any other market in the world’, the EIA said. Compared to China, the other markets are small and the growth potential is very large in our view. Indeed, in Europe there were fewer than 50,000 electric moped/motorcycle registrations in 2018 (source: European Association of Motorcycle Manufacturers (ACEM)); in India electric motorcycles accounted for only 0.2% of total 2017 motorcycles sales (source: CIC); we estimate fewer than 10,000 registrations in the US.

The e-motorcycle market in its early stage of development has significantly fewer units sold than e-bikes (European e-bike volumes were >65x e-motorcycle volumes in 2018). However, although electric two-wheeler sales are low in Europe, they are growing strongly (+27% CAGR for the e-scooter and e-motorcycle market over 2011–18) and already represent a bigger portion of registrations than electric cars (c 4% vs c 2%).

In our view, the largest growth potential for electric motorcycles is driven by the need to modernise and convert the ageing fleet of combustion-engine vehicles to electric. In addition, the transition to urban e-mobility may attract new customers to the two-wheeler market, such as car users looking for more sustainable solutions as well as a higher number of female customers, who historically represented a much smaller percentage of motorcycle users. Based on our assessment of the growth potential, the review of the various growth forecasts and the historical trends, we believe it is realistic to assume global electric motorcycles fleet will expand at least at c 5% per year until 2030. In the immature markets of Europe and North America volumes are likely to expand at double-digit rates. In India, volume growth rates could be significantly stronger due to the current low sales and depending on the upcoming regulatory targets. Below we provide a list of growth forecasts for the various regions relevant for PIERER Mobility from publicly available sources.

As new products are launched and the market develops, it is also increasingly clear that in many cases the e-bike and e-scooter markets are serving the same type of clients. The boundaries between the two industries, which are already blurred, are likely to come down in the not-so-distant future.

With the exclusion of China, the electric scooter/motorcycle market is a niche industry and new entrant manufacturers play a significant role. However, although many new start-ups have accessed the market, most have not yet proved their ability to generate adequate returns and several have not yet reached breakeven. NIU, the largest listed player, did not achieve breakeven in 2018 (negative 3.3% net profit margin) despite strong revenue growth and considerable volumes (340k units sold in 2018), although breakeven is likely to have been achieved in 2019. In Europe the Italian electric two-wheeler manufacturers Askoll EVA and Energica Motorcycles (listed companies offering urban lightweight e-scooters and high-performance e-motorcycles) also did not reach breakeven in 2019.

We believe traditional players such as PIERER will find it easier to achieve economies of scale as they can integrate new e-mobility products with existing operations. Their size combined with existing distribution channels, established brands and the fact that they access the market when it is more mature is likely to help their profitability. Finally, as the market develops, larger players enter the market and technological solutions converge, we expect consolidation in the sector. PIERER Mobility has the ambition to play a key role in this process.

We believe PIERER Mobility is well positioned for developing a new e-mobility business without cannibalising its existing products. This is because PIERER plans to focus mostly on a new market segment, urban e-mobility solutions – this is the segment we expect to be affected the most by the transition to e-mobility in the coming years. We do not expect a swift transition for PIERER’s existing core off-road offering as we believe it will take time to convince the majority of current customers that the quality of the experience (less noise, etc) is comparable to internal combustion engine vehicles. Within the urban-mobility market, we expect competition among manufacturers to be very intense in the low-end segment of the market, which includes large volume orders such as corporate fleets, sharing networks, etc. We expect PIERER to leverage its brands focusing instead on premium higher-margin market segments, consistent with its business model for internal combustion engine units and to focus on the 3–10kW power range. For modelling purposes we have assumed an average price of €5,000 per unit, which looks rather conservative based on the market pricing. The manufacturing will be concentrated in India, hence providing competitive pricing conditions and limiting investments by PIERER Mobility, in accordance with the strategic cooperation agreement with Bajaj Auto that starts in 2022.

We have forecast what we believe is a reasonable scenario of growth for PIERER Mobility in this market. We show in Exhibit 13 the potential revenue and profit uplift for PIERER Mobility from the entry into the e-motorcycle market. The visibility is low and our forecasts are subject to very high risks, considering the regulatory uncertainty, the fact that the bulk of the PIERER Mobility e-mobility products have not yet been launched and that industry data are scarce. Our forecasts are based on the following key assumptions:

As set out in the exhibit above, we believe the e-mobility opportunity could be a very large driver of the group’s earnings growth, with this segment potentially generating c 50% of the current net income of the group. As a sensitivity, in the following table we show the variation to EBIT uplift, if we adjust one of our key assumptions (market share), by using 5% and 15% instead of 10%.

The growth of the PIERER Mobility group is the outcome of the entrepreneurial career of DI Stefan Pierer. He founded the group in 1987 and is CEO, majority shareholder and member of the executive board. He has been a shareholder and member of the management board of KTM since 1992. He graduated from the Montan-University in Leoben, Austria, with a degree in business and energy management.

Mag. Friedrich Roithner, was appointed CFO in 2010 and has been part of the management team since 2007. After graduating in business administration from the Johannes Kepler University of Linz, he started his career as an auditing assistant at one of the big four leading tax consultancy and auditing companies in Austria. In 1992 he joined Austria Metall and was a member of the management board from 2002 until 2006.

Josef Blazicek has been chairman of the supervisory board since 2008. He is an entrepreneur and held several sales, trading and investment banking managerial positions at GIRO Credit Bank der Österreichischen Sparkassen, Erste Bank, Investmentbank Austria and ICE Securities. He was managing shareholder at Ocean Equities until 2003 and has been working for QINO Group and Ocean Consulting in various leading positions since 2000.

The remuneration of the management team is composed of a fixed and a variable component; the variable part is linked to EBIT, PBT and free cash flow generation of the companies of the group.

We believe the key upside and downside risks to our forecasts and valuation are:

We have calculated our fair value for PIERER Mobility using a DCF approach that includes the later transition to e-motorbikes from 2022 as it is part of the historic core markets. Together these DCFs generate a fair value estimate of €65.2 per share (core existing business €56.2 plus e-motorbikes €9.0 per share).

For now we exclude from the fair value estimate the calculated DCF value increment from e-bikes (PEXCO) as it is a new market segment in an early phase of growth with execution risks attached and has yet to reach profitability. If successful, we calculate e-bikes should add a further €9.5 per share to our fair value, a potential upside of 15% to our fair value bringing it to €74.7 per share

DCF approach provides value of €65.2 per share

We have derived our base case valuation with a DCF-based approach. This excludes any upside from the expansion into e-bikes (PEXCO) although we have added the separately calculated DCF for the development of the e-motorcycle markets from 2022. In our core business DCF we have used a WACC of 6.4%, which is calculated assuming some normalisation in the risk-free rate (2%), an ERP of 5.5%, a cost of debt of 4%, 24% tax rate and 30% target debt/EV. We have also assumed a five-year growth phase at 10% beyond our FY22 forecast period and a 1% terminal growth rate, with depreciation equal to maintenance capex in the final year. Finally, the large minorities line has been calculated as 48% (Bajaj Auto stake in KTM) of the total equity value pre-minorities. Our valuation implies c 14x EV/EBIT for the terminal value, which appears broadly consistent with the current c 16x average FY1 for global motorcycle peers, as identified below (Exhibit 19).

We show a sensitivity analysis to higher/lower WACC and higher/lower terminal growth rate for the core business DCF value in the following table.

To the core business we have added the separately calculated DCF we have for the proposed e-motorbikes venture that will be developed as part of the existing core activity. We have used the same group WACC of 6.4% for the calculation as for the core model. The DCF generates a value increment of €9.0 per share, providing an overall fair value for the existing core business of €65.2 per share.

We estimate the potential value upside to the current share price from a successful expansion into e-bikes should also be significant, although we believe it would take time for the market to reflect it in the share price. Based on our growth forecasts for expansion into e-mobility as described above, we have calculated the additional value upside based on a DCF approach, assuming our group calculated WACC of 6.4% as for our core business base case valuation. The €9.5 per share that the DCF produces could therefore add 15% to our fair value estimate.

Overall we estimate the c €600m increase in revenues from e-mobility on total new business in 10 years from now, roughly equally split between e-motorcycles and e-bikes (c 40% uplift vs 2019 sales) could add €18.5 per share to our base case core business DCF valuation, or +33%.

Peer group comparisons

PIERER Mobility trades at a modest discount to the global sector on an FY21 EV/EBITDA basis despite a stronger FY19–FY21 growth outlook of 8% against the motorcycle peer group average of 6.3%. However, it currently trades on a 32% EV/EBIT premium to its peers, which should diminish as growth resumes from FY21 following the current year investment in GASGAS and e-bikes launches. This leaves FY19–FY21 EBIT growth below peers (4% versus the sector’s +8%).

PIERER Mobility is trading at a premium to the European motorcycle manufacturer Piaggio, although it has a significantly stronger growth track record, higher EBITDA growth prospects and similar margins. PIERER is arguably more robust as its existing market should face limited impacts from urban mobility growth. We see PIERER as better positioned than many other motorcycle manufacturers in the context of the transition to e-mobility. We believe the expansion into urban electric vehicles represents significant upside potential for PIERER Mobility with little risk for its core business of premium/sports motorcycles (we do not expect a swift transition to electric in the medium term). Other motorcycle manufacturers such as Piaggio could also grow by expanding into e-mobility, but for many manufacturers we see a risk of cannibalisation of their existing business in the short term, potentially resulting in slower growth than at PIERER Mobility.

Overview of 2019 preliminary results

PIERER Mobility has developed a strong track record of growth of c 13% revenue CAGR and c 18% EBIT CAGR in 2011–19.

Revenues in 2019 were another record, growing 4% to €1.52bn. The slower rate of growth reflected the outperformance of subdued motorcycle markets with the exception of Europe where PIERER modestly underperformed the stronger market.

EBITDA also grew by an impressive 14% to €240.8m (FY18 €211.0m) although this benefited from a one-off IFRS adjustment of €10.4m related to the PEXCO buy-out. The same benefit was seen in the EBIT increase of 2.3% to €131.7m. Excluding the consolidation effect, underlying EBIT was €121.3m, down €7.4m or 5.7% below the prior year, representing an underlying EBIT margin of 8.0%.

Net income grew by 32.6% benefiting from lower interest, tax and minorities. EPS increased by a similar amount to €2.42 (FY18 €1.82). Stripping out the consolidation effect would reduce EPS growth to 7.3% at €1.96.

FCF was much improved at an inflow of €92.1m (FY18 outflow €16.7m) mainly due to a significantly improved working capital movement as well as lower cash tax payments. Investment in PPE, R&D and tooling reduced to €164.5m from €183.6m, exceeding deprecation and amortisation by €55m. Net debt increased to €395.8m (FY18 €323.3m), largely due to the application of IFRS 16, which capitalised c €39m of lease exposures, and the additions of PEXCO and the Australian motorbike distributor, which added around €84m to net debt levels. Net debt/EBITDA remained a comfortable 1.6x.

Management has issued guidance for FY20 but withdrawn the medium-term outlook for the time being. PEXCO will be fully consolidated in FY20, adding around €100m of sales and achieving an expected break-even EBIT performance as it fully integrates its brands, including HUSQVARNA e-bikes. In addition, GASGAS brand revenues should begin and these two factors should account for the bulk of the guided top-line growth of 8–10% in FY20. Although the Chinese joint venture starts production in H220, initial volumes will be low with little contribution to the group. The core business is expected generate revenues of €1.64bn to €1.72bn.

EBIT margins are expected to fall to a 6–8% range in FY20, slightly below the normal 8–10%. There are two main reasons for the expected temporary contraction in profitability. The newly acquired businesses will require additional marketing investment and integration expenses that mean the contribution to EBIT will be low, with PEXCO only expected to break even. In addition, the introduction of Euro 5 emissions on existing models from 1 January 2020 may mean the core business has to assist its European dealership network clear existing stock, which is likely to have some impact on selling prices and wholesale volumes, although retail sales should be slightly higher. We expect a return to the more normal EBIT margin range of 8–10% from FY21.

The implied ranges for EBITDA and EBIT are thus €230–268m and €99–134m respectively. Our FY20 estimates are €245m for EBITDA and €115m for EBIT.

Despite predicting a lower FCF in FY20 than guidance of €37m, we forecast net debt to decline modestly in the current year to €378m, a net debt/EBITDA ratio of 1.6x.

We expect growing volumes in developed markets (launch of new HUSQVARNA models, GASGAS re-launch), expansion in emerging markets and development of the e-bikes business to drive further growth and we forecast a sales CAGR of 9% FY19–22e. A key driver of the growth in the period is the increase in production volumes in India (according to the Bajaj Auto cooperation agreement) where the company expects volumes to grow to over 200,000 units by 2022 (vs 110,500 in 2019), which includes the transfer of production of HUSQVARNA model line 401 to Chakan in India in Q419.

Following the anticipated dip in FY19, we expect an EBIT margin of 8–10% generating 17% three-year EBIT CAGR. The stable margins are supported by several factors. Production in India generates a lower margin as a percentage of the product price (c 4-5% licence fee (effectively 100% gross margin) for the units produced and distributed by Bajaj vs 30% gross margin for the units produced in India and distributed by PIERER), but the licence fee is fully included in the revenues; hence the EBIT margin is close to 100%. In addition, we expect the revenue growth associated with the expansion of the HUSQVARNA production to drive economies of scale: GASGAS and PEXCO should improve margins from FY20. As set out in Exhibit 23, we expect improving returns on capital.

In terms of comparative performance it can be seen from Exhibit 24 that many PTW peers make healthy returns, with PIERER Mobility’s FY21 EBIT margin just within its normal target range of 8–10%, the midpoint of which appears to be aligned with the average of the peer group shown.

After significant investment in new capacity and infrastructure in previous years, PIERER expects company defined free cash flow/sales to improve to 3–5% pa (we forecast 2/3/5% in FY20/21/22). In 2019 a decrease in the rather high level of inventory allowed for a significant improvement in the cash flow generation.

We assume capex of c €160m per year on average in the period FY20–FY22 (company guidance €150–160m) and relatively stable working capital variation of c €5m per year. The company does not provide a split between maintenance and growth capex, but we assume growth capex is around 5–6% to support development meaning a slight reduction in absolute maintenance capex levels. We estimate a double-digit and growing FCF yield, pre-growth capex. We expect positive and growing total free cash flow after growth capex.

We calculate 1.3x FY21 net debt/EBITDA for PIERER Mobility, which is broadly consistent with the average for the peer group (c 1.5x). We believe such a level of gearing combined with the expected cash flow generation leaves room for small acquisitions over the next few years (such as the recent acquisitions of GASGAS and the majority stake in PEXCO) although larger acquisitions (which we would not rule out, based on the company’s aspiration to participate in the consolidation of the sector) would require new equity, in our view.