PIERER Mobility — Powered two wheelers in demand

PIERER Mobility delivered a relatively resilient performance in H120 despite the pandemic. Disruptions caused to economies and activity levels by lockdowns in a number of countries included the closure of some dealerships for a significant part of Q220, with an inevitable financial impact. The results were also affected by the temporary suspension of production in Austria for eight weeks from mid-March to mid-May. Key financial highlights were:

Free cash improved by €5m to an outflow of €26.6m and the primary additional increase in net debt was the €40.5m consolidation and recapitalisation of KTM Motohall in Mattighofen, Austria. A €13.2m cash dividend was paid to the minority shareholder in KTM AG (Bajaj 48%) in H120, but this should be returned by the minority partner in H220 as a reflection of the tougher operating environment and to assist liquidity.

Motorcycle performance was relatively resilient in the face of lockdowns that shut dealerships in many countries. Sales fell 29% to €529.4m in H120 with a consequent impact on gross margin which declined to 24.4% from 27.7% in H119. Some 30k units were lost as a result of the production shutdown, but management expects to recover the shortfall through higher H220 output with more shifts and employees.

Motorcycle demand, however, surprised on the upside versus our prior projections, as it recovered strongly towards the end of the period as lockdowns eased. The company continued to outperform its major markets in H120 despite the pandemic disruptions, increasing market shares in all of its main territories. While the European market declined sharply, especially due to the lockdowns in higher volume countries such as France, Italy, Spain, the UK and Austria, demand in Germany and Sweden for PIERER Mobility brands rose by c 3%. Overall KTM and HUSQVARNA registrations in Europe fell by 11.4% to 37.6k (H119: 42.4k) units against the addressable market decline of 14.7%, with market share rising to 11.8%.

In North America, KTM and HUSQVARNA brands achieved healthy growth in market share to 10.9%, with registrations increasing by 18.3% to 26.7k motorcycles. In the smaller Australia and New Zealand market, PIERER Mobility brands saw even stronger growth of 39.3% to 5.9k units.

Wholesales to dealers fell by 33% to 90,331 motorcycles (including 501 GASGAS bikes) as management proactively suspended production in Austria for eight weeks from mid-March as COVID-19 took hold in Italy, disrupting major component suppliers. However, PIERER’s extensive global dealership network, which now totals almost 3,200 dealers, was carrying enough stock to meet strong retail demand. Overall global registrations increased by 1.4%.

In 2020 PIERER Mobility has the capacity to produce around 140k KTM and Husqvarna motorcycles in Mattighofen, Austria, with the GASGAS facility in Girona, Spain, producing around 4k units. Bajaj output is likely to be around 108k units in Puna, India.

PIERER Mobility took full control of GASGAS ahead of plan in July 2020. As a side note, the return to racing appears to be proving successful, with a maiden MotoGP win and strong showings in recent races as well as good results across MotoX and Enduro competitions.

Following the purchase of 100% of PEXCO in late December 2019, the newly formed e-bike business operates as PIERER E-Bikes selling under the Husqvarna and R-Raymon brands, adding GASGAS in the future. It was fully consolidated in the income statement for the first time in H120. It is mainly European business with around 1,100 dealers in an e-bike market estimated by PIERER Mobility at 3.4m units, as well as 15k e-mopeds. Management maintains its target of 250k unit sales by 2024 generating revenues of approximately €500m. FY20 revenue guidance is maintained at €110m.

In H120 a total of 34,351 Husqvarna and R-Raymon e-bikes were sold. In addition, 8,492 traditional bicycles were sold under the R-Raymon brand. The business made an initial €68m revenue contribution and generated a better than expected positive EBIT contribution of €3.5m. Initial sharp market declines during European lockdowns were largely reversed in May and June, as pent up demand was absorbed and the public propensity for cycling increased.

The encouraging trends seen in the major markets since lockdown eased have continued through August. Partly driven by changes in attitudes towards public transport and potentially supported by the relative freedom for individuals by powered two wheelers, off road and e-bike demand has been particularly strong, according to the company.

The worst affected of PIERER’s markets in H120 was India, but there are now signs of encouragement. If we take total Bajaj Auto’s two wheeler registrations, which we believe includes KTM and HUSQVARNA brand motorcycles manufactured by the company in India, as a proxy for Indian market performance, it can be seen that in August sales volumes finally recovered to prior year levels. In August 2020 Bajaj’s total two wheeler sales (including KTM and HUSQVARNA brands) were just 1% below August 2019 levels, following the weak H120 market performance during the lockdown. The lockdown had decimated the Indian market in H120 when volumes were down 44%, with April down 90%. While PIERER Mobility brand sales were already anticipated to perform better than the market overall due to new model introductions, we expect demand for its brands are following a similar recovery pattern for imported motorcycles from Austria as well as local licensed production.

If the recovery is maintained, the Indian market will only be down around 5% in H220 compared to the prior year period. It should be remembered that Indian production only produces licence income that is included in revenue for PIERER, which currently accounts for only around €5m in revenue (essentially at 100% margin).

The strength of demand for PTWs noted in the later weeks of H120 continues in PIERER’s major markets of North America, Europe and Australia. In addition, markets elsewhere appear to be recovering to pre-lockdown levels, notably in India. As a result of the apparent structural shift in demand for motorcycles and e-bikes, PIERER Mobility is running at higher levels of production in H220 than last year.

On 28 September 2020 management indicated that the continuation of the positive trends had led it to increase its FY21 revenue guidance by 3% to more than €1.45bn (previously €1.40bn) and maintained the EBIT margin range of 4–6%. E-bike revenue guidance was maintained at €110m so the increase appears to reflect buoyancy in motorcycle markets. H220 revenues are now guided to be some 10% ahead of H219, and that momentum should continue into H121 when a repetition of the market disruptions seen in H120 appears less likely.

We have modestly increased our earnings estimates, as shown in Exhibit 4. We have assumed slightly increased motorcycles sales with a volume decline of 13% on FY19 rather than 15%. Our ebike forecasts remain unchanged. As we expect the momentum of recovery from H220 to continue into FY21, our revenue expectations increase by 1.2% in FY20 and 1.5% in FY21.

There is an increase in net debt resulting from the high level of investment being made, which included €40.5m in the recapitalisation and consolidation of KTM Motohall in H120. The resulting higher average debt levels increases interest payable. We have adjusted the minority charge payable to Bajaj to reflect a faster than expected rise in the proportion of e-bikes profitability, albeit still relatively modest.