Daldrup & Soehne — Profitable again in H120 with further upside

Daldrup & Söhne (DB: 4DS)

Last close As at 12/07/2024

5.85

0.00 (0.00%)

Market capitalisation

36m

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Research: Industrials

Daldrup & Soehne — Profitable again in H120 with further upside

Daldrup & Söhne reported a strong set of results in H120, with minimal impact from the coronavirus-pandemic. Total output increased by 5% to €23m, driven by positive sentiment in the drilling market, and EBIT turned positive to €0.5m after a loss of €1.0m in H119. The company won several large contracts this year, proving that market conditions in the drilling segment remain positive, driven by customers’ long-term goal to increase renewable energy sources and reduce carbon emissions. Management reiterated its FY20 guidance of total output of at least €40m and an underlying EBIT margin of 2–4%.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

Daldrup & Söhne

Profitable again in H120 with further upside

Alternative energy

Scale research report - Update

13 October 2020

Price

€2.68

Market cap

€16m

Share price graph

Share details

Code

4DS

Listing

Deutsche Börse Scale

Shares in issue

6.0m

Last reported net debt at 30 June 2020

€4.5m

Business description

Daldrup & Söhne is a provider of drilling and environmental services. The company has four divisions: Geothermics (80% of total output), Water Supply (6%), Raw Materials & Exploration (11%) and Environmental, Development & Services (3%).

Bull

Emission reduction and renewable targets provide a positive macro environment.

Strengthened balance sheet.

Healthy order book.

Bear

Volatility in project sales.

Projects can be subject to delays.

Low margins currently.

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Daldrup & Söhne reported a strong set of results in H120, with minimal impact from the coronavirus-pandemic. Total output increased by 5% to €23m, driven by positive sentiment in the drilling market, and EBIT turned positive to €0.5m after a loss of €1.0m in H119. The company won several large contracts this year, proving that market conditions in the drilling segment remain positive, driven by customers’ long-term goal to increase renewable energy sources and reduce carbon emissions. Management reiterated its FY20 guidance of total output of at least €40m and an underlying EBIT margin of 2–4%.

H120 results show return to positive EBIT

Daldrup & Söhne (Daldrup) had a good first half in 2020 despite the turmoil caused by the coronavirus pandemic. Total output increased 5% to €23m, driven by ongoing demand from its customers in Germany, Switzerland and the Netherlands. After being loss-making in 2019, Daldrup reported an operating profit of €0.5m. In January 2020, it finalised the divestment of Geysir Europe including its two power plants, which had caused a series of losses and exceptional costs over the past few years. Daldrup’s financial position has improved significantly with net debt of €4.5m in H120, down from €63m in H119.

Good order intake to date

Market conditions in the geothermal drilling segment remain positive, driven by targets set by its customers to increase the importance of renewable energy and emission reduction. Daldrup has landed a string of orders during 2020, with the most recent being the €4m order from Schwerin to drill an injection well. Management stated that the current order back log of €27m provides capacity utilisation well into 2021 and the company’s order pipeline further increased to €119m, up from €89m. Daldrup reiterated FY20 guidance of total output of at least €40 and an underlying EBIT margin of 2–4%.

Valuation: Discount to peer group

Daldrup’s share price has reacted positively (up 26% since 30 September) after the return to operating profit in H120. Based on consensus estimates, it is valued at an EV/EBIT for 2021e of 14.6x, which suggests the market is anticipating further growth and margin expansion in the next few years. Daldrup is valued at a discount to its peers, which we think is mainly caused by its below average margin. This offers multiple expansion once the gap in margin has been closed.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

EV/EBIT
(x)

P/E
(x)

12/18

38.9

(16.6)

(2.86)

0.00

N/A

N/A

12/19

24.8

(10.8)

(2.04)

0.00

N/A

N/A

12/20e

62.0

1.2

0.12

0.00

17.1

22.3

12/21e

34.4

1.4

0.16

0.00

14.6

16.7

Source: Daldrup & Söhne, Refinitiv (based on one analyst).

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Review of H120 results

Daldrup & Söhne experienced minimal negative effect from the coronavirus pandemic in the first half of 2020. Its supply and service chains mostly continued to work on time. The company’s projects are characterised by a relatively long development and decision period and, once financed, tend to proceed according to plan. Investment decisions by government customers are guided by long-term considerations and are often part of services of general interest.

The output figure (an aggregation of actual sales and work in progress) rose by 5% to €23m, driven by positive sentiment in the drilling business and well-filled order books. EBITDA more than doubled to €1.7m and EBIT was a positive €0.5m after the loss of €1.0m in H119. This reflects an EBIT margin of 2.4%. Reasons for the higher result were improved output, €0.4m lower personnel costs and €0.4m higher other income (eg relating to insurance compensation, sale of property and reversal of provisions). Net profit was break-even after a loss of €2.1m in H119.

In January 2020, Daldrup finalised the divestment of Geysir Europe, as described in our previous update note published in June 2020.

Exhibit 1: Daldrup H120 results

€m

H119

H120

% change

Revenue

9.7

11.9

23%

Increase in work in progress

12.3

11.3

-8%

Total output

22.0

23.2

5%

EBITDA

0.8

1.7

111%

EBITDA margin, on total output

3.7%

7.3%

Depreciation

(1.8)

(1.2)

-35%

EBIT

(1.0)

0.5

N/A

EBIT margin, on total output

(4.3%)

2.4%

Profit before tax

(2.2)

0.3

N/A

Net profit

(2.1)

0.1

N/A

EPS, €

(0.35)

0.00

N/A

Source: Daldrup & Söhne

Good order intake in 2020

Daldrup has won several new contracts during 2020. It announced in February that it had started drilling for a second well for Nagra, Switzerland’s national co-operative for the disposal of radioactive waste, with a project value of €5.3m (after finalising the first project for €8m). This project is designed to help Nagra find a suitable site for a deep geological repository for radioactive waste. Nagra also commissioned Daldrup to work on a third well and for 2021 an agreement was reached with Nagra to extend the contract for a fourth and, if necessary, a fifth well, thereby securing Daldrup's capacity utilisation in Switzerland for FY21. In March, the company announced a €20m order from Aardwarmte Combinatie Luttelgeest in the Netherlands. This is related to a geothermal heating plant involving the drilling of three geothermal boreholes. The project is expected to be competed in spring 2021. In October 2020, Daldrup received a further order for geothermal drilling from Stadtwerke Schwerin to drill an injection well. The order value is €4m and work will start mid-October.

At the end of September, Daldrup had an order backlog of €27.3m, which should ensure capacity utilisation well into 2021, according to management. The order from Schwerin adds another €4m to the order backlog. The order pipeline showed a further increase from €89m last year to €119m at H120. The pipeline is defined as potential order volume based on the likelihood of orders being placed following bids submitted or intensive customer discussions. According to management, there is good demand from Germany, Switzerland and Benelux.

Outlook

As the coronavirus pandemic had hardly any effect on Daldrup, it is unlikely that its second half results will be significantly affected. There have not been any cancellations so far. Daldrup reiterated its full year guidance for total output of at least €40m, which reflects total output of at least €17m in H220.

The EBIT margin from the operating business is expected to be 2–4% after the loss of €10.8m in FY19, which was mainly the result of the losses at Geysir Group including the two geothermic power plants. This margin range reflects EBIT of €0.8–1.6m or €0.3–1.1m in the second half.

Following the disposal of Geysir, Daldrup’s focus is on the drilling business. Expanded funding and incentives for renewable heating provide a helpful backdrop to the business and, with a strong market position, the company remains confident in its ability to improve profits. Management considers an EBIT margin of at least 4–5% to be achievable over the next few years, including the effects of planned improvements in the group’s structure, project planning and control, management system and supply of material.

Over the next few years, Daldrup also aims to build up a portfolio of minority interests in geothermal power plants, especially heating plants. However, in contrast to previous years, these minority shareholdings should correspond to the medium-sized structures and Daldrup’s risk profile.

Financials

In 2019, Daldrup’s balance sheet significantly improved due to the divestment of the Geysir Group including the two geothermal power plants, which were highly capital intensive. Net debt decreased from €62m in FY18 to €6.0m in FY19 and further declined to €4.5m at the end of H120 due to positive operating cash flow.

Financial assets form a large part of the balance sheet and largely consist of subordinated loans. As part of the sale of Geysir, a large proportion of the long-term debt granted via D&S Geothermie remained on Daldrup’s balance sheet as subordinated loans. The risk for Daldrup is that these loans will not be fully repaid, which might lead to additional impairments.

The equity ratio further improved in H120 to 51.7% from 50.3% at FY19 (37.9% in H119 before the sale of Geysir). Daldrup is currently not paying a dividend, which also supports the equity ratio. It is currently striving for an equity ratio of 35–40%, which offers room for higher leverage.

Daldrup might invest again in medium-sized power projects, but this will be a minority stake in contrast to the previous majority stake in power plants. Debt might be required for participating in such minority stakes in geothermal power plants.

Exhibit 2: Daldrup H120 balance sheet

€m

FY19

H120

Fixed assets

10.2

9.2

Financial assets

12.2

17.8

Current assets

21.3

17.4

Cash

2.7

3.3

Total assets

46.4

47.6

Equity

23.3

24.6

Provisions

1.9

1.4

Interest bearing debt

8.7

7.7

Other liabilities

12.4

13.9

Total liabilities

46.4

47.6

Equity ratio

50.3%

51.7%

Net debt

6.0

4.5

Source: Daldrup & Söhne

Valuation

Daldrup’s H120 results were well received, with the share price jumping 26% since publication on 30 September 2020. The main reasons for this were most likely the return to positive EBIT and a further strengthened financial position.

Consensus estimates assume EBIT of €1.4m in 2021. Based on this estimate, Daldrup is valued at a 2021e EV/EBIT of 14.6x. This level suggests that the market is anticipating further growth and EBIT margin expansion from the current relatively low level of 2–4%, which is company guidance for 2020. Daldrup is valued at a discount to its peers, which we believe is mainly caused by its below average margin. This offers multiple expansion once the gap in margin has been closed.

Exhibit 3: Peer group comparison

EV/Sales (x)

EV/EBIT (x)

2020e

2021e

2020e

2021e

Awilco Drilling

-1.1

-1.1

N/A

N/A

SD Standard Drilling

0.0

-0.1

N/A

-0.2

Northern Drilling

5.2

2.5

N/A

N/A

Nabors Industries

1.5

1.7

N/A

N/A

Transocean

2.8

3.3

543.1

N/A

Odfjell Drilling

2.0

2.2

11.3

18.4

7C Solarparken

8.5

8.2

27.3

24.8

Energiekontor

4.1

2.5

17.6

14.1

Good Energy

0.6

0.6

13.8

13.3

Ormat Technology

6.3

6.0

20.2

18.8

Median

2.4

2.3

18.9

16.3

Daldrup & Söhne

0.4

0.6

17.1

14.6

Premium/(discount)

(83%)

(74%)

(10%)

(10%)

Source: Refinitiv


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