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Research: Industrials
Diskus Werke has countered the disappointment of its September profit warning by clearly exceeding reduced PBT guidance for 2018 (€14.6m vs €14m) and securing a strong 9% rise in its year-end order book. This is impressive, given a slowing German machine tool market and procurement cost pressures. As in 2017, continued loss elimination at three problematic subsidiaries has been accompanied by volatility at some larger businesses. Current-year guidance is for 4% revenue growth at higher margin, driving a 10% increase in PBT to c €16m (€14.6m). Finances remain resilient (the debt/equity ratio is down slightly at 51%).
Diskus Werke |
Staying resolute
Mechanical engineering |
Scale research report - Update
11 July 2019 |
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Diskus Werke has countered the disappointment of its September profit warning by clearly exceeding reduced PBT guidance for 2018 (€14.6m vs €14m) and securing a strong 9% rise in its year-end order book. This is impressive, given a slowing German machine tool market and procurement cost pressures. As in 2017, continued loss elimination at three problematic subsidiaries has been accompanied by volatility at some larger businesses. Current-year guidance is for 4% revenue growth at higher margin, driving a 10% increase in PBT to c €16m (€14.6m). Finances remain resilient (the debt/equity ratio is down slightly at 51%).
H218 outturn defies management caution
Lowered guidance post-H1 results, prompted by pronounced margin disappointment (down slightly in H1 in contrast to the sharp rise expected for the full year) and softening conditions, suggested that H2 revenue and margin would do well to hold steady. It was therefore creditable that revenue was up by 6% y-o-y at maintained margin, allowing 10% higher PBT. While half-year subsidiary and divisional performance is not disclosed, we assume that continued turnround at three longstanding loss-makers (combined loss before tax reduced to €0.5m from €2m in 2017) was accompanied by volatility at major contributors NAXOS (full year profit more than doubled) and DVS Production (full year profit down by two-thirds). We also assume the strongest growth has again come from Production and Tools & Components, if from a much smaller base than the main Machine Tools business.
Good for now
While the recent slowdown in the machine tool market (Q1 down 7% worldwide, per VDW) is troubling, an opening order book of €139m should ensure a good workload in 2019 (over 50% of 2018 sales) and supports guidance of a 4% rise in revenue to €275m. Expected margin gain (6.6% on total operating income vs 6.3%) may seem ambitious, especially after last year’s disappointment, but would be achieved simply by loss elimination. On this admitted ‘best case’ scenario, management forecasts 2019 PBT at c €16m.
Valuation: Fair
The vast bulk of the company’s equity is firmly held and likely to remain so. With a free float of 0.4%, Diskus Werke may not appeal to most institutional investors. Headwinds justify caution but their impact is expected more in 2020, by which time management is confident that the company should have been able to adjust.
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Historical financials
Source: Diskus Werke accounts |
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 2018 results
2018 has calmed Diskus Werke’s recent volatile profit record. After sharp dips in EBIT in 2014 and 2016, a 6% improvement ensured another record outturn. A prime contributor was loss elimination at three subsidiaries, Pittler, Diskus Werke Schleiftechnik and DVS Production South, ie €0.5m vs c €2m in 2017, c €6m in 2016 and near breakeven in 2015.
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Exhibit 1: Analysis of revenue and profit before tax |
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Source: Diskus Werke accounts |
As detailed in Exhibit 2, second-half performance showed continued profit restoration against a relatively subdued H217 (EBIT up 9% y-o-y), if only unchanged on the preceding half. By contrast, revenue growth was ahead on both counts (by 6% and 4%, respectively).
Overall, the company appears thus to have performed on a par with the cutting and grinding segment of the German machine tool industry, ie production up 6% in 2018.
Exhibit 2: Financial performance
Year end December (€m), HGB |
H117 |
H217 |
FY17 |
H118 |
H218 |
FY18 |
Revenue |
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Machine Tools |
178 |
172 |
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Change |
+9% |
-3% |
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Tools & Components |
30 |
45 |
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Change |
+25% |
+50% |
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Production |
37 |
42 |
||||
Change |
+32% |
+14% |
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Other |
2 |
5 |
||||
International |
68% |
58% |
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Total |
120.5 |
126.4 |
246.9 |
129.5 |
134.5 |
264.0 |
Change |
+19% |
+8% |
+13% |
+7% |
+6% |
+7% |
Other operating income |
5.5 |
0.7 |
6.2 |
2.8 |
4.4 |
7.2 |
Total operating income |
126.0 |
127.1 |
253.1 |
132.3 |
138.9 |
271.2 |
Other income |
0.9 |
2.4 |
3.3 |
1.1 |
3.4 |
4.5 |
Material costs |
(58.5) |
(57.1) |
(115.6) |
(61.3) |
(64.8) |
(126.1) |
Labour costs |
(35.5) |
(36.9) |
(72.4) |
(39.1) |
(41.2) |
(80.3) |
Other operating costs |
(19.5) |
(22.7) |
(42.2) |
(19.3) |
(23.0) |
(42.3) |
Depreciation |
(5.1) |
(5.0) |
(10.1) |
(5.0) |
(4.8) |
(9.8) |
EBIT |
8.3 |
7.9 |
16.2 |
8.6 |
8.6 |
17.2 |
Margin on total operating income |
6.6% |
6.2% |
6.4% |
6.5% |
6.2% |
6.3% |
Associates |
Neg. |
0.3 |
0.3 |
Neg. |
0.2 |
0.2 |
Net interest |
(1.3) |
(1.6) |
(2.9) |
(1.2) |
(1.7) |
(2.9) |
Pre-tax profit |
7.1 |
6.5 |
13.6 |
7.4 |
7.2 |
14.6 |
Net profit |
4.1 |
3.1 |
7.2 |
4.9 |
3.7 |
8.6 |
Source: Diskus Werke accounts
Order intake in H2 effectively stalled at just 1% up y-o-y (€137.7m), which was in marked contrast to an especially healthy first half (up almost a quarter). This took the order book to €138.6m at the end of the period (€126.4m at December 2017 and €137.7m at June 2018). Costs were also a challenge, notably in procurement with intensifying pricing pressures and a tightening of delivery times. Indeed H2 saw raw material costs rise by 20% (just 2% in H1), even if bought-in services (less significant at €12m) enjoyed a slight reduction. In addition labour costs accelerated, up 12% yo-y vs up 8% in H1. The ratio of material and labour costs to total operating income was therefore up 4% and 2%, respectively.
2019
Management has hedged its guidance with admission that Q1 market slowdown suggests that it may be a ‘best case’ scenario. On the other hand, the company’s involvement in market niches with high barriers to entry promises resilience.
Guidance is for revenue and order intake of €275m (up 4%) and €280m (up 1%), respectively. Although this may seem cautious, given the size of the order book (c 50% of forecast sales) and the start of projects at DVS Production, we are mindful of conditions and also the lowering of original 2018 guidance. The targeted improvement in margin on total operating income (6.6% against 6.3%) is less ambitious than in 2018 (7.5%) and may be achieved simply through continued resolution of structural issues at problematic subsidiaries. Also, pricing pressures may lessen during the period. Investment will remain at a high level (c €10m capex as well as €4m on expansion projects, while the workforce is set to increase by over 5%, notably because of the business ramp-up at DVS Production. PBT of c €16m is expected.
Balance sheet and cash flow
Finances remain resilient with December 2018 net debt of €64m, down slightly on June 2018, if up on €52m at the start of the year. This represents a manageable equity ratio of 51%, which is almost unchanged on the year.
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Research: Industrials
Year to date trading has been in line with management’s expectations, which are also unchanged for the year as a whole. Forward momentum in the important Commercial division is continuing and we see other noted actions as positive, logical moves. Investor sentiment appears to have waned since the FY19 results announcement, but the investment case is gradually strengthening in our view and from a single-digit P/E base.