GESCO continues to implement the NEXT LEVEL strategy it launched in autumn 2018 after onboarding the new CEO. After a strong FY18, the company’s recent results were affected by broader economic headwinds. Although incoming orders in Q119 increased 4.3% y-o-y to €156.9m, preliminary Q2 numbers reveal a decline to €130m from a record-high €162.6m in Q218. The trend seems to reflect the recent production slowdown in Germany, with the Mechanical Engineering Industry Association (VDMA) reducing its growth forecast for 2019 from + 1% to -2% in July 2019. Nevertheless, has GESCO reiterated its FY19 guidance.
GESCO |
Strategic portfolio transition in progress
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5 September 2019 |
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GESCO continues to implement the NEXT LEVEL strategy it launched in autumn 2018 after onboarding the new CEO. After a strong FY18, the company’s recent results were affected by broader economic headwinds. Although incoming orders in Q119 increased 4.3% y-o-y to €156.9m, preliminary Q2 numbers reveal a decline to €130m from a record-high €162.6m in Q218. The trend seems to reflect the recent production slowdown in Germany, with the Mechanical Engineering Industry Association (VDMA) reducing its growth forecast for 2019 from + 1% to -2% in July 2019. Nevertheless, has GESCO reiterated its FY19 guidance.
Earnings decline from a strong comparative base
In Q119, GESCO’s sales increased 4.9% y-o-y to €147.7m, primarily driven by the first-time consolidation of Summer & Strassburger (acquired in August 2018). EBITDA declined 16% to €15.7m, mainly reflecting the impact of weaker economic conditions in the Resource Technology segment (its largest earnings contributor). This follows a particularly strong FY18 when EBITDA reached €73.5m compared with €51.6m on average between FY14 and FY17. Net debt increased to €139.6m at end-June 2019 from €119.6m at end-March 2019 mainly due to first-time adoption of IFRS 16. For FY19 (on a 12-month basis, please refer to the footnote below), GESCO expects its sales will reach the mid-point of the previously stated €585–605m while net income after minorities will be at the lower end of the €21–23m range announced earlier.
New strategy initiated to reshape portfolio
By redefining its acquisition strategy, GESCO hopes to increase the resilience of its portfolio to economic cycles in the long run (and targets an EBIT margin through the cycle at 8–10%). The company aims to own three core portfolio companies exposed to different end-markets and several additional investments of substantial size compared to one core and several small holdings at present. This will be achieved over the next few years through takeovers of larger entities and add-on acquisitions. In parallel, GESCO has started implementing excellence programmes at its subsidiaries to improve their efficiency and market positioning.
Valuation: Trading at a discount to peers
GESCO trades at a 9.9x FY19e P/E and EV/EBITDA ratio of 5.0x, which implies a 39% and 16% discount to its German industrial holding peers respectively. The company’s prospective dividend yield is 4.7% vs 3.3% for comparators.
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Consensus estimates
Source: Gesco accounts, Refinitiv consensus estimates. Note: *FY19 will be abbreviated to nine months to synchronise reporting years for GESCO and its subsidiaries. |
EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: TMT
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