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Research: Industrials
A sharply deteriorating machine tool market and procurement cost pressures have driven a reduction of over a third in DVS TECHNOLOGY’s H119 PBT and a material revision of full-year PBT guidance from €16m to €10m. This is all the more disappointing after H218 resilience (PBT up 11%) defied a similar profit warning. Management recently adopted a comprehensive group-wide plan to strengthen marketing and secure efficiencies. Finances remain sound (equity ratio almost unchanged at 50%) despite much higher net debt (up by a quarter since December), thanks to working capital needs and continued strong investment.
DVS TECHNOLOGY |
Tough going
Mechanical engineering |
Scale research report - Update
2 October 2019 |
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A sharply deteriorating machine tool market and procurement cost pressures have driven a reduction of over a third in DVS TECHNOLOGY’s H119 PBT and a material revision of full-year PBT guidance from €16m to €10m. This is all the more disappointing after H218 resilience (PBT up 11%) defied a similar profit warning. Management recently adopted a comprehensive group-wide plan to strengthen marketing and secure efficiencies. Finances remain sound (equity ratio almost unchanged at 50%) despite much higher net debt (up by a quarter since December), thanks to working capital needs and continued strong investment.
H119 market woes
The severity of the H1 slowdown in DVS TECHNOLOGY’s segment of the machine tool market (order intake down 26% in the first five months, per industry association VDW) was enough to overrun an apparently buoyant opening order book of €139m (over 50% of 2018 sales). With a shortfall in first-half revenue (down 3% against full-year guidance of a 4% rise) and a yet greater disparity in margin (EBIT 4.4% vs expected full-year 6.3%), there was predictably a step change in PBT (down 36%). A double-digit percentage rise in labour costs, reflecting the average workforce up by a fifth, was a principal factor, as was a €2m increase in material costs.
Justifiable H219 caution
Given H1 results and current conditions, ‘best case’ full-year guidance of €16m PBT is lowered to €10m. Similarly, expectations of revenue and order intake are now respectively €260m and €250m vs €275m and €280m. As detailed on page 2, this implies that H2 will see a further significant fall in year-on-year PBT (more than a quarter) on flat revenue, as well as 8% lower order intake. While the company exceeded revised guidance last year, a ‘very challenging’ environment (VDW forecasts a 17% reduction in 2019 market order intake) suggests a repetition may be optimistic. Implementation of the restructuring programme will start in H2.
Valuation: Need to deliver
The vast bulk of the company’s equity is firmly held and likely to remain so. With a free float of 0.4%, DVS TECHNOLOGY may not appeal to most institutional investors. As headwinds affected sooner and more severely than management expected, caution is understandable ahead of successful restructuring, which looks to be assumed in a demanding rating of 28x 2019e guided PBT of €10m.
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Historical financials
Source: DVS TECHNOLOGY 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 H119 results
The half to June saw a dip in revenue (-3%) and PBT (-36%), as shown in Exhibit 1. This was in contrast to the resilience of the previous two years. At the half-year stage, the company does not provide a top-line analysis, so it is difficult to identify the drivers. However, the outturn has clearly reflected an unexpectedly weak machine tool market (order intake down 26% in DVS TECHNOLOGY’s particular field in the five months to May). The company’s order intake fell by 11% to €126m against a strong comparative, which was up by a quarter, effecting a 9% lower book/bill ratio (1.00 vs 1.09).
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Exhibit 1: Analysis of half-yearly revenue and PBT (€m) |
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Source: DVS TECHNOLOGY accounts |
Cost pressures remained intense in H119, as evident in the lower margin (see Exhibit 2). In particular, labour expenses grew by 11%, at a similar rate to 2018, owing to expansion and the cost of bought-in services (less significant at €11m) again rose markedly by 10%, as did other operating costs, unlike in 2018 (flat). In mitigation, raw material costs were held in check (up only 2%). Despite much higher net debt, there was only a small increase in net finance costs.
Exhibit 2: Financial performance
Year end December (€m), HGB |
H118 |
H218 |
FY18 |
H119 |
H219* |
FY19* |
Revenue |
129.5 |
134.5 |
264.0 |
125.7 |
134.3 |
260.0 |
Change |
+7% |
+6% |
+7% |
-3% |
Flat |
-2% |
Order intake |
140.8 |
135.4 |
276.2 |
125.9 |
124.1 |
250.0 |
Change |
+23% |
+1% |
+12% |
-11% |
-8% |
-9% |
Other operating income |
2.8 |
4.4 |
7.2 |
11.8 |
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Total operating income |
132.3 |
138.9 |
271.2 |
137.5 |
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Other income |
1.1 |
3.4 |
4.5 |
1.4 |
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Material costs |
(61.3) |
(64.8) |
(126.1) |
(63.3) |
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Change |
+5% |
+13% |
+9% |
+3% |
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Labour costs |
(39.1) |
(41.2) |
(80.3) |
(43.6) |
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Change |
+10% |
+12% |
+11% |
+11% |
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Other operating costs |
(19.3) |
(23.0) |
(42.3) |
(21.1) |
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Change |
-1% |
+1% |
Flat |
+9% |
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EBITDA |
13.6 |
13.4 |
27.0 |
10.8 |
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EBIT |
8.6 |
8.6 |
17.2 |
6.0 |
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Margin on total operating income |
6.5% |
6.2% |
6.3% |
4.4% |
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Associates |
Neg. |
0.2 |
0.2 |
0.1 |
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Net interest |
(1.2) |
(1.7) |
(2.9) |
(1.4) |
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Pre-tax profit |
7.4 |
7.2 |
14.6 |
4.7 |
5.3 |
10.0 |
Change |
+5% |
+11% |
+7% |
-36% |
-26% |
-32% |
Net profit |
4.9 |
3.7 |
8.6 |
2.6 |
Source: DVS TECHNOLOGY accounts. Note: *Company guidance and implied by company guidance.
Little respite in H2
Management has lowered its 2019 guidance owing to market slowdown. On the other hand, the company’s involvement in market niches with high barriers to entry tends to bring resilience.
Guidance is now for revenue and order intake of €260m (down 2% on 2018) and €250m (down 9% on 2018) respectively. Although seemingly cautious, given the size of the order book, which was unchanged year-on-year at June 2019 and 52% of forecast full-year sales, we are wary of conditions and also the need to reduce original 2019 guidance. H219 PBT is now targeted to exceed that of the first half but still be appreciably below H218; indeed, it may be achieved through continued resolution of structural issues at problematic subsidiaries rather than any advance in general business. Investment should remain at a high level (c €10m full-year capex as well as €4m on expansion projects), while the workforce is set to increase (up 19% in H1), notably because of the business ramp-up at DVS Production. PBT of €10m is expected for 2019.
Balance sheet and cash flow
Finances remain resilient with June 2019 net debt of €78.6m, up €14.2m on December 2018 owing to working capital requirements (stocks up by €17m or 25% in the half) and sustained capex (over €4m in H119). This represents a manageable equity ratio of 50%, which is almost unchanged on June 2018.
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Research: Healthcare
Formycon’s partner Bioeq IP (Bioeq) plans to file FYB201, a Lucentis biosimilar candidate, to treat neovascular age-related macular degeneration (nAMD) with the FDA imminently in Q419. The US launch could be in 2021 and the EU in 2022. H119 revenues were €17.2m from partners for product development services. There are three main projects. Bioeq is the partner on FYB201, Santo on FYB203 (an Eylea biosimilar candidate) and a joint venture with Aristo Pharma on FYB202 (a Stelara biosimilar candidate). FYB202 is due to enter a Phase I trial soon. Formycon guides for FY19 revenues of about €35m, formerly €34m. End-June cash was €7.5m, effectively €19.8m including the final €12.3m of proceeds from the €17.3m private placing in March 2019.