Kendrion — Industrial leads the way

Kendrion (AMS: KENDR)

Last close As at 22/02/2024

EUR12.48

0.38 (3.14%)

Market capitalisation

EUR189m

More on this equity

Research: Industrials

Kendrion — Industrial leads the way

Despite the ongoing effects of the pandemic, supply chain constraints and volatile demand, Kendrion showed continued good revenue momentum in Q421 with organic revenue growth of 9%. Margins were lower due to supply chain issues, higher raw materials prices and a strong comparison base, but underlying trends such as electrification and energy transition continue to support strong growth. The unweighted average of our three valuation methods points to a fair value of €26.6 per share.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

Kendrion

Industrial leads the way

FY21 results review

Industrial engineering

11 March 2022

Price

€18.98

Market cap

€284m

Net debt (€m) at 31 December 2021

131

Shares in issue

14.9m

Free float

49%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.3)

(3.9)

(11.7)

Rel (local)

1.9

12.7

(10.9)

52-week high/low

€24.65

€16.50

Business description

Kendrion develops, manufactures and markets high-quality electromagnetic systems for industrial applications (50% of revenues) and automotive (50%). The geographical spread of FY21 revenues is Germany 39%, other Europe 30%, the Americas 16% and Asia 15%.

Next events

Q122 results

3 May 2022

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

Despite the ongoing effects of the pandemic, supply chain constraints and volatile demand, Kendrion showed continued good revenue momentum in Q421 with organic revenue growth of 9%. Margins were lower due to supply chain issues, higher raw materials prices and a strong comparison base, but underlying trends such as electrification and energy transition continue to support strong growth. The unweighted average of our three valuation methods points to a fair value of €26.6 per share.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/20

396.4

44.6

0.79

0.40

8.3

20.9

12/21

463.6

55.8

1.39

0.70

8.2

15.1

12/22e

505.1

64.9

1.74

0.87

6.7

10.9

12/23e

545.4

75.9

2.24

1.12

5.5

8.5

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Growth in Q421 driven by Industrial

Organic revenue growth of 9% y-o-y in Q421 was completely driven by Industrial, which showed accelerating growth throughout the year and 28% y-o-y growth in Q4 with industrial brakes benefitting from the accelerating electrification in wind energy, robotics and intralogistics. Automotive faced a revenue decline of 6% y-o-y in Q4 due to significantly lower car production globally. Group EBITDA in the quarter was up only 1% y-o-y due to the impact of volatile demand, material shortages (particularly in automotive) and the absence of temporary cost measures which were in place in Q420. Due to its strong performance in FY21, Industrial now represents 50% of revenues but more than 70% of Kendrion’s EBITDA.

Continued growth and margin expansion expected

For FY22, Kendrion expects the current uncertain economic environment to continue in the first half with potentially a more stable supply chain in the second half. Management remains very positive about its long-term growth potential, driven by the energy transition and accelerating electrification. We have slightly raised our revenue estimates after the better-than-expected revenues achieved in FY21, but we are a bit more cautious on margins given the prolonged impact of the shortage of materials. We expect sales growth of 8–9% in 2022–23e and a 190bp improvement in the EBITDA margin to 13.9% in 2022–23e, mainly driven by operating leverage.

Valuation: Discount to peers

Kendrion is valued at an 18% discount to peers based on 2022e EV/EBITDA. This could diminish over time as the company demonstrates accelerating growth and higher profitability. We have valued Kendrion based on three different methods: historical multiples, discounted cash flow and peer comparison. On broadly unchanged estimates and assumptions, the average of these methods now points at a value of €26.6 per share (versus previously €29.0).

FY21 results: Growth driven by Industrial

Kendrion’s FY21 results showed continued good revenue momentum despite the difficult market conditions, such as volatility in demand and shortages of many output materials (including semiconductors, steel and certain plastics). Revenues increased 17% y-o-y in the full year with acquired 3T (industrial control technology) contributing 1% to the annual growth rate since September. In Q4, revenue growth was 12% y-o-y with 3T contributing 3%.

Organic revenue growth for FY21 was 16% y-o-y, with 9% y-o-y in the last quarter. This growth was driven by the Industrial division where accelerating demand throughout the year resulted in organic revenue growth of 28% y-o-y in Q4, bringing the FY21 total to 20% y-o-y. Industrial is well above pre-pandemic levels (+10%) but Automotive has yet to catch up, reporting 13% y-o-y growth for the full year but a 6% y-o-y decline in Q4, due to significantly lower car production in the quarter with a decline in new car registrations of 13% y-o-y globally and 28% y-o-y in Europe. Kendrion did better than the market due to ramping up of orders won in 2018 and 2019.

Within Industrial, industrial brakes (28% of total revenues) showed strong growth of 21% y-o-y in FY21, accelerating to 36% y-o-y in Q421, which is traditionally the weakest quarter. Production continued well up to Christmas, when normally factories are closed for two weeks in December. Industrial brakes benefited from the acceleration in electrification in segments such as wind power, robotics and intralogistics. The company also gained several new customers. Industrial Actuators and Controls (IAC, 22% of revenues) has 30 different product/market combinations, with the activities related to energy transition offering strong growth opportunities. Acquired 3T in the Netherlands was integrated into IAC and the first engineers were hired to focus on automotive.

Kendrion reported 15% y-o-y revenue growth in its operations in China, with a strong comparison base in wind energy due to high subsidy schemes in FY20. Kendrion is constructing a new factory, which will double capacity towards 28,000 square metres, and expects to move in during H222.

Normalised EBITDA increased 25% y-o-y to €55.8m in FY21, driving a margin improvement of 70bp to 12.0%. The improvement was driven by the strong recovery in the first half, partly offset by the impact of volatile demand and supply chain constraints in the second half. Costs in Q421 were also higher due to the absence of temporary cost measures (short-term work) which supported the cost base by €1.5m in Q420. The FY21 EBITDA margin in Industrial increased 150bp to 16.8%, while the margin in Automotive was 30bp lower at 7.2%.

Exhibit 1: Kendrion results

€m

Q420

Q421

Change (%)

FY20

FY21

Change (%)

Industrial

46.1

62.8

36%

190.3

231.5

22%

Automotive

56.3

53

-6%

206.1

232.1

13%

Total revenues normalised

102.4

115.8

13%

396.4

463.6

17%

Industrial

4%

28%

-11%

20%

Automotive

-5%

-6%

4%

13%

Total organic revenue growth

-2%

9%

-17%

16%

Industrial

29.1

39.0

34%

Automotive

15.5

16.8

8%

Total EBITDA normalised

11.4

11.5

44.6

55.8

25%

Industrial

15.3%

16.8%

Automotive

7.5%

7.2%

Total EBITDA margin

11.1%

10.0%

11.3%

12.0%

EBIT reported

0.8

0.6

10.1

23.9

137%

Net profit reported

(0.3)

(0.1)

4.3

14.4

235%

Net profit normalised

2.9

4.1

11.7

20.6

76%

EPS reported (€)

(0.02)

(0.01)

0.29

0.97

234%

EPS normalised (€)

0.19

0.27

0.79

1.39

75%

Source: Kendrion, Edison Investment Research

Normalised free cash flow declined from €31.5m in FY20 to €3.5m in FY21, due to the increase in working capital as a percentage of revenues from 10.4% to 13.8%: Industrial has traditionally a higher working capital compared to Automotive and the company held buffer stocks. Also, capex strongly increased from the relatively low level last year of €16.5m to €28.9m, including €5.9m related to the start of construction of the new factory in China (€14m capex is planned for FY22), and due to the higher level of activity.

Net debt increased from €103.2m in FY20 to €130.6m in FY21, mainly due to the acquisition of 3T (€23.2m). Net debt/EBITDA remained stable at 2.3x, despite the acquisition spend and sharp increase in capex, and is well within the covenant of below 3.25x from 30 September 2021.

Positive long-term outlook

For FY22, Kendrion expects the current economic environment to continue in the first half with potentially a more stable supply chain in the second half. The impact on the supply chain of the current political situation in Europe is unclear yet. Management remains very positive about its long-term growth potential, driven by the energy transition and accelerating electrification.

Kendrion won new orders in automotive worth €305m in FY21, including €120m for sound systems (from a range of customers, with first deliveries expected at the end of FY22). Approximately 60% of these new orders are in the electric vehicle (EV) segment, which Kendrion calls the ACES (autonomous, connected, electrified and shared). Over the past four years, total new orders in automotive amounted to €1.25bn and the book-to-bill stands at 1.3, corrected for cancellations and the extended lifetime of legacy products (see Exhibit 2). As OEMs are reducing their investments in legacy products (internal combustion engine related), they are declining in importance within Kendrion’s order intake.

Exhibit 2: Kendrion Automotive nominations

Source: Kendrion

Based on recent market research from IHS Markit (January 2022), the automotive market is expected to gradually recover from the lower levels in FY20 (pandemic related), although it could take a few years to fully recover to the 2018–2019 levels. For FY22, growth of 9% is expected to a level of 83m new cars (pre political uncertainty in Europe). For the period 2018–2026, IHS Markit expects a CAGR of only 1% for global car production but 44% growth in EV production, which is the segment Kendrion is focused on.

Despite the external disruption in performance by the pandemic, resulting in an organic revenue decline of 17% in FY20 and a recovery of 16% in FY21, Kendrion remains confident in realising its medium-term targets for 2019–2025: organic revenue growth of 5% or more on average per year with an EBITDA margin of at least 15% in 2025 (12.0% in FY21) and return on invested capital of at least 25% in 2025 (FY21 15.6%).

We have raised our revenue estimates after the better-than-expected FY21 results and we also expect slightly higher revenue growth of 9% in FY22 versus 8% previously. This is driven by continued good growth in Industrial but also a further recovery in Automotive, which may be more second-half weighted based on the expected easing of the materials shortages during 2022. For FY23–24 we still expect revenue growth of 7–8%, driven by the energy transition and accelerating electrification. We are a bit more cautious about the margin development in the short term given the prolonged impact of the materials shortages, which Kendrion expects to stabilise in H222. We expect an 80bp improvement in the EBITDA margin to 12.8% in FY22 and a 110bp higher margin in FY23, largely driven by operating leverage and the easing of the materials shortage. Kendrion seems well on the way to achieving the targeted 15% EBITDA margin in 2025. The CAGR in our estimated EPS in 2021–23e is 27%.

Exhibit 3: Change in estimates

€m

2021

2022e

2023e

Old

Actual

Change

Old

New

Change

Old

New

Change

Sales

462

464

0.3%

499

505

1.2%

538

545

1.4%

EBITDA normalised

55.7

55.8

0.2%

64.6

64.9

0.4%

75.7

75.9

0.3%

EBITDA margin

12.1%

12.0%

13.0%

12.8%

14.1%

13.9%

EBITA margin

6.8%

6.9%

7.8%

7.8%

9.2%

9.0%

Net profit adjusted

19.7

20.6

4.6%

25.1

26.0

3.6%

33.0

33.5

1.4%

EPS adjusted (€)

1.32

1.39

5.3%

1.69

1.74

3.1%

2.22

2.24

0.9%

DPS (€)

0.66

0.70

5.3%

0.84

0.87

3.7%

1.11

1.12

0.9%

Source: Kendrion, Edison Investment Research

Valuation

For the valuation of Kendrion, we look at three different valuation methods: historical multiples, discounted cash flow (DCF) and peer comparison (as discussed in our Initiation report).

Based on our forecast EV/EBITDA multiple for FY22, Kendrion is trading at a discount of 22% compared to its historical valuation. Based on our previous assumption that a valuation in line with its historical multiples is justified, given that current profitability is in line with the historical average, this gives a value of €27.3 per share (down from €30.5 per share previously, mainly due to the increase in net debt). In our DCF model we have left our assumptions unchanged but rolled over by one year, which has resulted in a slightly lower value per share of €28.1 versus €28.8 previously.

For the peer group comparison, we have not changed our assumption that a valuation in line with its peers is merited based on the 2022e EV/EBITDA multiple, versus the current discount of 18%. Following the recent declines on the global stock exchanges, this delivers a value per share of €24.5, down from €27.9. The updated average of these valuation methods points to a valuation of €26.6 per share (previously €29.0).

Exhibit 4: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2022e EV/EBITDA in line with historical multiples

27.3

DCF

Terminal growth 1.5%, terminal EBITA margin 7.5%

28.1

Peer group

2022e EV/EBITDA in line with peers

24.5

Average value per share

26.6

Current share price

19.0

Source: Edison Investment Research

Exhibit 5: Financial summary

€ m

2019

2020

2021

2022e

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

412.4

396.4

463.6

505.1

545.4

586.3

Gross Profit

193.3

191.0

225.8

244.0

265.7

286.2

EBITDA normalised

43.8

44.6

55.8

64.9

75.9

86.5

EBITDA reported

38.1

40.2

51.7

63.4

75.9

86.5

Depreciation & Amortisation

(24.0)

(25.7)

(23.9)

(25.5)

(27.0)

(27.1)

EBITA normalised

19.8

18.9

31.9

39.4

48.9

59.4

Amortisation of acquired intangibles

(2.2)

(4.4)

(3.9)

(4.3)

(4.3)

(4.3)

Exceptionals (Edison definition)

(5.7)

(4.4)

(4.1)

(1.5)

0.0

0.0

EBIT reported

11.9

10.1

23.9

33.6

44.6

55.1

Net Interest

(0.9)

(4.4)

(3.7)

(3.6)

(3.1)

(2.5)

Participations

0.0

0.0

(0.1)

0.0

0.0

0.0

Profit Before Tax

11.0

5.7

20.1

30.0

41.5

52.7

Reported tax

(2.7)

(1.4)

(5.7)

(8.3)

(11.3)

(14.3)

Profit After Tax

8.3

4.3

14.4

21.7

30.2

38.3

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

12.6

11.7

20.6

26.0

33.5

41.6

Net income (reported)

8.3

4.3

14.4

21.7

30.2

38.3

Average number of shares (m)

13.5

14.8

14.8

14.9

14.9

14.9

Total number of shares (m)

14.9

14.9

14.9

14.9

14.9

14.9

EPS normalised before amortisation (€)

0.94

0.79

1.39

1.74

2.24

2.78

EPS reported (€)

0.62

0.29

0.97

1.45

2.02

2.57

DPS (€)

0.00

0.40

0.70

0.87

1.12

1.39

Revenue growth

-8.1%

-3.9%

17.0%

8.9%

8.0%

0.08

Gross Margin

46.9%

48.2%

48.7%

48.3%

48.7%

48.8

EBITDA Margin

10.6%

11.3%

12.0%

12.8%

13.9%

14.8%

Normalised Operating Margin

4.8%

4.8%

6.9%

7.8%

9.0%

10.1

BALANCE SHEET

Fixed Assets

244.8

299.6

324.5

335.2

332.1

330.3

Intangible Assets

115.5

159.1

183.4

182.2

181.1

179.9

Tangible Assets

111.4

118.7

121.9

133.8

131.9

131.2

Investments & other

17.9

21.8

19.2

19.2

19.2

19.2

Current Assets

113.2

129.5

166.2

174.4

192.1

213.0

Stocks

56.3

61.7

79.6

86.2

92.5

98.7

Debtors

42.9

47.2

58.0

63.1

68.2

73.3

Other current assets

6.9

7.6

10.0

10.9

11.8

12.7

Cash & cash equivalents

7.1

13.0

18.6

14.1

19.6

28.2

Current Liabilities

73.8

87.9

97.6

105.2

112.6

120.1

Creditors

41.3

44.0

56.6

61.7

66.6

71.6

Other current liabilities

26.9

31.9

28.2

30.7

33.2

35.7

Short term borrowings

5.6

12.0

12.8

12.8

12.8

12.8

Long Term Liabilities

80.7

137.8

170.2

170.2

160.2

150.2

Long term borrowings

48.9

104.2

136.4

136.4

126.4

116.4

Other long term liabilities

31.8

33.6

33.8

33.8

33.8

33.8

Shareholders' equity

203.5

203.4

222.9

234.2

251.4

273.0

Balance sheet total

358.0

429.1

490.8

509.7

524.3

543.4

CASH FLOW

Op Cash Flow before WC and tax

36.1

40.6

54.6

63.4

75.9

86.5

Working capital

13.0

5.4

(17.4)

(5.0)

(4.8)

(4.8)

Tax

(6.1)

(1.3)

(6.2)

(8.3)

(11.3)

(14.3)

Net interest

(2.1)

(2.9)

(3.2)

(3.6)

(3.1)

(2.5)

Net operating cash flow

40.9

41.8

27.8

46.4

56.7

64.9

Capex

(20.0)

(16.0)

(30.0)

(40.5)

(28.2)

(29.6)

Acquisitions/disposals

0.1

(78.2)

(18.8)

0.0

0.0

0.0

Equity financing

23.3

0.0

0.0

0.0

0.0

0.0

Dividends

(8.1)

0.0

(4.3)

(10.4)

(13.0)

(16.7)

Other

(3.1)

(3.4)

4.0

0.0

0.0

0.0

Net Cash Flow

33.1

(55.8)

(21.3)

(4.5)

15.5

18.6

Opening net debt/(cash)

80.5

47.4

103.2

124.5

129.0

113.5

Closing net debt/(cash)

47.4

103.2

124.5

129.0

113.5

94.9

Source: Kendrion, Edison Investment Research


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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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