DATRON — Building on success

Datron (DAR)

Last close As at 21/11/2024

USD4.51

0.01 (0.22%)

Market capitalisation

USD812m

More on this equity

Research: Industrials

DATRON — Building on success

Confirmation of a “very successful” start to 2018 is reassuring, given a softening in H217 after marked progress in the preceding half. Albeit from a low base and not strictly comparable, EBIT in Q118 more than trebled, thereby underpinning management guidance of a full-year outturn once again up by a third, after adjusting for 2017 exceptionals. Prospects are also positive for next year as consensus forecasts of a further 10% rise in revenue on a tight cost base drive trading margin to 10%, which management regards as a “realistic target” (9% 2018e and only back to pre-crisis level). Despite investment (8% of 2017 sales) finances are robust.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Industrials

DATRON

Building on success

Engineering

Scale research report - Update

29 June 2018

Price

€12.85

Market cap

€51m

Share price graph

Share details

Code

DAR

Listing

Deutsche Börse Scale

Shares in issue

4.0m

Net cash at December 2017

€7.1m

Business description

DATRON is a long-established provider of innovative CNC milling machines, dental milling machines, dosing machines and milling tools.

Bull

Strong growth in recurrent income (after sales and tools) with medium-term target 45% of revenue. Enhances client retention.

High-speed milling demand still growing.

Technologically advanced and innovative.

Bear

Small size relative to global market.

Sales of dental HSM machines far below peak.

Lack of market data creates risk of surprises.

Analyst

Richard Finch

+44 (0)20 3077 5700

Confirmation of a “very successful” start to 2018 is reassuring, given a softening in H217 after marked progress in the preceding half. Albeit from a low base and not strictly comparable, EBIT in Q118 more than trebled, thereby underpinning management guidance of a full-year outturn once again up by a third, after adjusting for 2017 exceptionals. Prospects are also positive for next year as consensus forecasts of a further 10% rise in revenue on a tight cost base drive trading margin to 10%, which management regards as a “realistic target” (9% 2018e and only back to pre-crisis level). Despite investment (8% of 2017 sales) finances are robust.

Strong growth resumes

Full-year 2017 saw initial group figures, so there are no available comparatives for the previous period or the quarterly level. However, the dominance of parent company DATRON AG in the group allows its performance to be taken as a good proxy. Q118 saw a double-digit percentage rise in revenue, which, given overhead recovery, led to EBIT up from €0.2m (DATRON AG) to €0.7m (group). Order intake (slightly ahead y-o-y) was also positive. Such buoyancy fuels continued expansion, notably €2m investment in a specialist tool technology operation. In addition, 2018 guidance is maintained, ie revenue c €55m (+9%) and EBIT c €5.0m (+30%, excluding exceptional 2017 gains of €0.9m on a business disposal and €0.4m on consolidation). This is all the more encouraging as H217 saw lower revenue and EBIT (guidance was slightly missed), in marked contrast to an upbeat first half.

Core CNC HSM milling machines drive business

In 2017 the main driver was the core computer numerically controlled high-speed milling (CNC HSM) machines segment, which broadly mirrored results for the group as a whole with revenue up 12% and order inflow up 16%. The replacement tools segment was another noteworthy performer with a 14% rise in revenue. Here, sales of tools for third-party manufacturers’ machines continue to grow in importance. The expanding installed base of machines (principally CNC HSM) helped drive a 14% increase in after sales and other revenue.

Valuation: Fair

After a bumper 2017 (+35%), current share price consolidation is understandable. The valuation reflects a greatly improved outlook, the stability of its model and recent profit progression. DATRON now needs to confirm these expectations.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16*

45.7

2.9

0.52

0.15

24.7

1.2

12/17

50.2

3.9**

0.99

0.20

13.0

1.6

12/18e

55.0

5.0

0.87

0.20

14.8

1.6

12/19e

60.0

6.0

1.06

0.30

12.1

2.3

Source: DATRON accounts, Bloomberg consensus estimates. Note: *Parent company only. **Excludes exceptional gains of €0.9m on sale of business and €0.4m on consolidation.

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.

Full-year 2017 broadly in line with expectations

Full-year 2017 saw initial group figures, so there are no available comparatives for the previous period or at the quarterly level. However, the dominance of parent company DATRON AG in the group allows its performance to be taken as a good proxy.

On a parent company basis revenue in 2017 rose by 8% to €49.3m and reported EBIT was up 63% to €4.8m including a €870,000 capital gain on the sale of the UK affiliate. Excluding the capital gain, operating EBIT was
still up an impressive 33% at €3.9m. These compare with guidance at the half-year results of revenue of at least €50m and EBIT of c €4m. Both sales and operating EBIT softened in H217 after healthy increases in the first half.

Much of the company’s commercial success can be attributed to a high level of R&D spend, which
has sustained product renewal. R&D spend in 2017 was maintained at the high level of €4m, charged fully to revenue.

In contrast to turnover, order inflow growth accelerated to 22% in H217, resulting in a 13% increase for the full year. This boosted the book/bill ratio excluding purely technical turnover items to 1.05x up from 1.01x in 2016.

Exhibit 1: Financial performance – DATRON AG (parent company)

Year end December (€m), HGB

H116

H216

FY16

H117

H217

FY17

Turnover

19.8

25.9

45.7

23.6

25.8

49.3

Change (%)

+19%

-1%

+8%

Order intake

23.4

22.1

45.4

24.3

27.0

51.3

Change

+4%

+22%

+13%

EBIT (ex €0.9m capital gain in H117)

Neg.

2.9

2.9

1.3

2.6

3.9

Change

N/M

-11%

+33%

Source: DATRON accounts

The continuing expansion of the international business diluted the contribution from Germany to 50% from 54% in 2016. This was largely driven by the strong growth in sales in North America, which were up an estimated 55%; the US is now the largest single national market after Germany. The domestic share remains typically high for a machine tool maker. Other strong national markets include France (perhaps helped by the new regional presence) and Russia.

Core CNC HSM machines drive business

There were distinct differences in the contributions from DATRON’s product areas to financial performance. The main driver was the core CNC HSM machines segment, where the performance broadly mirrored the results for the group as a whole with turnover growth of 12% to €27.5m and order inflow growth of 16%. Again, the split across the two halves saw a decline in turnover in H217 (5%), but a powerful (25%) improvement in order inflow. CNC HSM machines accounted for 270 of the 370 machines of all types sold in the year – 150 of these were the higher-end MXCube and 120 the compact neo range.

The replacement tools segment was another noteworthy performer with a 14% rise in turnover to €10.4m, in this case spread evenly across the two halves. Here, sales of tools for third-party manufacturers’ machines continue to grow in importance, especially in sales of tools for dental applications where sales of tools for third-party machines now account for half the total. This compares with only a 10th of CNC HSM tools sold for third-party machines. The expanding installed base of machines (principally CNC HSM) helped drive a 14% increase in after sales and other revenue.

There were no new product launches in either of the smaller machine segments, dental and dispense systems. Second-half sales in dental machines showed a 77% rise in turnover and 115% in order inflow, albeit from low bases. The biennial dental fair in the spring gave its accustomed fillip to business but it is possible that DATRON is reaping the first fruits of its strategic decision to concentrate on high-end machines. Turnover in dispense systems fell 46% in 2017.

Strong outlook for 2018

The most important feature of 2018 at a product level will be the full-scale roll-out of the ‘next’ tablet-based control system. It should drive growth in the CNC HSM machine segment. Initially, the ‘next’ system will be offered exclusively on DATRON’s own machines but may ultimately be made available for third-party machines.

Management expects 2018 to be another year of growth and guides to turnover of €55m, EBIT of €5.0m and EPS of €0.87. According to management, there will be little expansion of the cost base, so there will be a straightforward overhead recovery effect on trading margin which is guided to expand to 9.1% from 7.9% in 2017.

Management sees potential for further growth in 2019 and holds out the prospect of returning to a pre-economic crisis 10% EBIT margin, even if sales growth decelerates to €60m for the year.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Datron

View All

Industrials

Datron — Benefiting from returning demand

Industrials

Datron — Recovering after a challenging FY20

Industrials

Datron — Market headwinds persist

Industrials

DATRON — Facing a distressed market

Latest from the Industrials sector

View All Industrials content

SCISYS — An “impressive start” to 2018

SCISYS has released an upbeat AGM trading update, noting that progress has been made across all its four divisions. The order book has reached £100m, up from £91.3m at end-FY17, boosted in particular by the renewal of M&B’s BBC support contract. Cash flow was strong, with net debt declining by £4m over the first five months of the year, in what is typically a subdued period for cash generation. We have increased our FY18 operating cash flow forecast, while conservatively maintaining our other forecasts. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks increasingly conservative, and we believe the stock looks attractive on c 12.6x our FY19e EPS.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free