Schaltbau Holding — DC specialist on the verge of margin recovery

Schaltbau Holding got itself back in shape again, after a three-year restructuring programme that was finalised in 2019. Its focus is on rail infrastructure and rolling stock, but also on the automotive and capital goods industries. Within the core Rail segment, focus is on outperforming the modestly growing rail supply market while restoring EBIT margins to the peer group average of 6–8%. As one of the few DC specialists, the company should leverage its long history in this segment and benefit from a range of relatively new applications, such as electric drives, lithium-ion batteries, solar systems, wind turbines and other stationary energy storage devices (ie micro grids). The Components segment is expected to grow from 32% of revenues in 2020 to 40% in 2026, with e-mobility and new energy showing growth rates of >20% pa on average. To facilitate this growth, Schaltbau is constructing the New work, Excellence, Technology driven (NExt) factory, which should be operational from autumn 2022 and deliver additional revenues of €140–160m by 2026.

After a solid performance in 2020 and with positive guidance for 2021, we expect revenue growth of 5–8% in 2021–23, with the acceleration in growth driven by the contribution of the new market segments. We expect the EBIT margin to strongly improve by 270bp to 7.0% in 2023, driven by revenue growth, operating leverage and efficiency gains (particularly in the rail division at subsidiaries Bode and Pintsch). This implies a CAGR in reported EBIT of 25%. With declining financial expenses and a stable tax rate, this boils down to a CAGR in EPS of 30%. The company’s financial ambitions for 2026 are revenues of €750–800m (implying a CAGR of 7–8%) and a high single-digit EBIT margin, aiming to outperform the peer group average of 6–8%.

After having divested several loss-making subsidiaries and having refinanced its balance sheet (including two equity issues), net debt has come down from €158m in 2017 to €80m in 2020. The recently announced mandatory convertible bond (net proceeds €57.4m), which we treat as equity, will be used to finance the new factory (50–60%), debt reduction (25–30%) and add-on acquisitions (15–20%). As a result, the equity ratio will improve to 35% in 2021 from 20% in 2020. Management stated that it would most likely not need further funding to realise its 2026 financial targets.

Schaltbau Holding’s share price has fully recovered to pre-COVID-19 levels. The expected margin recovery and new orders in new market segments should be a positive catalyst for Schaltbau Holding’s share price and help narrow the valuation gap with peers. We value Schaltbau at €40 per share based on the average of historical multiples (€42), DCF (€40) and peer comparison (€38).

We see the following triggers to the investment case and our forecasts: a faster than anticipated increase in the penetration of electric vehicles; more government push to lower CO2 emissions faster; a quicker pick-up in margins in the rail division than currently anticipated; and a faster roll-out of the rail infrastructure plans by Deutsche Bahn.

The downside risks include: a prolonged drag from the COVID-19 pandemic on the overall economic environment and investment climate; increased competition in the DC segment where Schaltbau is one of the few specialists; a slower than currently expected development in the energy transition; increasing price pressure resulting from customer consolidation; and the emergence of alternative products and technologies in the different market segments.

Schaltbau Holding supplies products and technologies primarily for rail infrastructure and rolling stock and also for the automotive and capital goods industries. All products are focused on smart protection for mobility and DC power. Schaltbau is one of the few specialists in smart DC energy concepts. The geographical split of FY20 revenues is as follows: Germany 36%, other Europe 47%, Asia 10% and the US 7%. Schaltbau Holding employs around 2,900 staff.

Schaltbau was founded in 1929 as a producer of switches and heaters for the railway sector, and in 1956 it entered the capital goods market. In 1987, Pintsch was acquired, which focuses on rail infrastructure. Schaltbau was listed in 1992 and in 1995 it acquired Bode, a manufacturer of door systems. In 2000, the company name was changed to Schaltbau Holding and since then the company has expanded its business both organically and via several acquisitions.

In March 2021, Schaltbau provided a new segmentation (see Exhibit 1) with a split between core rail activities (68% of FY20 revenues) and components and DC applications (32%). Rail consists of infrastructure, rolling stock/bus, refurbishment and aftersales, where Schaltbau expects modest growth. Components and DC-applications is focused on battery-powered DC applications in growth areas in new energy, new industry and e-mobility, building on its experience in DC-rail components.

Schaltbau operates under four brands: Pintsch, Bode, Schaltbau GmbH and SBRS, as shown in Exhibits 2 and 3.

Pintsch focuses on safety-relevant products for railway infrastructure, with customers such as Deutsche Bahn Netz, Norwegian Railways and Dutch Pro-Rail. Pintsch will benefit from the investment plans of Deutsche Bahn (DB) to expand, update and digitise its rail infrastructure (€86bn in 2020–30). Due to the higher usage of rail track, demand for systems that ensure maximum occupancy of tracks will significantly increase. Pintsch manufactures the following product range:

The rail infrastructure market is very fragmented and global market shares are small. Pintsch is a strong player in Germany in its chosen segments. Within level crossings, there is one other large player: Scheidt & Bachmann (not listed). Competitors in the different segments are Siemens, Bombardier, Frauscher (wheel sensors and axle counters) and Voestalpine.

Bode is a supplier of door and access systems for trains, buses, commercial and electric vehicles. We estimate that rail represents 85% of Bode’s revenues, while automotive contributes the other 15%. The latter was hit much harder by the COVID-19 pandemic, affecting the division of activities in favour of rail. Customers in rail include Stadler, Hitachi, Siemens, Alstom/Bombardier, CRRC and CAF; and customers in automotive include Daimler, Iveco and MAN. Bode works with long-term framework contracts based on the customer’s platform strategy whereby suppliers have to comply with the set standards, which includes product testing. Bode’s orderbook is therefore relatively long.

Bode is developing from traditional door systems towards smart systems that will enable digital features, such as access control, ticketing and monitoring. Bode collaborates with automotive supplier Brose to develop smart door systems for people movers (autonomous e-shuttle buses for up to 15 passengers). Another new type of vehicle is the courier, express and parcel (CEP) vehicle for last mile delivery. According to McKinsey & Company, the last-mile delivery cost per parcel with an automated delivery vehicle is 40% lower when compared to delivery with a traditional vehicle.

According to Schaltbau, the global market for door systems to rolling stock was valued at around €800m in 2018, with its market share at 18–20% globally and 30–35% in Europe. Bode considers itself the number one player in Europe, although the other major player in the segment, Knorr-Bremse, claims the same. Other players are Chinese Kangni, Japanese Nabtesco and US Wabtec.

Schaltbau GmbH develops and manufactures electromechanical components and customised solutions for railway and industry segments. Its products are contactors, connectors, snap-action switches and driver’s desk equipment (see Exhibit 6 and explanatory text underneath). Customers are rail OEMs Alstom/Bombardier, CRRC, Siemens and Stadler. Its order book is relatively short as revenues are product driven, with the company supplying a range of over 1,000 products.

Schaltbau GmbH’s original focus was on the railway market, which is rather mature and more predictable in developed countries. We estimate that the rail market represents c 80% of divisional revenues and that relatively high top-line growth should come from the new areas such as new DC energy applications, new mobility and automation solutions (ie material handling). Schaltbau is constructing the NExt factory with a locally CO2-free energy concept. This should facilitate the anticipated growth in new segments as of autumn 2022.

The markets in which Schaltbau GmbH is active are very fragmented thus global market shares per participant are small. Competitors are large multinationals such as ABB, Siemens, Schneider Electric, Sensata Technologies, TE Connectivity, TT Electronics and Wabtec. When looking at the DC segment, Schaltbau GmbH is one of the larger players globally with an estimated share of 20%.

SBRS has two main activities: 1) the partial or complete modernisation and refurbishment of rolling stock, including service, and 2) high-performance fast charging solutions for electric cars, buses and commercial vehicles (see Exhibit 8 and explanatory text underneath). Rail operators are the customers for refurbishments and bus service operators are the customers for the charging solutions.

SBRS is a relatively small activity of Schaltbau Holding and is active in relatively small market segments. A competitor in refurbishments is Wabtec, competitors in fast bus charging are ABB and Heliox and competitors in passenger car fast charging are Alfen, Siemens and FastNed.

Schaltbau Holding’s strategy is based on the following four pillars:

The Rail division represented 68% of FY20 revenues and management expects that to decline to 60% by 2026. Looking at revenue guidance for 2026, this implies a CAGR of 4.7–5.8% (see Exhibit 9). Growth in the Components division is expected at 11–12% pa, growing to 40% of revenues in 2026, up from 32%. Growth is driven by new energy, new industry and new mobility.

The strategic direction for the four brands is summarised below:

In March 2021, Schaltbau Holding announced the issue of a mandatory convertible bond of €60m. According to IFRS, this mandatory convertible bond with a fixed conversion rate has to be treated as equity. The net proceeds of €57.4m will be split in three parts: financing the NExt factory (50–60% of net proceeds), reducing net debt and creating more financial flexibility (25–30%) and financing potential add-on acquisitions (15–20%).

For this mandatory convertible bond with shareholder subscription rights, the company has a pre-placement agreement with investors for 100% of the bond’s volume. Shareholders that are supporting this issue are AiC Group, Teslin Capital Management, Active Ownership Gruppe and Axxion which represent an estimated 46% of the outstanding share capital of the company.

The issuance of the bond is scheduled on or around 23 April 2021, with the subscription period running to 16 April. The bond carries a nominal rate of 0.5% and the fixed conversion price is €29 per share, the convertible thus being in the money based on the company’s current share price. The bond will mature on 30 September 2022 and the mandatory conversion will increase the number of shares outstanding by 2.1m to 10.9m (+23%).

Schaltbau Holding’s ambition for 2026 is for revenues of €750–800m (CAGR of 7–8%) and a high single-digit EBIT margin. As such, Schaltbau aims to perform better than its chosen peer group of rail infrastructure and rolling stock peers, such as Alstom, Stadler, Knorr-Bremse, Vossloh and Wabtec, which on average generate 6–8% EBIT margins. All four brands should meet this target.

In April 2020, Mr Jürgen Brandes was appointed as member of the executive board as designated successor of Mr Köhler as CEO from 1 January 2021. Mr Brandes has 35 years of experience in electrical engineering and automation in industries such as electromobility and rail. He had general management roles and in 2015–19 was CEO of Process Industries and Drives at Siemens. Mr Albrecht Köhler was the company’s CEO for the past three years, leading the restructuring programme. His appointment ended on 1 January 2021 due to his age.

After the announcement that the previous CFO, Mr Thomas Dippold, would step down, Mr Thorsten Grenz, the deputy chairman of the supervisory board, was appointed as interim CFO with effect from 1 September 2020. Mr Steffen Munz has been appointed new CFO as of 1 March 2021. Previously, he fulfilled CFO roles at Varta (2018–20), at the medical division of Gardner Denver in the US (2014–18) and at medical device manufacturer Hartmann.

Mr Volker Kregelin is responsible for Pintsch and has worked for over 25 years in rail and logistics. Previously, he occupied positions at Siemens Transportation, Siemens Dematic (logistics), Bombardier (rail infrastructure and railway traction vehicles and in his second period mobile and stationary transportation technology in Germany) and InoSig (rail infrastructure).

Schaltbau was founded in 1929 and has been listed on Germany’s Prime Standard since 1992. There is no public share register and we use the figures provided by the company. Around 65% of the shares are in the hands of nine shareholders, each owning >3%. Several shareholders are acting in concert, namely Luxempart, Hans-Jakob Zimmermann, Dr Johannes Zimmermann and Elrena GmbH. Dutch Monolith used to be part of this group but is currently mentioned separately.

Originally serving the rail industry, Schaltbau Holding has expanded into other markets with the following distribution of FY20 revenues: Rail 68% and Components & DC applications 32%. The latter consists of rail DC applications and applications for new energy, new industry and e-mobility.

The long-term market environment in the rail sector offers many growth opportunities driven by the mega-trends of climate change, urbanisation and digitisation. Disruptive trends that will change the transportation sector are connectivity, autonomous driving, digital mobility, transport services and electromobility. These segments make use of DC technology and therefore Schaltbau should be a clear beneficiary. For Schaltbau’s industry segments, growth is driven by automation and Industry 4.0, offering ample opportunities to increase the number of DC-industry applications.

Schaltbau has many years of experience in DC technology, which is mainly used in the rail industry. DC is more resource-conserving compared to AC, because it can be recovered and stored and transported over long distances without any losses. DC power supply is suitable for energy-intensive technologies, is much more efficient and has the advantage that it can be used for bi-directional charging, so that power also can be returned to the grid. The DC charger is therefore suitable for integration with home solar installations and battery energy storage. DC charging is known as level 3 or direct-current fast charging (DCFC), compared to level 1 (AC charging at home) and level 2 (AC charging at public charging points, up to 20 kilowatts). The DC system converts the AC from the grid to DC before it enters the car and charges the battery without the need for an inverter, operating at powers from 25 kilowatts to more than 350 kilowatts. McKinsey expects that DC fast charging in Europe will increase from 6% of total kilowatt hours in 2020 to 32% in 2030.

The core Rail segment consists of rail infrastructure, rolling stock/bus, refurbishment and aftersales, thus including the brands Pintsch, Bode and part of SBRS. The rail industry has always been the most important industry for Schaltbau Holding. An overview of the global market can be found in our Edison Explains: Rail supply market. UNIFE, the Association of the European Rail Supply Industry, expects 2.3% market growth per annum in the period 2019–25, which reflects 4.6% growth per annum for 2021–25 after the decline of 8% in 2020. Growth in the rail supply sector is driven by three broad areas: 1) population growth and urbanisation, 2) technology focused on energy efficiency, lightweight, automation and digitisation, and 3) decarbonising global transport. These mega-trends are expected to gradually change the current mobility solutions in the following ways:

Besides the sound underlying growth prospects for the rail sector over the next few years, we want to particularly highlight the European Green Deal and the plans of Deutsche Bahn, which will have a major effect on Schaltbau’s growth over the next decade.

The governmental push to lower emissions is expected to trigger more use of rail transport. Increasing air and road congestion could also cause a shift towards the less emitting rail transport. The European Green Deal is a clear example of governmental initiatives to reduce CO2 emissions with all the transport modes needing to become more sustainable. To realise the targeted reduction of 90% in emissions by 2050, a shift to rail will be a key driver to decarbonise the overall transport industry. The European Commission’s Sustainable & Smart Mobility Strategy comprises several priorities that high-speed rail traffic will double across Europe by 2030 and will triple by 2050, while rail freight transport is expected to double over the next three decades. The aim is to shift 75% of road traffic to railway and inland waterways.

Particularly important for Schaltbau are the plans of DB (Germany’s largest railway operator) as this is its largest customer and Germany reflects 36% of total revenues.

In January 2020, the Performance and Financing Agreement (LuFV III) between the German government and DB was signed (‘Digital Rail for Germany’), which comprises a total capex of €86bn to be invested in the maintenance and modernisation of the existing rail network. This money will be used to renew tracks and stations, signal boxes and energy supply systems. The federal government will finance €62bn and DB the other €24bn. The average of €8.6bn per annum reflects an increase of 54% compared to the previous planning period.

DB anticipates further growth in rail transport and it plans to double intercity rail traffic to over 260 million passengers, add one billion new regional and local passengers and add 70% more freight transportation by 2030. This higher usage will increase wear and tear of the infrastructure, which requires more maintenance and replacement. DB therefore wants to improve its infrastructure and continues to work on quality and customer service. For its ‘Strong Rail’ strategy, DB has total gross capex plans of €178bn for the period 2020–30, of which €19bn is for passenger transport, €13bn is for transport and logistics and €144bn for infrastructure. The planned capex for infrastructure, largely financed by the government, is double the amount DB invested in the period 2009–19. The building blocks of DB’s plan are:

Schaltbau Holding is well positioned to benefit from the expected growth in rail, both in rolling stock and in infrastructure. In December 2020, Pintsch announced the first order of €40m from DB Netz out the ‘Digital Rail for Germany’ programme. We also expect that the delivered content per vehicle will increase, due to smarter solutions with higher added value, which will further support the company’s growth.

Bode is focusing on entry systems for rail, bus and other automotive. For buses, it delivers its systems to all bus manufacturers independent of the type of engine. Based on market research from LMC Automotive, the bus market might only show moderate growth of 1–2% per annum until 2030. When looking at the e-bus market, there is a major difference between China and the rest of the world. So far, most of the e-buses are sold in China while the penetration in other parts of the world is still relatively low. According to BloombergNEF (New Energy Finance), the overall e-bus market is expected to show growth of 5% per annum until 2040 while growth outside China is expected to be 24% per annum until 2040. On top of this good growth outlook, entrance systems will become smarter and offer more functions, which will clearly add more value to its customers.

This segment comprises the DC rail applications and new energy (generation and storge), new industry (distribution and industry) and e-mobility (charging and automotive), representing the brands Schaltbau GmbH (28% of FY20 revenues) and two thirds of the revenues of SBRS (4%). In previous presentations, Schaltbau has expressed its expectation that the market for DC applications will grow by over 20% per annum. The Components division is expected to show growth of 11–12% on average per annum until 2026, as it also includes the slower growing DC rail applications. Below we comment on growth prospects for the different elements of this segment.

This is the origin of Schaltbau GmbH with DC applications for the railway industry. Growth is expected to be in line with the general rail supply market, which UNIFE estimates at 2.3% for 2019–25. This includes a recovery in the next few years after the 8% decline in 2020 due to the coronavirus pandemic. Schaltbau expects that this segment will represent 55% of the Components division in 2026, or 22% of total revenues.

Schaltbau increasingly focuses on e-mobility with solutions for electric cars, buses, trucks, forklifts and people movers. SBRS manufactures high-speed charging stations, which are based on DC technology, and Schaltbau GmbH manufactures contactors based on patented technology, which have a safety function for high-power battery systems in the event of danger.

Schaltbau expects this segment to grow strongly to 30% of the Components division or 12% of total revenues. We estimate that e-mobility is currently about 6% of revenues (ie 2% from Schaltbau GmbH and 4% from SBRS). The company will be beneficiary of the transition to electric drivetrains in all vehicle categories. Below we list the expected growth in the different market segments:

Schaltbau GmbH is the only brand within Schaltbau Holding active in new energy and new industry. Its DC contactors, connectors and switches are ideally suited for the different market segments that use DC technology.

Examples of Schaltbau’s products in this segment are:

This is another growth area for Schaltbau Holding. We estimate that this segment currently represents 3% of total revenues. Based on the company’s expectations, new energy and new industry will represent 15% of the Components division in 2026, or 6% of total revenues. This reflects a CAGR of more than 20% per annum. Below we show the market growth expectations for the different end-markets:

For the valuation of Schaltbau Holding we look at three different methods: historical multiples discounted cash flow (DCF) and peer comparison. The blended average of these three valuation methods points at a valuation of €40 per share.

Now Schaltbau is on the verge of restoring its profitability, its historical multiples can provide guidance for the potential upside in the shares. Schaltbau is valued at a discount of 16% based on 2022e EV/EBITDA (we do not use P/E due to several negative P/Es for loss-making years). We estimate that the company will achieve an EBIT margin of 6.3% in 2022, which is broadly in line with the average margin over the past nine years with clear upside in the years thereafter. This margin level might justify a valuation in line with the historical multiples and when we assume this based on FY22e EV/EBITDA, the value per share would be €41.9.

Our DCF model is based on the following assumptions:

Our DCF suggests a value per share of Schaltbau Holding of €39.8. Our sensitivity analysis shows the value under different sales growth, EBIT margin and WACC scenarios (see Exhibits 14 and 15).

There are no companies that closely match Schaltbau’s business profile. For comparison with Schaltbau’s Rail division, we have selected rolling stock OEMs Alstom and Stadler and several railway suppliers. Knorr-Bremse realises >50% of revenues from rail and is Schaltbau’s largest competitor in entrance systems. Vossloh is focused on rail infrastructure, that is fastening systems, switches and crossings, rail services and tie technologies. US Wabtec is active in segments that show overlap with Schaltbau such as entrance systems and refurbishment. For comparison with Schaltbau’s Components division, we have selected electrical components companies that show overlap with the activities of Schaltbau’s contactors, connectors and switches. Although competing in segments, we did not include the (too) large multinationals Siemens, ABB and Schneider Electric. We did not include Voestalpine, because Rail only represents 12% of revenues, and Nabtesco, as it is largely focused on Japan with a 70% local market share in door systems for railroad vehicles. We also excluded Dutch Alfen, active in smart grid solutions, EV charging and energy storage. Its share price has quadrupled since the low in March 2020 and its 2022e EV/EBITDA of >30 shows the market expectations of pure e-mobility companies.

For comparison, we take the weighted average according to Schaltbau’s new segmentation of Rail (68% of FY20 revenues) and Components (32%). Schaltbau is valued at a discount of 29% on FY22e EV/EBITDA, which is due to its lower margin. We expect strong margin improvement in the medium term, which should be supportive of shares and potentially offer multiples expansion as the gap in margin compared to peers is gradually reduced. If we assume a smaller discount of 20% in 2022, as we expect the company to make gradual progress towards improving its profitability, this would reflect a value per share of €38.4.

Schaltbau Holding went through a restructuring in 2017–19, resulting in a simplification of its organisation and the divestment of the subsidiaries Alte, Pintsch Bubenzer and Sepsa. These subsidiaries had revenues of more than €100m in the year prior to their divestment. In 2019, the company showed improvements in its results and at the start of 2020 management was positive about its outlook based on its internal scenario for revenues of €520–540m, reflecting underlying growth of 5–9%. Driven by operating leverage and efficiency improvements, the EBIT margin was anticipated to rise to 6–7%, compared to the adjusted margin of 5.9% in 2019 (like-for-like 3.7%).

However, the COVID-19 pandemic hindered the recovery story and had a mixed effect on the Schaltbau brands. Both Schaltbau, with locations in China, Italy and the US, and Bode, facing temporary plant closures of the major bus manufacturers, felt the impact, while Pintsch and SBRS reported strong growth. In FY20, total revenues increased 2% to €502.3m on a like-for-like basis and exceeded the company’s guidance of €500m. Also, the reported EBIT margin was better than company guidance, at 4.3% versus around 4%, even including several negative one-offs of around €5m or 100bps. For the years 2017-2019, Schaltbau also published a normalised EBIT due to a range of exceptional items, but from 2020 the company only publishes reported and like-for-like figures.

The company is at the start of a new era of focused growth. The company expects the highest acceleration in growth in 2023 when it expects to realise revenues of €600-650m. Its ambition for 2026 is to achieve revenues of €750–800m (CAGR of 7–8%) and a high single-digit EBIT margin, which reflects almost a doubling compared to the reported margin of 4.3% in 2020.

At the time of the FY20 preliminary results, Schaltbau Holding provided guidance for 2021. It expects revenues in the range of €520–540m, or growth of 5.5% at midpoint, and a reported EBIT margin of around 5%. Order intake is estimated at €550-580m. Assuming that the peak of the COVID-19 pandemic is behind us, we expect the company to realise an acceleration in growth with investments in new market segments gradually contributing to revenue growth. Our divisional forecasts are shown in the next table and show revenue growth in a range of 5–8% with a reported EBIT margin improvement of 270bp to 7.0% in 2021-23. This drives a CAGR in EBIT of 25%.

Pintsch showed an 48% higher order intake in 2020 driven by the first order of €40m from DB Netz out of the ‘Digital Rail for Germany’ investment plans of €86bn until 2030. The digital interlocking systems under this first order are scheduled to be operational in September 2023. In 2021, the company expects an order for level crossings with a low double-digit million order size. We therefore expect strong revenue growth at Pintsch over the next few years to continue. After relatively stable revenues in 2021 (due to the coronavirus pandemic), we expect Bode to grow slightly faster than the broader rail market at around 5% per annum, also driven by the higher added value of smart entrance systems coming to the market. After a relatively stable 2021, due to the coronavirus pandemic, Schaltbau GmbH is expected to continue to outperform the overall rail market and a contribution from new market segments is expected from 2022–23. Management recently commented that it is in talks with several interested customers for its e-mobility solutions. The NExt factory is expected to deliver additional revenues of €140-160m by 2026. The smallest unit, SBRS, is expected to take on more projects (order intake was +60% in 2020), which will drive double-digit revenue growth over the next few years, after which we assume a continued growth path of 5% per annum.

We expect strong growth in EBIT over the next few years, driven by better revenue growth, operating leverage and efficiency gains. The largest improvements are expected to come from Bode and Pintsch as Schaltbau Holding is focused on improving the profitability of its core Rail segment, which is far below industry average. Management believes that Bode should be able to reach the peer group margin range of 6–8% by 2026. Pintsch showed a good improvement in margin in 2020 and we expect further improvement over the next few years driven by higher volumes triggering operating leverage. Schaltbau GmbH realises the highest margin within the company and we expect this to remain unchanged, although we do expect a slight decline in margins due to the entrance of new, more competitive markets. Schaltbau GmbH’s EBIT in 2020 was affected by the impairment of €5.1m related to subsidiary SPII. For SBRS, we expect margins to remain stable at around 9%, which is already higher than the peer margin range of 6–8%.

The CAGR in EBIT normalised is 17% for 2021-23. We expect financial income to decline hand in hand with the decline in net debt and the tax rate to remain around 30%. Minorities will recover from the temporary dip in 2020 with 10% growth over the next few years. All in all, this delivers a CAGR in normalised net profit of 21%, but due to the dilution of the convertible bond the CAGR in EPS normalised fully diluted is 13% for the period 2021–23.

In 2016–18, Schaltbau Holding reported negative cash flows due to a weak operating performance, restructuring charges and write downs. The main driver for improved cash flow generation over the next few years will be the anticipated better operating performance.

Strict working capital management will continue over the next few years and we expect working capital to grow at a rate below the revenue growth level. Due to available tax loss carryforwards, we estimate cash taxes in the range of €5-7m over the next three years.

Maintenance capex is expected to be around 3.5% of revenues, which reflects a modest increase from €19m in 2020 to almost €23m in 2023. For 2021, the company plans a maintenance capex of €22.9m, according to the prospectus. On top of the normal capex programme, Schaltbau is currently in the process of constructing a new manufacturing plant in Velden, Germany, where it will develop and manufacture electromechanical components such as contactors, connectors and switching systems for a broad range of DC applications for industry, rail and new markets. The ‘NExT factory’ is scheduled for completion in autumn 2022. In the prospectus of 30 March 2021, Schaltbau mentions a committed amount of €34.6m for investment in the NExt factory, extension of the plant of RAWAG and the construction of a new logistics center of Pintsch and SBRS. This amount also includes a budget for add-on acquisitions of an estimated €10m (at mid-point of the announced 15-20% of the net proceeds of the convertible bond). In our model, we do not take into account any spending on acquisitions, so we take €24.6m for expansion capex in 2021. This investment will be fully financed by the announced mandatory and already fully underwritten convertible bond of €60m (scheduled to be issued on or around 23 April 2021).

Schaltbau Holding’s dividend policy is for a pay-out ratio of 30% of net profit according to local GAAP (that is net profit of the holding). Since 2016, it has passed dividend payments given the relatively weak financial position and profit generation at the holding level. In the prospectus of 30 March 2021, management stated not to intend a dividend payment for 2020 and 2021. As we assume a steady decline in net debt/EBITDA, we expect the first dividend again for 2023 with a pay-out ratio of 20%, further building up to 30% in the years thereafter.

Due to the investments in the NExt factory, we expect free cash flow to be negative in 2021 and around break-even in 2022, after which it will turn significantly positive. Based on our current assumptions, we expect an improvement in free cash flow towards €25m in 2023 (see Exhibit 19 and the financial summary table on page 19).

Schaltbau’s balance sheet looks much better compared to a few years ago. After having divested several loss-making subsidiaries and having refinanced its balance sheet (including two equity issues), net debt has come down from €158m in 2017 to €80m in 2020 (including leases of €12m).

After several impairments and divestments over the past few years (including impairment of €5.1m for SPII in 2020), goodwill amounts to €30m, reflecting >10% of total assets. Management has commented that it does not expect any more impairments as all risks are taken into account.

Inventories are relatively high, which is a characteristic of the rail market. Suppliers are connected to a certain rail platform for five to seven years but also have to guarantee for 30 years to supply spare parts when needed. The decline in accounts receivable in 2020 was mainly due to timing issues as before year-end an amount of €20m had been sold in relation to reverse factoring arrangements.

The level of provisions is rather high at around €90m, representing 20% of the balance sheet total. Pension provisions reflect almost half of the amount and are not expected to change materially over the next few years. The other provisions are related to warranties, outstanding supplier invoices, personnel bonuses, severance pay and pre-retirement part-time working arrangements.

In 2017, half of shareholders’ equity of €70m came from minority interests. In 2018, the company issued new equity of €50m, which improved the equity ratio from 16% in 2017 to 24% in 2018. The net proceeds of the announced convertible bond of €57.4m will push the equity ratio up to 35% in 2021 after the decline to 20% in 2020. Driven by increasing profits without paying any dividends in the next two to three years, we expect further improvement in the equity ratio towards 42% in 2023.

About 25–30% of the net proceeds of the mandatory convertible bond of €57.4m will be used to redeem debt, while 15–20% is allocated to potential add-on acquisitions. According to our estimates, this should reduce net debt to around €65m in 2021 with further reductions in the years thereafter. Net debt/EBITDA (reported) improved from 2.5x in 2019 to 1.9x in 2020 and we expect it to further improve to just 0.7x in 2023, well below the company target of <2.0x.