Daldrup & Söhne — Emission reduction will drive drilling demand

Daldrup & Söhne (DB: 4DS)

Last close As at 20/12/2024

5.85

0.00 (0.00%)

Market capitalisation

36m

More on this equity

Research: Industrials

Daldrup & Söhne — Emission reduction will drive drilling demand

Daldrup & Söhne (Daldrup) felt hardly any impact from the pandemic, reporting 14% growth in total output in FY20. Divestment of the loss-making power plants, efficiency improvements in business operations and more effective cost control were the drivers behind the strong recovery in profitability. The market outlook remains positive, driven by the aim of many governments to reduce carbon emissions, while geothermal electricity and heat are generated in an almost CO2-neutral manner. Management expects FY21 total output of around €43m and an underlying EBIT margin of 2–4%.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

Daldrup & Söhne

Emission reduction will drive drilling demand

Alternative energy

Scale research report - Update

15 June 2021

Price

€4.52

Market cap

€27m

Share price graph

Share details

Code

4DS

Listing

Deutsche Börse Scale

Shares in issue

6.0m

Net debt at 31 December 2020

€4.7m

Business description

Daldrup & Söhne is a provider of drilling and environmental services. The company has four divisions: Geothermics (72% of revenues), Raw Materials & Exploration (14%), Water Supply (12%) and Environmental, Development & Services (2%).

Bull

Emission reduction and renewable targets provide a positive macro environment.

Strengthened balance sheet.

Healthy order book.

Bear

Volatility in project sales.

Projects can be subject to delays.

Low margins currently.

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Daldrup & Söhne (Daldrup) felt hardly any impact from the pandemic, reporting 14% growth in total output in FY20. Divestment of the loss-making power plants, efficiency improvements in business operations and more effective cost control were the drivers behind the strong recovery in profitability. The market outlook remains positive, driven by the aim of many governments to reduce carbon emissions, while geothermal electricity and heat are generated in an almost CO2-neutral manner. Management expects FY21 total output of around €43m and an underlying EBIT margin of 2–4%.

FY20 results show strong margin recovery

Daldrup experienced favourable market conditions in FY20 despite the pandemic, with total output increasing by 14% to €47.5m. EBIT improved strongly to €1.9m (4.0% margin) after a loss of €10m in 2019. In January 2020, Daldrup finalised the divestment of Geysir Europe including its two power plants, which had caused a series of losses and exceptional costs over the past few years. The improvement in EBIT was also driven by the efficiency gains in business operations and more effective cost control. Daldrup’s financial position also improved further, with net debt declining from €6.0m in 2019 to €4.7m in 2020.

Positive outlook for drilling

Market conditions for Daldrup remain positive, with governments focusing on renewable energy to reduce emissions from climate-damaging greenhouse gases. Geothermal energy could be used to full advantage in a successful energy transition, because geothermal electricity and heat are generated in an almost CO2-neutral manner. Daldrup’s order backlog of €24.3m at end April 2021 utilises production capacities for FY21, with larger individual orders extending far into FY22. The company’s order pipeline stands at €94.6m, up from €89m at H120. For FY21, Daldrup expects total output of around €43m and an underlying EBIT margin of 2–4%.

Valuation: Small premium to peer group

Since the beginning of 2021, Daldrup’s share price has performed well, up 40% ytd. Based on consensus estimates, the company is valued at an FY21e EV/EBITDA of 9.5x, which represents a small premium to its peers. This compares to a small discount at the time of our last update in October 2020. The strong recovery in margin in FY20 has triggered a re-rating of the stock, while the outlook for the drilling business also remains positive.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

EV/EBIT
(x)

P/E
(x)

12/19

24.8

(10.0)

(2.04)

0.00

N/A

N/A

12/20

26.2

1.9

(0.87)

0.00

12.7

N/A

12/21e

34.4

1.2

0.30

0.00

26.2

15.1

12/22e

35.8

2.0

0.18

0.00

14.9

25.1

Source: Daldrup & Söhne, Refinitiv

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 FY20 results

Daldrup felt hardly any impact from the pandemic in FY20, reporting sound top-line growth and a strong recovery in profitability. The company’s projects are characterised by relatively long development and decision periods and, once financed, tend to proceed according to plan. Investment decisions by government customers are informed by long-term considerations and are often part of services of general interest.

The total output figure (an aggregation of actual sales and work in progress) rose by 14% to €47.5m after the increase of 5% in the first half. Growth was driven by continued positive sentiment in the drilling business and several new orders.

EBIT turned positive again and came in at €1.9m after the €10m loss in 2019, which was caused by the losses at subsidiary Geysir Europe. In January 2020, Daldrup finalised the divestment of Geysir, as described in our update note published in June 2020. The improvement in EBIT was also driven by the efficiency gains in business operations and more effective cost control. Daldrup simplified its group structure and completed the implementation of a new IT system. EBIT margin was 4.0%, at the high end of company guidance of 2–4%.

Non-operational charges of €6.4m from the sale of Geysir Europe nevertheless led to a net loss for the year of €5.2m, which the company had announced in February 2021.

Exhibit 1: Daldrup FY20 results

€m

FY19

FY20

% change

Revenue

24.8

26.2

6%

Increase in work in progress

17.0

21.3

25%

Total output

41.8

47.5

14%

EBITDA

(7.1)

4.2

N/A

EBITDA margin, on total output

-16.9%

8.8%

Depreciation

(2.9)

(2.3)

-21%

EBIT

(10.0)

1.9

N/A

EBIT margin, on total output

-23.9%

4.0%

Exceptional items

(0.8)

(6.4)

Profit before tax

(12.3)

(5.0)

N/A

Net profit

(12.3)

(5.2)

N/A

EPS (€)

(2.04)

(0.87)

N/A

Source: Daldrup & Söhne

Geographically, the company’s focus is on the DACH countries and Benelux. In FY20, 51% of revenues came from Germany, with the remaining 49% largely from the Netherlands and Switzerland. Revenues by activity are shown in Exhibit 2, with geothermic the largest with 72% of total revenues.

Exhibit 2: Revenue by activity, FY20

Exhibit 3: Revenue by geography, FY20

Source: Daldrup & Söhne

Source: Daldrup & Söhne

Exhibit 2: Revenue by activity, FY20

Source: Daldrup & Söhne

Exhibit 3: Revenue by geography, FY20

Source: Daldrup & Söhne

Positive outlook for drilling

Based on its strong orderbook, Daldrup expects total output in FY21 at around €43m, which compares to the reported €47.5m in 2020. The EBIT margin from the operating business is expected to be 2–4% after the reported 4% in FY20. We consider the guidance for 2021 as cautious because management stated in its press release of 1 June that it cannot rule out that the effects of a persistent or worsening pandemic will have a negative impact on revenues and profits. The order backlog of €24.3m at end April 2021 utilises production capacities for FY21. Larger individual orders extend far into FY22. The order pipeline of €94.6m is also positive overall and signals continued interest in Daldrup’s services. The pipeline is defined as potential order volume based on the likelihood of orders being placed following bids submitted or intensive discussions with customers.

Overall market conditions for Daldrup remain positive, with governments focusing on renewable energy to reduce emissions from climate-damaging greenhouse gases. Geothermal energy could be used to full advantage in a successful energy transition, because geothermal electricity and heat are generated in an almost CO2-neutral manner. Geothermal energy can be an essential addition to wind and solar capacities in the mix of renewable energies.

Another attractive market segment is the provision of high-quality drilling services such as exploratory drilling for safe final storage sites. Water extraction and dealing with the burdens of mining are also attractive market segments in the long term. Daldrup has a wide range of drilling equipment for different depths: 27 drilling rigs for a depth of up to 400m, eight rigs for depths of 400–2,000m, four rigs for drilling depths of 2,000–4,000m and one Bentec 350-t-AC for deep boreholes up to 6,000m.

Daldrup previously communicated its aim to improve the EBIT margin to at least 4–5% over the next few years. Drivers for this will be the benefits from planned improvements in the group’s structure, project planning and control, management systems and the supply of material.

Over the next few years, Daldrup also aims to build a portfolio of minority interests in geothermal power plants for the generation of electricity or heat. This is in contrast with the previous majority stake in power plants (the last part of loss-making Geysir was divested in early 2020). Potential new investments should focus on medium-sized companies that fit Daldrup’s risk profile. These participations could arise from drilling contracts for geothermal projects or the acquisition of existing plants. The aim of this portfolio is to generate continuous cash flows in addition to the rather volatile project business in drilling.

Further strengthening of its financial position

In 2020, Daldrup’s financial position improved further, with net debt declining to €4.7m from €6.0m in 2019, mainly driven by positive operating cash flow. The equity ratio is still strong at 47.3%, albeit slightly lower than the 50.3% in 2019, which was caused by non-operational charges related to financial assets. Daldrup is not currently paying a dividend.

Financial assets represent around 30% of the balance sheet and these largely relate to subordinated loans. As part of the sale of Geysir in early 2020, a large proportion of the long-term debt granted via D&S Geothermie remained on Daldrup’s balance sheet as subordinated loans, with Daldrup responsible for the risk of default. In the second half of 2020, Daldrup reported an impairment charge of €6.4m, which is the main reason for the decline in financial assets from €17.8m in H120 to €11.8m at year-end.

Part of the company’s strategy is to invest in medium-sized power projects via minority stakes. Additional debt might be required for participating in such minority stakes in geothermal power plants. Daldrup aims for an equity ratio of 35–40% versus the current 47.3%, which offers room for higher leverage.

Exhibit 4: Daldrup FY20 balance sheet

€m

FY19

FY20

Fixed assets

10.2

8.5

Financial assets

12.2

11.8

Current assets

21.3

15.1

Cash

2.7

3.0

Total assets

46.4

38.5

Equity

23.3

18.2

Provisions

1.9

1.3

Interest-bearing debt

8.7

7.7

Other liabilities

12.4

11.3

Total liabilities

46.4

38.5

Equity ratio

50.3%

47.3%

Net debt

6.0

4.7

Net debt/EBITDA (x)

N/A

1.1

Source: Daldrup & Söhne

Valuation: Small premium to peers

Daldrup’s share price recovered during 2020 from the pandemic-driven dip of just under €2.00. The H120 results were well received and showed a return to positive EBIT, resulting in a year-end share price of €3.23. Daldrup’s share price has performed well so far in 2021, to reach €4.52 currently.

Based on consensus estimates, Daldrup is valued at an FY21e EV/EBITDA of 9.5x, which reflects a small premium of 9% to the selected peer group. In our last update note published in October 2020, Daldrup was valued at a small discount to peers, but the strong recovery in margin in FY20 has triggered a strong share price performance, while the outlook for the drilling business also remains positive.

Exhibit 5: Peer group comparison

EV/sales (x)

EV/EBITDA (x)

2021e

2022e

2021e

2022e

Awilco Drilling

8.4

21.2

-12.0

-46.1

Northern Drilling

8.7

3.4

22.3

7.5

Nabors Industries

1.7

1.5

7.2

6.0

Transocean

3.4

3.3

10.2

10.6

Odfjell

2.0

1.8

6.7

5.3

Energiekontor

4.7

3.8

11.9

9.7

Good Energy Group

0.6

0.6

6.8

6.5

Ormat Technologies

7.9

6.4

12.9

10.8

Median

4.0

3.4

8.7

7.0

Daldrup & Söhne

0.9

0.8

9.5

8.8

Premium/(discount)

(78%)

(76%)

9%

26%

Source: Refinitiv. Prices per 14 June 2021.


General disclaimer and copyright

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. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

More on Daldrup & Söhne

View All

Latest from the Industrials sector

View All Industrials content

Industrials

Carr’s Group — At an inflexion point

Solid State_resized

Industrials

Solid State — Interim results

Research: TMT

Keywords Studios — CEO retires for health reasons, positive trading

Having stepped back temporarily in March 2021 for health reasons, Andrew Day has now confirmed that he will take early retirement after 12 years as CEO of Keywords. Accordingly, the board has initiated the search for a full-time replacement. Jon Hauck (CFO, M&A) and Sonia Sedler (COO and operations) will continue to operate as interim CEOs until the search is complete. In parallel, Keywords provided a trading update, with the group reporting 25% l-f-l organic revenue growth and overall revenue growth of 36% y-o-y for the first four months of the year, and ‘good margin delivery’. We note that the comparator period was relatively weak given the onset of COVID-19 (H120: 8% l-f-l organic revenue growth), but with trading momentum continuing as games companies try to make up for the content deficit last year, together with a strong M&A pipeline, the board is confident in meeting FY21 market expectations.

Continue Reading

Subscribe to Edison

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

Sign up for free