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Diskus Werke — Grinding it out

Diskus Werke — Grinding it out

2017 was a record year for revenue and EBIT, with all three divisions outperforming the market. However, H2 performance, broadly in line with management expectations but showing an absolute decline from H1, contrasts with a marked ‘beat’ in H117. A strong orderbook (up 4% at December 2017) and continued successful investment underpin 2018 guidance of 2–3% revenue growth at significantly higher margin (c 7.5% on operating performance vs 6.3% last year). The company feels well placed to grow by c 20% towards the €300m pa revenue mark long-term target.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Diskus Werke

Grinding it out

Mechanical engineering

Scale research report - Update

26 July 2018

Price

€17.60

Market cap

€171m

Share price graph

Share details

Code

DIS

Listing

Deutsche Börse Scale

Shares in issue

9.7m

Net debt at December 2017

€51.6m

Business description

Diskus Werke is an archetypal Mittelstand systems provider with extremely strong market positions in the sub-segments within which it operates. The company is organised around three business units: Machine Tools & Automation, Tools & Components, and Production.

Bull

■

Strong market position.

■

Few strategic threats.

■

Potential high-margin growth in contract manufacturing.

Bear

■

Very low free float.

■

Loss-making subsidiaries in 2017.

■

Core client industries are mature.

Analyst

Richard Finch

+44 (0)20 3077 5700

2017 was a record year for revenue and EBIT, with all three divisions outperforming the market. However, H2 performance, broadly in line with management expectations but showing an absolute decline from H1, contrasts with a marked ‘beat’ in H117. A strong orderbook (up 4% at December 2017) and continued successful investment underpin 2018 guidance of 2–3% revenue growth at significantly higher margin (c 7.5% on operating performance vs 6.3% last year). The company feels well placed to grow by c 20% towards the €300m pa revenue mark long-term target.

H217 consolidation

The step-change in H117 financials (eg PBT more than doubled) was a hard act to follow as set against particularly weak comparatives. Improvement in the second half was thus predictably more measured, with revenue up 8% at a slightly higher EBIT margin (6.3% on revenue vs 6.1%), driving PBT up over 20%. Indeed, profit (not revenue) was lower than in the first half. Continued turnaround at three loss-making subsidiaries was accompanied by notable volatility at the largest companies BUDERUS (full-year profit down 85%) and PRÄWEMA (full-year profit up by a third). While half-year divisional performance is not disclosed, the strongest growth may be assumed to have come from Production and Tools & Components, albeit from a much smaller base than the main Machine Tools business.

A good year in prospect

Despite the apparent loss of profit momentum in H217, a year-end orderbook of €126m ensures a creditable workload for 2018 (over 50% of 2017 sales), supporting guidance of €253m order intake and revenue. Management expectation of further significant margin gain (7.5% on operating performance vs 6.3%) may seem ambitious, given slight 2-3% top-line growth, but simply returning the three loss-making subsidiaries to breakeven would restore EBIT margin to 8-9%.

Valuation: Little on offer

The vast bulk of the company’s equity is firmly held and likely to remain so. With a free float of 0.4%, Diskus Werke is unlikely to appeal to most institutional investors. This means the peer group valuation is unlikely to play much of a part in setting the share price. Any activity is likely to be driven by private investors to whom absolute measures such as P/E (23x for 2017) and dividend yield (1.4% on 2017 payout) will be more important.

Historical financials

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

160.5

9.0

0.36

0.10

48.9

0.6

12/15

199.2

14.0

0.78

0.21

22.6

1.2

12/16

218.4

11.4

0.52

0.20

33.8

1.1

12/17

246.9

16.2

0.75

0.25

23.5

1.4

Source: Diskus Werke data

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 2017 results

Diskus Werke’s recent volatile profit record was maintained in 2017. After sharp dips in EBIT in 2014 and 2016, a 42% y-o-y improvement in 2017 ensured a record outturn (also at EBITDA and PBT levels, if not at net profit). A prime contributor was loss elimination at three subsidiaries, Pittler, Diskus Werke Schleiftechnik and DVS Production South, ie c €2m vs c €6m in 2016 and near breakeven in 2015.

Exhibit 1: Analysis of revenue and profit (€m)

Source: Diskus Werke accounts

Second-half performance showed continued profit restoration against a subdued H216 (EBIT up 10% y-o-y) but not compared with the preceding half (EBIT down 5%). By contrast, revenue growth was ahead on both counts (by 8% and 5%, respectively).

Overall, the company appears to have performed visibly better than the German machine tool industry as a whole (production up 4% in 2017).

Exhibit 2: Analysis of half-yearly revenue and EBIT (€m)

Source: Diskus Werke accounts

Order inflow in H2 was notably positive at +19% y-o-y (€133.4m) compared with +4% in the first half. This took the orderbook to €126.4m at the end of the period (€125.7m at December 2016 and €119.3m at June 2017). Costs remained under good control. Payroll, for example, was up 8% at €36.9m and despite a sharp increase in the cost of bought-in services (up 40% to €13.5m), raw material costs rose more slowly than turnover (+8% y-o-y), up just 4% to €43.7m.

There was further considerable progress in turning around the three subsidiaries that burdened 2016 results, with losses cut to €0.7m in the second half of 2017 from €3.0m in the comparable period. As a result, DVS Production South (formerly Fröhlich) returned almost to the black but the performances of Diskus Werke Schleiftechnik and Pittler remained unsatisfactory by management admission.

Exhibit 3: Financial performance

Year-end December (€m), HGB

H116

H216

FY16

H117

H217

FY17

Revenue

Machine Tools

164

178

Change

+9%

+9%

Production

28

37

Change

+27%

+32%

Tools & Components

24

30

Change

+9%

+25%

Other

2

2

International

57%

68%

Total

100.9

117.5

218.4

120.5

126.4

246.9

Change

+19%

+3%

+10%

+19%

+8%

+13%

EBITDA

8.9

12.0

20.9

13.5

12.8

26.3

EBIT

4.2

7.2

11.4

8.3

7.9

16.2

Margin

4.2%

6.1%

5.2%

6.9%

6.3%

6.6%

Net interest

(1.4)

(1.6)

(3.0)

(1.3)

(1.6)

(2.9)

Pre-tax profit

3.1

5.3

8.4

7.1

6.5

13.6

Net profit

1.1

4.0

5.1

4.1

3.1

7.2

Source: Diskus Werke accounts

2018

Management looks for revenue and order intake of €253m, a rise of 2%. In view of the size of the orderbook (c 50% of forecast sales), this may seem cautious and by comparison with the 8% gain in H217. There may also be scope for surprise in the targeted improvement in margin on operating performance (7.5% against 6.3%), given the scale of guidance overshoot in H117 (PBT was 32% above management expectations). However, there was an absolute decline in H217 margin from the first half, eg from 6.9% to 6.3% (EBIT on sales), which may reflect the persistence of structural issues at the three problematic subsidiaries.

Balance sheet and cash flow

Finances remain sound with net debt at December 2017 of €52m (vs €57m in December 2016 and €56m at June 2017). This represents a manageable 41% of equity (book value) with an equity ratio of 52%.

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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Investment Companies

Worldwide Healthcare Trust — Positive industry fundamentals

Worldwide Healthcare Trust (WWH) is managed by Sven Borho and Trevor Polischuk, of OrbiMed, one of the world’s leading specialist healthcare investors. The managers are very excited about the prospects for the global healthcare sector for the balance of the year. The threat of regulated drug pricing in the US is abating and the sector is experiencing a period of high innovation, which could lead to the launch of therapies with multi-billion-dollar sales potential. Within the key US market, the regulatory environment is supportive in terms of bringing new products to market, share price valuations are low versus history, and there is a likelihood of increased merger and acquisition (M&A) activity following US tax reform. WWH has a very strong, long-term investment track record. From inception in 1995 until the end of FY18, its average NAV total returns of 15.8% pa are significantly ahead of the benchmark’s average total returns of 11.6% pa.

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