IBU-tech — One door closes, another door opens

The Dieselgate scandal, which found discrepancies between the levels of polluting emissions from diesel cars and those claimed by the car manufacturers, resulted in a 13.2% drop in the number of registrations of diesel vehicles in Germany during calendar year 2017. For IBU-tec, this meant a substantial reduction in sales of catalytically active powders for the automotive industry. Intensive sales activity was not able to make up the shortfall, although it is encouraging to note that sales excluding those from the top three customers (which includes a major customer for automotive catalysts) grew by 24% during the year. Although demand for both battery materials for e-mobility and stationary energy storage and for chemical catalysts used to clean up factory exhaust gases showed double-digit growth, total revenues declined by 5% year-on-year during FY17 to €16.8m. While revenues attributable to product manufacture declined by 10% to €13.2m (78% of total sales) because of the weakness in the automotive sector, revenues from process and material development grew by 13%. This is encouraging, as a high proportion of project work eventually converts to volume production. For example trials undertaken during H117 on battery storage materials resulted in a major production order in Q417, which will benefit FY18.

Personnel expenses rose by 9%, partly as a result of management’s decision to invest in sales and engineering staff during FY16, partly as a result of the shift to more labour-intensive small-scale project business to replace some of the automotive catalyst production. Material costs as a percentage of sales increased by 2.3pp to 10.6%, reflecting the reduction in the proportion of high-margin automotive catalysts, plus a shift to carrying out contract manufacturing for the first time for some customers rather than working exclusively on a toll-processing basis. Stripping out the costs (€1.6m) of the IPO in March, EBITDA margin dropped by 10pp to 26%. This remains high compared with the EBITDA margin of industry peers (see Exhibit 1). Pre-tax profit (adjusted for IPO costs) reduced by 55% to €1.9m. IBU-tec is paying a maiden dividend to shareholders of €0.13/share, although the Weitz family, who are majority shareholders, have waived their dividend entitlement.

Following the IPO, which raised €16.5m (gross) at €16.5/share, the group moved from €2.0m net debt at end FY16 to €12.7m net cash. Part of the funds raised were allocated for the purchase of a new site where more complex and hazardous materials can be processed in volume. This was completed in April (see below) with the purchase of a site in Bitterfeld, which is c 140km from Weimar. Stripping out the IPO costs (€1.6m), cash generated from operations was €2.3m after deducting €1.1m to cover an increase in receivables related to extended payment terms as the group takes on a greater number of international customers. Capital expenditure, which was primarily on completing construction of a new rotary kiln (see below), fitting out the new logistics site (see below) and initial equipment of a new R&D facility at the main Weimar site, was substantially lower than in FY16 (€2.1m vs €4.6m). Management intends to invest c €4m in capital projects during FY18, primarily on purchasing and beginning to equip the new Bitterfeld facility (c €3m) and completing the new R&D facility at the main Weimar site. A further €3m is allocated for Bitterfeld equipment in FY19.

While IBU-tec has been involved in projects developing materials for use in batteries for several years, this activity exhibited double-digit growth during FY17. The company attracted new customers in the sector and moved from executing development projects for stationary storage and e-mobility applications to the production of high volumes for customers on a long-term basis as it signed the first framework agreement with an international group in Q417. Management expects this framework agreement to generate sales of single-digit million euros during FY18, which will be a major contributor to the anticipated recovery. As this framework agreement is with an international customer, this development will also help IBU-tec achieve its goal of growing outside Germany. This is important, because during FY17 nearly 90% of IBU-tec’s sales were still attributable to customers in Germany and reducing this dependency is a key management goal.

This intensified interest in materials used in battery energy storage systems is unsurprising given the projected growth in demand for batteries in both e-mobility and stationary energy storage systems. In its Global EV Outlook 2017 report, the International Energy Agency predicted that the electric car stock may range between 9m and 20m by 2020 and between 40m and 70m by 2025, compared with c 6m in 2016. A recent report from Marketsandmarkets predicted that the global battery energy storage system market will grow from US$1.98bn in 2018 to US$8.54bn by 2023, ie at a CAGR of 33.9%. Factors driving the growth are the need to provide a mechanism for storing surplus energy produced by wind and solar installations, both of which are intermittent sources of energy, for use when there is no wind and at night time, and the declining prices of lithium-ion batteries. As a key supplier of materials, IBU-tec is a central part of this price reduction. We note that since IBU-tec is a service provider for thermal treatment of battery materials, it is agnostic as to which of the battery technologies currently in production will become dominant.

In early 2017, IBU-tec opened a new logistics facility. This is located on a 8,686m2 site with a storage hall of 1,944m2 that is able to accommodate up to 1,400 pallets. It is around 10km from the main Weimar site. Since IBU-tec primarily processes raw materials for customers on a tolling basis, it stores raw materials for customers, processes them and then returns the resultant speciality chemicals to the customers on a pre-agreed schedule. The new site has substantially more storage space, so customers can purchase larger volumes of raw materials in one go and thus benefit from better pricing. In addition, IBU-tec can store more of the finished product until it is needed, which is particularly helpful for customers who prefer to receive their materials on a ‘just-in-time’ basis. The logistics activity was previously located at the main site in Weimar. Moving the logistics function from the production site has freed up space at Weimar for more processing capacity. A new rotary kiln that is larger than any of the other indirect rotary kilns at Weimar was commissioned during the summer. The greater size means that IBU-tec can produce larger batches of product more quickly. This kiln was commissioned in June 2017 and will be critical to meeting demand for battery materials.

The recently acquired Bitterfeld site is located in an industrial area approved for chemical activity. This 15,500m2 site will be used to process materials that cannot be produced at the Weimar site because of regulatory and permitting restrictions as well as providing additional capacity for manufacturing metal and metal oxide-based catalysts. The site will also be used to house more challenging processes involving reactions in reducing atmospheres including hydrogen gas, which have an attendant risk of fire or explosion. These chemicals and processes must be carried out in accordance with regulations intended to protect personnel, infrastructure and the environment. The rising regulatory burden means that large international companies are keen to outsource some of these manufacturing processes. IBU-tec has already built up a provisional pipeline of suitable projects for the proposed facility with existing and new customers, which will potentially deliver meaningful revenues when production commences at the site in Q418. It will start by installing three rotary kilns for processing battery materials and chemical catalysts. Management is also in initial discussions with a shortlist of M&A candidates who may be able to provide complementary process technology that can be used to manufacture materials requested by customers than cannot be made either at Weimar or potentially at Bitterfeld. The funds raised from the IPO will be used to finance any potential acquisition, as well as the purchase and commissioning of the Bitterfeld site.

IBU-tec’s share price has been fairly volatile since the IPO placing at €16.5/share. Despite a solid Q117 performance the shares dipped to €15.28 in early August, had risen to €21.18 by mid-October following positive H117 results, before taking a tumble after a profits warning at the end of October. The shares are trading close to the IPO price.

As there are no listed peers involved in toll manufacturing of inorganic chemicals, we are using a sample of European companies involved in the manufacture of speciality chemicals or using specialist chemical processes to provide a service. While the historical EV/EBITDA multiple is lower than the mean of the sample, the historic P/E multiple is higher. Given IBU-tec’s higher than average EBITDA margin and potential for strong sales growth once the third site comes on line, we believe it deserves to be valued at a premium to the mean. We see potential for share price appreciation as IBU-tec demonstrates that it is able to deliver revenue growth in the current market environment while maintaining EBITDA margin.