DVS TECHNOLOGY — Recovery in H220 will deliver FY20 break-even

DVS Technology (DB: DIS)

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17.00

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Research: Industrials

DVS TECHNOLOGY — Recovery in H220 will deliver FY20 break-even

DVS TECHNOLOGY’s H120 results were affected by a lower order book at the start of the year and the coronavirus pandemic, leading to a 28% decline in revenues to €90m and a loss before tax of €3.1m. Due to improved market conditions since then and cost-saving measures implemented since May 2020, management expects stronger results in H220 vs H120. FY20 guidance is for a decline in revenues of 19% and a break-even result before tax. Longer term, DVS TECHNOLOGY is well positioned to benefit from the market’s continued transformation towards e-mobility as it has exposure to e-mobility products in all of its divisions.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

DVS TECHNOLOGY

Recovery in H220 will deliver FY20 break-even

Industrials

Scale research report - Update

7 October 2020

Price

€16.40

Market cap

€159m

Share price graph

Share details

Code

DIS

Listing

Deutsche Börse Scale

Shares in issue

9.7m

Last reported net debt at 30 June 2020

€79m

Business description

Besides engineering and manufacturing machine tools, as well as grinding and honing tools, DVS TECHNOLOGY operates two production sites where automotive parts are machined in series production exclusively on DVS machines. The company is organised around three business units: Machine Tools & Automation, Tools & Components and Production.

Bull

Strong market position.

Few strategic threats.

Growth in contract manufacturing and tooling business.

Bear

Very low free float of 2%.

Several loss-making subsidiaries.

Development of the automotive industry.

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

DVS TECHNOLOGY’s H120 results were affected by a lower order book at the start of the year and the coronavirus pandemic, leading to a 28% decline in revenues to €90m and a loss before tax of €3.1m. Due to improved market conditions since then and cost-saving measures implemented since May 2020, management expects stronger results in H220 vs H120. FY20 guidance is for a decline in revenues of 19% and a break-even result before tax. Longer term, DVS TECHNOLOGY is well positioned to benefit from the market’s continued transformation towards e-mobility as it has exposure to e-mobility products in all of its divisions.

H120 results show a loss before tax

DVS TECHNOLOGY’s H120 performance was affected by the coronavirus pandemic, resulting in a 28% decline in revenues, which is broadly in line with market trends (source: VDW, the German Machine Tool Builders' Association). The company reported a loss before tax of €3.1m (vs profit before tax of €4.7m in H119) and a net loss of €2.8m (net profit of €2.6m). It also took extensive cost-cutting measures that have been effective since May 2020, with the full effect to be seen in the second half.

Guidance for FY20 is a break-even pre-tax result

At the beginning of 2020, DVS TECHNOLOGY was not very optimistic given a 27% lower order book at year-end FY19 compared to FY18. This situation was exacerbated by the coronavirus pandemic, resulting in declines of 20–40% in order intake. Now that the markets in general are recovering, management reports a gradual ramp-up in production. This should result in a better performance in H220 compared to the first half. For FY20, the company expects a revenue decline of around 19% and a break-even at the pre-tax profit line after a loss of €3.1m in H120.

Gradual transformation to e-mobility

In its outlook statement, management commented on the continued market transformation to e-mobility and DVS TECHNOLOGY’s exposure to e-mobility products in all three of its divisions. Looking at the order intake in H120, e-mobility showed a much better performance compared to the company’s automotive and non-automotive segments. Despite the coronavirus crisis, e-mobility reported a stable order intake while automotive showed a drop of 50%. In the longer term, the company will benefit from the e-mobility trend, but in the short term uncertain market conditions in automotive will influence its financial performance.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

218.4

8.4

0.52

0.20

18.4

1.2

12/17

246.9

13.6

0.75

0.25

21.9

1.5

12/18

264.0

14.6

0.89

0.25

18.4

1.5

12/19

261.6

5.3

0.00

0.00

N/A

N/A

Source: DVS TECHNOLOGY

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 H120 results

In H120, the coronavirus pandemic had a significant effect on DVS TECHNOLOGY’s results. As a result, H120 revenues declined by 28% to €90m. The reduction in revenues was 23% in Q120 and a more pronounced 34% in Q220. These percentages are broadly in line with market trends. According to VDW, overall order intake in the machining segment was 30% lower in Q120, while production was down 23%. These percentages were -38% and -32% respectively in Q220.

Since the beginning of the coronavirus pandemic, DVS TECHNOLOGY has taken extensive measures such as liquidity management, short time working, suspension of leasing instalments, personnel and cost adjustments. These measures have been fully effective since May 2020.

Despite these measures, H120 EBITDA dropped 72% to €3.1m, reflecting a margin decline of 520bp. We base our margin calculation on revenues, whereas DVS TECHNOLGY (and other German companies) calculates the EBITDA margin on the base of total operating income, which, however, can be influenced by swings in inventories and (non-recurring) other operating income.

The company reported an EBIT loss of €1.5m compared to a profit of €6.0m in H119. The loss at pre-tax level was €3.1m with a loss of €1.0m in the first quarter and a wider loss of €2.2m in the second quarter, due to the larger revenue decline. The loss per share was €0.31 compared to a profit of €0.13 per share in H119.

Exhibit 1: H120 results DVS TECHNOLOGY

Year-end December (€m), HGB accounting

H119

H120

% change

Revenue

125.7

89.9

-28%

Change in inventory

9.8

3.1

Other operating income

1.9

0.2

Total operating income

137.5

93.3

-32%

Other income

1.4

2.2

60%

Total income

138.9

95.5

-31%

Cost of materials

(63.3)

(38.5)

-39%

Personnel costs

(43.6)

(37.2)

-15%

Other operating costs

(21.1)

(16.8)

-21%

EBITDA

10.8

3.1

-72%

EBITDA margin (based on revenue)

8.6%

3.4%

Depreciation

(4.8)

(4.6)

-4%

EBIT reported

6.0

(1.5)

N/A

EBIT margin (based on revenue)

4.8%

-1.7%

Net interest

(1.3)

(1.6)

N/A

Profit before tax

4.7

(3.1)

N/A

PBT margin

3.8%

-3.5%

Tax

(2.0)

0.4

N/A

Net profit

2.6

(2.8)

N/A

Minorities

(1.4)

(0.2)

N/A

EPS (€)

0.13

(0.31)

N/A

Source: DVS TECHNOLOGY, Edison Investment Research

DVS TECHNOLOGY’s subsidiaries are grouped in three divisions (see Exhibit 2): Machine Tools (61% of H120 revenues), Production (18%) and Tools & Components (19%). Several smaller units are grouped in ‘Other’, which represented 2% of total revenues.

The largest geography remains Germany, which represented 38% of total revenues in H120 (see Exhibit 3). Growth in the different regions showed large differences in H120, with Germany and Europe reporting revenue declines slightly higher than the group average of 28%, the US showing a decrease of around 45%, while revenues in Asia remained stable.

Exhibit 2: Revenues split by segment, H120

Exhibit 3: Revenues split by geography, H120

Source: DVS TECHNOLOGY

Source: DVS TECHNOLOGY

Exhibit 2: Revenues split by segment, H120

Source: DVS TECHNOLOGY

Exhibit 3: Revenues split by geography, H120

Source: DVS TECHNOLOGY

Outlook

At the beginning of the year, management had expected revenues in 2020 to be 7% lower at €245m and the EBIT margin, driven by cost savings, to rise to 4.4%, up from 2.8% in 2019. Guidance for pre-tax profit was €7m.

Since then, markets have contracted sharply due to the effect of the coronavirus pandemic. This has seriously affected DVS TECHNOLOGY’s performance, in particular in the automotive segment. Looking at order intake, the company faced a decline of 32% in orders in H120, with a decline of 22% in the first quarter and a larger decline of 42% in the second quarter. The decline in order intake in products (80% of total order intake) was larger at 35% compared to the order intake in services (20% of total order intake), which showed a decline of 20%.

DVS TECHNOLOGY focuses on increasing the number of products for the e-mobility segment. Order intake by market segment as a percentage of the total is shown in Exhibit 4 below 4. Orders for Future Mobility have increased strongly to 34% of the total in H120, which reflects a broadly stable order intake compared to H119. Automotive has declined to 31% of the total, which reflects a drop of around 50% in orders. Non-automotive comprises for instance agriculture, energy (windmills) and aircraft engines.

Exhibit 4: Order intake by market segment

% of total

H119

H120

Future Mobility

23%

34%

Automotive

45%

31%

Non-automotive

32%

35%

Total order intake, %

100%

100%

Total order intake, €m

125.9

85.5

Source: DVS TECHNOLOGY

At the time of the FY19 results at the end of June, management refrained from providing any guidance for FY20 due to prevailing market and economic uncertainties, in particular in the automotive sector. In its H120 report, management stated that reliable forecasts are not possible at the moment and it is working on internal expectations using a three-month horizon. However, it does expect an improvement in business performance as of Q320, due to the further ramp-up of production and the effects of the measures taken in the first half, such as further staff reductions and short time work. Due to improved market conditions and cost-saving measures, DVS TECHNOLOGY anticipates a decline of 19% in revenues and a break-even result at pre-tax level by the end of the year.

Looking beyond the coronavirus crisis, management expects that the transformation towards e-mobility will continue to be of great importance. In all of its three business areas, DVS TECHNOLOGY offers products and services for e-mobility (machines, tools, production).

Financials

The lower results in H120 also had an effect on the company’s financial position with the equity ratio declining to 49% compared to 51% in FY19. Net debt increased to €79.3m compared to €67.4m at year-end 2019. Overall, a negative cash flow from operating activities of €8.0m was generated in the reporting period. Capex amounted to €1.5m and is at significant lower levels compared to €4.4m in H119. In May 2020, management expected a capex level of €5m for FY20 compared to €9.8m in FY19 against the backdrop of deteriorated market conditions.

Management assumes that its current financial resources will be sufficient to meet its payment obligations.

Exhibit 5: Balance sheet

Source: DVS TECHNOLOGY

DVS TECHNOLOGY’s shareholder base has not changed much in recent years, with 98% currently in the hands of shareholders holding a stake of more than 5%.The shareholder base is dominated by the Rothenberger family, which remains on board as a long-term investor.

Exhibit 6: Shareholders DVS TECHNOLOGY

Shareholder

Stake

Rothenberger 4xS Vermögensverwaltung GmbH

65.8%

Günter Rothenberger Beteiligungen GmbH

17.6%

FWI Fritz Werner International GmbH

7.9%

Maschinenfabrik Heid AG

6.8%

Total of >5% stakes

98.1%

Free float

1.9%

Source: DVS TECHNOLOGY


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