FY17 results in line with expectations
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Reported FY17 revenues of €124.8m (FY16 €102.8m), a 21.4% increase and at the upper end of the forecast consensus range.
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Reported FY17 EBITDA of €17.0m (FY16 €16.1m)
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Reported FY17 Adjusted EBIT of €11.2m includes an extraordinary item in Mechanics of €3.6m, giving an adjusted operating margin of 8.9%.
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Reported FY17 EBIT of €7.6m (FY16 €8.9m) represented a 14.6% decline.
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Net cash at the period end was €59.5m of which €98.5m is attributable to Voltabox, with €39.0m of net debt attributable to the remaining paragon activities.
Exhibit 1: FY17 revenue by division
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Electronics remains the largest segment, but we expect the rapid organic growth at Electromobility (Voltabox) will result in this being at least as large by FY19. We would expect it to be further supplemented by M&A investments in line with Voltabox’s strategy.
Revenue growth was driven primarily by the Electromobility segment (up 52%) and Mechanics (up 188%). Both segments benefited from increases in serial production.
Exhibit 2: paragon Q417 and FY17 results summary
Year to December (€m) |
Q416 |
Q417 |
% change |
FY16 |
FY17 |
% change |
Divisional revenue |
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Electronics (of which) |
|
|
|
85.3 |
90.8 |
6.5% |
- Sensors |
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|
|
34.6 |
33.8 |
-2.4% |
- Cockpit |
|
|
|
33.7 |
35.7 |
5.8% |
- Acoustics |
|
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|
17.0 |
21.4 |
25.8% |
Electromobility |
|
|
|
14.3 |
24.7 |
52.0% |
Mechanics (Body Kinematics) |
|
|
|
3.2 |
9.3 |
188.1% |
Total revenue |
29.1 |
40.1 |
37.8% |
102.8 |
124.8 |
21.4% |
Reported EBITDA |
5.9 |
4.433 |
(25.2%) |
16.1 |
20.6 |
28.5% |
EBITDA margin |
20.4% |
11.1% |
(45.7%) |
15.7% |
13.6% |
(13.0%) |
Adj operating profit |
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|
|
8.9 |
11.2 |
25.8% |
Adj operating profit margin |
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|
8.7% |
9.0% |
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Reported operating profit |
3.831 |
1.5 |
(60.8%) |
8.9 |
7.6 |
(14.6%) |
Reported operating margin |
13.2% |
3.7% |
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8.7% |
6.1% |
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Profit before tax (adjusted) |
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|
5.8 |
6.9 |
19.0% |
Profit before tax (reported) |
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|
5.8 |
3.3 |
(43.6%) |
Net profit (loss) |
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|
|
3.6 |
(0.7) |
N/A |
Reported EPS (€) |
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|
0.8 |
(0.2) |
N/A |
Net debt/(cash) |
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|
34.9 |
(59.5) |
N/A |
In Electromobility (20% of FY17 group sales), comprised of Voltabox’s operation in the US and Germany, the main driver was strong growth of battery modules for forklift trucks. The growth was achieved entirely at the German subsidiary with sales more than doubling, while the smaller US subsidiary remained flat at just over €3m. The improvement also generated a positive EBIT of €0.6m compared to an EBIT loss of €3.7m in 2016. Voltabox was the subject of a successful IPO in October 2017, and paragon now holds a 60% stake in the operation. Voltabox announced on 4 April 2018 that it had added engineering capability in the US through the acquisition of Concurrent Design based in Austin, Texas. With more than 20 design and software engineering specialists, the purchase will bolster Voltapower’s R&D capability, extending the ability to develop platform solutions to more than one at a time and potentially further accelerating growth from 2019.
Mechanics accounted for 7% of external sales in FY17 and benefited from the introduction of a new generation of freely adjustable rear spoilers that optimise vehicle aerodynamics. The operation moved into profit, generating an adjusted EBIT of €1.2m compared to a loss of €0.1m in 2016. This excludes €1.4m of start up costs and increased material costs of prototypes as well as €2.2m of expenses, not yet passed on to customers. The performance also benefited from the initial consolidation of paragon movasys (formerly HS Genion), which was acquired in November and added €1.7m to sales and €0.7m of net income.
Electronics continued to be the largest segment accounting for 73% of group external sales in FY17 and achieved healthy overall revenue growth of 6.5%. There was a modest decline in sensors revenues largely due to life-cycle effects on older products where production volumes fell, with sales of new generation sensors on current in-production vehicles continuing to increase. There was strong growth in Acoustics as sales volumes of the current generation of premium hands-free microphones increased. Growth of 5.8% in the Cockpit sub-segment reflected increased volumes of new generation instrumentation products. The division generated an adjusted EBIT contribution of €9.7m, down from €12.7m in 2016.
For the group overall adjusted EBIT in 2017 was €11.2m, up from €8.9m in 2016 and in line with our estimate, a margin of 9.0% (FY16 8.7%).
Investment is central to paragon's dynamic growth strategy over the medium term and was very much in evidence in the FY17 report. While R&D investment is vital, it is also essential for the company to be able to move seamlessly from early expansion products into serial production. For FY17 development work capitalised of €16.4m (FY16 €15.3m), €15.8m related to own work pursuant to IAS 38 (FY16 €14.3m), and was largely evenly split between the Electronics, Electromobility and Mechanics operating segments. FY17 PPE investment amounted to €4.7m (FY16 €7.7m). This included €4.0m of production process plant and machinery, €0.3m testing equipment and €0.4m on building expansion at Artegastrasse.
Management guidance for FY18 includes further revenue growth of c 40% to €175m, with an estimated EBIT margin maintained at around 9.0%. This is significantly faster than the automotive sector and is supported by a healthy order book. More specifically, management is looking for Electromobility to more than double its revenues to c €60m with an EBIT margin of c 10%. Mechanics (Body Kinematics) is also expected to contribute strongly with growth exceeding the group average. It will be boosted by the €15m acquisition on 24 November 2017 of HS Genion, subsequently renamed paragon movasys. Consolidated for just one month it generated sales of €1.723m and net income of €0.743m. In FY18 it should make a significant additional contribution to sales. Despite the continued product transition to the new generation of functionality in sensors, the Electronics division is expected to deliver further solid progress.
We anticipate further strong growth in FY19 as Electromobility continues to execute against its strong backlog and accelerates solution development and introduction following the recently announced acquisition of Concurrent Design; Mechanics grows its body kinematics output with an extended offering through paragon movasys; and Electronics benefits from renewed growth in sensors as it starts to build sales of the newer generation products ahead of declines of the more mature product lifecycle effects.
Company restructuring proposal
The management board and supervisory board of paragon AG proposed on 26 March 2018 that the legal form should be changed to a partnership limited by shares (KGaA). The proposal will go before the AGM on 8 May 2018 for shareholder approval. The change is designed to ensure control of the business remains with the Frers family and avoid unwanted takeover approaches.
“In the opinion of the Management and Supervisory Boards, the conversion of paragon AG into a KGaA will enable the founder and majority shareholder Klaus Dieter Frers to support future capital measures without risking a takeover by unwanted investors. These measures would also include possible capital increases. Furthermore, the change of legal form will ensure that Klaus Dieter Frers remains a long-term investor in paragon AG and that the company can continue its proven growth strategy.”
The KGaA structure consists of a general partner to manage the business, which would be paragon GmbH 100% owned by the Frers family, and limited liability shareholders.
While available among companies in Germany, particularly family run businesses, the more limited influence of external shareholders may be an issue for some investors, although it should help to improve liquidity and facilitate capital raising to support growth.
