DVS TECHNOLOGY — Tough going

DVS Technology (DB: DIS)

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Research: Industrials

DVS TECHNOLOGY — Tough going

A sharply deteriorating machine tool market and procurement cost pressures have driven a reduction of over a third in DVS TECHNOLOGY’s H119 PBT and a material revision of full-year PBT guidance from €16m to €10m. This is all the more disappointing after H218 resilience (PBT up 11%) defied a similar profit warning. Management recently adopted a comprehensive group-wide plan to strengthen marketing and secure efficiencies. Finances remain sound (equity ratio almost unchanged at 50%) despite much higher net debt (up by a quarter since December), thanks to working capital needs and continued strong investment.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Industrials

DVS TECHNOLOGY

Tough going

Mechanical engineering

Scale research report - Update

2 October 2019

Price

€16.60

Market cap

€161m

Share price graph

Share details

Code

DIS

Listing

Deutsche Börse Scale

Shares in issue

9.7m

Net debt at June 2019

€78.6m

Business description

DVS TECHNOLOGY (also known as Diskus Werke) is an archetypal Mittelstand systems provider with very 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.

Growth in contract manufacturing and tooling business.

Bear

Very low free float.

Loss-making subsidiaries in 2018, albeit responding well to turnaround.

Development of the automotive industry, notably e-mobility.

Analyst

Richard Finch

+44 (0)20 3077 5700

A sharply deteriorating machine tool market and procurement cost pressures have driven a reduction of over a third in DVS TECHNOLOGY’s H119 PBT and a material revision of full-year PBT guidance from €16m to €10m. This is all the more disappointing after H218 resilience (PBT up 11%) defied a similar profit warning. Management recently adopted a comprehensive group-wide plan to strengthen marketing and secure efficiencies. Finances remain sound (equity ratio almost unchanged at 50%) despite much higher net debt (up by a quarter since December), thanks to working capital needs and continued strong investment.

H119 market woes

The severity of the H1 slowdown in DVS TECHNOLOGY’s segment of the machine tool market (order intake down 26% in the first five months, per industry association VDW) was enough to overrun an apparently buoyant opening order book of €139m (over 50% of 2018 sales). With a shortfall in first-half revenue (down 3% against full-year guidance of a 4% rise) and a yet greater disparity in margin (EBIT 4.4% vs expected full-year 6.3%), there was predictably a step change in PBT (down 36%). A double-digit percentage rise in labour costs, reflecting the average workforce up by a fifth, was a principal factor, as was a €2m increase in material costs.

Justifiable H219 caution

Given H1 results and current conditions, ‘best case’ full-year guidance of €16m PBT is lowered to €10m. Similarly, expectations of revenue and order intake are now respectively €260m and €250m vs €275m and €280m. As detailed on page 2, this implies that H2 will see a further significant fall in year-on-year PBT (more than a quarter) on flat revenue, as well as 8% lower order intake. While the company exceeded revised guidance last year, a ‘very challenging’ environment (VDW forecasts a 17% reduction in 2019 market order intake) suggests a repetition may be optimistic. Implementation of the restructuring programme will start in H2.

Valuation: Need to deliver

The vast bulk of the company’s equity is firmly held and likely to remain so. With a free float of 0.4%, DVS TECHNOLOGY may not appeal to most institutional investors. As headwinds affected sooner and more severely than management expected, caution is understandable ahead of successful restructuring, which looks to be assumed in a demanding rating of 28x 2019e guided PBT of €10m.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

199.2

10.9

0.78

0.21

21.3

1.3

12/16

218.4

8.4

0.52

0.20

31.9

1.2

12/17

246.9

13.6

0.75

0.25

22.1

1.5

12/18

264.0

14.6

0.89

0.25

18.7

1.5

Source: DVS TECHNOLOGY accounts

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 H119 results

The half to June saw a dip in revenue (-3%) and PBT (-36%), as shown in Exhibit 1. This was in contrast to the resilience of the previous two years. At the half-year stage, the company does not provide a top-line analysis, so it is difficult to identify the drivers. However, the outturn has clearly reflected an unexpectedly weak machine tool market (order intake down 26% in DVS TECHNOLOGY’s particular field in the five months to May). The company’s order intake fell by 11% to €126m against a strong comparative, which was up by a quarter, effecting a 9% lower book/bill ratio (1.00 vs 1.09).

Exhibit 1: Analysis of half-yearly revenue and PBT (€m)

Source: DVS TECHNOLOGY accounts

Cost pressures remained intense in H119, as evident in the lower margin (see Exhibit 2). In particular, labour expenses grew by 11%, at a similar rate to 2018, owing to expansion and the cost of bought-in services (less significant at €11m) again rose markedly by 10%, as did other operating costs, unlike in 2018 (flat). In mitigation, raw material costs were held in check (up only 2%). Despite much higher net debt, there was only a small increase in net finance costs.

Exhibit 2: Financial performance

Year end December (€m), HGB

H118

H218

FY18

H119

H219*

FY19*

Revenue

129.5

134.5

264.0

125.7

134.3

260.0

Change

+7%

+6%

+7%

-3%

Flat

-2%

Order intake

140.8

135.4

276.2

125.9

124.1

250.0

Change

+23%

+1%

+12%

-11%

-8%

-9%

Other operating income

2.8

4.4

7.2

11.8

Total operating income

132.3

138.9

271.2

137.5

Other income

1.1

3.4

4.5

1.4

Material costs

(61.3)

(64.8)

(126.1)

(63.3)

Change

+5%

+13%

+9%

+3%

Labour costs

(39.1)

(41.2)

(80.3)

(43.6)

Change

+10%

+12%

+11%

+11%

Other operating costs

(19.3)

(23.0)

(42.3)

(21.1)

Change

-1%

+1%

Flat

+9%

EBITDA

13.6

13.4

27.0

10.8

EBIT

8.6

8.6

17.2

6.0

Margin on total operating income

6.5%

6.2%

6.3%

4.4%

Associates

Neg.

0.2

0.2

0.1

Net interest

(1.2)

(1.7)

(2.9)

(1.4)

Pre-tax profit

7.4

7.2

14.6

4.7

5.3

10.0

Change

+5%

+11%

+7%

-36%

-26%

-32%

Net profit

4.9

3.7

8.6

2.6

Source: DVS TECHNOLOGY accounts. Note: *Company guidance and implied by company guidance.


Little respite in H2

Management has lowered its 2019 guidance owing to market slowdown. On the other hand, the company’s involvement in market niches with high barriers to entry tends to bring resilience.

Guidance is now for revenue and order intake of €260m (down 2% on 2018) and €250m (down 9% on 2018) respectively. Although seemingly cautious, given the size of the order book, which was unchanged year-on-year at June 2019 and 52% of forecast full-year sales, we are wary of conditions and also the need to reduce original 2019 guidance. H219 PBT is now targeted to exceed that of the first half but still be appreciably below H218; indeed, it may be achieved through continued resolution of structural issues at problematic subsidiaries rather than any advance in general business. Investment should remain at a high level (c €10m full-year capex as well as €4m on expansion projects), while the workforce is set to increase (up 19% in H1), notably because of the business ramp-up at DVS Production. PBT of €10m is expected for 2019.

Balance sheet and cash flow

Finances remain resilient with June 2019 net debt of €78.6m, up €14.2m on December 2018 owing to working capital requirements (stocks up by €17m or 25% in the half) and sustained capex (over €4m in H119). This represents a manageable equity ratio of 50%, which is almost unchanged on June 2018.


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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

1,185 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

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