Diskus Werke — Hard grind

DVS Technology (DB: DIS)

Last close As at 18/03/2024

17.00

0.00 (0.00%)

Market capitalisation

165m

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Research: Industrials

Diskus Werke — Hard grind

Diskus Werke has accompanied predictably solid H1 results (PBT up 5%) with lowered 2018 PBT guidance, now expected to be up 3% at €14m, suggesting a flat H2. While half-yearly divisional performance is not disclosed, this shortfall is attributed mainly to the expected turnaround of longstanding loss-making subsidiaries rather than core demand (June 2018 order book up 15% y-o-y with H1 book/bill ratio of 1.09 vs 0.95 y-o-y). Finances remain sound (debt/equity ratio 51%) despite much higher net debt, driven by working capital needs and continued strong investment.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Industrials

Diskus Werke

Hard grind

Mechanical engineering

Scale research report - Update

28 September 2018

Price

€17.40

Market cap

€169m

Share price graph

Share details

Code

DIS

Listing

Deutsche Börse Scale

Shares in issue

9.7m

Net debt at June 2018

€66.3m

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

Diskus Werke has accompanied predictably solid H1 results (PBT up 5%) with lowered 2018 PBT guidance, now expected to be up 3% at €14m, suggesting a flat H2. While half-yearly divisional performance is not disclosed, this shortfall is attributed mainly to the expected turnaround of longstanding loss-making subsidiaries rather than core demand (June 2018 order book up 15% y-o-y with H1 book/bill ratio of 1.09 vs 0.95 y-o-y). Finances remain sound (debt/equity ratio 51%) despite much higher net debt, driven by working capital needs and continued strong investment.

Mixed fortunes in H118

The half to June saw Diskus Werke exceed one of its key metrics (7% revenue gain was 4% ahead of plan) but disappoint in terms of EBIT margin, which fell slightly in contrast to the sharp increase it forecast for the full year. This is consistent with surprising buoyancy in the German machine tool market (up 8% in the company’s segment) offset by rising procurement costs. The net result was a 5% increase in PBT to €7.4m, in line with management expectations. In the absence of a revenue breakdown, it is difficult to identify the drivers but the pressure on margins (H1 EBIT margin of 6.7% on sales vs 6.9% y-o-y) rather than on revenues indicates likely resilience in core activities, offset by persistent structural issues at the three problematic subsidiaries, which burdened 2016 results. A surge in working capital and high capex explain the c 30% rise in net debt since 2017.

H218 caution

New full-year guidance of €14m PBT effectively suspends its July forecast of further significant EBIT margin growth (7.5% on operating performance vs 6.3% in 2017). While not specifying a revised margin, its confirmation of likely c 3% higher sales implies that EBIT margin may in fact decline slightly, as in H1. In terms of PBT, H2 is now forecast just to hold steady. Below-budget contributions by both the three loss-making companies at the centre of the company’s turnaround programme and by fellow sufferer, BUDERUS (2017 profit down 85%), are to blame.

Valuation: Consolidation likely

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 may not appeal to most institutional investors. Moreover, caution is understandable until the company can show that this lowered guidance marks only a temporary delay in the key restructuring programme.

Historical financials

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

160.5

9.0

0.36

0.10

48.3

0.6

12/15

199.2

14.0

0.78

0.21

22.3

1.2

12/16

218.4

11.4

0.52

0.20

33.5

1.1

12/17

246.9

16.2

0.75

0.25

23.2

1.4

Source: Diskus Werke 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 H118 results

The half to June saw continued top-line growth (7%), as shown in Exhibit 1, but no repeat of the 2017 step-change in profit (full-year EBIT +42%) up from the depressed levels of the previous year. A prime contributor then 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. Instead, H118 EBIT grew by just 3%, ie at lower margin on sales (6.7% vs 6.9%).

At the half-year stage the company does not provide an analysis of turnover, so it is hard to identify the drivers. However, it does appear broadly to have matched an unexpectedly strong German machine tool market (production up 8% in its particular field). Order intake was especially healthy (up almost a quarter at €141m), driving a 15% improvement in the book/bill ratio, ie to 1.09.

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

Source: Diskus Werke accounts

Cost pressures remained challenging in H118, as evident in the lower margin (see Exhibit 2). In particular, labour expenses grew by 10%, faster than in the two previous years, and the cost of bought-in services (less significant at €10m) rose again by over 20%. In mitigation, raw material costs were held in check (up only 2%). Despite the rise in net debt, there was a small decline in finance charges, which allowed a 5% increase in PBT.

Exhibit 2: Financial performance

Year end December (€m), HGB

2016

H117

H217

FY17

H118

Revenue

218.4

120.5

126.4

246.9

129.5

Change

+10%

+19%

+8%

+13%

+7%

Order book

125.7

119.3

126.4

126.4

137.7

Change

+2%

-9%

+1%

+1%

+15%

Other income

8.2

6.4

3.1

9.5

3.9

Material costs

(100.3)

(58.5)

(57.1)

(115.6)

(61.3)

Change

+2%

+20%

+11%

+15%

+5%

Labour costs

(66.6)

(35.5)

(36.9)

(72.4)

(39.1)

Change

+7%

+9%

+8%

+9%

+10%

Other operating costs

(38.7)

(19.5)

(22.7)

(42.2)

(19.3)

Change

+25%

+12%

+6%

+9%

-1%

EBITDA

20.9

13.5

12.8

26.3

13.6

EBIT

11.4

8.3

7.9

16.2

8.6

Margin

5.2%

6.9%

6.3%

6.6%

6.7%

Net interest

(3.0)

(1.3)

(1.6)

(2.9)

(1.2)

Pre-tax profit

8.4

7.1

6.5

13.6

7.4

Net profit

5.1

4.1

3.1

7.2

4.9

Source: Diskus Werke accounts

A difficult H2 in prospect

Management’s new 2018 guidance envisages that longstanding revenue growth will stall in the second half, ie down 1%, based on its full-year forecast of €255m, which has not been raised for the overshoot in H1. H2 PBT is also expected to be flat, given its forecast of €14m for the year. Such revision is in stark contrast to its upbeat outlook statement only in July, which envisaged c 20% higher full-year EBIT margin on operating performance (there was no specific PBT forecast). Despite the now evident margin disappointment in H1 and management’s stated concerns about its turnaround targets, there may be scope for surprise in view of a markedly higher (15%) order book at the start of the period, reflecting an even more substantive gain in order intake (up by a quarter). In addition, there would be a material benefit to profit simply from returning the three loss-making subsidiaries to breakeven.

Balance sheet and cash flow

Finances remain resilient with June 2018 net debt of €66m on a par y-o-y, if up on €52m at the start of the year. This represents a manageable 51% of equity (book value). The equity ratio, also 51%, is almost unchanged.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

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United Kingdom

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NSW 2000, Australia

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