We started to follow Heidelberger Druck almost 15 years ago. At that time, the shares traded at around €20 but they fell into penny-stock territory briefly in 2019 and genuinely in 2020. During these years, the company accumulated net losses of more than €500m and the EPS numbers were positive in seven but negative in six of these years. Simultaneously, revenue collapsed from €3.8bn to €2.5bn and the workforce was cut from almost 20,000 to less than 12,000.
Companies: Heidelberger Druckmaschinen AG
Heidelberger Druck has not generated any reasonable profits for several years which has caused its balance sheet quality to deteriorate sharply. To deal with this, management has announced drastic actions to keep the company alive.
The lack of volumes and intensifying price pressure have resulted in quite sizeable operating and net losses in the last quarter. In addition and as business conditions remained weak in Germany and most of Europe, the product mix changed which resulted in further profit pressure.
With a market cap of €500m, this peer is also small, but it is larger than Heidelberger Druck’s c. €360m. We do not analyse the peer, but it competes directly with Heidelberger for sheetfed printing machines. In addition, it manufactures speciality offset printing machines such as for the printing of banknotes.
The company’s Q2 EBIT number was actually quite good and so was the pre-tax profit number. Both numbers were up, but the H1 profit numbers are still down. Higher revenue and lower personnel costs have contributed to this Q1 development.
The printing of books and brochures was invented some 600 years ago and it seems that companies that continue producing printing machines are becoming obsolete. Heidelberger Druck planned to protect its business model by offering full-service leasing contracts to its clients, but the Q1 19/20 numbers suggest that this is not helping.
Heidelberger Druck with its sheet-fed printing machines has been under profit and share price pressure since the beginning of the current decade. It is the lack of demand for printed brochures and other smaller print jobs that has caused this setback. Management has tried to protect the company by developing machines for printing packaging material, but this has been insufficient to keep order inflow, revenue and profit numbers where they were ten years, not to mention twenty years ago.
Heidelberger Druck’s order inflow and revenue fell by 4% to €579m and 11% to €606m, respectively, in the last quarter. At the same time, the respective EBIT and pre-tax earnings numbers were down by 19% to €22m and 57% to €6.5m. Whereas 9M revenue is short of our projected number (€1.76bn), EBIT of €49m is higher (€43m) and pre-tax earnings of €1m are about in line (€2m).
In 2014, Heidelberger Druck acquired all the shares of Swiss Gallus, a producer of packaging printing equipment. The Gallus owner (Ferd. Rüesch AG) received a stake of around 9% in the German company and continues to hold this stake. This time, the share issue will not expand the company’s product portfolio but is intended to strengthen the relationship with Masterwork.
Heidelberger Druck showed H1 numbers that fell slightly short of our expectations although we had anticipated that Q2 profits would be lower than last year’s. Order inflow was up by 6% to almost €1.31bn, while revenue also increased by 6% to a good €1.11bn. Consolidated EBIT was unchanged from last year at €27m (-17% to €25m in Q2 alone) while the pre-tax loss was €5.5m compared to a profit of €2.0m. As a result, the pre-tax result fell by 50% to €8.5m in Q2. Finally, H1 cash from operations (based on management’s definition) was a negative €49m compared to a positive €5m last year.
Revenue growth of almost 10% has been insufficient to drive profits strongly up. The new profit numbers are a clear disappointment to us and this is certainly also true for cash generation.
Heidelberger Druck’s order inflow was about unchanged at €2.59bn in 2017/18 and revenue fell by 4% to €2.42bn. As a result, EBIT was down by 5% to €103m while net profit collapsed by 61% to €14m as a consequence of the US income tax reform which increased deferred tax charges by €25m. Except for order inflow, all the numbers released were lower than we had anticipated and management blames currency effects. Excluding these, revenue would have fallen by 1.3%.
Heidelberger Druck’s machinery is overwhelmingly produced in Germany and shipped to clients around the world. As major competitors are Japanese and as the yen has fallen almost in line with the US dollar, currency movements have started to bite into earnings.
Heidelberger Druck has introduced a new business model for its Digital business which, in our opinion, increases the potential risks considerably.
Management expects the tax reform to lead to an additional €25m in income tax charges in the current fiscal year. This will not be cash effective but simultaneously lead to lower deferred tax assets, i.e. this asset item will be down, as will equity.
Management previously expected net earnings to increase in 2017/18 but now sees it coming in considerably below last year’s €36m. Our current projections see net earnings of €57m. However, including the above tax charge, it will be down to around €30m.
Heidelberger Druck has considerable tax losses carried forward in the USA. For some of these, management had capitalised deferred tax assets. As the future tax rate will be reduced from 35% to 21%, these tax assets are worth less than previously expected, hence the additional tax charge.
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Strix has announced the strategic acquisition of LAICA a family owned business in Vicenza, Italy for €19.6m in a mixture of cash and shares. It will be earnings accretive in FY21 and is scheduled to complete by the end of FY20, with just Italian government approval outstanding. ZC operating profit estimates are unchanged in FY20 but increase by c. 8% in FY21 to reflect the contribution from the deal, the impact on earnings is smaller due to the issue of shares and higher tax in Italy. Management believe significant synergies, both cost and revenue, will be derived from the deal over the next 2-5 years. The interim results had been well flagged in the comprehensive trading update in late July and today’s statement confirms that profitability remains in line with the guidance of achieving a flat performance yoy in FY20. The interim dividend of 2.6p is in line with last year and in keeping with the commitment to at least meet the 7.7p paid in FY19. Unlike most peers, Strix has maintained guidance as well as its commitment to pay a dividend and today’s acquisition unpins the continuing strategy of diversifying the business into areas offering greater growth.
Companies: Strix Group Plc
Strix has published reassuring interims and announced the acquisition of LAICA, conditional upon approval from the Council of Ministers in Italy. Against a backdrop of global disruption caused by COVID 19, Strix’s H1 performance is in line with expectations. Net sales down 21% YoY, with a much smaller impact on net profits on the back of strong cost management. Encouragingly, FY 20 profit expectations are now underpinned, at around £28.9m PAT. Taking into account the LAICA deal, we provisionally upgrade FY 21 PAT/EPS by 6%. The shares are already up materially YTD, but the Strix growth story remains compelling.
Byotrol’s FY 2020 full-year results are inconsequential, given the dramatic and positive impact that the COVID-19 pandemic has had to product sales since the year-end. However, year-end cash was £0.1m above forecast at £1.7m and when combined with positive cashflow since year-end, Byotrol is well-resourced to finance its ongoing operations and steady growth. With the order-book remaining strong (c.£1.1m at 31 August), despite summer lull, and demand likely to persist for some time, given the emerging second wave of coronavirus, we upgrade EBITDA to reflect lower costs and higher licensing income. If, as we suspect, the demand curve has shifted sustainably to the right, this leaves room for further upgrades. Consequently, we raise our target price to 11p, at which level the stock would trade on EV/Sales and EV/EBITDA of 4.1x and 26.9x, respectively. Future revenues and milestones from licensing deals will be largely additive.
Companies: Byotrol Plc
The company has announced that its recently acquired subsidiary Booth Industries has won a landmark multi-year contract for the supply of high integrity protection doors for HS2 worth £36m. This contract also with other recent contracts validates the group’s acquisition of Booth. No change to forecasts in advance of tomorrow’s full year results. Clearly, today’s news will be very well received, with the shares looking undervalued.
Companies: Avingtrans Plc
Directa Plus is a commercially proven graphene supplier with a unique production process that creates high quality materials that are already used in a wide array of products internationally across multiple verticals. We expect the company to reach EBITDA positive in FY22 with existing cash reserves, leaving material upside in our expectations from some of its recently developed products such as the Co-Mask and Gipave.
We see Directa Plus as an underappreciated, undervalued and more mature and lower risk play in the UK listed graphene and speciality nanomaterials space and initiate with a Buy recommendation and 122p target price.
Companies: Directa Plus Plc
Today’s AGM Statement highlights further progress during H1. As anticipated at the final results on 6th August, trading has now returned to pre-COVID levels, with a particularly strong recovery in housing market activity. As at 31st August, the order book has increased by 5% to £69.4m from £66.2m at 31st, with contracts secured across the Group’s end markets. The Company has invested in its sales team and back office functions in order to support the recovery, though management continues to monitor costs given the near term uncertainty presented by COVID-19. In the absence of more restrictive lockdown measures, we would expect activity to continue to improve in the near term and the medium term prospects of the Group remain encouraging, supported by the UK’s net-zero target, which will require substantial investment in the UK’s utility networks. Fulcrum has also announced the appointment of Jennifer Cutler as CFO from 19th October, whose most recent role was Direct of Finance at Harworth Group Plc. The shares have justifiably outperformed since the full year results and today’s statement is supportive of this increase. Forecast guidance continues to be withdrawn given near term COVID uncertainties, but we anticipate reintroducing forecasts at the interim results.
Companies: Fulcrum Utility Services Ltd.
Eden Research has reported interim results for the 6-months to June 2020, reporting product sales up 63% to £0.73m, within revenues of £0.75m. Operating loss was £1.0m. Year to date the company has announced a number of product approvals and a one-year evaluation agreement with Corteva Agrisciences, a leading market player. Operationally, the company is investing the capital from its successful raise in Mar-20, establishing new lab facilities and in-house capabilities, making new senior personnel hires, and pursuing the development of entirely new product categories. While COVID-19 uncertainty remains, we maintain our Under Review recommendation.
Companies: Eden Research Plc
Spectra Systems, a leading provider of advanced technology solutions for banknote and product authentication markets, has announced a solid set of interim results. Moreover, significant H2 visibility, notably from central banking customers, yields upgrades to our FY 2020 and FY 2021 estimates with adjusted PTP increasing 17% and 16% to $5.8m and $6.1m respectively. In terms of H1 numbers, revenues increased marginally to $6.5m (H1-19: $6.4m), and adjusted pre-tax profit came in flat at $2.3m. The balance sheet retains its robust state which, even after the $4.1m FY 2019 dividend, distributed June 2020, still holds $10.9m (H1-19: $11.1m) of net cash (excluding restricted cash of $1.3m, H1-19 $1.1m). Our Sum-of-the-Parts valuation indicates a risked fair value more than 200p.
Companies: Spectra Systems Corp.
The Ince Group has released a trading update ahead of its AGM today, indicating that the Group remains on track to achieve the Board's expectations as set in late July when the annual accounts were approved. Solid trading along with a continuing focus on cash and costs has positioned the Group well for future market recovery. We keep our forecasts withdrawn at this time with no guidance for this financial year provided by the Group.
Companies: The Ince Group plc
Augean has reported interims to 30 June 2020. With the first half bearing the full impact of Covid-19, adjusted PBT decreased by 11% to £8.5m, which is in line with our expectation. With radioactive wastes, biomass for EfW and construction impacted by lockdown and depressed activity levels in its North Sea services, due to the low oil price, the results demonstrate the resilience of the Group and also the benefit of its key position in its markets with strategically located hazardous waste treatment and disposal facilities in the UK. Whilst the statement highlights that full year results are expected to be broadly in-line with market expectations, we have conservatively reduced forecasts. Nevertheless, with strong cash generation and sustained growth EV/EBITDA falls to 5.3x and 4.1x for FY21E and FY22E, a level that is substantially below sector constituents and transaction valuations.
Companies: Augean Plc
Xaar has issued an update highlighting that trading for the six months to 30 June has been in line with the Board’s expectations and that good progress is being made in implementing the new strategy. H1 revenue is noted to be £23.7m, a 7% decline relative to H1 FY2019, but sequentially in line with H2 FY2019. In the Printhead business, sales are no longer being made through distributors and OEM customers are now re-engaging with the group. New product development in printheads remains key to reversing market share losses over the last few years. Product Print Systems is marginally ahead in revenue terms in the first half, which is below plan, and Xaar 3D is noted as making good progress in testing despite lockdown restrictions. The balance sheet is strong with cash and cash equivalents of £23.9m. Financial guidance remains withdrawn, given the shorter term uncertainties, with the Board focused on a return to profitability in FY2022. The shares trade at c.0.6-0.7x EV/sales, excluding cash ring fenced in Xaar 3D of $7.25m at 19 November 2019 and the potential payment of $33m should Stratasys exercise its call option over the 55% of Xaar 3D that it currently doesn’t own.
Companies: Xaar Plc
Seeing Machines has released a trading update demonstrating the business is performing better than expected on key metrics: Revenues of A$39.7m were 13% ahead of our expectations of $35.1m and cash of A$38.7m was 21% ahead of our expectations of A$32.0m. We believe this strong end to the financial year reflects the continued demand for the company's Fleet product by sophisticated fleet owners and that the key home markets of Australia and New Zealand have been less affected by COVID than feared. We believe this strong cash performance should reduce the perceived funding risk weighting and help the valuation recover towards previous levels. We iterate our Buy recommendation and 7.2p price target.
Companies: Seeing Machines Ltd.
Newmark Security (AIM:NWT) specialises in products and services in the security and data sectors. The company has two operating divisions:1) People & Data Management consists of two sub-segments – Human Capital Management and Access ControlThe Human Capital Management (HCM) segment provides edg
Companies: Newmark Security Plc
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Companies: INTU SHI INCE
The Group has delivered an FY2020 adjusted operating profit performance that is modestly ahead of our expectation and strong cash generation, with net cash of $32m, excluding $10.9m of IFRS16 lease liabilities. The business has benefited from its diverse customer base, products and operating geographies, and exposure to medical devices, EV charge cables and high speed datacentre products. Good progress has also been made with operational efficiencies, lowering product costs and with selective acquisitions. Whilst revenues in the 4 months to May 2020 are up 4% to $126.2m on the comparable period, the Group is seeing weakness, primarily in medical equipment installations and delays in the EV sector. With a broader range of potential outturns in FY2021E, the Group has withdrawn financial guidance. We have recast our forecasts to reflect an expectation of broadly flat revenues with a recovery into FY2022E as customer stock levels normalise and impacts from Covid-19 diminish.
Companies: Volex Plc