Electrification And Automation Trends Will Drive Stronger Industrial Brakes And Actuators Demand

Catalysts

About Kendrion

Kendrion is a specialized industrial technology company that designs and manufactures actuators, brakes, valves and control solutions for focused industrial applications.

What are the underlying business or industry changes driving this perspective?

• The strategic shift to a pure-play industrial profile after the China divestment concentrates capital and management attention on higher margin industrial brakes, actuators and controls, supporting sustained EBITDA margin expansion and structurally higher earnings.
• Growing adoption of electrified motion and power in intralogistics, robotics, wind energy and medical robots is expected to lift demand for Kendrion’s high value brakes and actuators, driving medium term revenue growth back toward and above the targeted 5 percent through the cycle.
• Increasing automation across manufacturing, parcel logistics and beverage dispensing, combined with Kendrion’s expanding portfolio in industrial locking, parcel lockers and flow control, should deepen customer penetration and enhance mix, supporting both top line growth and added value margin improvement.
• Rising focus on clean and energy efficient production, including the shift from gas to cleaner heating in industrial ovens, underpins demand for Kendrion’s inductive heating and other efficiency solutions, which is likely to support premium pricing, resilient revenues and higher net margins over time.
• A strengthened balance sheet with materially lower leverage and recurring cash inflows from the mobility cooperation and China proceeds enables disciplined reinvestment and potential bolt on acquisitions, which can accelerate revenue growth and support the company’s 15 to 18 percent EBITDA margin and 23 to 27 percent return on investment targets.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Kendrion's revenue will decrease by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 9.9% in 3 years time.
• Analysts expect earnings to reach €23.8 million (and earnings per share of €1.55) by about December 2028, up from €7.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 28.9x today. This future PE is lower than the current PE for the GB Auto Components industry at 28.9x.
• Analysts expect the number of shares outstanding to grow by 1.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged weakness in European and global industrial activity beyond management’s current expectations could delay the inflection point in reinvestment for robotics, intralogistics and other capital goods, holding Industrial Brakes and Industrial Actuators and Controls growth below the targeted 5 percent through the cycle and weighing on revenue and EBITDA growth.
• If key secular trends like automation, medical robotics and parcel logistics scale up more slowly than anticipated or suffer regulatory or investment setbacks, Kendrion’s current pipeline of niche projects, including medical robot brakes, inductive heating and parcel locking solutions, may not reach the critical volume needed to support premium pricing and could limit future net margin and earnings expansion.
• Ongoing sunset of mobility programs combined with dependence on partners such as Knorr Bremse and Solero to keep facilities fully utilized introduces counterparty and execution risk, where weaker call offs, faster ramp downs or changes in cooperation terms could erode contribution margins and reduce overall profitability and cash generation.
• The strategic decision to return a substantial portion of China divestment proceeds via special dividends and share buybacks, while positive for shareholders in the short term, may constrain the capital available for disciplined organic investment and selective M&A in high growth niches and could cap long term revenue growth and earnings potential if attractive opportunities materialize but cannot be fully funded.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €17.0 for Kendrion based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €239.9 million, earnings will come to €23.8 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of €13.54, the analyst price target of €17.0 is 20.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.