Esauotomotion annual results

The following is an analysis of esautomotion's annual results in what has been a turbulent year.

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Results

Revenues grew by 4.6%, but include the acquisition of Sangalli Servomotori, which was consolidated in H2. In organic terms, sales decreased by 2.6%.

What may appear to be poor results in terms of revenue are far from it. Based on data from Fanuc, a market proxy with a 65% market share, sales fell by 24.4% and orders by 33.8%.

The results could be summarized as a great H1 and a bad H2, but in line with the market.

H1: ESAU grew by 17.2% compared to an already very good year 2022. This is remarkable considering that the market declined by 16%.

H2: Excluding M&A, sales fell by 21.2% and the company was unable to outperform the market.

We have to remember that historically they have always been able to outperform the market in good and bad years, and this was no exception.

The sharp drop in demand is partly due to the pandemic, which has affected revenues, margins, and inventories:

Customers significantly increased demand in 2021 and 2022, resulting in company growth of 61.8% and 19.2%, respectively.

Growth was well above what I would consider normal, and that has happened in several industries. The pandemic caused tensions in the supply chain, especially with the shortage of microchips. In order to meet demand, many customers brought forward their orders and ESAU had to significantly increase its inventories to meet demand.

The EBITDA margin declines from 25.5% in 2022 to 23.8% in 2023. The main reasons were one-off M&A-related expenses and, most importantly, increased costs due to supply chain tensions and logistics cost increases. To counter this, the company has been looking for alternative suppliers, which is negative in the short term, but gives the company more flexibility in the long term.

Net income has suffered a 15.3% decline, mainly due to an increase in personnel costs from 6.9% of sales in 2022 to 9.6% in 2023.

Financial analysis

All data in thousands of euros, except per share data.

P&L

Financial position

The company reports net cash of 3,637 million euros, but I prefer to make my own adjustments and arrive at a lower net cash of 2,492 million euros.  Enough cash to deal with the uncertainty.

3,233 million of debt is a call option to buy the remaining 35% of Sangalli Servomotori. This transaction will almost certainly go through as Esautomotion has a call option, but Sangalli also has a put option, i.e. either of the two parties can make the transaction go through.

Therefore, I think it is good that it is accounted as debt, but at the time of valuation it must be considered because if this debt is executed, the income of Esautomotion will also be higher. In conclusion, if we consider the call option as debt, we must also consider higher profits in the valuation.

Working capital and cash flow analysis

We see that the company had a negative cash generation this year due to working capital. If we exclude working capital, the company would generate €4.8 million. We have to keep in mind that working capital/sales is at a record high, mainly due to the effect of the pandemic destocking as explained above. By normalizing inventories to the highest level before the pandemic, the company could free up € 4.7 million.

ROCE

The company's ROCE decreases in 2023 due to increased investment in working capital but is still at a very high level.

Outlook

Despite the uncertainty about demand in the short term, the outlook is positive. Factors such as an interest rate cut or a recovery in China could put the company back on a growth path.

Analyst firm KT & Partners, which follows the company, expects it to grow 21.9% in 2024. I am not so optimistic because there is a lot of uncertainty about demand in the short term, but I am optimistic in the medium to long term.

The company will continue its international growth strategy, particularly in China and in new markets such as the US, Mexico and India.

On the other hand, one of management's goals is to return to normalized working capital levels, which should generate additional cash.

Conclusion

In order to draw a conclusion, we have to consider three things in particular:

1.    The Sangalli acquisition was only consolidated in H2, so we will have more revenue from this side next year.

2.    The normalization of inventories to their highest pre-pandemic level, assuming constant revenues and margins, would free up additional cash of € 4.7 million.

3.    3.2 million of debt is tied to the option for the purchase of the remaining 35% of Sangalli, so we will also have more earnings if this option is exercised.

Due to the uncertainty, it is difficult to make short-term estimates and it would not be surprising if at least in the first half of 2024, sales could decline compared to a great first half of 2023. Just to illustrate (These are not estimates), if the company were to keep its sales and margins constant (which are slightly depressed), it would have the capacity to generate 9.9 million in cash, which if we adjust for working capital would be 5.2 million. Compared to a market cap of 47.8 million and an EV of 45.3, we would be talking about an EV/FCF of 4.5 and an adjusted EV/FCF of 8.7 in a bad or at least mediocre year in a cyclical business, but with tremendous competitive advantages.