Vectron Systems AG

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Vectron Systems AG The company´s future growth prospects gain additional attractiveness by considering the market potentials related to the introduction of a mandatory fiscal memory chip, which according to Vectron is scheduled to be launched by the relevant governmental authorities in FY 2011. The effects from such a measurement would deliver tremendous growth prospects by considering Vectron´s sound installation basis of almost 90,000 devices. However, at current stage we did not consider for such a scenario in our forecasts. Development of the operating business and profits In course of the current expansion strategy, Vectron added significant sales and R&D resources in FY 2008. We expect to see the full-effects of this expansion strategy on company´s operating expenses for the first time in FY 2009E. Consequently, we assumed significantly higher operating expenses in FY 2009E particularly in the area of personnel costs. Therefore, we expect EBIT margin to drop significantly in FY 2009E as a result of the combination of higher operating expenses and declining sales. However, with the completion of its product portfolio enhancements by the end of FY 2009E we expect operating expenses to remain rather stable. Moreover, the currently high amortization expenses will substantially decline in the mid-tern as the write-offs on software source-codes which the company had acquired in the course of the MBO, will terminate by FY 2012E. Therefore we expect Vectron´s EBIT margin to return to double digit range after the growth dip in FY 2009E. Operating expenses, EBIT margin and net profit 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 11.3 16.1% 2.56 Source: CBS Research AG As consequence of depressing revenues and higher operating expenses the company´s net income will experience a further drop in FY 2009E, too. Nevertheless, we expect Vectron to return to its past growth path in its bottom-line in the mid-term as a result of stable operating expenses as well as increasing economies of scale. Cash flows and financial aspects In the past, one of the Vectron´s key strength was its strong cash generating capability in its operating business. However, the company´s operating cash flows dropped significantly in FY 2008 in the course of the declining net income and the high cash tax payments of EUR 2.64m. Consequently, the company´s free cash flows experienced a significant decline in FY 2008 that we expect to continue in FY www.cbseydlerresearch.ag 12.3 12.4 12.7 13.0 1.5% 0.05 8.1% 1.34 11.6% 1.94 2008 2009E 2010E 2011E 2012E 14.0% 2.56 Operating expenses (in EUR m) Net income (in EUR m) EBIT-Margin 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Growth prospects become more promising considering fiscal memory chip We expect significant drop in EBIT margin in FY 2009E... ...with increasing trend afterwards Return to past growth path in FY 2010E Cash generation in operating business will recapture past strength Close Brothers Seydler Research AG | 28
Vectron Systems AG 2009E, too. However, we expect this trend to reverse and Vectron to return to its past strength of cash generation in its operating business from FY 2010E on. Net working capital (left chart) and Free cash flow (right chart) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 49 40 Source: CBS Research AG Given a cash conversion cycle (CCC) of 40 days in FY 2008, we see additional potentials in Vectron`s CCC over the next years. Consequently, we assume that the company`s net working capital will remain slightly below the level seen in FY 2008 despite the implied mid-term growth in the top-line. Overall, Vectron has an attractive business model and should be able to generate sufficient cash flows in its operating business to finance its further business expansion. With a current equity ratio of 70%, Vectron has a sound balance sheet with no bank debts. Given the profitability in its underlying business, Vectron should be able to further improve its equity basis by retaining earnings despite the company´s philosophy of high dividend payments. Nevertheless it has to be mentioned that Vectron has a large off-balance position of EUR 10.3m (FY 2007) regarding rentand leasing agreement related to the property in which the company´s headquarter is located in. Moreover, the company´s balance sheet shows a large proportion of liabilities associated to Jouissance capital and undisclosed partnership which will terminate partly by FY 2011E and FY 2012E. www.cbseydlerresearch.ag 37 34 33 2007 2008 2009E 2010E 2011E NWC (in EUR m) CCC in days 60 50 40 30 20 10 0 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 14% 5% 2% 9% 9% 2007 2008 2009E 2010E 2011E Free cash flow (in EUR m) FCF/Sales 16% 14% 12% 10% 8% 6% 4% 2% 0% Stable working capital development Sound balance sheet Close Brothers Seydler Research AG | 29
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