EDAG: More of the Same in Q3 2019
EDAG’s financial performance in Q3 2019 was very similar to that of Q2: revenues were down by 1.6% yoy in Q3 2019 (Q2: -2.5%) as the company suffered from falling revenues in its Production Solutions unit (Q3: -31.0%, similar to Q2).
Production Solutions continues to suffer from the end of its Mexican client and the lack of investment in automotive in production plants, globally and in Asia, in particular. EDAG’s lack of momentum for its manufacturing engineering capabilities raises questions given the current appetite for digital manufacturing. EDAG still aims to diversify its client base for Production Solutions beyond automotive, but this diversification is taking time. The situation at Production Solutions is impacting the full company: EDAG’s adjusted EBIT margin in Q3 was 5.9%, and 4.8% in Q1-Q3, in line with the guidance for full-year (4%-5% range).
Luckily, EDAG’s issues were limited to Production Solutions: Vehicle Engineering, its core engineering unit, grew revenues by 4.3% (in line with previous quarters). Electrics/Electronics (E/E), the “digital unit”, was up by 9.0% (Q1: 17.9% and Q2: +10.4%), showing a deceleration. In total, Q1-Q3 revenues were down by 0.6%, in line with EDAG’s guidance of revenue growth in the range of -1%-+1% for full-year 2019.
With EDAG still suffering in its core automotive market, the company continues its push toward internationalization. The company had been successful in internationalizing its Production Solution unit. With the revenues of Production Solutions falling in 2019, the level of international revenues is under pressure: during Q1-Q3 2019, international revenues were down by 700 bps, to 30% of revenues. EDAG continues to target 40% in the mid-term.
It’d be tempting to think of 2019 for EDAG as a year of transition with 2020 set to rebound. This is not ligely. EDAG’s core challenges will remain in 2020 with a substantial client concentration (the company’s top nine clients accounted for 82% of Q1-Q3 revenues), little presence outside of automotive, lack of internationalization outside of Germany and probably a service portfolio issue in Production Solutions.
Also, EDAG wanted to increase its employee presence offshore (best-cost countries) by 50% to 70% by 2021, from a base of 800 in 2018. The company has reduced its ambition and now targets 50% growth, to 1,200 (approximately 10-%15% of headcount). We think EDAG’s revised objective is in line with other what other ER&D vendors are saying: the German automotive industry is only gradually adopting offshore and currently prefers to puce pressure on onshore fees.
In the meantime, EDAG has limited M&A options, with a net debt of EUR 300m and a market cap in the EUR 250m-EUR 300m range. This excludes any significant acquisition that would change its geographical and vertical profile. It also prevents EDAG from making substantial acquisitions in digital.
In other words, EDAG is currently in an strategic dead-end, until its market cap increases.