JENOPTIK AG 
Door 
During this last quarter, the acquisition of the Canadian company Prodomax Automation and the German company Otto Vision Technology have enabled Jenoptik to strengthen its position in the industry - mainly automobile - where its optical technologies are already integrated with cutting-edge robotic solutions on assembly chains.
This segment represents, however, a reduced part (27 billion euros) of the global photonics market which is estimated at 600 billion: the main markets are the sub-contracting to semiconductor manufacturers (120-140 billion), display and lightening technologies (152 billion), and consumer electronics (72 billion).
For Jenoptik, 2019 will be the year where there will be a clear focus on growing in North America as well as the launch of a new business activity in mechatronics. Or, to cite Wikipedia, ’ a multidisciplinary branch of engineering that focuses on the engineering of both electrical and mechanical systems, and also includes a combination of robotics, electronics, computer, telecommunications, systems, control, and product engineering.'
According to Jenoptik’s management, this positioning should allow an annualized future turnover growth of between 5 and 10%, several points above the market, and to keep the EBITDA margin around 15%.
On a financial level, Jenoptik - selected based on its fundamentals by MarketScreener’s Stock Screener - distinguishes itself by a robust financial position and a modest but stable growth.
The leverage is reduced to a minimum, with a net debt of only 36 million euros, or exactly one-third of the EBITDA of 105 million euros generated last year. In parallel, the cash continues to accumulate on the balance sheet.
As there aren’t any shares issues either, all the company’s acquisitions - for a total amount of 110 million euros since 2013 - have been auto financed with the cash flow.
At this point though, it’s difficult to say something about the profitability of these external growth investments, unlike for example a case like Accenture. For that we’d need to have more information and - even if we don’t wish for it to happen - some of those reversed cycles the semiconductor industry is so used to.
The turnover grows with an annualized average of 3.5% since 2008, but the operating profit grows at a faster pace (9%), while the net result (71%) benefits from the decreasing debt and the financial cost that comes with this.
In any case, we see that the growth ambitions of the management are higher than the historical performance of the group. The future financial years will show us whether or not these objectives are realistic, or if they turn out to be just a financial announcement that was a tad too enthusiastic.
In 2017, the group generated a net result of 72 million euros. The cash profit (free cash flow) was 63 million euros before acquisitions, against 72 million last year.
In 2018, all of the profit - and even a little more, but the difference was made up by a tiny issue of debt - has been reinvested in acquisitions: the future value creation will largely depend on the pertinence of this strategic choice, which was without a doubt necessary to get a foot in the door in new business activities.
At 26 euros per share, the market capitalization (1.5 billion euros) represents thus a multiple of around 20 times the cash profit. In the current interest rate context, the valuation is therefore well deserved if the growth targets are met, or exceeded. This is the analyst consensus, which has just been revised upwards - a momentum that lay behind the investment on behalf of MarketScreener’s European Portfolio.
Difficulties when it comes to making the recent acquisitions profitable, a heavy recession and/or a reversal of the cycle in the semi-semiconductor industry would without a doubt lead to an immediate compression of the multiple.
We observe that Jenoptik’s valuation has remained more or less unchanged during fourteen years, as a result of a modest growth and stable operating results. The share price tripled in 2006 following an activity spike among manufacturers and OEMs (original equipment manufacturers) of semiconductors, the company’s biggest clients.
We’ve also commented on these exceptional market conditions - after almost a decade of drought - in several articles, among which were features on Applied Materials, and KLA-Tencor.
In Jenoptik’s case, the good performance of the share price will be directly linked to the continuation of this prosperous phase. The more skeptical ones out there, however, have pointed out the clear slowdown of the last months, illustrated by the deflation of ‘inflated’ valuations last year.
The position will be quickly arbitrated if this reversing trend is confirmed.
(The author is not a shareholder.)
