Diskus Werke AG (F:DISG) is a sound business with a defensible leading market position, but extreme illiquidity in the stock curtails potential investor interest. Core clients’ industries, most notably automotive, are mature and cyclical and in 2016 profits were held back by losses at three subsidiaries. Eliminating this effect should boost margin, while diversification into the contract manufacture of end parts could boost the top line and profitability.
Strong position in mature markets
Diskus Werke is a leading systems provider of machinery to manufacture metal through the application of various abrasive processes to cast metal elements. The largest single end product comprises gear wheels for automotive vehicles. The automotive and machine construction industries are significant customer groups. Diskus Werke’s total addressable market for machine tools is small in the context of the major global industries that it supplies. Most of these markets are mature and fairly cyclical, but Diskus Werke aims to expand its business in the contract manufacture of end parts to 20% of turnover from the current 15%.
Scope for margin improvement
While turnover has been volatile over the past few years it did return to growth in 2015 (+25%) and 2016 (+10%). However, the benefit of improved underlying conditions in 2016 was more than offset by three subsidiaries moving into serious losses. In the case of two machine tool subsidiaries, problems at the top line were to blame and one of the contract manufacturing subsidiaries suffered despite sales growth of 26%. The total burden from these losses of some €6m helped cut group EBIT from €14.0m to €11.4m. Simply returning these subsidiaries to breakeven would restore the EBIT margin towards the 8-9% levels recorded in 2011 and 2012. Full turnaround to the levels of profitability of other subsidiaries would take the group margin to 10% or above. In turn, this could more than double EBIT.
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