Topic: On Monday, we hosted a digital roundtable with INDUS. Here are our key takeaways:

Well-filled M&A pipeline: INDUS has a substantial budget of € 70m for M&A in FY24e, due to the large cash position of € 266m at the end of FY23, driven by a strong FCF of € 199m in FY23. As of yet, INDUS has spent approx. € 20m and the pipeline for growth as well as add-on acquisitions remains filled. Industries of particular interest for INDUS are automation technologies within the Engineering segment, recycling within Materials and sustainable infrastructure. In our view, now is a good time for value accretive acquisitions in the German Mittelstand, as valuation multiples in recent years have come down.

Operationally, Infrastructure should compensate for a weaker Materials and Engineering Segment in FY24e: Sales in Engineering declined 8.9% yoy in Q1 due to the slowdown particularly in the sorting systems and packaging technology segment. Incoming orders for the entire industry were 10% below the previous year’s level in real terms, however, a recovery is expected for the second half of FY24e. Materials in Q1 was affected by declining volumes and massive price pressure from customers (-11% in sales yoy). While in Q1 & Q2 FY23 the Materials segment benefited from lower cost of materials (12% EBIT margin in Q1 FY23, +3.1pp yoy), now these cost reductions are passed through to customers, leading to pressure on the top-line and more normalized levels of profitability.

In contrast, we expect to see an increase in EBIT for Infrastructure in FY24e. The business climate in the construction industry is slightly improving and raw material prices such as steel and timber are falling. Furthermore, the portfolio company Aurora, a specialist in heating and air-conditioning systems (c. 14% of segment sales), recently realized a substantial improvement in operating efficiency.

Solid FCF expected for FY24e: Due to a lower seasonal working capital increase in the first quarter, free cash flow in Q1 improved significantly to € 6.1m (Q1 FY23: € 7.5m) adjusted for the € 14.4m one-time cash inflow from a property sale in Q1 2023. However, we also expect the seasonal working capital reduction in the second half of the year to be lower than usual. FCF should come in again in the low triple-digit area (eNuW: € 104m). Importantly, at the current valuation INDUS provides an attractive adjusted FCF yield of c. 10% (eNuW).  

INDUS remains a BUY with an unchanged PT of € 36, based on FCFY 2024e.