Mixed first quarter
Overall, we do not think the performance of the battery expert from Ellwangen is necessarily bad. After all, it was possible for the Company to largely avoid the trapdoors of the Corona and Russia crises. The fact that the stock market is currently punishing almost every announcement is due more to the generally weak condition than to the specific figures of VARTA AG. After a difficult start to the year, the battery group is also expecting lower earnings in the second quarter than last year, but is sticking to its outlook for the year. However, the targets for the year as a whole are increasingly dependent on a late recovery in sales, which has yet to materialize in the current environment.
Where there is light, there is also shadow
Sales in the Lithium-Ion Solutions & Microbatteries segment amounted to EUR 88.4 million in the first quarter, corresponding to a decline in sales of EUR 27.5 million. The current situation is affecting the fundamentally good demand in the Microbatteries segment, as well as in the Solutions and CoinPower segments. Varta responded to the declining sales with temporary capacity adjustments and cost savings. Adjusted EBITDA decreased from EUR 45.9 million to EUR 26.7 million compared to the same period of the previous year, with the decline in earnings in the Microbatteries and Solutions segments being more pronounced than in CoinPower.
In the Household Batteries segment, sales in the first three months rose from EUR 82.4 million to EUR 96.9 million year-on-year, corresponding to a delta of +17.6%. However, adjusted EBITDA fell from EUR 13.9 million to EUR 11.4 million. The earnings contribution from the additional business was not able to fully compensate for the increase in raw material prices. However, the business unit continues to benefit from the good order situation. Demand for energy storage solutions, especially home storage, also grew dynamically again in the fiscal year. Adjusted EBITDA margin was 11.8% as a percentage of sales, a decrease of 5.1 percentage points compared to the previous year.
With areas running in line with depressed expectations, it is important to look at the second quarter. It is here that the foundation stones for 2022 are laid.
High-performance battery V4Drive
VARTA continues to invest in the expansion of its production capacities for lithium-ion batteries. The Company is currently delivering several tens of thousands of ultra-high performance lithium-ion round cells per month from its pilot line in Ellwangen to customers for initial release testing. How things stand with the V4Drive e-mobility variant remains an unknown. Varta is doing well to say little about this area so as not to raise hopes that could later be dashed. We await the things to come. VARTA will no doubt soon be able to report progress in this area.
The forecast from the beginning of the year stands
Despite all the burdens, VARTA is optimistic about the future; pilot production for large-format lithium-ion round cells is running according to plan. Negotiations with new customers are proceeding as expected, which in our view is a normal course of events in the current development phase. New product launches are expected in the second half of the year, which should contribute to a significant upturn in business.
In view of the global crises, the Company is well-positioned; the structural growth of the core markets, the strong market position according to the Company's assessment, and the continued high investments in the expansion of production capacities will lead to positive business development in 2022. Varta continues to be very well positioned despite the ongoing global COVID-19 pandemic and current Russian crisis. Production at its sites has been running without significant interruptions since the beginning of the pandemic. While many companies worldwide are suffering from problematic supply chains, these have been fully maintained at VARTA. Nevertheless, negative influences on the Group cannot be ruled out. The impact of the war against Ukraine and the assessment of future developments on the Company is still difficult to assess. However, the share of sales with Ukraine, Belarus and Russia amounts to less than 1% of Group sales and takes place exclusively via supply contracts; the Company does not operate its own plants in these countries. VARTA also does not maintain any supplier relationships on the procurement side. Therefore, the direct negative impact from this crisis area is currently estimated by the management as low.
Nevertheless, the cost increases in raw material and energy prices resulting from this crisis cannot be estimated, nor whether they will have a lasting effect. The Company is confident that it will be able to pass on these cost increases to customers through price increases. Possible disruptions to the supply chains are being countered by increased stockpiling of raw materials. In view of the many risks, the Company continues to expect consolidated sales of between EUR 950 million and EUR 1 billion in 2022. This corresponds to a year-on-year increase of up to 10%. Adjusted operating profit (EBITDA) is expected to be between EUR 260 million and EUR 280 million, compared with EUR 282.9 million in the past fiscal year. The above-mentioned risks and the start-up costs for the V4Drive cell impact the forecast earnings development. For the second quarter of 2022, the Company expects sales between EUR 195 and EUR 205 million and adjusted EBITDA of EUR 34 to EUR 38 million. A dividend of EUR 2.48 per share will be proposed at the Annual General Meeting on June 21, 2022. The present statements confirm the forecast from the beginning of the year.
Analysts predominantly positive
Despite a subdued first quarter and a cautious outlook, DZ Bank maintains its "hold" rating. However, it has sharply lowered the fair value for the share from EUR 95 to EUR 71. The battery group's forecast seems ambitious, analyst Michael Punzet wrote in a study available May 12. The analysts at Berenberg and Warburg have lowered their share price expectations to EUR 95 each, but they remain positive with "Overweight" and "Buy" ratings, respectively. Warburg, however, is less optimistic regarding the weak development in rechargeable lithium-ion button cells and is reducing its sales estimates for the battery group. Overall, Varta is probably still in the high favor of the analysts. Only Hauck & Aufhäuser and Keppler Chevreux are negative.
Interim conclusion
Varta's once hyped shares slipped to a new low for the year of EUR 68.34 shortly after the figures were announced. With -12%, this was, in our opinion, a very negative blow for the first reaction to the figures. Towards the end of the week, Varta AG was able to make up a few percentage points with a tailwind from a recovering NASDAQ and ended up at around EUR 77. However, analysts remain skeptical.
It is still not entirely clear how the Ellwangen-based company intends to achieve its annual targets. For the second half of the year, sales from new products could be included, but we cannot yet determine their composition today. The Company's solid positioning has so far prevented a more severe operating setback due to the Russia-Ukraine crisis. Business is running smoothly, but not exuberantly.
**For this reason, the valuation is still lush at a P/E ratio of 3.2. Whether the presented quarterly results can completely turn the sentiment in the share remains questionable. From a chart perspective, the share price has fallen well below the EUR 80-85 zone, so it only makes sense to re-enter the market if a sustained rebound above EUR 85 is achieved.
The update is based on our initial Report 11/21
