Ardan Livvey's view on 2Q21 earnings results of Deutz AG
Ardan Livvey is a ‘Top Five’ investor in Deutz AG and we are disappointed to see in the company’s second quarter 2021 earnings report that management is unable to provide detailed guidance on its expected short-term performance over the next 18 months and that it continues to lag its sectoral peers, despite the boost given to earnings from largely exogenous factors, notably the economic and markets recovery from the Covid-19 pandemic.
A spokesperson for Ardan Livvey, said: “We believe the company’s reporting guidance in its Q2 results lacks clarity and transparency over the short-term. Management is kicking the ball down the road to say Deutz aims to achieve a 7-8% EBIT margin threshold only by 2023/24, while most of its peers are already currently delivering such levels of profitability. It Is unacceptable, and an abdication of management’s responsibility towards its shareholders, not to provide far more transparency on expected operational performance in coming months. Deutz’s management has a past history of failing to properly deliver on the guidance they have communicated and a significant portion of the valuation discount of the company’s stock is directly attributable to the lacklustre execution they have delivered.”
It is Ardan Livvey’s view that Deutz’s financial guidance is overly conservative after the improvement in performance during the second quarter and in the light of potential market opportunities, notably in the Asia-Pacific (APAC) region. We expect a more pronounced recovery in most of Deutz’s end markets over the second half of this year and into 2022, particularly in the vertical segments most negatively impacted during the Covid-19 pandemic, such as material handling and stationary equipment.
We are convinced that Deutz is a highly asymmetric investment opportunity, with its shares still trading at attractive levels. But the company’s management is failing to provide appropriate disclosure and transparency in its financial reporting guidance, such as detailed analysis on the profitability of each of its market verticals, capital allocation decisions and the profitability of the APAC- based operations, particularly in China.
It is imperative that we see concrete actions implemented in a timely manner aimed at mitigating the operational inefficiencies and competitive gaps that Deutz currently has relative to its peers. In Ardan Livvey’s view, supply shortages at Deutz’ suppliers and/or the Covid-19 pandemic should not be used as an excuse for poor performance. We expect, as a minimum, that Deutz should have similar profitability to its direct sectoral peers and not be an industry laggard, which is currently the case.
