Diebold Nixdorf Stock: Believing in the electric vehicle charging industry (NYSE: DBD)
DBD makes the transition to a growth path
Diebold Nixdorf, Incorporated (NYSE:DBD) is changing its focus and now giving enough importance to the rapidly growing electric vehicle (EV) charging station industry. Recently the company contracts received for several thousand charging stations in Europe and the United States. Additionally, he expects to add several more by the end of the year. While this will facilitate revenue, it also plans to increase its operating margin through price traction and contract restructuring. DN Series ATMs will also help gain market share as customers shift to automation and self-service.
However, the company faces headwinds from cost and wage inflation, while increased infrastructure investment will put pressure on earnings. It can also divest its network of distribution subsidiaries, which can offset revenue growth elsewhere. This year, I expect working capital requirements to decrease due to lower inventory and accounts payable. As a result, free cash flow is expected to improve in fiscal 2022. The balance sheet will continue to carry accumulated losses and reflect financial risks. Nevertheless, the current engines are powerful enough to justify a hold on the title in the medium term.
Growth model and electric vehicle charging projects
DBD has started consolidating its initiatives in electric vehicle charging stations as part of the diversification process. I discussed business strategies and challenges in my previous article. In the fourth quarter of 2021, DBD received contracts for several thousand charging stations in Europe and the United States and plans to serve more than 30,000 charging stations by 2022. According to one of the studies cited by the company, the number of public EV charging stations in Europe and the United States combined will exceed the number of ATM devices. Europe is currently the main driver for the adoption of electric vehicles and therefore requires huge investments in charging.
In Europe, customers are more likely to use public electric vehicle charging facilities due to the increased use of rental cars and fleets and the increased use of electric vehicles for public transport. Recently, the company won an award from one of Europe’s leading charging technology providers and will provide services for 1,000 DC fast charging stations.
Outlook: fiscal year 2022 and first quarter 2022
DBD management expects DBD’s fiscal 2022 revenue to increase 5% over fiscal 2021. However, this included a $150 million revenue deferral, excluding , organic revenue would remain virtually unchanged. Favorable drivers for the business in 2022 would be price growth and divestiture, as well as the termination of low-profit service contracts. However, disruptions in logistics and supply chain would reduce the profit margin. These factors will drive the adjusted EBITDA margin to 8.3% (at the midpoint of the forecast) in fiscal year 2022.
Although the margin is unlikely to change much in the first half of 2021, it will begin to increase rapidly in the second half due to higher volume, improved pricing and cost management exercises from the business. Following the pandemic, e-commerce has proliferated. Since customers now prefer less tactile options during the purchase process, DBD’s self-checkout offerings are better options.
Management expects gross margin to remain unchanged in Q2 2022 compared to Q1 following cost inflation, wage inflation and growth in infrastructure investment. In fiscal 2022, management expects general and administrative expenses to decrease due to variable incentive compensation. Although investment will increase in growth projects, the company will likely begin to divest its infrastructure business, primarily the network of distribution subsidiaries. It must also develop and standardize the processes of its distribution subsidiaries.
Analyze Segment Drivers
In the fourth quarter of 2021, Americas Banking segment revenue increased 11% from the third quarter due to increased demand for self-service and automation. Growth momentum has tracked above market rates in Europe for DBD self-service hardware, services and software. In the United States, the company’s market share for DN Series ATMs grew as customers moved toward automation. According to the company’s estimates, self-service devices connected to its AllConnect data engine have grown 122% over the past year. This device has also helped reduce customer downtime.
In addition, revenues from the Eurasia Banking segment increased by 16%. In comparison, retail segment revenue saw the weakest revenue growth (up 3% quarter over quarter in Q4 2021). During the fourth quarter, extended outbound transit times and inbound component delays resulted in lost revenue. In the United States, Latin America and certain APACs (Asia-Pacific), such a loss would result in an overall revenue deferral of $150 million in 2022.
Gross margin contracted by approximately 280 basis points in the last quarter, while EBITDA margin increased. Revenue deferral and non-billable inflation negatively impacted its margin in the fourth quarter. However, improved performance of DN Series ATMs partially offset the negative impact.
Financial risks remain, but cash flow is improving
In fiscal 2021, DBD’s cash flow from operations (or CFO) recovered impressively (a 585% increase) compared to a year ago. Although year-over-year revenue was flat, tight discipline related to days past due, lower inventory and favorable income tax changes reduced cash requirements rolling. As a result, its free cash flow (or FCF) turned significantly positive in fiscal year 2021. In 2022, DBD has excess inventory related to the $150 million in deferred revenue, as discussed earlier in the article. Over the course of the year, I expect inventory and accounts payable to normalize. On top of that, it has faced revenue recognition issues on some of the ongoing ATMs due to supply chain and logistics delays. All of these factors will largely determine cash flow in 2022.
DBD’s accumulated deficit pushed its equity into negative territory. On top of that, it had net debt of $1.86 billion as of December 31, 2021. Its liquidity was $707 million (cash plus revolving credit facility) as of that date.
DBD expects to generate between $130 million and $150 million of positive cash flow in fiscal 2022, significantly more than its previous forecast. The forecast assumes the transformation of DN Now, the restructuring program and the normalization of working capital.
Relative valuation and target price
The contraction in DBD’s forward EV/EBITDA multiple relative to current EV/EBITDA is more pronounced than its peers, resulting in a higher EV/EBITDA multiple than peers. However, the stock’s EV/EBITDA multiple (8.7x) is lower than the average of its peers (NCR, ORCL and FISV) of 14x. So the stock I think is undervalued at the current level.
According to Seeking Alpha, three sell-side analysts recommended a “buy” on DBD (including “strong buy”), while two recommended a “hold.” None recommended a “sale”. The average sell-side analyst target price is $11.75, which at the current price gives returns of 75%.
What is the point of view on DBD?
Recently, DBD received contracts for several thousand charging stations in Europe and the United States and plans to add several more by the end of the year. While this will facilitate revenue, the company plans to increase operating margin through price growth, divestitures and termination of low-profit service contracts. On the ATM side, he intends to increase the market share of DN-series machines as customers move towards automation and self-service.
Despite these positive developments, the stock has underperformed the S&P 500 over the past year on rising costs. On the cash flow side, the company has made remarkable improvements in fiscal 2021. Admittedly, the accumulated losses have exposed it to financial risks over the past few years. But the situation has not significantly deteriorated. With various factors in balance, investors might want to hold the stock for relatively stable returns going forward.