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CAPITAL GOODS: Knorr-Bremse (KNOGR A3/A-/NR): Credit Profile

CAPITAL GOODS
  • With just short-dated bonds outstanding, this is effectively a new credit for us. KB is a leading global rail and commercial vehicle parts manufacturer, specialising in brake systems. Rail is smaller by revenue but bigger by EBIT. Its markets require high technical expertise, have stringent regulatory standards creating high barriers to entry according to management.
  • Aftermarket was 39% of sales in 2023, a source of recurring revenue while primary markets are more cyclical.
  • While China rail is no longer booming, market conditions remain good there. The green transition is supportive in Europe and North America. Some supply chain issues persist.
  • Truck production is declining this year, over 10% in Europe and less so in North America. China is seen weaker to flat. Pricing development is supportive, however.
  • KB has a stated M&A policy that is disciplined and value oriented. Targets must be compatible with its strong investment grade rating target.
  • Margin improvement is the top priority, via efficiencies and/or accretive expansion.
  • Revenues have risen to above pre-covid levels.
  • Despite the slowdown in trucks this year, revenue has held up quite well with book-to-bill down only marginally in 1H. Revenues have risen to above pre-covid levels.
  • However, EBIT margins are below as 11% for 2023 vs 15% in 2019. Consensus sees 12% for 24, 13% for 25. The business seems to have defensive qualities with pricing power to combat inflation at least partially. Supply chain issues post-covid muddy the picture somewhat. The fall in margins came with the cooling of the Chinese property market and less metro build out as a result. Moody’s downgraded KB by one notch in November due to the margin weakness. Leverage was also above their threshold at 1.7x.
  • KB closed its acquisition of Alstom’s signalling business this month for €630mn.
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