Knorr-Bremse AG

Knorr-Bremse AG

(MDAX, Automobile & Parts)

A n a l y s t

Mustafa Hidir

[email protected]

+49 40 309537-230

NO T E Published 07.10.2020 08:15 1

RESEARCH

Buy (Hold)

EUR 124.00 (EUR 89.00)

Price EUR 101.88

Upside 21.7 %

Value Indicators: EUR Share data: Description:

DCF: 124.01

FCF-Value Potential: 68.33

Bloomberg: KBX GR

Reuters: KBX.DE

ISIN: DE000KBX1006

Leading supplier for braking- & other safety critical rail and commercial vehicle systems

Market Snapshot: EUR m Shareholders: Risk Profile (WRe): 2020e

Market cap: 16,423

No. of shares (m): 161

EV: 18,670

Freefloat MC: 6,733

Ø Trad. Vol. (30d): 42.77 m

Freefloat 41.0 %

KB Holding GmbH (Thiele) 59.0 %

Beta: 1.1

Price / Book: 8.4 x

Equity Ratio: 30 %

Net Fin. Debt / EBITDA: 0.6 x

Net Debt / EBITDA: 1.0 x

Three reasons to buy KBX

Why we like the stock

� With the publication of its Q2 figures, KBX once again proved the quality of its earnings and operational management. Even if

we anticipate a normalisation of the EBITDA margin in the rail segment in Q3 (pre-buying effects in the rail aftermarket

significantly increased profitability in Q2), we expect an ongoing revival in order placements in the rail segment (WRe +15% in

FY20).

� Furthermore, the rail segment takes advantage of attractive aftermarket opportunities, based on stable growth in demand

through a large installed base of vehicles equipped with KBX systems, along with a global presence and stickiness of

customers.

� In addition, current market figures on the order development for heavy-duty trucks in the USA confirm our positive assessment

of a sustained recovery in the CVS segment. Although we do not assume that the Truck OE business will reach the peak

values of FY18 in FY20, we anticipate a significant recovery, which should have a noticeable impact on the volume effects on

the CVS profitability side.

Conclusion: Statements on current trading, margin drivers and the mid-term outlook strengthen our confidence in the prospective development of KBX’s operations. We see share price weaknesses due to further sales of Mr. Thiele's shares (target should be ~50% of KBX) as a buying opportunity. We increase our DCF-based price target from EUR 89 to EUR 124 and upgrade our rating from Hold to Buy.

Changes in Estimates: Comment on Changes:

FY End: 31.12. in EUR m

2020e (old)

+ / - 2021e (old)

+ / - 2022e (old)

+ / -

Sales 5,915 3.3 % 6,818 1.5 % 7,232 1.3 %

EBITDA adj. 957 10.7 % 1,259 5.1 % 1,381 5.3 %

EPS 2.53 15.0 % 3.79 6.6 % 4.24 6.8 %

� On the backdrop of a stronger than originally anticipated aftermarket, we are increasing our estimates for FY20 and beyond.

� We have reduced our beta due to higher resilience in the rail business and increased our long-term growth expectation from 1.5% to 2.0% to adequately reflect structural drivers.

FY End: 31.12. in EUR m

CAGR (19-22e) 2016 2017 2018 2019 2020e 2021e 2022e

Sales 1.8 % 5,471 6,154 6,616 6,937 6,109 6,918 7,323

Change Sales yoy -6.0 % 12.5 % 7.5 % 4.8 % -11.9 % 13.2 % 5.8 %

Gross profit margin 53.2 % 52.2 % 51.1 % 51.7 % 50.7 % 50.9 % 51.1 %

EBITDA adj. 2.4 % 1,052 1,115 1,152 1,354 1,059 1,323 1,455

Margin 19.2 % 18.1 % 17.4 % 19.5 % 17.3 % 19.1 % 19.9 %

EBIT 3.4 % 886 904 972 1,063 779 1,054 1,174

Margin 16.2 % 14.7 % 14.7 % 15.3 % 12.7 % 15.2 % 16.0 %

Net income 7.4 % 526 535 593 589 469 651 730

EPS 7.5 % 3.27 3.32 3.68 3.65 2.91 4.04 4.53

EPS adj. 7.5 % 3.27 3.32 3.68 3.65 2.91 4.04 4.53

DPS 3.6 % 2.69 5.57 1.75 1.80 1.00 1.80 2.00

Dividend Yield n.a. n.a. 2.2 % 2.0 % 1.0 % 1.8 % 2.0 %

FCFPS 3.56 2.98 2.87 4.85 2.42 5.06 5.64

FCF / Market cap n.a. n.a. 3.5 % 5.4 % 2.4 % 5.0 % 5.5 %

EV / Sales n.a. n.a. 2.3 x 2.4 x 3.1 x 2.6 x 2.4 x

EV / EBITDA n.a. n.a. 12.8 x 12.6 x 17.6 x 13.7 x 12.1 x

EV / EBIT n.a. n.a. 15.5 x 15.8 x 24.0 x 17.2 x 15.0 x

P / E n.a. n.a. 22.1 x 24.7 x 35.0 x 25.2 x 22.5 x

P / E adj. n.a. n.a. 22.1 x 24.7 x 35.0 x 25.2 x 22.5 x

FCF Potential Yield n.a. n.a. 4.8 % 5.0 % 3.5 % 4.4 % 5.0 %

Net Debt -79 70 760 1,045 1,048 502 2

ROCE (NOPAT) 34.7 % 31.5 % 31.5 % 27.9 % 17.8 % 23.3 % 26.1 % Guidance: Sales of EUR 5,900m - 6,200m and an EBITDAadj margin of 16.5% - 17.5%

Rel. Performance vs MDAX:

1 month: -6.5 %

6 months: 0.7 %

Year to date: 15.8 %

Trailing 12 months: 11.0 %

Company events:

19.11.20 Q3

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 2

RESEARCH

Sales development in EUR m

Source: Warburg Research

Sales by regions 2019; in %


EBITDA development in EUR m


Company Background

� Knorr-Bremse is the world’s leading manufacturer of brake systems and supplies additional safety-critical sub-systems for rail and

commercial vehicles.

� Knorr-Bremse’s larger segment Rail Vehicle Systems accounts for ~53% of group sales and ~65% of group EBIT. ~66% of RVS sales

are generated with brake systems, ~9% with entrance systems and another ~6% with HVAC.

� KB's smaller segment Commercial Vehicle Systems accounts for ~47% of group sales and ~35% of EBIT. Brake systems generate

~71% of CVS sales, energy supply & distribution ~15% and fuel efficiency ~14%.

� ~66% of revenues are generated in the OE business and the remainder in the less cyclical and higher-margin aftermarket business.

� 59% of KB's shares are in the hands of KB Holding GmbH, the investment vehicle of former long-term CEO Mr. Thiele.

Competitive Quality

� The extremely high barriers to market entry include the immense homologation requirements and increasing regulation, a high

number of variants, low unit volumes, and a high level of customisation.

� Synergies between the two segments mean KB can optimise its R&D investments and stay at the forefront of technological

developments.

� KB has a resilient business model, based on two segments with different economic cycles, supported by broad geographical and

customer diversification, high aftermarket exposure and strong localisation.

� Long-term contracts with customers (especially in RVS) guarantee high top-line visibility.

� With outstanding profitability and high capital efficiency, KB consistently earns ROCEs >30%

Segment EBITDA development in EUR m


Sales by segments 2019; in %


EBITDA by segment 2019; in %


Knorr-Bremse AG


RESEARCH

Summary of Investment Case 4

Company Overview 5

Aftermarket growth as main earnings driver 6

Aftermarket is the resilient backbone 6

Major earnings contributor 7

CVS should resume its growth path 8

Truck market recovery underway 8

Volume effects should develop in favour of KBX again 10

Detailed segment forecast 11

Valuation 12

DCF valuation 12

FCFVP 14

Peer-group valuation 15

Knorr-Bremse AG


RESEARCH

Summary of Investment Case

Investment triggers

� KBX should be able to significantly increase its profitability in the coming years. We identify three main sources for the expected

earnings growth.

� Due to an increased installed base in the rail business in recent years (especially in China), which should be subject to ongoing

maintenance going forward, we assume that the aftermarket share of sales should increase from 34% of sales in FY19 to ~40% by

FY24. Against the background of a significantly higher profitability of the aftermarket business (3x the OE business), we assume a

noticeable margin expansion.

� While there have been no larger rail order cancellations for KBX, tender processes have been shifted during the COVID-19 pandemic.

We expect a catch-up of postponed tenders in the quarters to come, resulting in a strong recovery of rail order intake in FY21 (WRe

+15% yoy).

� In line with the expectations for other truck suppliers in our coverage, we forecast a continuous recovery of the truck market in the

course of FY21 and beyond. A higher utilisation of KBX’s truck OE business should have a noticeable impact on group profitability.

Competitive quality

� Barriers to market entry include strong homologation requirements and increasing regulation, a high number of variants but low unit

volumes, and a high level of customisation. Synergies between both segments mean that KBX can capitalise on its R&D investments

and stay at the forefront of technological developments.

� KBX’s resilient business model is based on high aftermarket visibility. In addition, both segments are exposed to overlaying economic

cycles, supported by a broad geographical and customer diversification, and strong localisation. Long-term contracts with customers

(especially in RVS) guarantee high top-line visibility.

� Owing to outstanding profitability and high capital efficiency, KBX consistently earns ROCEs of >30% (average 2016-2019 ~33.4% or

~ 5x its WACC).

Valuation

� The price target of EUR 124 is based on our DCF model. The stability of earnings power and the quality of operational execution

proved to be higher than initially anticipated. As a result, we raised our earnings estimates and reduced the risk factor to adequately

reflect the quality of the business model.

Knorr-Bremse AG


RESEARCH

Company Overview


Sales* in EUR m

in % of total

EBIT in EUR m

EBIT Margin

•Brake control

•Brake systems

•Automated driving

•Steering systems

* All numbers relate to FY 2019

Commercial Vehicle Service

Service

Power

electrics

Signaling

systems

Modernisation and

supportAftermarket services

Aftermarket services including Alltrucks

network

Product

examples

ConnectivityEnergy supply &

distribution

Brake Systems & vehicle

dynamics

ElectrificationAuxiliary power

supply

•Engine compnents

•Transmission

Market leader in Brake Systems &

Vehicle dynamics, Energy Supply &

Distribution and Fuel Efficiency

~ 15 % market share ~ 31 % market share

Global pneumatic brake systems

market share of

~ 42 %

696,7

19,06%

Railway Vehicle Systems

Brake

Systems

Entrance

Systems

HVAC Train Control

Management

Systems

Group

-7,6

-3525,58%

100,0%

6936,5

0,0%

Remaining Segments

3656,1 0,223280,2

Segments CVSRVS

47,3%52,7%

15,32%

1062,9

Sales by Regions in 2019

Fuel efficiency

Customers

Competitors

Market positions

(market share)

Global brakes market share of

~ 50%

Market Leader in Brake

Systems & entrance Systems

Segments

373,8

car builders operators

11,40%

EBITDASales

Global Presence Balanced portfolio

53%

47%

RVS CVS

62%

38%

RVS CVS

46%

24%

2%

29% Europe/Africa

North America

South America

Asia-Pacific

Knorr-Bremse AG


RESEARCH

Aftermarket growth as main earnings driver

� The installed base of vehicles equipped with KBX systems has broadened noticeably,

which should make maintenance increasingly necessary in the coming years.

� As a result, we expect the aftermarket share of revenues to increase from 32% in

FY19 to WRe 40% in FY24.

� Based on historical profit swings as well as companies with comparable earnings

profiles, we expect profitability of the aftermarket to be 3x higher than that of the OE

business (WRe group aftermarket EBITDA margin of ~34.3%).

� In this context, we consider KBX's targeted EBITDA margin expansion of 150bp

(FY17-FY22) to be conservative.

Aftermarket is the resilient backbone

Both segments, but RVS in particular, are taking advantage of attractive aftermarket

opportunities, based on a stable growth in demand through a large installed base of

vehicles equipped with KBX systems, along with a global presence and stickiness of

customers. On top of that, more and more regulatory bodies worldwide are requiring

regular inspections and fleet modernisation, both of which directly impact KBX’s

aftermarket volume.

To illustrate the basic procedure: Brake pads have to be replaced once a month. In

addition, brake discs are changed approximately every three years and every ten years a

train is almost completely dismantled and reassembled. Especially government

customers do not take any risks with maintenance and replace the spare parts even if

there is less wear and tear. Even if the exact maintenance intervals cannot be determined

for the entire installed base of KBX, it still allows maintenance work to be planned reliably.

Over the entire life cycle, the aftermarket potential of a rail vehicle system is around two

to three times higher than the value of the OE systems supplied. Coupled with an

average useful life of a rail vehicle of around 30 years, this offers high visibility for future

aftermarket growth.

In the past few years, the aftermarket has been the stabilising earnings pillar of KBX,

which has grown steadily, largely decoupled from the OE market development.

Knorr-Bremse AG


RESEARCH

From FY10 to FY19, KBX increased the installed base of vehicles by approx. 6% p.a.

through the OE business. We assume that the downstream aftermarket business will

grow by WRe ~9.1% p.a. As a result, the aftermarket share of revenues should grow from

32% in FY19 to ~40% in FY24.

Major earnings contributor

While the aftermarket business makes a smaller contribution to sales, KBX usually

generates more than 60% of EBITDA in the aftermarket business, thanks to its high

profitability. Particularly in the current FY20, where the OE business was significantly

affected by COVID-19-related production stops, the aftermarket business showed its

power as a stable earnings pillar.

The significantly above-average profitability of the aftermarket business is the key driver

behind KBX's targeted EBITDA margin expansion of 150BP (2017-2022). In light of the

expected aftermarket growth of WRe 9% p.a., we would even consider this target as

conservative.

Knorr-Bremse AG


RESEARCH

CVS should resume its growth path

� Latest market data strengthen our confidence in a sustainable truck market recovery

in the quarters to come.

� Although we do not expect the highs of FY18 to be reached already next year, we

assume that CVS's earnings power will normalise in FY21.

� In addition, we are convinced that the underlying expansion of KBX’s product portfolio

will lead to an ongoing outperformance of the underlying truck markets.

Truck market recovery underway

Based on historical data, boom and bust cycles within the truck industry typically last

about 18 months. After the global heavy-duty truck market had reached all-time highs in

terms of order intake in 2018, a significant decline in new orders started in Q3 2018. This

decline was further accelerated by the COVID-19 pandemic, as the global truck market

(with the exception of China) almost came to a standstill during Q2 2020. After the

development of truck orders even dropped below the levels of the financial crisis in 2009,

the recovery that we have already flagged several times has now started. The latest

market figures for Class 8 net orders published by FTR in September 2020 underline our

assumption.

FTR US Class 8 Net Orders - NATRORDE Index

Source: FTR, Warburg Research

Although we partially attribute the strong development in September to catch-up effects

from Q2 2020, we believe that the recovery should be sustainable at a more normalised

level going forward. This assumption is also confirmed by KBX, which expected the start

of a replacement cycle for Q3 2020 and acceleration in net order development in FY21.

Knorr-Bremse AG


RESEARCH

China truck sales - CNVSTHT Index

Source: Bloomberg, Warburg Research

After the Chinese truck market came to a standstill in Q1 2020 and recovered

significantly in the following Q2 2020, we expect partially normalised but still high

volumes for the coming quarters.

EU truck registrations - HCVHWEU Index

Source: Bloomberg, Warburg Research

In contrast to the US and Chinese truck markets, the European truck market is subject to

less pronounced cycles. According to the current new registration figures for heavy-duty

trucks in Europe, a rapid recovery is not expected. Based on the statements made by the

truck suppliers in our coverage, we expect a recovery in Q1 2021 and beyond.

Although we do not expect the highs of FY18 to be reached already next year, we

assume that CVS's earnings power will normalise in FY21.

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 10

RESEARCH

Volume effects should develop in favour of KBX again

Due to production stops at truck OEMs caused by the COVID-19 pandemic in Q2 2020,

output volumes at KBX also came under massive pressure. As a result, profitability was

also significantly lower than we initially expected. Although the recovery in net order

development highlighted in the previous section is not immediately recognised as

revenue, output volumes already improved by the end of Q2 2020 and should continue

to do so in Q3. The current utilisation of production capacities should be around 80% and

increase to around 90% by the end of the year. Based on our utilisation estimate, we

assume that the volume effect on EBITDA should be around WRe EUR 141m for FY20.

Volume effects on EBITDA


Against the backdrop of an ongoing truck market recovery in the course of FY21, we

expect CVS’s profitability to return to FY19 levels, but assume slightly lower volumes

with revenues of WRe EUR 3,092m vs. EUR 3,280m in FY19. Since FY19 was already

characterised by weaker revenues in the truck segment, we consider our assumption to

be conservative.

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 11

RESEARCH

Detailed segment forecast

The following table is a detailed overview of the respective OE and aftermarket sales in the

RVS and CVS segment for the upcoming years:

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 12

RESEARCH

Valuation

DCF valuation

� The price target of EUR 124 is solely based on our DCF model.

� We raised our estimates according to the segment forecast in the previous section.

� We reduced our beta from 1.20 to 1.12 due to better than initially anticipated earnings

quality.

� Furthermore, we raised our long-term growth assumption from 1.5% to 2.0% to

adequately reflect structural growth drivers, especially in the RVS segment

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 13

RESEARCH

DCF model

Detailed forecast period Transitional period Term. Value

Figures in EUR m 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e 2031e 2032e

Sales 6,109 6,918 7,323 7,755 8,218 8,676 9,124 9,560 9,977 10,373 10,744 11,084 11,391

Sales change -11.9 % 13.2 % 5.8 % 5.9 % 6.0 % 5.6 % 5.2 % 4.8 % 4.4 % 4.0 % 3.6 % 3.2 % 2.8 % 2.0 %

EBIT 779 1,054 1,174 1,277 1,376 1,444 1,510 1,572 1,631 1,685 1,735 1,779 1,817

EBIT-margin 12.7 % 15.2 % 16.0 % 16.5 % 16.7 % 16.6 % 16.5 % 16.4 % 16.3 % 16.2 % 16.1 % 16.0 % 15.9 %

Tax rate (EBT) 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 %

NOPAT 545 738 822 894 963 1,011 1,057 1,101 1,142 1,180 1,214 1,245 1,272

Depreciation 280 269 280 297 315 332 349 366 382 397 411 425 436

in % of Sales 4.6 % 3.9 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 % 3.8 %

Changes in provisions 5 11 17 -37 23 23 22 22 21 20 19 17 15

Change in Liquidity from

- Working Capital 217 -76 -83 62 67 66 65 63 60 57 53 49 44

- Capex 281 339 359 380 403 412 420 425 429 430 430 427 439

Capex in % of Sales 4.6 % 4.9 % 4.9 % 4.9 % 4.9 % 4.8 % 4.6 % 4.5 % 4.3 % 4.2 % 4.0 % 3.9 % 3.9 %

Other 0 0 0 0 0 0 0 0 0 0 0 0 0

Free Cash Flow (WACC Model)

333 755 843 712 832 888 944 1,000 1,056 1,109 1,161 1,211 1,241 1,268

PV of FCF 329 703 739 587 646 649 649 647 643 635 626 614 592 14,175 share of PVs 7.97 % 28.28 % 63.75 %

Model parameter Valuation (m)

Derivation of WACC: Derivation of Beta: Present values 2032e 8,060

Terminal Value 14,175

Debt ratio 20.00 % Financial Strength 1.00 Financial liabilities 2,534

Cost of debt (after tax) 0.7 % Liquidity (share) 1.20 Pension liabilities 392

Market return 7.00 % Cyclicality 1.20 Hybrid capital 0

Risk free rate 1.50 % Transparency 1.20 Minority interest 1,199

Others 1.00 Market val. of investments 0

Liquidity 1,881 No. of shares (m) 161.2

WACC 6.27 % Beta 1.12 Equity Value 19,990 Value per share (EUR) 124.01

Sensitivity Value per Share (EUR)

Terminal Growth Delta EBIT-margin

Beta WACC 1.25 % 1.50 % 1.75 % 2.00 % 2.25 % 2.50 % 2.75 % Beta WACC -1.5 pp -1.0 pp -0.5 pp +0.0 pp +0.5 pp +1.0 pp +1.5 pp

1.35 7.3 % 88.90 91.31 93.94 96.82 99.99 103.49 107.37 1.35 7.3 % 85.81 89.48 93.15 96.82 100.49 104.16 107.83

1.23 6.8 % 98.87 101.92 105.27 108.98 113.09 117.69 122.85 1.23 6.8 % 96.80 100.86 104.92 108.98 113.04 117.10 121.16

1.18 6.5 % 104.58 108.03 111.84 116.07 120.80 126.12 132.14 1.18 6.5 % 103.21 107.50 111.78 116.07 120.36 124.65 128.94

1.12 6.3 % 110.87 114.79 119.14 124.01 129.48 135.68 142.76 1.12 6.3 % 110.38 114.92 119.47 124.01 128.55 133.10 137.64

1.06 6.0 % 117.82 122.30 127.31 132.94 139.32 146.60 155.00 1.06 6.0 % 118.45 123.28 128.11 132.94 137.77 142.60 147.43

1.01 5.8 % 125.56 130.71 136.50 143.07 150.56 159.21 169.28 1.01 5.8 % 127.60 132.75 137.91 143.07 148.22 153.38 158.54

0.89 5.3 % 143.95 150.90 158.84 168.00 178.67 191.27 206.38 0.89 5.3 % 150.13 156.08 162.04 168.00 173.96 179.92 185.87

� We forecast a gradual decrease in top-line growth from 6.5% (RVS) and 5.0% (CVS) in 2025 to 2% in perpetuity

� EBIT margin will reach its peak in 2024 and will gradually soften to 16% in perpetuity.

� Minority interests are deducted at 7x BV (equivalent to P/B of KBX) + 379.6m for the value of the Bosch put-option.

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 14

RESEARCH

FCFVP

While our FCFVP indicates a fair value for KBX below the current share price, our DCF

model points to a significant undervaluation of KBX shares. With respect to the

conservative approach of the FCFVP, we do not consider this valuation method as

adequate. FCFVP does not include the already secured growth in the aftermarket

business and the associated margin expansion that is very likely.

Free Cash Flow Value Potential Warburg Research's valuation tool "FCF Value Potential" reflects the ability of the company to generate sustainable free cash flows. It is based on the "FCF potential" - a FCF "ex growth" figure - which assumes unchanged working capital and pure maintenance capex. A value indication is derived via the perpetuity of a given year’s “FCF potential” with consideration of the weighted costs of capital. The fluctuating value indications over time add a timing element to the DCF model (our preferred valuation tool). in EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Net Income before minorities 567 587 629 632 505 701 785

+ Depreciation + Amortisation 166 211 206 266 280 269 280

- Net Interest Income -45 -52 -97 -156 -57 -53 -53

- Maintenance Capex 164 153 216 212 187 226 239

+ Other 0 0 0 0 0 0 0

= Free Cash Flow Potential 614 697 716 841 655 797 879

FCF Potential Yield (on market EV) n/a n/a 4.8 % 5.0 % 3.5 % 4.4 % 5.0 %

WACC 6.27 % 6.27 % 6.27 % 6.27 % 6.27 % 6.27 % 6.27 %

= Enterprise Value (EV) n.a. n.a. 15,043 16,749 18,670 18,124 17,624 = Fair Enterprise Value 9,792 11,119 11,425 13,425 10,452 12,716 14,027

- Net Debt (Cash) 653 653 653 653 651 94 -423

- Pension Liabilities 392 392 392 392 397 408 425

- Other 0 0 0 0 0 0 0

- Market value of minorities 1,199 1,199 1,199 1,199 1,199 1,199 1,199

+ Market value of investments 0 0 0 0 0 0 0

= Fair Market Capitalisation 7,548 8,875 9,181 11,181 8,205 11,015 12,825

Number of shares, average 161 161 161 161 161 161 161

= Fair value per share (EUR) 46.82 55.06 56.95 69.36 50.90 68.33 79.56

premium (-) / discount (+) in % -50.0 % -32.9 % -21.9 %

Sensitivity Fair value per Share (EUR)

9.27 % 27.16 32.73 34.01 42.40 29.91 42.80 51.40

8.27 % 32.13 38.37 39.81 49.21 35.21 49.25 58.51

7.27 % 38.47 45.57 47.20 57.90 41.98 57.48 67.59

WACC 6.27 % 46.82 55.06 56.95 69.36 50.90 68.33 79.56

5.27 % 58.36 68.15 70.41 85.17 63.21 83.30 96.08

4.27 % 75.29 87.38 90.17 108.39 81.28 105.29 120.34

3.27 % 102.59 118.38 122.02 145.81 110.42 140.74 159.44

� We assume maintenance capex at 2/3 of total capex.

� Minority interests are deducted at 7x BV (equivalent to P/B of KBX) + 379.6m for the value of the Bosch put-option.

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 15

RESEARCH

Peer-group valuation

A look at a peer group comparison would also suggest an overvaluation. In fact, we do

not consider this valuation method to be sufficient, as a large number of companies do

not match KBX in terms of earnings quality and visibility of growth.

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 16

RESEARCH

Valuation

2016 2017 2018 2019 2020e 2021e 2022e

Price / Book n.a. n.a. 8.7 x 8.1 x 8.4 x 6.7 x 5.7 x

Book value per share ex intangibles 8.24 8.11 5.33 5.84 6.69 9.52 12.02

EV / Sales n.a. n.a. 2.3 x 2.4 x 3.1 x 2.6 x 2.4 x

EV / EBITDA n.a. n.a. 12.8 x 12.6 x 17.6 x 13.7 x 12.1 x

EV / EBIT n.a. n.a. 15.5 x 15.8 x 24.0 x 17.2 x 15.0 x

EV / EBIT adj.* n.a. n.a. 15.5 x 16.0 x 24.0 x 17.2 x 15.0 x

P / FCF n.a. n.a. 28.3 x 18.6 x 42.1 x 20.2 x 18.1 x

P / E n.a. n.a. 22.1 x 24.7 x 35.0 x 25.2 x 22.5 x

P / E adj.* n.a. n.a. 22.1 x 24.7 x 35.0 x 25.2 x 22.5 x

Dividend Yield n.a. n.a. 2.2 % 2.0 % 1.0 % 1.8 % 2.0 %

FCF Potential Yield (on market EV) n.a. n.a. 4.8 % 5.0 % 3.5 % 4.4 % 5.0 %

*Adjustments made for: One-offs

Company Specific Items

2016 2017 2018 2019 2020e 2021e 2022e

Order Intake (RVS) 3,144 3,536 3,798 4,017 3,615 4,157 4,448 Order Backlog (RVS) 2,601 2,876 3,212 3,573 3,744 4,075 4,442 Book-to-Bill (RVS) 0.9 0.9 0.9 1.0 1.1 1.1 1.1 After Market Share (RVS) 40.0 % 42.0 % 40.0 % 42.0 % 44.6 % 44.1 % 45.5 % Order Intake (CVS) 2,581 3,123 3,208 3,051 2,441 2,807 2,947 Order Backlog (CVS) 1,084 1,316 1,364 1,134 910 625 330 Book-to-Bill (CVS) 0.4 0.5 0.4 0.3 0.3 0.2 0.1 After Market Share (CVS) 31.0 % 28.0 % 27.0 % 25.0 % 30.8 % 28.4 % 29.0 %

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Consolidated profit & loss In EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Sales 5,471 6,154 6,616 6,937 6,109 6,918 7,323

Change Sales yoy -6.0 % 12.5 % 7.5 % 4.8 % -11.9 % 13.2 % 5.8 % Increase / decrease in inventory -11 39 34 6 40 46 49

Own work capitalised 21 32 48 73 0 0 0

Total Sales 5,481 6,224 6,698 7,016 6,149 6,964 7,371

Material expenses 2,571 3,010 3,318 3,429 3,055 3,445 3,632

Gross profit 2,910 3,214 3,380 3,587 3,095 3,519 3,739

Gross profit margin 53.2 % 52.2 % 51.1 % 51.7 % 50.7 % 50.9 % 51.1 % Personnel expenses 1,272 1,439 1,497 1,594 1,457 1,583 1,629

Other operating income 83 81 66 117 104 111 110

Other operating expenses 669 741 771 782 682 723 766

EBITDA 1,052 1,115 1,178 1,329 1,059 1,323 1,455

Margin 19.2 % 18.1 % 17.8 % 19.2 % 17.3 % 19.1 % 19.9 %

EBITDA adj. 1,052 1,115 1,152 1,354 1,059 1,323 1,455

Depreciation of fixed assets 134 168 146 213 225 207 215

EBITA 918 947 1,032 1,116 834 1,116 1,240

Amortisation of intangible assets 32 43 60 53 55 62 66

Goodwill amortisation 0 0 0 0 0 0 0

EBIT 886 904 972 1,063 779 1,054 1,174

Margin 16.2 % 14.7 % 14.7 % 15.3 % 12.7 % 15.2 % 16.0 %

EBIT adj. 886 904 972 1,048 779 1,054 1,174

Interest income 19 24 20 28 28 28 28

Interest expenses 29 39 54 51 55 51 51

Other financial income (loss) 36 37 63 132 30 30 30

EBT 841 852 875 907 722 1,001 1,122

Margin 15.4 % 13.9 % 13.2 % 13.1 % 11.8 % 14.5 % 15.3 % Total taxes 274 265 246 275 216 300 336

Net income from continuing operations 567 587 629 632 505 701 785

Income from discontinued operations (net of tax) 0 0 0 0 0 0 0

Net income before minorities 567 587 629 632 505 701 785

Minority interest 41 52 37 44 36 50 56

Net income 526 535 593 589 469 651 730

Margin 9.6 % 8.7 % 9.0 % 8.5 % 7.7 % 9.4 % 10.0 %

Number of shares, average 161 161 161 161 161 161 161

EPS 3.27 3.32 3.68 3.65 2.91 4.04 4.53

EPS adj. 3.27 3.32 3.68 3.65 2.91 4.04 4.53

*Adjustments made for: One-offs

Guidance: Sales of EUR 5,900m - 6,200m and an EBITDAadj margin of 16.5% - 17.5%

Financial Ratios 2016 2017 2018 2019 2020e 2021e 2022e

Total Operating Costs / Sales 81.0 % 83.0 % 83.4 % 82.0 % 83.3 % 81.5 % 80.8 %

Operating Leverage 3.2 x 0.2 x 1.0 x 1.9 x 2.2 x 2.7 x 2.0 x

EBITDA / Interest expenses 36.7 x 28.7 x 21.7 x 26.0 x 19.3 x 26.1 x 28.7 x

Tax rate (EBT) 32.6 % 31.1 % 28.1 % 30.3 % 30.0 % 30.0 % 30.0 %

Dividend Payout Ratio 76.3 % 153.0 % 44.8 % 45.9 % 31.9 % 41.4 % 41.1 %

Sales per Employee 221,832 228,925 232,525 239,977 239,977 239,977 239,977

Sales, EBITDA in EUR m


Operating Performance in %


Performance per Share


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RESEARCH

Consolidated balance sheet In EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Assets

Goodwill and other intangible assets 484 540 643 842 885 920 956

thereof other intangible assets 198 149 209 842 885 920 956

thereof Goodwill 286 300 306 0 0 0 0

Property, plant and equipment 1,099 1,116 1,167 1,469 1,427 1,462 1,504

Financial assets 110 117 105 112 112 112 112

Other long-term assets 6 12 38 74 74 74 74

Fixed assets 1,700 1,785 1,954 2,497 2,498 2,567 2,646

Inventories 611 749 836 815 879 897 896

Accounts receivable 971 1,148 1,237 1,149 1,255 1,232 1,204

Liquid assets 1,726 1,632 1,756 1,881 1,883 2,440 2,956

Other short-term assets 427 413 479 505 505 505 505

Current assets 3,736 3,942 4,308 4,350 4,522 5,074 5,561

Total Assets 5,435 5,727 6,262 6,847 7,019 7,641 8,207

Liabilities and shareholders' equity

Subscribed capital 68 68 161 161 161 161 161

Capital reserve 0 0 0 0 0 0 0

Retained earnings 1,704 1,838 1,448 1,754 1,934 2,424 2,863

Other equity components 42 -58 -107 -131 -131 -131 -131

Shareholders' equity 1,813 1,848 1,502 1,784 1,964 2,454 2,893

Minority interest 153 148 105 117 153 202 258

Total equity 1,966 1,996 1,607 1,902 2,116 2,656 3,151

Provisions 832 820 820 863 868 879 895

thereof provisions for pensions and similar obligations 359 354 344 392 397 408 425

Financial liabilities (total) 1,288 1,348 2,172 2,534 2,534 2,534 2,534

thereof short-term financial liabilities 531 571 1,530 1,658 1,658 1,658 1,658

Accounts payable 754 894 996 967 921 991 1,045

Other liabilities 594 670 666 581 581 581 581

Liabilities 3,469 3,732 4,655 4,945 4,904 4,985 5,055

Total liabilities and shareholders' equity 5,435 5,727 6,262 6,847 7,019 7,641 8,207


Efficiency of Capital Employment

Operating Assets Turnover 2.8 x 2.9 x 2.9 x 2.8 x 2.3 x 2.7 x 2.9 x

Capital Employed Turnover 2.9 x 3.0 x 2.8 x 2.4 x 1.9 x 2.2 x 2.3 x

ROA 31.0 % 30.0 % 30.3 % 23.6 % 18.8 % 25.4 % 27.6 %

Return on Capital

ROCE (NOPAT) 34.7 % 31.5 % 31.5 % 27.9 % 17.8 % 23.3 % 26.1 %

ROE 30.1 % 29.3 % 35.4 % 35.8 % 25.0 % 29.5 % 27.3 %

Adj. ROE 30.1 % 29.3 % 35.4 % 35.8 % 25.0 % 29.5 % 27.3 %

Balance sheet quality

Net Debt -79 70 760 1,045 1,048 502 2

Net Financial Debt -438 -284 416 653 651 94 -423

Net Gearing -4.0 % 3.5 % 47.3 % 55.0 % 49.5 % 18.9 % 0.1 %

Net Fin. Debt / EBITDA n.a. n.a. 35.3 % 49.1 % 61.4 % 7.1 % n.a.

Book Value / Share 11.2 11.5 9.3 11.1 12.2 15.2 17.9

Book value per share ex intangibles 8.2 8.1 5.3 5.8 6.7 9.5 12.0

ROCE Development


Net debt in EUR m


Book Value per Share in EUR


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Consolidated cash flow statement In EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Net income 567 587 629 632 505 701 785

Depreciation of fixed assets 134 168 146 213 225 207 215

Amortisation of goodwill 0 0 0 0 0 0 0

Amortisation of intangible assets 32 43 60 53 55 62 66

Increase/decrease in long-term provisions 54 -45 87 10 5 11 17

Other non-cash income and expenses 33 25 -6 190 0 0 0

Cash Flow before NWC change 820 779 915 1,098 791 981 1,082

Increase / decrease in inventory 50 -202 -245 -58 -64 -18 1

Increase / decrease in accounts receivable 0 0 0 0 -106 23 28

Increase / decrease in accounts payable -96 87 22 -39 -47 71 54

Increase / decrease in other working capital positions 0 0 0 0 0 0 0

Increase / decrease in working capital (total) -46 -114 -223 -97 -217 76 83

Net cash provided by operating activities [1] 774 664 692 1,001 574 1,057 1,165

Investments in intangible assets -46 -45 -94 0 -98 -97 -103

Investments in property, plant and equipment -200 -185 -230 0 -183 -242 -256

Payments for acquisitions -160 -97 -17 -223 0 0 0

Financial investments 79 -27 -7 5 0 0 0

Income from asset disposals 26 19 29 193 0 0 0

Net cash provided by investing activities [2] -460 -280 -304 -354 -281 -339 -359

Change in financial liabilities 467 -27 728 -139 0 0 0

Dividends paid -385 -385 -871 -337 -290 -161 -290

Purchase of own shares 0 0 0 0 0 0 0

Capital measures 0 0 -131 0 0 0 0

Other -35 -33 22 -29 0 0 0

Net cash provided by financing activities [3] 48 -445 -252 -505 -290 -161 -290

Change in liquid funds [1]+[2]+[3] 362 -60 137 142 2 557 516

Effects of exchange-rate changes on cash 10 -72 3 9 0 0 0

Cash and cash equivalent at end of period 1,732 1,589 1,740 1,907 1,883 2,440 2,956


Cash Flow

FCF 573 480 462 781 390 815 909

Free Cash Flow / Sales 10.5 % 7.8 % 7.0 % 11.3 % 6.4 % 11.8 % 12.4 %

Free Cash Flow Potential 614 697 716 841 655 797 879

Free Cash Flow / Net Profit 109.0 % 89.6 % 78.0 % 132.7 % 83.2 % 125.1 % 124.6 %

Interest Received / Avg. Cash 1.2 % 1.4 % 1.2 % 1.5 % 1.5 % 1.3 % 1.0 %

Interest Paid / Avg. Debt 2.8 % 2.9 % 3.1 % 2.2 % 2.2 % 2.0 % 2.0 %

Management of Funds

Investment ratio 4.5 % 3.7 % 4.9 % 0.0 % 4.6 % 4.9 % 4.9 %

Maint. Capex / Sales 3.0 % 2.5 % 3.3 % 3.1 % 3.1 % 3.3 % 3.3 %

Capex / Dep 148.7 % 108.7 % 157.5 % 0.0 % 100.3 % 125.9 % 127.9 %

Avg. Working Capital / Sales 15.3 % 14.9 % 15.7 % 15.0 % 18.1 % 17.0 % 15.0 %

Trade Debtors / Trade Creditors 128.8 % 128.4 % 124.2 % 118.8 % 136.4 % 124.3 % 115.2 %

Inventory Turnover 4.2 x 4.0 x 4.0 x 4.2 x 3.5 x 3.8 x 4.1 x

Receivables collection period (days) 65 68 68 60 75 65 60

Payables payment period (days) 107 108 110 103 110 105 105

Cash conversion cycle (Days) 44 50 51 44 70 55 45

CAPEX and Cash Flow in EUR m


Free Cash Flow Generation


Working Capital


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LEGAL DISCLAIMER

This research report (“investment recommendation”) was prepared by the Warburg Research GmbH, a fully owned subsidiary of the M.M.Warburg &

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The valuation underlying the investment recommendation for the company analysed here is based on generally accepted and widely used methods of

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SOURCES

All data and consensus estimates have been obtained from FactSet except where stated otherwise.

http://www.mmwarburg.de/disclaimer/disclaimer.htm#Valuation

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 21

RESEARCH

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1. This research report (the “Report”) is a product of Warburg Research GmbH, Germany, a fully owned subsidiary of M.M.Warburg & CO (AG & Co.)

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-1- Warburg Research, or an affiliated company, or an employee of one of these companies responsible for the compilation of the research, hold

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-2-

Warburg Research, or an affiliated company, within the last twelve months participated in the management of a consortium for an issue in

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Company Disclosure Link to the historical price targets and rating changes (last 12 months)

Knorr-Bremse AG – http://www.mmwarburg.com/disclaimer/disclaimer_en/DE000KBX1006.htm

http://www.mmwarburg.com/disclaimer/disclaimer_en/DE000KBX1006.htm

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 22

RESEARCH

INVESTMENT RECOMMENDATION

Investment recommendation: expected direction of the share price development of the financial instrument up to the given price target in the opinion of

the analyst who covers this financial instrument.

-B- Buy: The price of the analysed financial instrument is expected to rise over the next 12 months.

-H- Hold: The price of the analysed financial instrument is expected to remain mostly flat over the next 12

months.

-S- Sell: The price of the analysed financial instrument is expected to fall over the next 12 months.

“-“ Rating suspended: The available information currently does not permit an evaluation of the company.

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING

Rating Number of stocks % of Universe

Buy 133 65

Hold 54 26

Sell 11 5

Rating suspended 6 3

Total 204 100

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING O

O taking into account only those companies which were provided with major investment services in the last twelve months.

Rating Number of stocks % of Universe

Buy 34 85

Hold 4 10

Sell 0 0

Rating suspended 2 5

Total 40 100

PRICE AND RATING HISTORY KNORR-BREMSE AG AS OF 07.10.2020

Markings in the chart show rating changes by Warburg Research

GmbH in the last 12 months. Every marking details the date and

closing price on the day of the rating change.

Knorr-Bremse AG

NO T E Publ ished 07 .10 .2020 23

RESEARCH

EQUITIES Matthias Rode +49 40 3282-2678 Head of Equities [email protected] RESEARCH Michael Heider +49 40 309537-280 Thilo Kleibauer +49 40 309537-257 Head of Research [email protected] Retail, Consumer Goods [email protected]

Henner Rüschmeier +49 40 309537-270 Eggert Kuls +49 40 309537-256 Head of Research [email protected] Engineering [email protected]

Stefan Augustin +49 40 309537-168 Andreas Pläsier +49 40 309537-246 Cap. Goods, Engineering [email protected] Banks, Financial Services [email protected]

Jan Bauer +49 40 309537-155 Malte Schaumann +49 40 309537-170 Renewables [email protected] Technology [email protected]

Jonas Blum +49 40 309537-240 Oliver Schwarz +49 40 309537-250 Telco, Media, Construction [email protected] Chemicals, Agriculture [email protected]

Christian Cohrs +49 40 309537-175 Simon Stippig +49 40 309537-265 Industrials & Transportation [email protected] Real Estate [email protected]

Felix Ellmann +49 40 309537-120 Cansu Tatar +49 40 309537-248 Software, IT [email protected] Cap. Goods, Engineering [email protected]

Jörg Philipp Frey +49 40 309537-258 Marc-René Tonn +49 40 309537-259 Retail, Consumer Goods [email protected] Automobiles, Car Suppliers [email protected]

Marius Fuhrberg +49 40 309537-185 Robert-Jan van der Horst +49 40 309537-290 Financial Services [email protected] Technology [email protected]

Mustafa Hidir +49 40 309537-230 Andreas Wolf +49 40 309537-140 Automobiles, Car Suppliers [email protected] Software, IT [email protected]

Ulrich Huwald +49 40 309537-255 Health Care, Pharma [email protected]

Philipp Kaiser +49 40 309537-260 Real Estate [email protected]

INSTITUTIONAL EQUITY SALES Marc Niemann +49 40 3282-2660 Maximilian Martin +49 69 5050-7413 Head of Equity Sales, Germany [email protected] Austria, Poland [email protected]

Klaus Schilling +49 40 3282-2664 Christopher Seedorf +49 69 5050-7414 Head of Equity Sales, Germany [email protected] Switzerland [email protected]

Tim Beckmann +49 40 3282-2665 United Kingdom [email protected]

Lyubka Bogdanova +49 69 5050-7411 Ireland, Poland, Australia [email protected]

Jens Buchmüller +49 69 5050-7415 Scandinavia, Austria [email protected]

Alexander Eschweiler +49 40 3282-2669 Sophie Hauer +49 69 5050-7417 Germany, Luxembourg [email protected] Roadshow/Marketing [email protected]

Matthias Fritsch +49 40 3282-2696 Juliane Niemann +49 40 3282-2694 United Kingdom [email protected] Roadshow/Marketing [email protected]

SALES TRADING Oliver Merckel +49 40 3282-2634 Marcel Magiera +49 40 3282-2662 Head of Sales Trading [email protected] Sales Trading [email protected] Elyaz Dust +49 40 3282-2702 Bastian Quast +49 40 3282-2701 Sales Trading [email protected] Sales Trading [email protected] Michael Ilgenstein +49 40 3282-2700 Jörg Treptow +49 40 3282-2658 Sales Trading [email protected] Sales Trading [email protected] MACRO RESEARCH Carsten Klude +49 40 3282-2572 Dr. Christian Jasperneite +49 40 3282-2439 Macro Research [email protected] Investment Strategy [email protected] Our research can be found under: Warburg Research http://research.mmwarburg.com/en/index.html Thomson Reuters www.thomsonreuters.com Bloomberg MMWA GO Capital IQ www.capitaliq.com FactSet www.factset.com For access please contact:

Andrea Schaper +49 40 3282-2632 Kerstin Muthig +49 40 3282-2703 Sales Assistance [email protected] Sales Assistance [email protected]

mailto:[email protected]






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