Our latest deep dive into industry EBITDA multiples looks at how manufacturing companies are going and some of the positive news for manufacturing business valuations.
Manufacturing used to be the mainstay of the Australian economy, contributing as much as 30% to our GDP in its hey day. But globalisation, automation, the rise of the information age and now the Gig economy and demand for services has seen it drop to less than 5% of Aussie GDP.
But it is not all bad news - many traditional manufacturing industries that struggled to make reasonable commercial returns have made way for high technology advanced manufacturing, often with heavy design components included. And these manufacturers are exporting to the world.
EBITDA Multiples
We have detailed some of the key issues that drive manufacturing company valuations in our Valuation of Manufacturing Company summary. For the most part, manufacturing companies with revenue between $2m - $20m are likely to attract manufacturing industry EBITDA multiples of 3.0x - 5.5x.
Our Valuation Affairs February newsletter highlighted a solid group of manufacturing companies listed on the ASX with industry EBITDA multiples for large companies ($1b+ market capitalisation) in excess of 15x EBITDA (assuming a 20% control premium). Even manufacturing companies with market cap of less than $100m still attracted industry EBITDA multiples greater than 10x.
The February Industrials Dashboard from Interfinancial (a leading mid-market corporate advisory firm specialising in M&A, capital raising and growth consulting) has reported an EV/EBITDA multiple range of 8.0x - 10.0x on a non-control basis, although it lags the ASX200 at 9.4x.
So what are some of the key performance metrics of the manufacturing sector?
There were 83,700 manufacturing businesses at the end of FY17 and has remained static.
Overall revenue contracted by 2%.
Average revenue was $4.3m per business.
EBITDA margin was 9.0%.
Average EBITDA was $2.6m per business.
Clearly the average EBITDA multiple per business is significantly skewed with a small number of businesses generating a larger margin EBITDA than 9.0%.
The Issues and Opportunities
Maintaining a sustainable EBITDA margin will be critical for survival of any manufacturing business. A critical requirement will be to increase the market share to help maintain lower costs.
Access to capital in current climate to finance automation and achieve economies of scale.
High level of globally based competition, often with a lower cost base and greater economies of scale.
Access to skilled workforce and management to maintain competitive labour costs per revenue.
Access to new export markets in an increasingly protectionist environment with US tariffs imposed on
Low growth global economy with global GDP growth dropping, and China growth also reduced (although still twice the growth rate of the rest of the world and an economy that is one of the largest).
Implementing new technology (Precision manufacturing, Manufacturing 4.0, Big Data, AI, Virtual Reality).
We believe there are still many #acquisition opportunities that can drive strategic growth for the right acquirers.
St David Dairy sold to an ASX listed company in 2018 for an 11x EBITDA multiple because the buyer could see immediate strategic benefits they could leverage.
UK-based Volution Group PLC announced the acquisition of Melbourne-based Ventair Pty Ltd (March 1 2019) for $AUD19.2m and an industry EBITDA mutliple of 8.0x.
Some of the key merger and acquisition lessons our clients have emphasised include:
Ensure processes, procedures, sytems and IP are effectively documented before any deal to show a reduced reliance on key owners and support intangible value.
Make sure employee cultures are a good fit and have a clear plan for building an effective team.
Have clear targets on staff productivity and how this can be increased to get the highest business valuation.
Being very clear on the benefits that are being sought by the acquisition or merger and identifying clear metrics on these benefits from the start.
Ensure the weaknesses of one company are balanced by the strengths of the other company.
We have provided some more broader advice on the selection of EBITDA multiples in our recent blog post How to Select an EBITDA Multiple.
If you want to learn more about the valuation of your business then contact us for an obligation free discussion.