On May 10, 2023, Crane
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XT
For FY23, CXT raised its adjusted EPS guidance by $0.10 to ~$3.75- $4.05. Core sales growth is expected to be +2.0% to 4.0%. Adjusted operating margin is expected to be 27.0% while adjusted EBITDA is anticipated to be ~375.0 million. Corporate expenses are anticipated to be the same at $50.0 million while non-operating expenses are expected to increase to $50.0 million.
On March 30, 2022, Crane Holdings Co., a diversified manufacturer of industrial products, announced a plan to separate into two publicly listed companies: Crane Co. and Crane NXT. Crane Co. would retain Aerospace & Electronics and Process Flow
FLOW
Valuation and Recommendation
We maintain a BUY rating on Crane NXT (CXT) with a revised target price of $58.00 per share (previously $53.00), representing a potential upside of 17.9% based on the closing price as of 5/11. We believe that CXT’s CPI business will experience continued growth due to its evolving technologies in payments within the gaming and financial services end markets. Additionally, the weaker Crane Currency is expected to benefit from increased international demand for RAPID vision banknote security technology, along with a robust order backlog.
Key highlights of the conference call
• For 1Q23, CXT achieved adjusted EPS of $0.97, driven by a 3.0% growth in core sales and an adjusted EBITDA margin of around 27.0%. While it also experienced a 34.0% increase in backlog.
• The Crane Payment Innovations reported a core sales growth of 10.0%. In addition, it’s margin expanded by over 420 basis points to 30.1%, driven by the disciplined execution of the Crane business system and continuous improvement.
• The Crane currency saw a significant increase in order rate and backlog growth in the quarter, with core orders up 36.0% and backlog up 132.0% compared to the previous year.
• CXT has technology leadership in launching innovative products. In 1Q23, Crane Currency launched RAPID Vision, a banknote security technology that features the world’s first multicolor micro-optic security thread for banknotes. This product provides a broader range of fully customizable multicolor movement effects while maintaining the proven durability, easy printability, and eye-catching movement of Crane Currency’s existing products.
• Crane Currency is performing well in the international currency business, reflected in a 132.0% backlog growth in the quarter, and continues to gain new market share with its banknote security features. Crane Currency has adapted RAPID HD micro-optics security thread for high-value banknote denominations with Iraq and Argentina. Crane Currency was also awarded the first banknote series in the world to feature both MOTION SURFACE and RAPID HD DETECT together, which will launch in 2024.
• CPI launched the ALIO PRO terminal for processing payments and mobile transactions paired with Simplify cloud management platform for EV charging applications in Europe.
• CXT aims to grow its business to $3 billion in revenue in the next five years through a mix of organic growth and M&A, while maintaining high operating profit margins of 20.0% and free cash flow conversion of ~100.0%. While investing in its core business, improving operational excellence, and executing proven M&A strategies to diversify its portfolio.
• CXT is expecting to achieve a mid-single-digit plus growth while maintaining a low leverage of net debt to EBITDA of around 1.7x and aiming to keep below 3.0x.
• Crane Currency had solid cash flow in the quarter and expects an adjusted free cash flow conversion ratio of approximately 100% this year. CXT’s strong capital structure, with cash of approximately $270 million and total gross debt of approximately $900 million. With net debt-to-EBITDA at approximately 1.7x, the company has around $1 billion of M&A capacity and flexibility to deploy capital to maximize shareholder returns.
• CPI’s business drivers are focused on automation and productivity, and the recent supply chain improvements are expected to drive strong performance for the segment this year. Crane Currency is continuing to gain market lower production as it prepares for the launch of newly redesigned bills.
• CXT is increasing the midpoint of their adjusted EPS guidance by $0.10 to a range of $3.75 to $4.05 due to higher interest expense in 2023 but offset by higher margins and expected core growth likely to be in the upper half of their 2.0% to 4.0% range.
Overall Results
1Q23
For 1Q23, sales declined 1.1% YoY (constant currency or CC: +2.7%) to $329.1 million, while it was ahead of the consensus of $317.9 million. Crane Payment Innovation (CPI) revenue +6.0% YoY (CC: +10.0%) to $223.8 million, stronger than expected while Crane Currency (CC) sales declined 10.5% YoY (CC: -13.5%) to $105.3 million, was consistent with expectations.
Adjusted operating income declined to $76.8 million (vs. 1Q22: $93.8 million) while the corresponding margin declined 484 bps YoY to 23.3%. For CPI adjusted operating margin expanded by 420 bps to 30.1% on strong pricing and positive mix while CC adjusted operating margin declined drastically to 20.1% (1Q22: 31.9%) on lower US notes production and low margin mix. Adjusted EBITDA was $88.0 million with a corresponding margin of 26.7%. Adjusted net income came in at $55.4 million while the corresponding margin stood at 16.8%. Diluted EPS was at $0.97.
Investment Thesis
Crane NXT: A pure-play industrial technology player having a market leadership in the global payments and currency markets
Crane NXT has a differentiated payment technology and has been continuously focusing on innovations making it a market leader in niche automated payment solution markets. Moreover, it has tremendous ability to grow through mergers and acquisitions to expand its market reach globally. The company has ~20.0% revenue market share in a ~ $7.0 billion market and its core revenue is expected to report core growth of mid-single digit annually in next five years. Moreover, the company has ~100.0% free cash flow conversion profile making it financially consistent with its mid-cap industrial technology peers. Additionally, it has attractive business mix and 40% of its revenue is generated on a recurring basis providing base for sustainable top line growth. The payment technology aligned with long-term secular business trend is expected to have long-term earnings growth potential and sustainable margins. Moreover, CXT is expected to distribute dividend in line with its peers making it lucrative for investors.
Crane NXT: Evolving trends in payment technology to drive growth
The payment technology business is anticipated to grow with the evolving technologies like the recently launched image recognition software built on advanced algorithm to authenticate products. It introduced the innovative ALIO PRO terminal to handle credit card and mobile payment transactions in conjunction with Simplify cloud management platform and this integration was specifically implemented for electric vehicle charging applications across Europe. In payment technology specifically in gaming, CXT has seen growth recently with new casino openings and converting new customers to their solution. Together, new innovative technologies coupled with new customer additions are estimated to drive the growth for CXT payment innovations sub-segment.
Crane NXT: Innovative technologies to drive international demand for Crane Currency
Crane currency business is mainly depended on demand of lumpy government orders. For 1Q23, the sub-segment has ~132% order backlog implying on mark to achieve FY23 targets. While its domestic market (US) growth is anticipated to be moderate in 2023, in 2024, U.S. government currency demand is expected to rebound due to a new series redesign of $10, $20, and $50 signaling significant growth potential. Internationally, the growth is anticipated to be driven by Emerging markets where demand for CXT RAPID HD micro-optics security featuring bank notes is high to tackle the problem of counterfeit banknotes. Recently launched next generation technology RAPID Vision is also has a large pipeline of customers, mainly the central bank across the world which are expected to drive the order backlog for the company.
Valuation
Crane NXT (Stub entity)
Crane NXT (Stub) is well positioned to deliver healthy earnings growth and earn sustainable margins going forward on account of its differentiated offerings and innovative technologies in the automated payments market. The company has ~20.0% market share in terms of revenue (total market size: $7.0 billion), which is poised to grow in the long run. CPI will continue to grow on evolving technologies like ALIO PRO and healthy customer pipeline in end markets like gaming and financial services. Crane Currency is anticipated to have health order backlog on international demand for its RAPID Vision technology. Moreover, as a standalone entity the company can deploy its capital in building innovative technologies and to serve their customers more efficiently.
We compare Crane NXT with other listed peer companies engaged in payment technology business such as Global payments, Worldline, CCL industries, Gates Industries, Altra Industrial Motion
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We value CXT on EV/Sales multiple of 2.2x which is at discount vs peer median and EV/Adj. EBITDA of 13.0x which is at premium considering the superior growth and return profile. Accordingly, we arrive at an average enterprise value of $4.0 billion. Subsequently, we deduct net debt of $630.0 million (as of April 4, 2023) and pension liability of $20.0 million to arrive at an implied equity value of $3.3 billion. Considering the diluted shares outstanding of ~57.3 million, we arrive at a target price of $58.00 (Previous: $53.00 per share) with an upside of 17.9% on closing price as on 5/11. We reiterate Buy rating on CXT.
Company Description
Crane NXT, Co.
Crane Holdings, Co., headquartered in Delaware, underwent a name change after the spin-off and is now known as Crane NXT, Co. Crane NXT aims to offer electronic devices and associated software that leverage their extensive and exclusive knowledge in payment validation, authentication, automation, field servicing, remote troubleshooting, and productivity-enhancing software. With its technological prowess, Crane NXT stands out and is well-positioned to capitalize on long-term trends such as automation, security, and productivity in various rapidly evolving adjacent sectors.
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