PRIMA INDUSTRIE. Further margin improvement. Buy (maintained) Company Update

Transcription

1 PRIMA INDUSTRIE Company Update Buy (maintained) MARKET PRICE: EUR13.24 TARGET PRICE: EUR15.34 (from EUR12.06) Machinery Data Shares Outstanding (m): Market Cap. (EURm): Enterprise Value (EURm): Free Float (%): 44.8% Av. Daily Trad. Vol. (m): 0.03 Main Shareholder: 28.0% Reuters/Bloomberg: PRII.MI PRI IM 52-Week Range (EUR) Performance 1m 3m 12m Absolute 19.0% 51.7% 35.7% Rel. to FTSE IT 15.1% 33.5% 3.0% Graph area Absolute/Relative 12 M Next event 12/05/14 1Q14 results Marco Cristofori marco.cristofori@ubibanca.it Tel Website: Further margin improvement Despite the revenue slowdown reported in the second half of 2013, Prima Industrie increased its EBITDA margin significantly confirming its ability to streamline operating costs and rationalize its product portfolio, even in the context of a declining top line. In addition, the conversion of the warrants at Dec-13 strongly improved the financial structure of the company (gearing is now below 1x and leverage declined to 3.27x) removing the risk of a breach of covenants, which was feared by the market. Finally, although industry market forecasts for 2014 have been reduced, prompting us to fine tune our estimates, Prima Industrie s rapid expansion in emerging markets (34% of sales in 2013 vs. 28% in 2012), which will be reinforced by a new plant in China, should allow the company to maintain attractive top-line growth (our new estimates indicate a CAGR of >9% in E). As a result, we believe the company remains an attractive buying opportunity despite the stunning share performance since the beginning of the year (+43%). We confirm our positive stance with a new target price of EUR15.34 (from EUR12.06), which still leaves >15% upside. > While sales in the second half of 2013 were below our expectations, due to the strength of EUR, the weak European machine tool market and the phase-out of Prima Electro products, EBITDA and the bottom line beat our expectations, demonstrating the company s ability to improve profitability even in difficult circumstances. NWC fell sharply in the second half of the year and this, together with the successful conversion of the outstanding warrants, led to a sharp reduction of Prima Industrie s net debt (from EUR131 million at June-13 to EUR100 million at Dec-13). > Now the market scenario is improving, although significant growth is not expected before We anticipate top line growth of 7.4% this year while should benefit from additional sales from the new plant in China. Profitability should continue to improve and we estimate an EBITDA margin of more than 12% in Net result should strongly benefit from these trends with >50% CAGR in > Following our estimate changes and a higher number of shares following conversion of the warrants, we have set a new target price of EUR15.34 per share (from EUR12.06) which benefits from a lower Risk Free rate (now 3.5% vs. 4.5% previously) and from the sharp reduction in net debt reported at Dec13. At the target price, Prima Industrie would trade at 11.7x 2015 P/E and 6.3x EV/EBITDA, multiples which are below the average multiple for the Italian machinery sector (16.4x and 6.5x respectively). Buy reiterated. Financials E 2015E 2016E Ratios E 2015E 2016E Revenues (EURm) EBITDA (EURm) EBITDA margin (%) 9.1% 10.2% 10.8% 12.4% EBIT (EURm) EPS (EUR) CFPS (EUR) DPS (EUR) Source: Company Data, UBI Banca Estimates P/E(x) P/CF(x) P/BV(x) Dividend Yield 0.0% 0.0% 0.0% 0.0% EV/EBITDA(x) Debt/Equity (x) Debt/EBITDA (x) Source: Company Data, UBI Banca Estimates 1

2 Key Financials (EURm) E 2015E 2016E Revenues EBITDA EBIT NOPAT Free Cash Flow Net Capital Employed Shareholders Equity Net Financial Position Key Profitability Drivers E 2015E 2016E Net Debt/EBITDA (x) Net Debt/Equity (x) Interest Coverage (%) Free Cash Flow Yield (%) 10.8% 5.6% 7.0% 10.4% ROE (%) 5.2% 9.0% 10.7% 13.8% ROI (%) 8.1% 10.5% 12.6% 16.8% ROCE (%) 8.1% 10.5% 12.6% 16.8% Key Valuation Ratios E 2015E 2016E P/E (x) P/BV (x) P/CF (x) Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) EV/CE (x) Key Value Drivers (%) E 2015E 2016E Payout 0.0% 0.0% 0.0% 0.0% Cost of Equity 9.4% 9.4% 9.4% 9.4% WACC 4.8% 5.2% 5.7% 6.4% NWC/Sales 15.2% 15.1% 15.0% 15.0% Capex/Sales -3.6% -3.2% -3.2% -3.2% 2

3 Recent Developments > Sales fell 6.1% in 4Q13 (-6.4% in 2H13), with a sharp decline in Europe (-21%) and Asia (-10%, following a 33% increase in 9M13) partially offset by a solid recovery in Italy (+22%) and in North America (+10%). Prima Electro suffered again in 4Q13 (-15%) but also Prima Power was slightly down (-5%). > However, EBITDA improved further (beating our expectation), reaching a margin of 11.1% compared with 8.9% in 4Q12, mostly due to the recovery of Prima Power which exceeded 10.8%. As a consequence, EBIT and pre-tax profit were higher than last year, leading to a net profit of EUR3.3 million in the quarter (+33%) and EUR5.4 million in the full year (+2.4%). The company will not distribute dividends, confirming its priority of reducing financial debt. > As expected, >80% of the outstanding warrants were converted into new shares at Dec-13 with EUR15.6 million cash in for Prima Industrie. Consequently, there are now million shares in circulation. Based on our new estimates, the EPS dilution stemming from conversion of the warrants is close to 12% including post tax savings of about EUR0.6 million p.a. The impact on the financial structure was very positive and significantly reduced both gearing (from 1.54 at Sept13 to 0.94 at Dec12) and leverage. Net debt fell to EUR100 million compared with EUR126 million at Dec-12, also thanks to the reduction of NWC (driven by lower inventories), equal to 15.2% of sales in 2013 (vs. an average of 17.5% in ). The revenue slowdown in the second half of 2013 was stronger than the first part of the year, with a decline of 6.4% in 2H13, vs. our expectation of flat sales. There were three main reasons behind this trend: 1. The weakness of Prima Electro (revenues down 13.1% in 2H13) which was still impacted by the phase-out of old products which have not yet been replaced by new ranges; 2. Continued weakness in Europe (-15% in 2H13), partially offset by a positive trend in Italy (+9% due to a sharp recovery in 4Q13 which was up 22%); 3. The strength of the EUR which adversely impacted revenues in the US (-7% in the second half of the year) and in Asia (-3%), even if China now represents 14% of consolidated sales. 4. Figure 1-4Q13 and 2013 results Sales declined by 6.1% in 4Q13 but EBITDA rose 17% with a margin which was the highest since (EURm) 4Q12A 4Q13A % Chg. 2012A 2013A % Chg. Orders intake ,1% ,1% Book to bill 0,86 0,89 0,95 0,97 Order backlog ,8% ,8% Sales ,1% ,9% EBITDA 9,2 10,8 16,9% 29,0 30,6 5,4% Margin (%) 8,9% 11,1% 8,3% 9,1% EBIT 6,4 7,7 20,8% 17,6 18,7 6,1% Margin (%) 6,1% 7,9% 5,0% 5,6% Net Result 2,5 3,3 32,8% 5,3 5,4 2,4% Net debt 126,3 100,0-20,8% 126,3 100,0-20,8% Source: Company data 3

4 The order intake was EUR156 million in the second half of the year, broadly flat compared with 2H12, with a book to bill ratio of 90%, leading to a backlog of about EUR75 million, 15% below Dec-12. The reduction was totally due to Prima Electro, which was impacted by the phase-out of old products which have not yet been replaced by new ranges. In this scenario, Prima Industrie was able to increase its EBITDA margin, exceeding our estimates, mostly due to productivity gains particularly at Prima Power (its margin rose to 10.8% in 2H13 compared with 8.7% in 2H12), while Prima Electro s EBITDA margin was down by 370 bips. The increase in EBITDA led to a 2H13 bottom line 13% higher than last year despite a higher tax rate. Figure 2 - Quarterly trend 120,0 12,0% 100,0 10,0% 80,0 60,0 40,0 20,0 0,0 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% -20,0-4,0% 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12A 4Q12A 1Q13A 2Q13A 3Q13A 4Q13A Sales EBITDA % margin Source: Company data Net debt fell to EUR100 million compared with EUR126 million at Dec-12 mostly due to the cash inflow from the conversion of the warrants (EUR15.6 million) and the sharp reduction in NWC which benefitted from lower inventories (down 18% vs. Dec-12), particularly spare parts. Lower net debt resulted in an improvement in gearing (0.94x vs. 1.5x at Dec-12) and in the net debt/ebitda ratio (3.27x vs. 4.35x in 2012) while interest cover increased to 2.12x (1.97x in 2012). As a result, we believe the company s financial structure is not particularly stressed. It should be emphasised that the net debt figures are well below debt covenants with banks (gearing of <1.6x at Dec-13, leverage of <4.1x) relating to the Finpolar financing (EUR104 million in place at Dec-13 of which EUR65 million due in Feb-16). Figure 3 - Gearing and leverage vs. covenants with banks Prima Industrie should also remain well below the covenant targets it has with banks also in the coming years 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0, A 2012A 2013A 2014E 2015E 2016E Gearing Leverage Gearing covenant Leverage covenant 4

5 Financial Projections > The company anticipates some margin improvement in 2014, although market forecasts for machine tools have weakened: a significant recovery is now expected only next year (about +10%) while 2014 should see moderate growth (about +5%). Therefore, we have reduced our top line forecasts by 7% in 2014 and by 3% in We have also added new estimates for 2016 which indicate revenues of EUR436 million. Our forecast also includes the impact of the new JV in China (51% Prima Industrie, 49% two partners from Hong Kong) which is expected to commence production in Oct-14 with a target of generating additional sales of about EUR30-35 million (around 10% of consolidated sales) with an EBITDA margin of more than 15% when fully operational (2017). > Following the cuts in our revenue estimates for we have also slightly lowered our EBITDA forecasts, although we believe that the company might be able to improve profitability further. We now expect an EBITDA margin of 10.2% in 2014 (vs. 9.1% in 2013) and 10.8% in We expect a robust improvement in profitability in 2016 (expected margin of 12.4%) due to the contribution from the Chinese JV. > Altogether, our net profit estimates have been slashed by an average of 10%, but still present an attractive CAGR (56%). However, we do not expect the company to distribute dividends, given that its top priority is to continue to reduce net debt. EPS now reflects the new number of shares following conversion of the warrants last December (10.48 million shares vs. 8.9 million previously). > Our new estimates of the net financial position, which reflect the cash inflow from conversion of the warrants, implies net debt of EUR92 million at Dec-14 which should decline to EUR83 million at the end of 2015 and to EUR68 million in The most recent analyses confirm that 2013 was a cold shower for the machine tool market, with a slowdown in consumption of almost 8% at about USD85 billion, mostly caused by the fall in Asia. Modest recovery is expected in all markets in 2014 followed by significant growth rate through to 2017 when the market is expected to reach USD110 billion, driven by China, which could represent 46% of global consumption. In this scenario, Prima Power is expected to grow at a CAGR of 9.2% between 2013 and 2016, also helped by the new JV in China. Figure 4 Machine Tool consumption - % Change (local currency) The slowdown in 2013 may only be partially recovered this year while double digit growth is expected in The weighting of Asia in terms of global demand is likely to rise from 64% in 2012 to 66% in (%) E 2014E 2015E 2016E 2017E Europe 1,1% -2,4% 4,6% 6,9% 7,2% 6,5% Americas 11,2% -1,9% 6,6% 6,1% 3,0% 2,5% Asia -1,0% -10,0% 4,8% 12,1% 10,7% 9,9% World 1,1% -7,4% 5,0% 10,2% 9,0% 8,3% Prima industrie 12,8% 3,9% Source: Oxford Economics (Oct-13), Company data We expect Prima Electro to recover following weakness in 2013 which was mostly caused by the by the phasing out of old products. The market is expected to continue to grow at a double digit rate through to 2020, supported by a buoyant trend in Europe and in Asia and Prima Industrie should benefit from the impact of new products coming onto the market. We forecast a CAGR of 8% for this division which should reach EUR60 million sales in 2016 vs. EUR48 million in

6 Figure 5 Global market for High Power Laser Systems (EURm) The high Power Laser systems market continued to grow from its nadir in The CAGR is expected to be 8.1% E 2014E 2015E 2016E 2017E Source: Optech Consulting (Jan-14) Figure 6 - New vs. old estimates (EUR) 2013A 2014A 2015E 2016E Old New Old New Revenues 335,8 386,7 360,8 408,5 395,2 436,4 % change -6,7% -3,3% EBITDA 30,6 39,1 36,7 44,6 42,5 54,0 % change -6,3% -4,5% EBIT 18,7 26,3 24,0 31,0 29,1 39,6 % change -8,7% -6,2% Pre tax profit 8,8 19,7 17,1 24,6 22,9 34,2 % change -13,1% -7,0% Net profit 5,4 11,8 10,3 14,7 13,8 20,6 % change -12,5% -6,5% Net financial debt 100,0 107,5 92,3 95,0 82,5 68,0 % change -14,2% -13,2% 6

7 Valuation > Given our revised estimates and the new number of shares following conversion of warrants, we have set a new target price of EUR15.34 per share, up from EUR12.06 per share (EUR11.43 after the warrant conversion), which still provides >15% upside, despite outstanding share performance since the beginning of the year (+43%). Our new target price benefits from a lower Risk Free rate (now 3.5% vs. 4.5% in our last report) and from the sharp decline in net debt reported at Dec13. > Our target price of EUR15.34 per share is based on a DCF (WACC 7.35%, terminal growth rate of 1% and an operating margin of 6.5% at terminal value, which is well below our forecast for 2016, while we have used a relative valuation for control purposes. At the target price, Prima Industrie would trade at 11.7x 2015 P/E, which is still below the average multiple for the Italian machinery sector (16.4x) and on 6.3x EV/EBITDA (vs. an average of 6.5x). > Overall, Prima Industrie is trading at a significant discount to its direct peers (32% on average), mainly due to its modest size compared to Amada (nearly 5x bigger in terms of revenues) and its lower EBITDA margin compared with Rofin (11.8% vs. 9.1%) and a valuation based on P/E and EV/EBITDA multiples would deliver a fair value of EUR22.1, or 44% above our DCF valuation. Taking the Italian machinery manufacturers into consideration (we have included IMA, Fidia, Biesse, Bolzoni and Interpump in the peer group) produces a valuation of EUR20.2 per share. > Based on a relative P/E, Prima Industrie would be valued at EUR21.6 per share while on EV/EBITDA it would be EUR20.6 per share. The average of these two valuations gives EUR21.1 per share. Applying a 30% discount to our relative valuation to factor in Prima Industrie s modest size and low liquidity, generates a valuation of EUR14.8 per share which is not far from our DCF fair value. Figure 7 WACC assumptions Risk Free rate (10Y BTP bench.) 3.5% Debt spread (%) 2.5% Cost of debt [net] (%) 4.4% Market risk premium (%) 4.5% Beta (x) 1.30 Cost of equity (%) 9.4% Weight of Debt (Wd) 37.5% Weight of Equity (We) 62.5% Wacc 7.35% Source: UBI Banca estimates Figure 8 DCF Valuation (EUR m) % Weight Per share (EUR) Sum of PV FCF % Terminal value % Total Enterprise value % minorities (1) (0.10) - Pension Provision (8) (0.74) - Net cash (debt) (100) (9.54) Total Equity value Fully diluted number of shares (m) 10.5 Source: UBI Banca estimates 7

8 Figure 9 - Peer comparison and valuation based on multiples Overall, Prima Industrie is trading at a significant discount to its direct peers (>40% on average), mainly due to its modest size compared to Amada (nearly 5x bigger in terms of revenues) and its lower margin compared with Rofin. Market Cap. P/E EV/EBITDA (EURm) 2014E 2015E 2014E 2015E Amada ,1 x 14,9 x 8,0 x na Rofin ,7 x 17,0 x 10,5 x 7,5 x Average 22,9 x 15,9 x 9,2 x 7,5 x Prima Industrie ,4 x 10,1 x 6,9 x 5,7 x Premium (discount) -41% -37% -25% -24% Prima Industrie valuation on multiples 22,53 20,96 23,46 21,43 Interpump ,1 x 17,4 x 9,8 x 8,4 x IMA ,2 x 20,2 x 11,4 x 10,4 x Bolzoni 90 21,7 x 10,6 x 4,5 x 3,3 x Biesse ,7 x 11,5 x 5,5 x 4,4 x Fidia 18 29,6 x 22,2 x 8,5 x 6,1 x Average 21,8 x 16,4 x 7,9 x 6,5 x Prima Industrie ,4 x 10,1 x 6,9 x 5,7 x Premium (discount) -38% -38% -13% -13% Prima Industrie valuation on multiples 21,51 21,54 18,99 18,69 Source: Factset, UBI Banca estimates 8

9 Income Statement (EURm) E 2015E 2016E Net Revenues EBITDA EBITDA margin 9.1% 10.2% 10.8% 12.4% EBIT EBIT margin 5.6% 6.6% 7.4% 9.1% Net financial income /expense Associates & Others Profit before taxes Taxes Minorities & discontinuing ops Net Income Balance Sheet (EURm) E 2015E 2016E Net working capital Net Fixed assets M/L term funds Capital employed Shareholders' equity Minorities Shareholders' funds Net financial debt/(cash) Cash Flow Statement (EURm) E 2015E 2016E NFP Beginning of Period Group Net Profit Minorities D&A Change in Funds & TFR Gross Cash Flow Change In Working Capital Other Operating Cash Flow Net Capex Other Investments Free Cash Flow Dividends Paid Other & Chg in Consolid. Area Chg in Net Worth & Capital Incr Change in NFP NFP End of Period

10 Financial Ratios (%) E 2015E 2016E ROE 5.2% 9.0% 10.7% 13.8% ROI 8.1% 10.5% 12.6% 16.8% Net Fin. Debt/Equity (x) Net Fin. Debt/EBITDA (x) Interest Coverage NWC/Sales 15.2% 15.1% 15.0% 15.0% Capex/Sales -3.6% -3.2% -3.2% -3.2% Pay Out Ratio 0.0% 0.0% 0.0% 0.0% Per Share Data (EUR) E 2015E 2016E EPS DPS Op. CFPS Free CFPS BVPS Stock Market Ratios (x) E 2015E 2016E P/E P/OpCFPS P/BV Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% Free Cash Flow Yield (%) 10.8% 5.6% 7.0% 10.4% EV (EURm) EV/Sales EV/EBITDA EV/EBIT EV/Capital Employed Growth Rates (%) E 2015E 2016E Growth Group Net Sales -3.9% 7.4% 9.6% 10.4% Growth EBITDA 5.4% 20.0% 16.0% 26.9% Growth EBIT 6.1% 28.4% 21.1% 36.2% Growth Net Profit 2.4% 90.2% 33.5% 49.3% 10

11 Disclaimer Analyst Declaration The analyst who prepared this report, and whose name and role appear on the front page, certifies that: a. the views expressed on the Company mentioned herein accurately reflects his personal views. It does not represent the views or opinions of the management of UBI Banca or any other company in or affiliated to the UBI Banca Group. It is possible that individuals employed by UBI Banca, or any other company in or affiliated to the UBI Banca Group, may disagree with the views expressed in this report; b. no direct or indirect compensation has been or will be received in exchange for any views expressed; c. the analyst does not own shares of the Company; d. the analyst does not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions. About UBI Banca This document has been prepared by UBI Banca, a bank authorized by the Bank of Italy to provide investment services pursuant to Article 1, Paragraph 5, letter a), b), c), c-bis), e) and f) of Legislative Decree, 24 February 1998, n 58. General warning This document is for information purposes only. This document (i) is not, nor may it be construed, to constitute, an offer for sale or subscription of or a solicitation of any offer to buy or subscribe for any securities issued or to be issued by the Company, (ii) should not be regarded as a substitute for the exercise of the recipient s own judgement. In addition, the information included in this document may not be suitable for all recipients. Therefore the recipient should conduct his own investigations and analysis of the Company and securities referred to in this document and make his own investment decisions without undue reliance on its contents. Neither UBI Banca, nor any other company of the UBI Banca Group, nor any of its directors, managers, officers or employees, accepts any liability whatsoever (in negligence or otherwise), and accordingly no liability whatsoever shall be assumed by, or shall be placed on, UBI Banca, or any other company of the UBI Group, or any of its directors, managers, officers or employees, for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. The information provided and the opinions expressed in this document are based upon information and data provided to the public by the Company or news otherwise public and refers to the date of publication of the document. The sources (press publications, financial statements, current and periodic release, as well as meetings and telephone conversations with Company representatives) are believed to be reliable and in good faith, but no representation or warranty, express or implied, is made by UBI Banca as to their accuracy, completeness or correctness. Past performance is not a guarantee of future results. Any opinions, forecasts or estimates contained herein constitute a judgement as at the date of this document, and there can be no assurance that the future results of the Company and/or any future events will be consistent with any such opinions, forecasts or estimates. Any information herein is subject to change, update or amendment without notice by UBI Banca subsequent to the date of this document, with no undertaking by UBI Banca to notify the recipient of this document of such change, update or amendment. Organizational and administrative arrangements to prevent conflicts of interests UBI Banca maintains procedures and organizational mechanisms (physical and non-physical barriers designed to restrict the flow of information between Business Analysis Unit and the other areas/departments of UBI Banca) to prevent and professionally manage conflicts of interest in relation to investment research. For further information please see Meccanismi organizzativi ed amministrativi posti in essere per prevenire ed evitare conflitti di interesse in rapporto alle Ricerche. Disclosure of potential conflicts of interest The outcome of the checks carried out is reported below: > UBI Banca provides corporate broking services for Prima Industrie S.p.A. Frequency of updates UBI Banca aims to provide continuous coverage of the companies in conjunction with the timing of periodical accounting reports and any exceptional event that occurs affecting the issuer s sphere of operations and in any case at least twice per year. The companies for which UBI Banca acts as Sponsor or Specialist are covered in compliance with regulations of the market authorities. Valuation methodology UBI Banca s analysts value the Company subject to their recommendations using several methods among which the most prevalent are: the Discounted Cash Flow method (DCF), the Economic Value Added method (EVA), the Value map method, the Multiple comparison method. For further information please refer to Ranking system UBI Banca s analysts use an absolute rating system, not related to market performance. The explanation of the rating system is listed below: Buy: if the target price is 10% higher than the market price. Hold: if the target price is 10% below or 10% above the market price. Sell: if the target price is 10% lower than the market price. Target price: the market price that the analyst believes that the share may reach within a one-year time horizon. Market price: closing price on the day before the issue date of the report, appearing on the first page. 11

12 Distribution This document is intended for distribution only by electronic and ordinary mail to Professional Clients and Qualified Counterparties as defined in Consob Regulation n dated This document may be distributed in the USA by a United States Securities and Exchange Commission ( SEC ) registered broker dealer. This document may not be distributed in Canada, Japan or Australia. Copyright This document is being supplied solely for the recipient s information and may not be reproduced, redistributed or passed on, directly or indirectly to any other person or published, in whole or in part, for any purpose without prior written consent byubi Banca. The copyright and intellectual property rights on the data are owned by UBI Banca Group, unless otherwise indicated. The data, information, opinions and valuations contained in this document may not be subject to further distribution or reproduction, in any form or via any means, even in part, unless expressly consented by UBI Banca. By accepting this document the recipient agrees to be bound by all of the forgoing provisions. Distribution of ratings For further information regarding quarterly rating statistics and descriptions, please refer to Historical ratings and target prices Date Rating Target Price (EUR) Market Price (EUR) 30 April 2013 BUY 12: September 2013 BUY