MASTERS IN FINANCE EQUITY RESEARCH CARGOTEC 3Q RESULTS PREVIEW. 3 rd Quarter preview INDUSTRIAL MACHINERIES 16 OCTOBER 2014 STUDENT: MATIAS PARIKKA

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1 MASTERS IN FINANCE EQUITY RESEARCH CARGOTEC INDUSTRIAL MACHINERIES 16 OCTOBER 2014 STUDENT: MATIAS PARIKKA 3 rd Quarter preview Recommendation: BUY Is the efficiency program finally paying off? Facts: While the efficiency program that was initiated to boost Cargotec s Hiab and Kalmar segments should finally start bearing fruit, slow growth and uncertainty in the world economy has potential to drag growth in the near term. Our Analysis: Due to the challenging macro environment, we expect Cargotec s Q3 sales to show no YoY growth and stay roughly in the previous level at 749 m (752 m ). While Cargotec has kept its forward guidance expecting revenue and profit growth this year, two of its main competitors have already slashed their guidance and this clearly brings dark clouds to the Cargotec s horizon as well. On the bright side, on-going efficiency improvement projects in Hiab and Kalmar segments are likely to finally show results and EBIT is expected to climb 2.5% YoY to 32 m (31.2 m ). This translates into a small improvement in the net profit which we expect to increase 5.6% YoY to 20.4 m (19.3 m ). Conclusion: We cover Cargotec with a Buy rating and a YE15 price target of 26.8 resulting from the discounted cash flow valuation. Due to the well performing and strong MacGregor segment and the anticipated efficiency improvement in Hiab and Kalmar segments, we believe there is a nice upside potential in the stock. Price Target FY15: 26.8 Price potential +21% Price (as of 21-Oct-14) week range ( ) 20,57 34,67 Market Cap ( m) Outstanding Shares (m) 61.3 Source: Bloomberg Source: Bloomberg (Values in millions) E 2015E Reenues EBITDA Net Profit EPS P/E Source: Analyst projection, Bloomberg Company description Cargotec is a global manufacturer of cargo handling machinery for ships, ports, terminals, and local distribution. Cargotec was formed in 2005 when Kone Corporation was split into two companies to be listed. Cargotec has approximately personnel in over 100 countries and is listed in OMX Helsinki stock exchange. See more information at Page 1/6

2 Recent developments Cargotec s competitors have lowered their forward guidance due to the rapidly declining orders. Despite of not having lowered its guidance yet, Cargotec is most likely not immune to these trends either. Without a doubt, the state of the world s economy is one of the main drivers of the cargo equipment industry. Given that, the outlook in Europe which is Cargotec s main market, still seems weak. U.S. is expected to do little bit better but the growth there is also expected to be moderate. Most parts of Asia are still growing at a brisk pace but buyers in the less developed areas are reported to have problems tapping into credit lines, which might hinder sales in the area. In short, macro picture could be better. Having said that, two of Cargotec s main competitors - Palfinger and Terex - have both lowered their 2014 guidance due to the weak state of the global economy. Interestingly, Cargotec has not lowered its guidance and is expecting its 2014 revenue (3181 million ) and operating profit (92.5 million ) to be higher than in One explanation for these relatively high expectations could be Cargotec s MacGregor segment which has been a bright spot in the otherwise dim operating environment. However, we need to bear in mind that we still have one quarter to go this year, so it will be interesting to see whether the management changes its guidance in Q3 report. Efficiency improvement programmes in Hiab and Kalmar segments should start bearing fruit already in Q This should translate into significantly higher margins in both segments. To fight the challenging operating environment and increasing competition especially from low cost Asian manufacturers, Cargotec initiated ambitious efficiency programs aimed to improve the results of its underperforming Hiab and Kalmar segments. These programs aim to improve the results of both segments by 40 million by the end of During the first half of 2014, due to the cost over-runs in current large scale deliveries, Kalmar has not shown any signs of improvement. However, as these large projects have presumably now run their course, latter half of 2014 is expected to bring significant improvements to Kalmar. Efficiency improvements in Hiab segment on the other hand are proceeding as expected and Hiab s EBIT has improved from 1.9% to 4.4% while sales have also shown healthy growth. MacGregor segment has been strong and is expected to continue to perform strongly in the future with high order intake and growth in sales. PAGE 2/6

3 Impact on Forecasts and Valuation Due to the macro uncertainty Comments and increasing on the competition, main text we are conservative in our growth estimates Due to the sluggish growth, we have set our growth expectations for the year 2014 as follows. Revenue is expected to decline approximately 1% to 3153 m whereas heavy emphasis on efficiency is expected to finally kick in and EBIT is set to grow 15% to 106 m. As for the longer term forecasts, we expect revenue to resume to the growth track in 2015 with 3% growth. Due to the recovering economies in Europe and U.S., revenue growth is expected to peak in 2016 with 5% and then slowly decline to 3% over time. Sales growth is expected to be relatively moderate due to the increased competition especially from Asian low cost manufacturers which have been able to win orders solely due to their competitive pricing policies. Cargotec s emphasis to improve efficiency is expected to improve EBIT margins from 3% in 2014 to 6% in 2016 onwards. Financials Multiple acquisitions to strengthen Cargotec s segments have burdened company s balance sheet by raising debt levels Cargotec s MacGregor segment has been on a shopping spree recently. In Q it acquired merchant ship and offshore deck equipment provider Hatlapa for 160 m, in Q it acquired mooring and loading system unit of Aker solutions for 180 m, and in Q it purchased Deep Water Solutions AS. These acquisitions have increased Cargotec s debt/equity (book values) levels from 21% in 2010 to 69% in Q Cargotec s official target for D/E (book values) is 50% so we expect these levels to be reached in the near future. In Q2 2014, Cargotec is sporting a rather high D/V of 41% based on market prices. Cargotec has expressed one of its key goals to be to reduce its net debt. We hold 35% D/V target for Cargotec based on market prices which should be seen already in the very near future. PAGE 3/6

4 Appendix Financial Statements Consolidated income Statement, MEUR 3Q Q 2014E 9M M 2014E E Sales Operating expenses EBITDA EBITDA margin % 6.3% 7.1% 5.6% 4.9% 5.3% 5.9% D & A EBIT EBIT margin % 4.1% 4.3% 3.4% 2.3% 2.9% 3.4% Net financing income Profit before taxes Taxes Net profit Net profit margin % 2.5% 2.7% 2.1% 1.1% 1.7% 2.1% Consolidated balance sheet, MEUR 3Q Q 2014E E Assets Fixed assets Other non-current assets Inventory Accounts receivable and other non-interest bearing assets Deferred tax assets Cash and cash equivalents Other non-operating current assets Total assets Equity & Liabilities Equity attributable to equity holders of the company Non-controlling interest Total equity Deferred tax liabilities Interest bearing debt Advances received Accounts payable and other non-interest-bearing liabilities Other interest free debt Total liabilities Total equity and liabilities PAGE 4/6

5 Consolidated free cash flow map, MEUR 3Q Q 2014E E Net sales EBIT Notional income tax Tax adjustment NOPLAT Depreciation, amortization and impairment (+) Gross free cash flow Change in NWC (-) Capex (-) Free cash flow Change in other non-operating assets (-) Financing income (+) Total free cash flow available to investors PAGE 5/6

6 Disclosures and Disclaimer Research Recommendations Buy Hold Sell Expected total return (including dividends) of more than 15% over a 12-month period. Expected total return (including dividends) between 0% and 15% over a 12-month period. Expected negative total return (including dividends) over a 12-month period. This report was prepared by a Masters of Finance student, following the Equity Research Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The NOVA School of Business and Economics does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report is not an investment recommendation as defined by Article 12.º-A of the Código do Mercado de Valores Mobiliários. The students of NOVA School of Business and Economics are not registered with Comissão do Mercado de Valores Mobiliários as financial analysts, financial intermediaries or entities or persons offering any services of financial intermediation, to which Regulamento 3.º/2010 of CMVM would be applicable. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice. PAGE 6/6