Gorenje (GRVG SV, GORE.LJ)

Transcription

1 (GRVG SV, GORE.LJ) Difficult time ahead Analyst: Bojan Ivanc Recommendation statistics Current Previous Contact: +386 (0) Hold (12.0) Acc. (14.4; Sep 27 th, 2010) Key data Target price (12M) (EUR) 12.0 Upside/(downside) (%) 0.8 Current price on March 23th (EUR) 11.9 Market cap (EUR m) week range (EUR) Average daily turnover (EUR m) 0.06 Free float (%) 54.3 Primary stock exchange Ljubljana SE Audit KPMG Slovenija Next results published May 30 th, 2011 Internet site Forecasts and ratios A* 2011E 2012E 2013E Net sales (m) 1, , , ,705.6 EBIT (m) EBITDA (m) EPS P/E EV/EBITDA *unaudited Share price performance (%) 3M 6M 1Y 2Y SGD* S&P Global 1200 Consumer Discretionary index More or less exceeding our estimates announced a set of figures on March 11 th that were mostly above our estimates after excluding a larger X-O items which were above our estimates. Nevertheless was 2010 a transitional year as struggled to meet the debt covenants, was injected by one equity tranche of EUR 25 m (we expected that a 2 nd one will be successful as well) and finally took over Scandinavian company Asko for a bargain (EUR 4.5 m; implied EV/EBITDA 2.86). Lifted by East, Asko & Energy As the 8 th largest manufacture of white goods in Europe and holding a 4% market share in Europe, s sales are more weighted towards Eastern Europe than the West (58%:42%). In the former segment, sales rose by 32.4% in Ukraine and by 23.4% in Russia. Other markets where sales development was also favorable are Serbia, US, Middle & Far East. Disappointing figures came from Croatia and France. It has to be noted that just about 76% of sales are generated in the segment Home Full 2010 (act.) KD Banka Actual Actual/ est. figures est. Sales 1, , EBITDA EBIT Net income Appliance division whereas the rest comes from Ecology, Energy & Services division (22%) and Home Interior division (2%) which is despite all the restructuring efforts not breaking even due to cooled real-estate market in Slovenia. Sales increased by 16.5%, lifted by acquisition of Asko (12.5% w/o), low base effect (sales dropped by 11% in 2009) and according to mgt., better product sales mix. Average price of product sold increased by 4%. Sales in the most important segment Home Appliances rose by 12.5% y-o-y, Energy & Services by 34.4% whereas performance in Home Interior division further declined. Sales performance of the most important division significantly outperformed growth of European home appliances market (4.8% vs. 2%) after accounting for the effect of Asko. Total quantity sold on Western markets rose by 0.5%, outpaced by East (8.8%). managed to increase sales on the former by 2.7% and by 7.4% in the latter. The relative underperformance on the Eastern front was likely attributable to additional WC needs which decided not to provide to the wholesalers according to our view due to perceived risk. Source: Bloomberg, March 23 th, 2011 KD Banka d.d., Neubergerjeva 30, 1000 Ljubljana, Slovenia

2 Valuation multiples Profitability improved Left column: P/E, right column: EV/EBITDA. Source: own calc. Operational data (EUR m) Left column: EBIT, right column: net income. Source: own calc. Profitability & debt management Curve: ROE& debt/equity, column: debt/equity Growth performance Gross margin reached 24.7% an increase of 0.7 p.p. above EBIT leveled off at EUR 56.4 m what represents a 4.1% EBIT margin. After removing the effect of Asko, the margin stood at 3.1%. After removing the effect of acquisition of Asko and AR impairment, net profit stood at EUR 10.8 m what represents a significant improvement compared to 2009 (EUR 12.2 m loss). Net cash flow amounted to EUR 72.3 m whereas FCF in amount of EUR 13.3 represented higher WC needs and capex. Adjusted profitability was dented in last quarter due to rising COGS and this trend should persist in the following quarters as announced sales increases are likely to lag the rising COGS at least for 2 quarters. High unemployment on main markets and fiscal tightening speak in favor of rescheduled purchase of white goods. AR rose at a high pace in This was one of the necessary catalysts for growth of top-line. At end of 2010, they stood at EUR m what is 21.7% higher. Adjusted for acquisition of Asko, AR rose by 11%. As a % of sales they represented 22.2% which was all-time-high in last 5 years of operations. Capex amounted to EUR 44.6 m. CFO Mirjana Dimc Perko left the company at end of the year and was substituted by Marko Merzel, which was the director of sales subsidiary in Serbia. s guidance for 2011 outlined its rather ambitious plan for 2011 in late December. Adjusted sales should increase by 6% and those accounting for Asko, for 14%. Asko alone should in 2011 generate about EUR m in revenues and EUR 8.7 m of EBITDA. Division of Home Appliances should rose by 17.4%, followed by Ecology & Services (5.5%) and Home Interior (3%). Planned EBIT is set at EUR 54.6 m what should transform into 3.8% EBIT margin when considering EUR 1.5 b of sales. Target FCF is set at EUR 29.1 m. It will be mainly used for reducing the high level of debt. Net debt/ebitda stood at 3.25 whereas EBIT/interest expense stood at This represents a significant improvement compared to 2009 when those figures were alarming (6.34 vs. 0.57). LT goal of EBIT margin remains at 5-6%. Capex plan is set at EUR 40.4 m. Additional impairment of AR are according to CEO excluded. Material changes to our valuation Curve: sales growth, column: net income growth Margins We decided to retain our valuation model of 50:50 for EV/EBITDA and DCF. We still do not include peer analysis to our valuations directly as of incomparable ratios. has below-peer profitability ratios and higher leverage. Current profitability ratios are not appropriate and comparison of forwards may bring input data bias due to necessary inclusion of our DCF forecast. DCF model changes Left column: EBIT margin; middle column: EBITDA margin; right column: NI margin WACC estimates are unchanged. KD Banka uses same WACC for the 10-year and infinite period what may imply a too low WACC for the near-by period (high leverage) and a too high one for the infinite period. Simulation confirms that a change in methodology would not materially change the value of operations. KD Banka d.d., Neubergerjeva 30, 1000 Ljubljana, Slovenia

3 Cost of debt is unchanged at 7.2% as company faces high debt burden. Cost of common equity is set at 13.6% (beta of 1.6 and a risk premium of 5.1%). Add. premium for mid-cap status remains (1.7%) which also partly incorporates illiquidity status of the shares. The ratio between MV of debt and equity is set as a target in relation 60:40. WACC of 8.9 ranges well with comparable companies (8-10%). We facelift the sales estimates considering the impact of higher base (our sales estimates for 2010 were beaten). Our 2011 estimate is 0.9% ahead of company s guidelines set in December. Forward sales estimates 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Old (nom.) 1, , , , , , , , ,881.0 N.A. New (nom.) 1, , , , , , , , , ,997.7 Old (rel.) N.A. New (rel.) Diff. (nom.) N.A. We reduce the steepness of EBIT margin improvement due to rising COGS, which are industry-wide trend. Part of the increase is likely to be offset by internal cost reduction (SG&A, mostly labor costs). We also reduce the LT EBIT margin from 4.2 to 4.1% reflecting a persistent view of difficult environment for European white goods sector. Our estimates are well below outlined medium-term targets of (5-6%) but it has to be taken into account that poor track record ( EBIT margin was at 2.8%), risks and costs of restructuring of operations (moving production to more labor-friendly countries as Serbia) which have just seriously begun, will take approximately 3-5 years which decreases the probability of meeting the ambitious targets. Forward EBIT estimates 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Old (nom.) N.A. New (nom.) Old (rel.) N.A. New (rel.) Diff. (nom.) N.A. Together with sales adjustments, capex is adjusted as it is set as fixed % of sales. The relative proportion of capex to sales has not changed in the model WC estimates are refined slightly upwards. Forward WC estimates 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e NWC (old) N.A. NWC (new) NWC/sales (old, in %) N.A. NWC/sales (new, in %) Diff. (nom.) N.A. KD Banka Equity Research Page 3

4 Capex & WC development Capex estimates 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Net capex in fixed assets (EUR m) Net capex/sales (in %) Depreciation & Amortisation(EUR m) Depreciation/net fixed assets (in %) Reinvestment ratio WC estimates 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Inventories (EUR m) as % of sales AR (EUR m) as % of sales AP (EUR m) as % of sales Total NWC Change in NWC NWC/Sales KD Banka Equity Research Page 4

5 Historical & forecasted income statement in EUR m / year 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Net sales 1, , , , , , , , , , , , ,997.7 Change in sales (%) Changes in invent Other oper. income As % of net sales Gross revenue 1, , , , , , , , , , , , ,042.8 COGS 1, , , , , , , , , , , ,526.2 As % of net sales Gross margin (%) SG&A As % of net sales EBIT EBIT margin (%) EBITDA EBITDA margin (%) Interest expense Interest received Net non-oper. profit/(loss) (2.6) (4.4) (12.6) (4.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) Pretax income As % of net sales Income tax expense Effective tax rate (%) 34.2 N.A Minority interests Net income As % of net sales KD Banka Equity Research Page 5

6 Forecasted balance sheet in EUR m / year 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Assets Cash & Cash Equivalents ST financial assets AR Inventories Other current assets Total current assets Net fixed assets LT financial investments Other noncurrent assets Non-current assets Total assets 1, , , , , , , , , , , , ,562.1 Liabilities & Equity AP Other ST liabilities ST borrowings Current liabilities LT borrowings Other LT liabilities Minority interests Equity Total liabilities & equity Forecasted CF statement 1, , , , , , , , , , , , ,562.1 Year (figures in EUR m) 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e CFO CFI CFF Change in cash KD Banka Equity Research Page 6

7 DCF metrics Year 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e EBIT*(1-t) Depreciation& Amortisation Capex WC Inv FCFF Discounted FCFF Year 2010 Discounted value of operations Discounted terminal value Total value of operations Cash & ST financial assets LT financial investments 9.8 Other current assets 59.7 Value of company Financial debt Minority interests 1.8 Other LT liabilities 95.1 Other ST liabilities Value of equity Current fair value of share m target price 14.2 DCF target price Sensit. Matrix 1 LT growth in FCFF Sensit. Matrix 2 LT EBITDA margin Long-term WACC 9.92% 9.42% 8.92% 8.42% 7.92% 0.50% % % % % Long-term WACC & 1.5% terminal growth rate 9.92% 9.42% 8.92% 8.42% 7.92% 6.60% % % % % Most important changes to DCF include higher sales estimates due to higher base effect in 2010, downward re-rating of EBIT margin, higher capex and WC needs. Current fair price is set at EUR 12.5, whereas 12-m target price adjusted for cost of equity is EUR The conclusion is just coincidently the same as in our latest report as of September 21 st KD Banka Equity Research Page 7

8 Implied EV/EBITDA Implied EV/EBITDA valuation model lessens the effect of long-term nature of projections compared to 10-year DCF and is less sensitive to WACC. Fair valuation multiple EV/EBITDA of 4.8 reflects 80 % of current close peer median (Electrolux, Indesit, De Longhi; 4.6) and 20 % of historical 10-year median for (6). Compared to previous report, ratios have decreased materially. These 3 companies are most comparable to in terms of sales exposure & target EBIT margin but are less levered. This represents a material difference in the calculation methodology compared to our previous report, where also Whirlpool and Arcelik were included. These are now excluded as they do not represent a fair peer comparables. stands out compared to close peers in terms of net debt/equity as it is close to 90% compared to peers 0% and earns a symbolic ROE of 5%. Implicated LT growth rate (after year 2015) is 1.0% (after 5-year period). Current fair price is EUR 8.7 and 12-month EV/EBITDA matrix Peers- trading rather expensive Mcap (b EUR) P/B P/S P/E Next year P/E target price, adjusted for cost of equity is set at EUR 9.8. This represents a significant decrease in target price for a third. EV/sales EV/ EBITDA Divid. yield ROE EBITDA margin Net debt/ equity Arcelik Schulthess Whirlpool Indesit De Longhi Electrolux Median close peers 2011e 2012e 2013e 2014e 2015e EBIAT Depreciation& Amortisation Capex WC Inv FCFF Discounted FCFF N.A KD Banka Equity Research Page 8

9 Final valuation & risks Applying a 50:50 weight to EV/EBITDA and DCF seems reasonable as both methods likely capture the true value of the company. Peer comparison is not used due to far different profile of in terms of profitability and indebtedness. Valuation ratios such as trailing P/E or forward P/E would signal a far lower price whereas those including sales would show a far too bullish unjustified signal. Final 12-month target price is therefore set at EUR 12.0, marking a downward adjustment stemming mainly from the fact of rather unambitious short term plan, mounting COGS concerns and higher WC needs. Our analysis already incorporates some further adjustments to bottom-line reflecting one-off charges which reflect a past pattern of operations. Our recommendation is changed from Accumulate to Hold with a lack of upside. Possible catalyst would be several quarters of exceeding the estimates, lower than expected COGS ( does not hedge the COGS) and faster transitioning of production facilities into more labor friendly countries. Higher consumer confidence in Europe and low unemployment are welcomed industry-wide trends that could reduce the oversupply and lessen the competition from Asia and Turkey. KD Banka Equity Research Page 9

10 Appendix 1 Analyst Certification The views expressed in this report accurately reflect the personal views of undersigned analyst about the issuer of the security. The undersigned analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. The recommendation has not been disclosed to anyone prior to public release. Bojan Ivanc Important Disclosures This publication has been either approved or issued by KD Banka in order to promote its investment business. KD is a licensed bank and is a member of Ljubljana Stock Exchange, Inc ( The operations of KD Banka are supervised by Bank of Slovenia ( and Slovenian Securities Market Agency ( Unless it is explicitly otherwise stated in the document, the information on issuers, financial instruments and/or financial strategies: - Is based only on the information, made accessible to general public by issuers of securities or by printed or electronically available public media. - Is made on the basis of analyses of companies past operations data and valuation of future cash flow models inferred from the above-mentioned analyses. Cash flow models have been established on the basis of the past and the anticipated future, and analyzed with the help of value indicators, profitability indicators, funding structure and liquidity indicators. - Was not revealed to issuers prior to its publication. - Is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. The Information contained in or provided from or through this Website is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information on this Website and provided from or through this Website in the form of s and/or newsletters is general in nature and is not specific to you the User or anyone else. - Does not constitute or form part of an offer, subscription, recommendation or solicitation to buy or sell any securities, commodities, financial objects, futures, options, stocks or other investment vehicles, in any amount or at all or to take up any services, nor should it be relied on in connection with any contract or commitment whatsoever. - May include data about above average returns on financial instruments in the past, which are not representing solid guarantee for same or similar future returns. The trading with financial instruments has potential rewards, and it also has potential risks involved. - Do not exclude risks involved in securities trade. - May not in all cases be current and it is subject to continuous change. Accordingly, the User should not rely on any of the Information as authoritative or substitute for the exercise of his own skill and judgment in making any investment or other decision. KD Banka does not warrant that the supply of Information will not be error free, and will not be liable for any direct, indirect, or consequential loss arising from any use of or reliance on the Information and its availability. However KD Banka endeavors to provide for comprehensive and reliable information, this is not enough to make an informed and good investment decision. To achieve that, every user shall contact directly the issuer or shall turn to a professional financial adviser in order to discover and avoid all potential investment risks. Therefore users of this information should not make any decision, financial, investments, trading or otherwise, based on any of the information presented on or delivered by these internet sites without undertaking independent due diligence and consultation with a professional broker or competent financial advisor. Any and all use of these information which the user makes, is solely at his/her own risk and without any recourse whatsoever to KD Banka, its associates, subsidiaries, partners or content Providers. General information about risks on trading with financial instruments and on potential conflicts of interests is stated in General terms and Conditions on provision of brokerage services (General Conditions for Performing Investment Services and Customer Operations of KD BANKA). First release of this recommendation was performed on 25 th of March This recommendation is valid for 12 months, except in case of previous update of the recommendation. However KD Banka is not engaged in periodical updating of the recommendation of the issuer under consideration as well as is not obliged to notify readers about any kind of valuation, opinion or forecast changes, which have arisen from occurrences after the recommendation release. When dealing with costumers, KD Banka is not obliged to act in accordance with opinions and assessments expressed in investment recommendations. KD Banka or an associated company may have provided or may be providing corporate finance or other services for the company referred to in this document. KD Banka and its related entities do not own shares of the issuer under consideration. A financial analyst responsible for monitoring of the issuer under consideration does not have a financial interest concerning the financial instrument of the relevant issuer. KD Banka, its related entities and a financial analyst responsible for monitoring of the issuer under consideration do not have any conflict of interest concerning the issuer under consideration. This research is for our clients only and is based on current public information that we consider reliable, if not stated otherwise. We do not represent it as accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Reports are published at irregular intervals as appropriate in the analyst's judgment. Rating definitions Buy Accumulate Hold Reduce Sell >+15% from current price of recommendation +5%< from current price of recommendation<+15% -5%< from current price of recommendation<+5% -15%< from current price of recommendation<-5% <-15% from current price of recommendation Our target prices are established by determining fair value of stocks, taking into account additional fundamental factors and news of relevance of the stock price (such as M&A activities, major forthcoming deals, positive/negative share/sector sentiment, news) and refer to 12 months from now. All fundamentals are to be understood relative to our current fundamental valuation of the stock. The recommendation does not indicate any relative performance of the stock vs. a regional or sector benchmark. KD Banka Equity Research Page 10

11 Historical recommendation and target price Date of recomm. Recommendation Target price 1. Hold EUR September 27 th, 2010 Accumulate EUR June 23 rd, 2010* Buy EUR May 14 th, 2010 Buy EUR March 16 th, 2010 Buy EUR January 6 th, 2010 Accumulate EUR November 11 th, 2009 Accumulate EUR August 28 th, 2009 Reduce EUR 9.7 * On June 11 th, 2010, transfer of coverage was performed from Matjaž Maletič to Bojan Ivanc Investment banking relationship There was no investment banking relationship with the issuer. Published by KD BANKA d. d., Neubergerjeva 30, 1000 Ljubljana, Slovenia. Phone: +386(0) KD BANKA Homepage: On Bloomberg please type: KDBP <GO>. Copyright KD BANKA, d. d. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of KD Banka, d. d. KD Banka Equity Research Page 11