MASTERS IN FINANCE EQUITY RESEARCH CARGOTEC 3Q RESULTS POSTVIEW. 3 rd Quarter preview INDUSTRIAL MACHINERIES 24 OCTOBER 2014 STUDENT: MATIAS PARIKKA

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1 MASTERS IN FINANCE EQUITY RESEARCH CARGOTEC 3Q RESULTS POSTVIEW INDUSTRIAL MACHINERIES 24 OCTOBER 2014 STUDENT: MATIAS PARIKKA 3 rd Quarter preview Alive and kicking Recommendation: BUY previous recommendation BUY Price Target FY15: 29,7 Facts: Despite of the uncertainty that surrounds the global economy, Cargotec s 3 rd quarter report was very strong in terms of YoY growth. Revenue grew 12% to 840 m, EBIT grew a whopping 47 % to 45.2 m and net income amounted to 27.8 m, posting a 44% growth. Our Analysis: Due to the challenging macro environment, which had weakened Cargotec s competitors, we expected Cargotec s Q3 sales to show no YoY growth and stay roughly in the previous level at 749 m (752 m ). Needless to say, we were overly pessimistic. Stronger than expected sales growth was largely driven by MacGregor segment which posted 28% growth in sales to 255 m. Other sectors, Hiab and Kalmar saw an increase in sales by 1% and 9%, respectively. On-going efficiency improvement projects in Hiab and Kalmar segments finally showed great results and EBIT climbed 47% YoY to 45.8 m (31.2 m ). This was clearly above our careful expectations of 32 m. Net income for the period was 27.8 m, again above our expectations (20.4 m ). Conclusion: All in all, the 3 rd quarter report was very strong and showed that despite of struggles that Cargotec s competitors are facing, Cargotec is doing quite well in the current market environment. We repeat the Buy recommendation and raise the target price to 29.7 per share for YE Price potential +22% Price (as of 24-Oct-14) week range ( ) 20,57 34,67 Market Cap ( m) 1495,7 Outstanding Shares (m) 61.3 Source: Bloomberg Source: Bloomberg (Values in millions) E 2015E Revenues 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 Efficiency improvement programme in Hiab and Kalmar segments proceeded as management has promised. During the 3 rd quarter, Cargotec s efficiency improvement programme proceeded very well. EBIT margins in Kalmar and Hiab (8% and 6%, respectively) segments were couple of notches higher than we forecasted. On the other hand, due to the recent acquisitions, EBIT margin in MacGregor segment (3%) was substantially lower than we expected and was clearly a disappointment after good results in Kalmar and Hiab. This was largely due to the fact that integration process with MacGregor s newly acquired business is still not complete. However, we expect that the segment will do much better in the future once new pieces are fully integrated. Good news is that despite of the lower than expected performance in MacGregor segment the overall EBIT was substantially higher than our expectations. As we were expecting in our 3 rd quarter preview, operating environment in the near future can be challenging. In the 3rd quarter report, Cargotec s CEO Mika Vehviläinen is expressing worries over increased uncertainty in the current operating environment. This type of comment was largely expected. Cargotec s competitors are already struggling and it would be naïve to assume it would not have any impact on Cargotec. Due to the worsening outlook of ship market, Cargotec will initiate efficiency programme in its MacGregor segment. This should significantly improve currently low profitability of the segment. Given the increased uncertainty, Cargotec announced that it will take measures to improve the performance of its MacGregor segment. It is estimated that the challenging operating environment will hit especially hard MacGregor segment. New ship orders have dropped and that will impact on marine cargo investments without a doubt. In addition to this, decline in oil price has an impact on offshore oil exploration and can potentially slow down future orders in the segment. To fight this, a reorganization programme that seeks improvement in sales, services, and procurement through a more customer oriented organization has been launched to further strengthen MacGregor segment. When these improvements start to pay off, remains to be seen. We expect, however, that MacGregor will improve its EBIT margins already in the 4 th quarter due to the ongoing integration process. PAGE 2/6

3 Impact on Forecasts and Valuation Due to the stronger than expected 3 rd quarter results, we have revised our target price upwards to 29.7 per share. As a result of Cargotec s performance that clearly exceeded our expectations, we have increased our growth expectations for the year 2014 as follows. Revenue is expected to grow approximately 2% to 3242 m (vs. previous forecast of 3153 m ) whereas heavy emphasis on efficiency is expected to kick in even stronger and EBIT is set to grow 39% to 128 m. For the longer term forecasts, we didn t do any changes based on the 3 rd quarter report. We still expect revenue to grow 3% in Due to these adjustments, we increased our target price for YE 2015 to 29.7 per share. Financials As we mentioned earlier, due to the recent acquisitions done to strengthen Cargotec s MacGregor segment, Cargotec s debt levels have drifted higher. However, as this was already apparent in the last quarter, not much has changed in Cargotec s financials during the 3 rd quarter. Interest bearing debt is roughly at the same level as it was in Q2 2014, at 1030 m. D/V ratio is currently at 41%, which is a minor increase from 38% in Q2. This was due to the lower market value of equity in Q3. 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 because we believe that there are currently no major acquisitions in the pipeline. PAGE 3/6

4 Appendix Financial Statements Consolidated statement of income, MEUR 2013A 2014E 2015E 2016E 2017E Sales Operating expenses EBITDA Depreciation, Amortization and impairment EBIT Financing expenses Financing income Profit before taxes Taxes Net profit EPS Consolidated balance sheet, MEUR 2013A 2014E 2015E 2016E 2017E 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 the equity holders of the company Of which 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 2013A 2014E 2015E 2016E 2017E Net sales EBIT Notional income tax Tax adjustment NOPLAT Depreciation, amortization and impairment (+) Gross free cash flow Change in NWC (-) Capex (-) Free cash flow 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