Capital Bank - Update on SBO - upgrade to BUY from HOLD, 12M price target cut to EUR 63.50 from EUR 70.44

SBO is scheduled to report preliminary figures for FY07 on the following Monday which we consider to beat the consensus. In the 9M period, the company reported substantially improved figures which can be traced back to the fact that it was successful in utilising the positive overall conditions in the oilfield service market. We expect these market conditiions to remain favourable in the next quarters, which will again enable SBO to accelerate its growth strategy. But it must be stressed that the company‘s future growth will largely depend on the availability of skilled workers. It is essential to close the gap between production and demand, which will take longer than originally thought, as years of underinvestment in new talent have led to a limited and ageing pool of skilled labour. But despite of this tight worldwide situation, SBO‘s headcount grew from 1051 as at September 2006 to currently 1215. Nevertheless, the burden of work at its US plants is still far too great.

Investment Case - Solid margins and attractive valuation

Due to the ongoing boom situation in the industry, the company’s investment case remains valid. SBO’s management expects the strong business environment to continue in 2008, but the company traditionally does not give any guidance. It is worth mentioning that continuing growth can be expected till the end of 2010. The demand for the company‘s products is driven by the demand for oil. However, the current high oil price cannot be put down to the strong demand of oil, but rather to geopoltical reasons. So the oil price does not have an immediate impact on SBO‘s business, and accordingly the company is not subject to speculative risk.

As a reminder, we would like to emphasize once more the key points of SBO, which make the stock attractive and are as follows: The major challenges so far have been the swift expansion of capacities, finding qualified workers and the weak USD. Currently the USD has reached an average price of around 1.40 per EUR, which implicates margins to be put under pressure. Even though we slightly adjusted our margins downwards, we think that the EBIT margin will not fall below the 20% level before 2011, still representing a lucrative business. In our model, margins are planned to peak in FY 2007, but from 2008 to 2010, EBITDA and EBIT margins will still be incredible high at around 27% and 22% respectively. Furthermore, the new production facility for long-term contracts with several key customers at the Ternitz production site is scheduled to go onstream in 1Q 2008, which will ensure solid future operating results and favourable cash-flows in the long term. We also expect rather high dividend payments.

Current valuation seems low - 12M price target EUR 63.50

We adjusted our revenue estimates downwards by around 11% for 2007, 10% for 2008 and 7% for 2010. Based on this and a lower peer valuation we cut our 12M price target to EUR 63.50 from 70.44 (after adding COE for one year and taking off dividends), which implies some 37.63% upside. Therefore we raise our recommendation on SBO to buy from hold, backed by the facts that our forecasts for 2007 are still above the market consensus - which we consider rather conservative - and after the unexpected sharp drop in share price.