Deutsche Bank: Solid Q3 - niche position pays off


* Well on track, guidance confirmed

Voestalpine has proven the benefits of its niche position and delivered strong
numbers in Steel. Despite the weaker results in Specialty Steel, this puts the
company well on track to achieve confirmed FY targets of significant positive
EBIT (our est E274m incl. E20m restructuring charges) and high two-digit net
profit (our est E72m). We believe a further reduction of leverage (our net debt
09/10E E4.4bn incl. hybrid bond) and quick turnaround of Specialty Steel are key
and could offer upside potential. We recommend Hold owing to a balanced
risk/reward profile.


* Solid earnings, strong FCF lowered debt further

Voestalpine released solid Q3 numbers slightly ahead of expectations on the
earnings line. Sales of E2.1bn remained flat vs. Q2 (Deutsche Bank est E2.2bn
vs. cons. E2.2bn). Reported EBIT post PPA came in with E132m which was slightly
above the Street (our est E122m vs. cons. E118m). Hence, implied EBIT pre PPA
was c.E161m and above expectations as well (our est E151m vs. cons. E143m). Net
income minorities/pre-allocation to hybrid bondholders was E73m and above our
estimates and Street (our est E50m vs. cons. E36m). Management had been able to
squeeze WC further (-E251m) and hence lowered net debt excl. hybrid capital to
E3.3bn (was E3.6bn in Q2).


* More optimism on the outlook – steel scenario on track

Voestalpine now expects a step-by-step recovery with low probability of
another setback (slightly more positive than they had been before). Furthermore,
management was surprisingly optimistic on volumes in the Auto sector, expecting
even a mild volume increase in 2010. Shipments for CY 2010 have been guided with
1.2-1.3mmt per quarter which is slightly higher than our modeled run rate of
1.1-1.2mmt. Voestalpine plans to take out sustainable E500m in fixed costs of
which we estimate 40-50% have been achieved already. Management will likely
provide more details on the program with the reporting of the FY figures.


* Maintain our E30 price target; steel market recovery a risks

We apply a DCF valuation in line with our European Steel universe. To derive
our price target of E30 we use beta of 1.0, WACC of 8.2% and TG of 1% to reflect
limited growth prospects. Voestalpine currently trades at 7.0x EV/EBITDA for
2010/11E, which appears fully valued vs. sector at 5.5x. Downside risks: lower
steel prices and demand as well as higher-than-expected raw material costs could
lead to further deterioration in margins and cash flow; the group has high
financial gearing, and lower-than-expected CF might leave debt at a stretched
level. A stronger-than-expected recovery of the steel market poses an upside
risk.