Capital Bank – Update on SBO - cut to HOLD from BUY, 12M target EUR 70.44
Crude oil futures traded to new record-highs on weak US-Dollar
Crude oil prices rose to a fresh all-time high above USD 90 a barrel in
real terms as well as inflation adjusted, encouraging the demand for SBO‘s
products and services. According to Lord Oxburgh, the former chairman of
Shell, a rapid increase in the oil price was inevitable as demand continued
to outstrip supply. So, peak oil - that is the point when global oil
production goes into terminal decline - scarcely matters. It is the gap
between production and demand that is of significance. But the response to
build adequate new supplies will take longer than originally thought. This
can be particularly traced back to the lack of experienced professionals in
almost every part of business. Years of underinvestment in new talent have
led to a limited and ageing pool of skilled workers. Therefore it will take
time to train large numbers of new recruits. Accordingly, SBO is affected
by this shortage as well. At the company‘s US plants, its professionals
have been working extra shifts to make up for the lack.
Investment Case - Business is booming
The company’s investment case remains intact as its business is booming.
SBO’s management traditionally does not give any guidance, but mentioned
that continuing growth can be expected till the end of 2010. Demand is
still strong as supply lines are lagging behind the investment demand of
the oil industry. Capacity adding in the sector is low; hence supply is not
expected to reach demand in the near future.
The major challenges has been so far the swift expansion of capacities,
finding qualified workers and the weak USD. Currently the USD has reached
an average price of 1.35 per EUR, which implicates margins to be put under
pressure. But we do not think that margins will fall below the 20% level
till 2010, still representing a lucrative business.In our model, margins
are planned to peak in 2007, but from 2008 to 2010, EBITDA and EBIT margins
will still be incredible high at 26% and 22% respectively. Besides
capacity-investments, acquisitions may become a hot topic as well to invest
the generated cash (we also expect rather high dividend payments). SBO’s
management has some companies on its radar screen, but nothing concrete
yet. We don’t see the company itself as a takeover-target as we do not
consider that Berndorf will sell its 31% stake.
Current valuation justified - 12M price target EUR 70.44
We valued SBO with a four pillar approach, using DCF and Multiple method as
well as GGM and CFRoEV to support our findings. The planning till 2012
reflects the business‘ cycle to peak in 2010 (declining sales growth rates)
and sales and margins to decrease by approx. 4% and 6% respectively in 2011
and 2012. Margins are planned to peak in 2007 and we expect the EBIT margin
to be around 22% from 2008 to 2010 because of the weak USD and the
agreement not to go ahead of the client’s margins. Because of this
conservative planning, we see just a low downside risk for our valuation.
Our models show a current fair value of EUR 65.07 for SBO and a 12M price
target (after adding COE for one year and taking off dividends) of EUR
70.44. A P/E of 20 for 2008 leaves little scope for upside on the stock.
Therefore we cut our recommendation on SBO to hold from buy.
