Capital Bank - Initial Coverage on Andritz - BUY, 12M price target EUR 49.28
Andritz - leader in the supply of customized plants and systems
Andritz Group is one of the leading technology companies based in Graz,
Austria. The group has approximately 12,000 employees and runs 35
production/service facilities and over 120 affiliates and distribution
firms around the world. It develops high-tech production systems and
industrial process solutions for various standard and highly specialised
products. Andritz provides high-tech systems, machinery and services
especially for the production of pulp and paper, steel, animal feed, and
wood pellets as well as turnkey electro-mechanical equipment for hydro
power plants and pumps.
Revenue growth of 10% is backed from a record backlog
Andritz reported a record order backlog of EUR 3.8 bln as of the end of FY
2007, ensuring favourable earnings in 2008. As the management confirmed us
that the average divisions processing time of 12-15 months will not
significantly change, we are confident that a 10% revenue growth
(management expects revenues of EUR 3.5 bln in 2008) is well supported this
year. Taking into account the average processing time, some EUR 2.7 bln of
sales are ensured only from the order backlog. Both the average percent of
sales from service of approximately 25% in the last years, combined with a
book-to-bill ratio of 1.14 in 2007, backed our stance that Andritz will
record about EUR 3.6 bln of revenue in 2008. Moreover, the management aims
to increase its EBITA margin this year based on a increase in sales from
service. During the 1Q of 2008 only the official published order intakes of
the company amount to approximately EUR 445 mln, primarily coming from its
pulp and paper, steel and hydropower division. Thanks to the acquisition of
VA Tech 35-40% of group sales are achieved with renewable energy products
for which demand is likely to remain high in the mid-term. Nonetheless,
Andritz has a capacity utilisation of 100%, because it is outsourcing
approximately 60% of its production. Due to this reason the group is able
to offset margin pressure during periods of economic slowdowns, because it
has very limited operational leverage due to the outsourcing.
Recently, Andritz issued a EUR 150 mln bond with maturity in 2015, in order
to refinance a EUR 100 mln bond which ends in 2008. The coupon of 5.25% of
the new one is even lower than the 6.0% coupon of the bond maturating this
year.
Valuation & Outlook
The management maintained its goal to increase its revenue by approximately
10% a year, with a 5% organic growth and the remaining growth coming from
acquisitions. In our planning model, we implied 10.6% revenue growth for
2008 based on our opinion mentioned above and backed from the high order
backlog of EUR 3.8 bln of Andritz in 2007. As we usually never take
possible acquisitions in account, our view on the company reflects a 4% to
5% revenue growth for the next four years with only 3% growth in 2013. In
addition, the management plans with around 7% EBITA margin in 2008, but we
prefer to stay on the conservative side and accounted 6.5%. As already
said, without planning some acquisitions, in our planning model the EBITA
margin slightly decreases over time to 6.25% in 2013. We believe that the
hydro power division will remain the most profitable, while the high-grade
steel division will further be a cyclical one. We valued Andritz with our
four pillar model, getting a current fair value of EUR 43.50 and a 12M
price target of EUR 49.28. This offers a 35.4% upside or 28.7% expected 12M
continuously compounded excess return and therefore we initiate our
coverage on Andritz with a BUY recommendation.
