Momentum keeps SBO going

– Based on significantly increased estimates for 2011 and 2012, we raise our target price to EUR 59.0 (previously EUR 47.0). Given the cyclical nature of SBO’s business model, we stick to our Hold recommendation from a fundamental perspective, even though we believe that this stock will continue to outperform the broad market until the cycle is breaking.

– SBO delivered a very strong set of figures in 3Q10. Sequentially, new orders rose 14% to EUR 96mn. Thanks to increased capacity utilisation, the EBIT-margin rose to 18.4%.

– YTD operating cash flow rose substantially (+41.5% y/y) to EUR 58.7mn. Net debt dropped to just EUR 9mn, as of September 30, 2010. Overall, management has done an excellent job. We expect that, driven by the DSI acquisition, SBO’s net debt position will rise to around EUR 70mn by year end.

– The announcement of the USD 600bn liquidity injection of the US Fed will be short-term supportive for the crude oil price, in our opinion. We believe that China’s lending spree of 2009 (+ 35% y/y) was the major fundamental force that drove oil-prices up from the lows of early 2009. The monetary tightening steps China took in 2010 are pointing towards a stabilisation of oil prices at current levels. In the worst case scenario, if China is not able to digest the lending spree of 2009, then lower oil prices are on the cards.

– SBO is a very compelling investment case, offering a secular growth story in a well-protected niche market. It furthermore delivers investors sound free cash-flows in both the up- and downturn of the business cycle. So the management team has done an extremely good job over the last couple of years. However, due to the cyclical nature of the business model, investors might find more attractive price levels at which to purchase this stock.