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Sanok RC - 2Q19E results forecast

Sanok has been hit by a coexistence of several factors leading to a severe drop of production margins including: (i) growing cost of raw materials, labor and energy, (ii) ongoing large investment projects (incl. a new factory in Mexico and a new production warehouse in Sanok) and (iii) extensive launches of new contracts in the automotive segment happening throughout the whole 2019. All the above have led to the decrease of gross margin in the biggest automotive segment from the record high 19.7% in 2016 to forecasted 10.4% in 2019E, accompanied by the severe drop of the Company’s valuation (nearly -70% from the peak in 2017).
Currently, the majority of negative factors have been already reflected in the results, except for one – the Company has just started to launch numerous automotive contracts from the record high nominations signed in 2016. Sanok is entering a transition period when old, high margin and high volume automotive contracts are being replaced by new, often negative margin (at start) and yet low volume ones. Moreover, the Company must learn how to effectively manage new contracts and therefore a high level of wastes and QA refusals is expected. In our view, all of the above will lead to further deterioration of the automotive segment margin from 12.7% in 1Q19/ 15.3% in FY18 to forecasted 9% in 4Q19/ 10.4% in FY19.
Our new forecasts imply a drop of EBITDA by nearly 30% yoy in 2-4Q19 which, we believe, is not yet reflected in the market consensus. Therefore, we uphold our LT fundamental and ST market relative recommendations at Hold and Underweight, respectively. We also decrease our 12M EFV of Sanok’s equities to PLN 24.1 per share (down 22%; from PLN 30.8) due to (i) lower financial forecasts, (ii) slightly higher CAPEX assumed, and (iii) c. 10% drop of peer companies multiples. We expect the return to the positive yoy dynamics in 2H20.
Sanok is a well-managed automotive company with very promising foreign expansion plans and a chance to become a global provider of body sealing and anti-vibration systems by 2021. However, with a forecasted further yoy drop of results in 2-4Q19 as well as uncertain immediate future for the global automotive segment, we would expect further negative pressures on the Company’s valuation in the ST, before the recovery comes in the second half of 2020.