Waberer’s - DRIVING OUT OF MUD

WABERER’S - INITIATION OF COVERAGE

Recommendation:  BUY

Target price (e-o-y): HUF 1,785

Share price: HUF 1,215

 

 

• We initiate a coverage of Waberer’s International Plc. with a BUY rating and a TP of HUF 1,785, implying a 47% upside potential.
• It’s going to be very difficult but not impossible to get back on track after a rapidly changing economic environment, as well as company-specific structural issues challenged Waberer’s over the past couple of quarters. As European transportation industry is characterized by oversupply at the moment, companies begun to suffer in the EU.
• We see the company is not teetering on the edge of bankruptcy despite accruing losses quarter by quarter. In addition, Waberer’s has some valuable assets, which is worth more than the current share price, in our opinion. However, if the Company continues to make losses on Group level, it may sooner or later become insolvent. According to our sum-of-the-parts valuation method, RCL segment is worth ca. HUF 1,370 per share, while Waberer Hungaria is worth ca. HUF 1,010 per share. ITS segment is a loss-making unit, suffering from structural issues and mounting risks, thus we believe this is deteriorating the fair value of Waberer’s (HUF -400 per share) at this stage. We also applied a DLOM of 10% due to the fact that liquidity of the shares has been very limited at the BSE since its IPO in 2017.
• Net revenues are expected to fall 4% YoY to EUR 701mn in ‘19F on Group level. As a result of the implementation of IFRS 16, it’s more practical to highlight the evolution of EBIT, instead of showing EBITDA’s trajectory. We assume that the Group will achieve a reported EBIT of EUR -6mn and EUR 4mn in ‘19F/’20F, respectively, compared to a net loss of EUR 9mn in 2018.
• We expect a rec. net loss of EUR 21mn and EUR 8mn in ‘19F and ‘20F, respectively. The Group will hardly be able to make profit in 2020 amid Brexit uncertainties and recession fears. However, we expect Waberer’s to be profitable in 2021 on Group level on the back of mid-term measures if the Management restructures its loss-making core operation. However, WHB is a very profitable unit, operating with a profit margin of 8-9%.
• On a segment level, we are of the view that operating margins will improve somewhat in 2019, however the company will continue to make huge losses in ITS. As a result, the Company has to restructure the business model to become viable, which might take a longer time. We assume that ITS segment will deliver a net recurring loss of ca. EUR 26mn and ca. EUR 16mn in ‘19F and ‘20F, respectively. All of this means that we don’t expect net income to reach break-even within 2-3 years.
• Regarding RCL segment, operating margins will very likely shrink in 2019 predominantly due to higher wages, transit and fuel costs. As a result, the Company has to restructure this segment as well, which might take a longer time. However, we assume that RCL segment will deliver a net profit of ca. EUR 0mn and ca. EUR 2mn in ‘19F and ‘20F, respectively. This means that we don’t expect net income to plunge below zero over our investment horizon.
• WHB is without doubt the most profitable and strategic arm of the Group. At first glance, it may seem a little weird that a transportation company has its own insurance activity. However, it should make sense to have it if the cost of insurance, which represents one the largest cost items, is taken into account, and also that how much more expensive Waberer’s would be able to insure its own trucks and how much more vulnerable position it would be in as a whole, if it did not have its own insurance company.
• Reaching a profit margin of ca. 8-9% also means that WHB is one of the most profitable insurers in the region. On the basis of the average of earnings multiples of WHB’s peers (10.6x) we estimate that WHB is worth at least ca. HUF 1,010 (EUR 3.1) per share (excluding PV of future CFs coming from renewables). However, we believe that WHB should be trading at an even higher P/E multiple because of its outstanding profitability compared to its peers.
• Waberer’s is trading at a FY0 EV/EBITDA multiple of 5.7x, well below the peer group’s median of 6.6x. It doesn’t reflect the outlook and recovery story of the Company.

 

Waberer’s in charts

Source: Waberer’s, Concorde estimate

Q2/19 results

• Waberer's Q2/19 results are disappointing, affected by negative one-offs, recovery is said to shift toward H2/19.
• Waberer's posted a recurring net loss of EUR 9.1 million for Q2/19 vs. a recurring net loss of EUR 0.1 mn seen in Q2/18, predominantly driven by (1) IT issues stemmed from the implementation of a new SAP-based transportation management system; (2) postponed Brexit end-date. In March, warehouses were filled in the UK, which had a positive impact on Q1/19 results, whereas transportation services inbound to the United Kingdom dropped dramatically in April. It resulted in more intensifying competition in continental Europe in the first half of Q2/19, which led to 5-10% lower prices on a YoY basis.
• Total Group sales amounted to EUR 172.7 mn, down by 6.4% YoY in Q2/19 predominantly due to lower volumes, which was mainly attributable to the fleet reduction programme.
• Proportion of International Transportation segment’s (ITS) sales shrunk in Q2/19 on yearly comparison, which was attributable to the guided fleet reduction programme. On the other hand, Waberer's reported a revenue growth of 6.9% in Regional Contract Logistics (RCL).
• Direct costs rose by merely 1.8% YoY to EUR 146.8mn in Q2/19 driven by (1) lower number of trucks; (2) higher fuel/transit prices and (3) higher personnel costs, resulting in a gross profit of EUR 25.9mn (-26.1% YoY).
• Recurring EBITDA dropped by 41.0% YoY to EUR 12.0mn from EUR 20.3mn (pro forma) on higher fuel/transit/personnel costs amid concerns over weakening demand on the Company's key markets, Brexit uncertainty and tightening labour market.
• In terms of ITS, EBITDA fell 61.2% YoY to EUR 5.1mn, while the Group recorded an EBITDA of EUR 5.1mn (-4.3% YoY) in Q2/19 in the RCL segment. It implies that RCL could achieve the same EBITDA level with ca. 800 trucks, while ITS is operating about 3400 trucks.
• Recurring EBIT reached a net loss of EUR 5.9mn in Q2/19 vs. EUR +3.3mn in Q2/18. Financial expenses decreased to EUR 1.7mn in Q2/19 from EUR 3.6mn in Q2/18 due to (1) the reduction of the fleet and (2) the fact that implied interest rate for H1/19 remained under 1.5%.
• According to the statement, net leverage increased to 5.7x (covenant at 3.5x) as of the end of June from 4.3x as of the end of 2018 partly as a result of the implementation of IFRS 16. In case of improving efficiency and further fleet size reduction (further 300 trucks to be handed back until the end of 2019), negative trend is expected to turn around by the end of the year. More importantly, CEO highlighted that the Company is in the mid of a transitory period, added that short-term measures contributed to improving yield results. However, positive effects of measures seem to be slower-than-expected. Waberer’s also stressed that the financial position of the Group remained stable despite record high net leverage.
• CEO has also given an insight into the Group’s current situation. He mentioned that Waberer’s suffered from one-offs in April. Firstly, Waberer’s implemented a new SAP-based transportation management system in April, which had serious functionality and performance issues in the first weeks, led to complete breakdown of the system and loss of orders on a couple of days. Secondly, the industry was impacted by the aftermath of the end-March Brexit date due to a meaningful drop in orders from the UK. It contributed to a yield pressure across continental Europe.
• Mr Ziegler also noted that they are back to utilisation levels seen in 2017, which was one of the most relevant facts why bottom line deteriorated over the previous quarters.
• Opinion: We are of the view that short-term and long-term measures will likely result in a margin improvement in H2. However, Brexit, which is beyond the scope of the Company, poses the biggest risk.We initiate a coverage of Waberer’s International Plc. with a BUY rating and a TP of HUF 1,855 per share based on our sum-of-the-parts method, implying a 60% upside potential. In our view, it is higher than the liquidation value of the Company at this stage, which is worth ca. HUF 1,500 per share.

 

 

Gabor Bukta
analyst

CONCORDE SECURITIES LTD.

Alkotás Point
55-61 Alkotás street, H-1123 Budapest.
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MEMBER OF THE CONCORDE GROUP

 

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