EUR 147.78 For Business Accounts Only

Returns under temporary pressure

Sioen reported weak 1H17 results with strong organic sales growth (+4.4%) muted by stronger-than-expected gross margin pressure from rising raw material prices. We have cut our EPS forecasts significantly, well below consensus. The good news is, however, that the company is passing through the higher raw material costs to its customers through price hikes implemented from July, which should have a positive impact on gross margins from August. As such, we expect sequentially flat gross margins in 2H17e and a y-o-y improvement has from 1H18e. The stock is trading at a slight discount to peers vs. an average historcial premium of more than 30% since 2013. The discount is probably due to (1) gross margin pressure from rising raw material prices since 2H16, (2) initial dilutive impact on ROCE from the 5 acquisitions since early 2016 and (3) the dilutive impact of the company’s renewed capex cycle from 2H17e through the entire FY18e. As long as the economic cycle is favourable for Sioen, we would expect the market to look through this period of temporary pressure, rewarding the company with a valuation which should, at least, be in line with peers. A premium would be justified as soon as the gross margin pressure eases and signs of successfully passing through of rising raw material prices are tangible. We expect this point to be reached in early 2018. Without such signs, we could expect Sioen’s share price to fall back, based on our ROCE/WACC analysis, to around €20/share.