EUR 850.00 For Business Accounts Only

Morningstar | G1A Updated Forecasts and Estimates from 17 Jul 2018

At its annual general meeting, GEA Group announced the early departure of the CFO, details on sources for EBITDA margin gains, and that it was seeking authorisation for another share buyback (up to 10% of shares), following the one just completed in February (6%-plus of shares).  We are maintaining our EUR 47 fair value estimate and wide moat rating.

We believe activists are directly or indirectly playing a role in these announcements, as Elliott Management had included all of the points above in their initial comments to the press. We note that GBL has been taking advantage of the numerous profit warnings, picking up more shares and increasing their stake to 5.1% at the end of March, up from 3% in August.

Management gave a breakdown of the expected sources for the new targeted EBITDA margin gains of 120-320 basis points over the next five years, including volume, footprint, procurement and efficiency, and finally pricing, with the first three looking more achievable to us than the last.

Volume growth should continue to come from global demand for modernisation of food processing plants, increasing productivity and food safety, with GEA as the sector's largest supplier. GEA's top line has returned to growth with low-single-digit organic growth in 2018 so far.

We think GEA's manufacturing footprint is bloated compared with its peer group. Alfa Laval is its closest peer in terms equipment and manufacturing complexity, in our view. However, Alfa manages to run its business with around one-third fewer manufacturing sites; thus, we believe GEA's five-year target to reduce its number of plants to the same as Alfa's is reasonable.

GEA sources disproportionately from high-cost countries, with 70% of sourcing coming from Western Europe, while only 60% of the revenue comes from developed markets. Given that GEA can do assembly in local markets, as it does in Mexico, we see moving more procurement to low-cost countries as an easy win.

Backing into the implied margin gains from the low and high end of guidance on each of these programs, we believe the company can reach consensus medium-term EBITDA margin targets with the low end of guidance for the first three (volume, footprint, and sourcing), but to beat consensus, it would need to achieve midpoint savings on all the programs. We exclude margin gains from increased pricing in our analysis, as we view this as a tougher/lower-probability source of gains, given that richer pricing for customers is naturally a bigger challenge.