EUR 850.00 For Business Accounts Only

Morningstar | GEA Posts Solid 2Q; Consensus for Full Year Looks Low; Shares Attractive

The GEA Group second-quarter results and near-term announcement of a new CEO may represent a turning point for the firm after a series of setbacks, mostly self-inflicted, that have delayed its return to normalised profitability despite a rebound in orders. Second-quarter results came in ahead of consensus on revenue and EBITDA, and the company looks well on track to meet our full-year figures. Management tweaked guidance, with revenue anticipated to come at the high end and the adjusted EBITDA margin at the low end of its previously stated outlook. We believe consensus was below guidance on both counts coming into the second-quarter figures. Our full-year forecasts are already on the high end of guidance on revenue but slightly below guidance on the EBITDA margin. We believe the shares are attractive and maintain our wide moat rating and EUR 47 fair value estimate.

Full year 5%-6% sales growth guidance looks achievable when looking at the first-half 5.6% performance and the details of the company's two divisions. The equipment division posted 9% and 11% organic and reported growth, respectively. An 18% rise in the order backlog since December, as well as 12% order growth in the first half, should support revenue growth for the remainder of the year (the lead time for equipment orders is around three to four months). Sales in the solutions (engineering) division were up 4% (organic) and 1% (reported), with the backlog up 4% since the end of the year and second-quarter results improving sequentially.

The group operating EBIT margin in the first half was 6.4%, down by roughly 400 basis points from year end 2017. However, the second quarter, at just over 8%, was markedly better than the first quarter, and performance in the second half should improve further, as revenue growth implies volume increases and cost absorption, particularly on solutions, where a large engineering pool remains underutilised when the order backlog dips.

GEA's current management, and importantly new management, still has a lot of work to do. Receivables remain at historic highs with just a slight improvement to 108 in the second quarter from 111 at the end of the year, and plant closures have been coming in at a slow drip. We count one since the beginning of the year, but anticipate 10-plus in the medium term. We expect a new CEO announcement well before year-end, with potential candidates having some experience in turnaround strategies. That news should buoy the stock in the short-term.