EUR 850.00 For Business Accounts Only

Morningstar | GEA Trading at Lowest P/B in Eight Years; Management Issues Cautious Statement; Not Much Was New

GEA’s market cap lost nearly EUR 800 million after announcing EUR 70 million in expected additional expenses in 2019 versus 2018, as well as increased working capital needs in 2018 from good order growth in the fourth quarter so far. The shares are trading at 1.9 times book value, around the last low in 2010. Short sellers have been active in the name for a couple of years with some continuing to build positions in the last couple of months (based on the public filings.) Looking into the trading update, we found the share price reaction out of proportion with the information provided. We think the actual new information in the statement boils down to higher inventory build-up from stronger orders in the fourth quarter so far and less optimism on increased prices. On the former, order-led inventory build should convert to cash inflows eventually and on the latter, we note the company was looking for pretty punchy increases as high as 20% on some products in the price discussion on the second-quarter call. We do not expect to make changes to our wide-moat rating or our EUR 45 fair value estimate.

Specifically, the company guided for a 2018 operating cash flow driver margin of 6.5% to 7.0%, down the previous guidance of 8.5%. The operating cash flow driver is defined as (operating EBITDA minus capital expenditures plus capital expenditures portion for strategic projects-net working capital changes)/revenue. Strategic projects are primarily the ongoing modernization/consolidation of the its internal reporting and IT systems. In its updated guidance for 2018 the company left the largest figure in this calculation, operating EBITDA, unchanged, along with revenue guidance. So the change was driven by the strong growth in the order book, increasing inventories, not by worsening fundamentals. Positively, in October, within working capital, the company was able to decrease receivables with more than 90 days outstanding, now down 20% from the beginning of the year.

The additional EUR 70 million in expenses expected in 2019 versus 2018 come from previously discussed wage and raw material price inflation. This is not new; however, we think management issued a cautious statement with the view that the EUR 600 million EBITDA consensus estimate would be difficult to achieve without further price increases. We note that management hasn’t issued 2019 guidance, which is likely to be announced in March with the full year 2018 results. All in all, we see the share price reaction as overdone and think that outgoing management could be looking to kitchen sink guidance before the CEO comes on board in February.