EUR 850.00 For Business Accounts Only

Morningstar | GEA's New CEO Resets the Bar Lower; Restructuring Benefits Look Further Out; Cutting FVE to EUR 38

We are lowering our fair value estimate for GEA group to EUR 38 from EUR 45 per share, but are maintaining our wide moat rating. In his first move, GEA's new CEO seems to be resetting the bar lower with a lower revenue and margin outlook for 2019 versus 2018, indicating that we won't see the benefits from restructuring this year. He also abandoned previous management's medium-term targets, which was expected. Preliminary results for 2018 showed revenue growth in line with expectations, growing at 8% but a lower EBITDA than expected indicating about a 40 basis points drop in EBITDA margin. We still see upside in the shares, but the restructuring program looks like it will take longer to implement than we previously expected and the lack of visibility in progress has made us more cautious on our forecasts.

We forecast the company reaching an 11% EBIT margin by 2025, 180 basis points from preliminary indications on 2018 and just below peer SPX Flow's food and beverage levels. GEA's statement indicated that IT and personnel costs were the reason for a lower-margin outlook in 2019, the former is likely linked to costs needed to address issues with the software overhaul that began around 2016.

GEA's potential for restructuring remains with its oversize manufacturing footprint relative to peers, something that activists investors and previous management have also acknowledged. We also see a disproportionate exposure to more expensive western markets in its cost base as an easy target. We have extended our model to a 10-year explicit forecast period as we believe it will take longer than five years to reach midcycle margins.

Management released few details in its statement and will hold a conference call with full-year results on March 14. Recent management comments from GEA's peer group Alfa Laval and SPX Flow 2018 results indicate general good market demand for food and beverage equipment but pricing pressure in dairy spray dryer lines used in milk powder production. This market still seems to be suffering from overcapacity and pricing power is not as strong as liquid dairy products where there is more product customisation. GEA group has a decent presence in spray dryers and liquid dairy equipment. SPX Flow indicated that the market for liquid dairy equipment, like yoghurt lines, for instance, shows better growth and value opportunities for equipment suppliers. We could see management try to reduce exposure to lower-margin projects related to spray dryers as SPX is doing.