Morningstar | GEA's New Management Takes Necessary Steps to Curb Lower-Margin Business Exposure
Wide-moat GEA Group's first-quarter results did not show any major changes in the trend: The equipment business continued to outperform the project (solutions) business, which again dragged down the group's margins. However, the shares rose sharply in response to the new CEO's announcement of 200-250 job cuts, namely in the dairy processing and project areas. This is long overdue. The overcapacity in dairy processing has been apparent for a couple of years. This is the new CEO's second major move to derisk the business in the three months since he officially took the helm. The first move was to remove the head of the project business from his role. We expect management to announce more changes in the coming months with the next known likely on June 24, when the company expects to announce a reorganisation. The shares still trade well below our EUR 38 fair value estimate.Group revenue increased 1.7%, but the EBITDA margin was down 40 basis points, with the solutions business posting a loss while the equipment business expanded its margin by 150 basis points. Gross margin pressure, higher selling costs, and we suspect poor project pricing were the drivers behind the margin pressure. We hope to see improved project pricing discipline under new management. The continued solid performance of the equipment business underscores our wide moat rating. We believe the switching costs are high with food processing equipment due to co-product development between supplier and customer as well as strict hygiene and regulatory standards.
GEA Group focuses on the development and production of process technology and components for production methods. Co. segments include: GEA Food Solutions, which manufactures machinery for preparing, marinating, processing, cutting, and packaging meat, poultry, and other foods; GEA Farm Technologies, which manufacturers product solutions for milk production and livestock farming; GEA Mechanical Equipment, which concentrates in separators, decanters, valves, pumps, and homogenizers; GEA Process Engineering, which designs and develops of process solutions for the pharmaceutical, and chemical industries; and GEA Refrigeration Technologies, which concentrates in refrigeration technology.
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