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Morningstar | Geberit's Full-Year Results as Expected; Ceramics Weak With Tepid 2019 Group Outlook; Shares Rich

We are maintaining our narrow moat rating and CHF 330 fair value estimate for Geberit following full-year results. As the company had announced high-level results earlier, the full results brought few surprises; however, the outlook for 2019 is tepid. Lower end-market demand from a slowdown in residential construction points to 2019 organic revenue growth that is likely to be slower than the 3% in 2018. Growth in the ceramics unit (Sanitec) has flatlined, and the refreshed product portfolio of shower toilets and  new Geberit One combined ceramics and toilet installation systems seems to be aimed at a small premium market, unlikely to offset broader market weakness.

New residential building permits in Europe grew around 1% in 2018 (with the fourth quarter still to be reported), down from more than 8% in 2017, which was reflective of a cyclical recovery. Geberit's 2018 3% organic growth is already below the level at which the company is usually able to maintain stable margins, and so the risk is likely on the downside for 2019 margins with a lower growth outlook. Historically, Geberit has needed to grow 4% organically to maintain stable margins. Impressively, the company maintained its EBITDA margin at 28% in 2018, with some tailwinds of cost-cutting in the acquired Sanitec business. However, we think the easy cuts and integration are now behind the company. We have built in slower revenue growth in 2019 but stable margins. However, before we review our margin forecast, we will wait for the first 2019 results, as well as the development of raw material prices, which have been rising again.