Morningstar | Good Geberit 1Q, but European Construction Outlook Remains Softer Than 2018
Narrow-moat Geberit moderately surprised the market with first-quarter results that look more in line with the company's 10-year historic average growth rather than materially slowing down from a downturn in the construction market. However, we do expect the remainder of the year to reach or exceed the 3.6% underlying growth achieved in the first quarter, primarily because broad demand from the European construction market looks softer than 2018. This has been consistently communicated by companies in our coverage universe. We are not expecting a big drop in revenue growth but rather a softening. For the full-year 2019, we forecast 3% revenue growth and a 10-basis-point EBIT margin expansion. We are maintaining our CFH 330 fair value estimate.On a country basis, the outlook is mixed, with France and the Nordic region looking softer than some of the other Northern European markets. Key to our long-term thesis for the company is its successful expansion outside historic stronghold markets of German-speaking Europe and Benelux countries, as well as returns after the Sanitec acquisition, that is the ceramics business. First-quarter results do not include a product breakdown, so we will have to wait until the first-half results are released to see if one of the trends from 2018, the weakness in demand for ceramics products, continues in 2019.
The company's EBITDA margin made a good recovery in the first quarter, expanding by 180 basis points year over year to 31.6%, despite the effect of a negative 100-basis-point tariff increase. Lower raw material prices were able to more than offset the tariff increase
At a regional level the company's largest market, Europe, posted decent growth, up 3.5% on a constant currency basis. However, outside Germany and the Benelux countries, which contribute about 40% of group revenue, the company indicated that demand outlook was flat to down. Therefore, we believe the first quarter could be the high-water mark for 2019 demand.
Geberit is a supplier of sanitary technology products. Co. develops, produces and distributes sanitary products and systems for the residential and commercial new construction and renovation markets. Co.'s product range consists of: the Sanitary Systems product area with the Installation Systems, Cisterns & Mechanisms, Faucets & Flushing Systems and Waste Fittings & Traps product lines; and the Piping Systems product area with the Building Drainage Systems and Supply Systems product lines. Co.'s products are sold through the wholesale channel to in more than 120 countries.
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