Morningstar | Metso Sees Continued Strong Orders in FY 2018 While Cash Flow Slightly Down; Shares Fairly Valued
We are maintaining our no-moat rating and EUR 27 fair value estimate for Metso. Shares look fairly valued. The company reported full-year 2018 revenue slightly ahead of expectations but with slightly lower-than-expected margins, which are still moderately below the previous peak in 2016. In its outlook statement, management guided for continued growth in the next six months for equipment and services.Free cash flow in the quarter was down 8% for full-year 2018, both on a year-over-year basis as more working capital from inventory build and capital expenditure was required to meet the surge in order book growth since the trough in 2018. Orders were up 38% and 23% on an organic basis year over year for the fourth-quarter and full-year 2018, respectively. In line with the rebound in volumes, EBIT margins expanded 200 basis points in the fourth quarter and 300 basis basis for the full year, both on a year-over-year basis. Margin expansion improved returns by more than 600 basis points with improved with ROCE increasing to 16.9% in 2018. Note, we see these as peak cycle levels.
Metso is a global services, products and systems provider. Co. serves its customers in mining, oil and gas as well as aggregates industries. Co. serves also some other process industries, such as pulp and paper industry. Co.'s offerings to the mining industry include grinding mills, mill linings and grinding media; as well as crushers and screens. Co.'s offerings to the aggregates industry include crushers; as well as screens, feeders and conveyors. Co.'s offerings to the oil and gas industry include control valves, on-off valves; intelligent safety valves; intelligent valve controllers and limit switches; intelligent field services; spare and wear parts; as well as performance services.
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