EUR 850.00 For Business Accounts Only

Morningstar | Metso Report July 2019

Metso made its name as a capital equipment and services company in the pulp and paper industry. However, with that industry facing stiff secular headwinds, the company has shifted its focus toward mining and oil and gas. At the start of 2014, Metso split its paper and mining businesses into separate publicly traded companies, with the mining business continuing under the Metso banner and the paper business incorporating under the name Valmet. Metso's fortunes will rise and fall with the oil and gas and mining industries.Metso specialises in machines that process raw materials taken out of the ground. Its clients include some of the industry's largest players in mining and aggregates, and Metso estimates that about 70% of its mining sales are linked to the production of iron ore, copper, gold and other minerals. As a result of the separation of the paper business, Metso is now more exposed to commodity price fluctuations, as customers purchase capital equipment based on demand and price outlooks for minerals. Although the firm has recently seen an order boom due to brownfield equipment replacement, we expect Metso's sales of new mining equipment will be pressured in the medium term. China, which has accounted for the bulk of global incremental materials demand over the past decade, is likely to see slowing consumption growth of investment-oriented commodities as the composition of the country's GDP growth shifts.Metso's service business helps to offset revenue and margin swings in the company's capital equipment offerings. A large installed base of machines drives fairly consistent revenue from spare and wear parts, as mining and construction technology in particular is subject to heavy wear over a machine's life cycle. Metso has built out a large network of service representatives to serve customers in their local markets. Management is focused on driving service revenue growth; this should add a measure of stability to financial results. Service revenue as a percentage of total sales has increased consistently over the years and now represents close to 60% of sales.