Morningstar | Reducing ThyssenKrupp's FVE: Breakup Could Offer Upside on Elevator Business. See Updated Analyst Note from 14 Dec 2018
We are reducing our fair value estimate for no-moat ThyssenKrupp to EUR 20 per share from EUR 26 after rolling our model forward but lowering our forecasts for some of the company's businesses, including project business related to plant engineering in the industrial solutions division as well as lower expectations for the company's components business.Separately, as the company announced a split earlier this year, we have looked at the valuation from a sum-of-the parts basis, arriving at a EUR 25 valuation. However, we note that full financials on the split are not yet available, so we have estimated profit allocation for some of the businesses in the post-split plan. Not likely a surprise to investors who follow ThyssenKrupp closely is our conclusion that the elevator business, which will be included in the tk Industrials entity carries the greatest value in our sum of the parts. It also has the potential to expand its below-peer EBIT margin of 12% to levels closer to 13%-15%, given that the size of its installed base is not far off from peers with higher margins.
The split will likely take place in 2020, resulting in two traded entities, tk Industrials and tk Materials. Like many conglomerates, ThyssenKrupp is breaking up its business to create better focus, but the two entities will still be a disparate collection of businesses lacking synergies. For this reason, the split entities will continue to present challenges for investors to forecast and value with a likely discount to valuation. The company also plans to put its European steel business in a joint venture with Tata Steel. This joint venture is currently under review by the European Commission, with a March 2019 review deadline. The EC is investigating reduced supplier choice for customers on three product groups: steel for automotive applications, metallic coated steel for packaging, and grain-oriented electrical steel, creating some risk to the JV's approval in its current proposed form.
ThyssenKrupp is the parent company of the ThyssenKrupp Group. Co. has six business areas: Components Technology, which provides components for the automotive and machinery sectors; Elevator Technology, which supplies passenger and freight elevators, escalators and moving walks, passenger boarding bridges, stair and platform lifts; Industrial Solutions, which comprises the System Engineering and Marine Systems units; Materials Services, which focuses on materials distribution and technical services; Steel Europe, which develops, produces and markets flat carbon steel in the European market; and Steel Americas, which produces, processes and markets steel products in North and South America.
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