EUR 850.00 For Business Accounts Only

Morningstar | Robust Order Intake ThyssenKrupp in 3Q but Pricing Pressure and Elevated Costs Depress Profitability

ThyssenKrupp reported a mixed third quarter 2018 with profitability slightly below our expectation, especially for the firm's elevator business, but higher than expected order growth. Corrected for currency and portfolio effects, ThyssenKrupp's order intake (up 10%) and sales (up 9%) grew due to solid organic growth in the capital goods businesses, including components technology, or CT, and elevator technology, or ET, and continued recovery of spot prices in materials business areas. Despite weaker demand for wind turbine components, CT's revenue grew 5% in the quarter as the firm benefited from China and Western Europe's demand growth for car components like axle assembly, damper systems, and camshaft modules. The group's adjusted EBIT of EUR 332 million was substantially below the EUR 519 million mark of last year, mainly due to EUR 200 million of elevated cost at industrial solutions, as highlighted by management on July 31. ET's profitability was slightly disappointing (with adjusted EBIT down 9%) due to continued pricing pressure in China and higher input costs. We will be updating our forecasts which could result in a modest reduction to our EUR 28 per share fair value estimate. We maintain our no-moat rating.

Stellar reported EBIT adjusted growth for material services (up 13%) was the main positive highlight of the first quarter. This impressive performance was due to cost control and increased selling prices with higher level of shipments (up 5% year over year). Steel Europe was able to maintain profitability in line with last year. We are happy with this result given the high comparison base; however, we continue to believe the steel market remains challenging due to global overcapacity and continued highly volatile raw material prices. In this respect, we support ThyssenKrupp's intentions to join forces with Tata Steel to create Europe's second-biggest steelmaking company in order to cut costs within this competitive market.

Free cash flow generation in the quarter improved EUR 121 year on year (mainly due to a reduction in inventories at materials) but is still in negative territory at minus EUR 211 million. The firm's net financial debt at June 30, 2018 was EUR 3.8 billion, which represents a gearing ratio of 114%, a substantial decrease from June 30, 2017, when the gearing level was 281%. For the remainder of the year, we expect substantially improved cash flow generation as inventory levels normalize due to execution of strong order intake in the first nine months of the year, and continued growth and operational improvement at Thyssenkrupp's capital goods businesses.