Norican A/S : Focus Emission

Overall we believe that Norican’s set up is not a typically boom-bust profile. We take comfort in its substantial and attractive aftermarket business, which distinguishes Norican from other companies in the capital goods sector. This set-up has provided positive free cash flows since 2009, although not without volatility. The company’s low capex requirements and the prospect of outsourcing further parts of its value chain could help to improve its cost structure going forward. This all mitigates the company’s exposure to cyclical equipment sales, particularly in the automotive industry. Industry analytics still indicate no downswing risk, but those impacts come mostly without notice.In addition, cyclicality – at least true for equipment sales – and high leverage do not mix well. However, we believe Norican’s liquidity resources, countercyclical working capital swings and at least some equity buffer could help to bridge a certain period of stress. We also believe that the financial sponsor’s pockets are deep enough to provide capital if necessary.The company has so far managed the tough competition in the fragmented metallic parts industry quite well and we also do not yet see that lightweight material demand will rise sharply over night and erode demand for steel and iron completely. This will rather be a gradual process. The acquisition of LMCS increases the group’s exposure to the automotive sector, but also opens up growth potential in the aluminium lightweight material market. We like the inherent hedge between Norican’s product offering for heavy and lightweight material customers.However, for more conservative investors, any indication of severe weakness in cyclical end markets such as the automotive, aerospace or construction should be taken as a signal to get rid of the bond because in the worst case recovery expectations are quite low (30-50%) for a capital goods company.We recommend subscribing at a coupon above 5%.>