Rosenbauer raised to BUY, TP EUR 45.5 - Do not overlook the cash flow improvement
Rosenbauer delivered convincing 3Q results that enabled the group to increase its FY 20 financial targets. Revenues are now expected to exceed the prior years level (previous wording: slightly up) and the EBIT margin should reach around 5% (previously 4-5%). While this is encouraging, we think that the containment of working capital in 1-3Q is at least equally good news and warrants higher confidence that the targeted cash release from better working capital efficiency should gain traction in the coming quarters. We have been long-standing advocates of the conviction that an improved cash conversion would be a central catalyst for a re-rating. In this regard, the coming year could bring a major step forward. While we refrain from giving the group the entire benefit of the doubt regarding full delivery on its 40% TWC/Sales target ratio at this stage, even projecting a decline to 42% in FY 21e (after 45% in FY 20e) results in major FCF generation. Surprisingly, Rosenbauer already provided a glimpse into 2021 for which, against the backdrop of an assumed sideways development of the global fire-fighting sector, a stable top-line development is anticipated (and we see scope for a slight margin expansion). While this heralds a plateauing after a lengthy growth period, we argue that it might actually facilitate the execution of the wide-ranging working capital efficiency measures. Bearing in mind the scope for a de-leveraging of the balance sheet and improving ROCEs coupled with higher earnings forecasts we have increased the target price to EUR 45.5 from EUR 37.5 and upgrade the stock to BUY from HOLD. The valuation remains undemanding, in our view, with current FY 21-22e EV/EBITDA multiples of 7.0x and 6.4x below the 7-year medians of 8.2x and 7.2x, respectively, rounded out by single-digit P/Es.Rosenbauer International is a holding company. Co. through its subsidiaries is engaged in the manufacture, sale and distribution of mobile fire protection and civil defense solutions. Co. maintains five business segments: vehicles, aerials, fire and safety equipment, service and spare parts/others, fire fighting components. Co.'s product portfolio includes a range of municipal fire fighting vehicles and aerials built to both European and the United States standards, series of aircraft rescue and fire fighting vehicles, industrial fire fighting vehicles, fire and safety components and equipment. Co. provides services and spare parts, instruction and training programs for its products.
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