Zumtobel confirmed at HOLD, TP EUR 7.5 - Cutting estimates and target price

After an encouraging performance in 1H 19/20, trading conditions became more challenging throughout 2H and Zumtobel witnessed a major (though just initial) impact of the Covid-19 pandemic in its 4Q results. We acknowledge that the group weathered the ~13% revenue decline reasonably well, helped by a decent regional sales mix and material personnel cost savings (aided by short-time work schemes). However, the economic weakening will be strongly felt in FY 20/21e with substantial top line pressure to hit especially in the groups seasonally strongest periods 1Q and 2Q. For 1Q (May-July) the management flagged a revenue drop in the magnitude of 20%. Given the high operating leverage particularly in the luminaire operations (underlying drop through of some 50%), this heralds even stronger pressure to streamline the cost base. We acknowledge that the management has a decent track record in this respect, but on our downward revised forecasts we assume that it will take until FY 21/22e for Zumtobel to reclaim last years profitability level (adjusted EBIT margin of 4.8%). Moreover, it appears likely that the group will have to digest further restructuring costs/extraordinary items -a constant companion of the investment case (in the last decade Zumtobel booked a cumulative EUR 209 mn of one-offs). Summing up, given the importance of positive top-line momentum for the earnings trajectory, we do not see the triggers for a re-rating in place at this stage. We maintain the HOLD rating but lower the target price to EUR 7.5 from EUR 8.5.