09.08.2017

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This was the second year in a row where Andritz had to lower its top-line outlook to negative after an initially hopeful start into the year. In 2Q 17, hydro, but also Metals profitability excluding one-offs was very disappointing, and management's target to keep EBITA profitability at level with last year's 7.4% excluding an about EUR 25 mn one-off from the divestment of a Schuler Technical Centre in Tianjin seems rather ambitious and dependent on project completions and related provision adjustments at year-end. We have lowered our forecasts for Hydro across the board and also lowered our expectations for Metals on open issues in the German car making industry. In the mid-term, we are slightly more upbeat for Pulp & Paper despite order delays. We lower our price target to EUR 50 from EUR 55 following the downgrade of our estimates and confirm our HOLD recommendation after the recent share price drop.

Hydro and Metals down, Pulp & Paper still optimistic: We have never been overly bullish on Hydro given the read-across from electric utilities and lowered our run-rate for hydro order intake further to around EUR 1.4 bn on weakening economics in the current low-price environment. We also see competition from other renewables increasing as equipment manufacturers seem to be working on >10 MW on-shore wind turbines, threatening the small hydro segment. Despite the potential delay of large Brazilian orders, we have lifted our Pulp & Paper forecast somewhat as hardwood prices have rebounded and 2020e capacity decreases could prompt an earlier project start for some mills. Also, we like the underlying profitability of the segment, with high-margin service sales having increased to EUR 425.6 mn or 42% of revenues. We believe that Andritz could even pass the 9% EBITA margin mark in 2017e.

What's next: Andritz's capital markets day on September 12, 2017 is to focus on automation, an integral part of Andritz's products that is other than with some peers not reported separately. With customers looking for ever more cost-savings potential, we could gain more insight on the issue, which has been hard to pin down so far.

Outlook & recommendation: We use return- and multiples-based valuation methods in addition to the traditional DCF method, in particular return ratios as well as target multiples. With lower estimates, all valuation metrics have come down markedly, hence we lower our price target to EUR 50 from EUR 55 and keep our HOLD recommendation. Upside risks would include the Inga III order being awarded (more than EUR 1 bn volume) or a pick-up of large-scale M&A activity. Management hinted that it might resume the share-buyback programme or even increase the dividend further.

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Andritz

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