Lenzing confirmed at HOLD, TP EUR 145 - Likely test for specialty pricing 

Risks from an indicated increase of competitive viscose capacities and their impact on selling prices weigh on the share price

In light of industry growth and rising demand for specialty fibers the market is likely to be able to absorb part of the additional capacities, in our view, but capacity increases of potentially more than 10% should likely not go without a negative impact on market prices

Our calculations lead to slightly lower revenues and operating earnings in FY 18e (EBITDA EUR 511 mn) vs. FY 17e (EUR 525 mn). Additional Tencel^TM capacities in FY 19e should then allow again for a significant rise in earnings (EBITDA 19e EUR 581 mn)

TP cut to EUR 145 from EUR 150; reiteration of HOLD

While another record year looks to be on the cards for FY 17e (EBITDA 17e EUR 525 mn implying EBITDA 2H 17e of EUR 255 mn vs. 1H 17 of EUR 271 mn; FY 16 428 mn), the outlook for the next two business years is of higher uncertainty. According to Lenzings management, about 600 - 900 kt of competitive viscose capacities might come on stream next year representing some 10-15% of the total global viscose production capacities. Risks with regard to capacity related uncertainties, their impact on selling prices and the inherent risk of competition in the field of specialty fibres were the driving force behind the share price correction of some 25% since its high in May and stand against a more pronounced rebound in the short-term, in our view. We reiterate our HOLD recommendation slightly cutting our TP to EUR 145 from EUR 150 on a smaller cut of our FY 18e and FY 19 estimates.

Risks to viscose prices from new capacities: Given inherent industry growth of some 5-6% p.a. and the rising demand for specialty fibres the market is likely to be able to absorb part of the additional capacities, in our view. Nevertheless, capacity increases of potentially more than 10% should likely not go without negative impacts on market prices. We base our estimates on viscose prices being down 5-10% vs. current levels in FY 18e and additional FX headwinds from the recent EUR strength. The debottlenecking investments of specialty fibers and the launch of eco-responsible fiber brands (Refibra^TM, EcoVero^TM) will have a compensating positive effect. However, in total our calculations lead to slightly lower revenues and operating earnings in FY 18e (EBITDA EUR 511 mn) vs. FY 17e (EUR 525 mn). Additional Tencel^TM capacities in FY 19e should then allow again for a significant rise in earnings (EBITDA 19e EUR 581 mn).

Valuation: Stressing the target multiple calculations (EV/EBITDA 8.0x, PER 14.0x) for FY 17e and FY 18e we derive fair values per share of EUR 158 and EUR 149, respectively. The economic profit model yields a fair value of about EUR 134 per share. When accounting for the value accretion of the new Tencel^TM plants that are expected to start operations in FY 19e values rise by between EUR 5-10 per share when discounted to year-end 2018. Taking a longer-term perspective using a DCF-model we calculate a fair value of EUR 151 incl. DPS 17e of EUR 4.20 (unchanged vs. total payment including a special dividend of EUR 1.20).

New branded specialty fibres having positive price effects: Recently Lenzing launched a new viscose fiber type EcoVero^TM. EcoVero^TM uses certified and controlled wood, a third-party controlled sustainable production process and an identification system that allows tracking the fibre. The fiber should be priced at a premium to standard viscose according to the management. The plants in Lenzing and Nanjing (about 50% of viscose capacities) could gradually shift production depending on demand. The Management has flagged a new product launch for October 6, 2017 that will hint at the new brand architecture that is to be presented in 1Q 18e.

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