Inbox: Lenzing bekommt tieferes Kursziel

●  Q3 2017 results mark turning point in upgrade cycle: Lenzing’s quarterly results since the start of 2016 have been a heady mixture of pricing momentum across its fibres business, margin expansion and earnings upgrades (40% for 2017 EBITDA). Q3 brought this run to an abrupt halt. Headline EBITDA of EUR126m was a modest 2% miss versus consensus, but the 5.3% fall in the share price on the day appears to have been triggered by the prospect of two years of above-demand capacity growth in viscose. The only conclusion we can draw is that earnings estimates for Lenzing now need to fall – substantially. We cut our DCF-derived price target to EUR120/share and remain holders.

●  Lack of visibility to weigh on shares, even if cheap on headline multiples: On the conference call, the company’s management indicated that it has limited visibility on capacity deployments to viscose in 2018 (600,000- 900,000 tonnes) and caustic soda prices. Circumstantial evidence leads us to assume the worst. Management’s reluctance to endorse the pre-existing target of 75% backward integration in dissolving wood pulp by 2020 suggests to us a focus on avoiding a potential cash squeeze by triggered by an investment of over EUR500m. As Lenzing has a net cash position, this would suggest an eye for “worst case scenarios” in 2018/19.

● Best- and worst case-scenarios: The best-case scenario for Lenzing in 2018 would be for consensus EBITDA of EUR495m to turn out to be correct. This would involve the unlikely assumption that viscose prices decline by less than 5% yoy, and that specialty fibre prices continue to rise. The worst case, in our view, would bring a 25% decline in viscose pricing levels (equivalent to one standard deviation from 2017 average levels of c16,000 RMB/tonne). This would reduce EBITDA to cEUR330m.

● Estimate changes, Berenberg versus consensus: We cut our adjusted EBITDA estimates for 2017-19 by an average of 3.5%, reflecting reduced viscose pricing assumptions and higher caustic soda (input) costs. Consensus does not appear to have incorporated the pricing and raw material headwinds for 2018 and 2019, and we are an average of 10.6% below Bloomberg consensus for these years. On our estimates, Lenzing trades on 2018E P/E of 12.5x. This is 1) a cheap relative to the European chemical average of 17x, and 2) a c11% discount to its five-year average level of 13.9x. But the potential for two gruelling years of downward movement in viscose prices is likely to prevent a rerating in the near term.