Setting the standards in microbatteries: With a unit production volume of more than 1bn units pa, VARTA is a world-leading manufacturer of microbatteries, mainly focusing on primary zinc-air for hearing aids and lithium-ion (li-ion) batteries for wearables. Its industry-leading R&D efforts (c5% of sales) and its proprietary in-house machine technology for a highly automated production (up to 4m zinc-air batteries per day) have enabled VARTA to achieve superior battery quality, economies of scale and strong relationships with customers, thereby eliminating many competitors over the past few years.

 

Attractive exposure to the healthcare end-market: VARTA generates c50% of group sales and, we estimate, about two-thirds of its current profits in its Healthcare sub-division, which primarily sells high-energy-density zinc-air batteries for hearing aids. VARTA has a dominant c45% market share in this consolidated market, which is expected to grow by a stable and solid 4-5% pa, driven by an ageing population and increased penetration in all its key markets and increasing hearing aid functionality.

 

Opportunities in “hearables” and Power & Energy: VARTA’s Entertainment & Industrial division sells more than 100m microbatteries pa. It aims to spend EUR80m by 2020 to triple its production of li-ion microbatteries for hearables (ie audio equipment, such as wireless premium headsets) in order to meet strong demand growth, which is confirmed by VARTA’s high order backlog. We also forecast a 29% sales CAGR in 2016-20E in VARTA’s asset-light Power & Energy division, which assembles premium battery packs, for portable devices such as power tools, and battery power storage solutions. We forecast that the Power & Energy division will contribute to positive earnings from 2018.

 

Strong earnings growth underpinned by high Microbatteries division margins: We forecast 10% sales and 16% EBITDA CAGRs in VARTA’s core Microbatteries segment in 2016-20E, at an attractive EBITDA margin of above 22% from 2017. With the high growth and profitability improvements in Power & Energy, we forecast that group sales and EBITDA will grow by 14% and 28% pa respectively in 2016-20E. This should result in a pre-tax ROCE uplift to 23% by 2020, up from 18% in 2016.

We initiate with a Buy rating, price target EUR25.00: VARTA raised cEUR150m in gross proceeds from its IPO in October. We derive a fair value of EUR25.00 based on our DCF. This implies 16x 2019E EV/EBITDA, broadly in line with its hearing aid peers, which have similar financial profiles and operate in similar competitive environments in our view. We initiate with a Buy rating.