- We raise our recommendation to HOLD from REDUCE while we decrease our TP to EUR 13.50 from EUR 16.00 as we tweak our operational forecasts
- 2Q 17/18 operating figures were in line with our estimates and Wolford confirmed the outlook including an operating loss in FY 17/18e
- The company expects a decision on the majority stake in 6-8 weeks, and as we expect the upcoming change to be accompanied by an adjustment of the capital structure we would remain on the sidelines for the time being
- We expect the restructuring to be continued by the new shareholder(s) however we reckon with a potential profitability improvement to be a drawn-out exercise

Following the release of 2Q 17/18 results on December 6, we tweak our operational forecasts for Wolford. Assuming the restructuring is successful and Wolford is able to generate EBITDA margins at 10% (the lower level of peer companies) in the long-term, we set our 12-month target price at EUR 13.50, down from EUR 16.00 and raise our recommendation to HOLD from REDUCE at current share price levels. Wolford stated that the discussions with prospective investors on acquiring a majority stake from the current shareholders are ongoing, with a decision expected in 6-8 weeks. As we expect the upcoming major shareholder change to be accompanied by an adjustment of the capital structure we would remain on the sidelines for the time being.

2Q 17/18: The operating figures were in line with our estimates. Revenues improved by 3.0% yoy to EUR41.1 mn, while EBITDA expanded to EUR 2.35 mn (+25.6% yoy). EBIT remained positive at EUR 1.0 mn vs. EUR 0.2 mn in 2Q 16/17. The bottom line netted EUR 0.29 mn (vs. a loss of EUR 0.04 mn in 2Q 16/17). The company's net debt amounted to EUR 39.1 mn (down by EUR1.3 mn yoy). Wolford adjusted its 2Q 16/17 figures following the audit by the OePR (Austrian Financial Reporting Enforcement Panel). In 1H 17/18 Wolford decreased its head count by 82 FTEs to an average number of employees of 1,476.

Outlook: The company confirmed its outlook as published on August 24: 1) only a slight improvement of the top line expected in 2017/18e; 2) an operating loss expected in 2017/18e; 3) a two-year timeframe for the planned restructuring to result in a positive operating result only by 2018/19e. We highlight the risks from potential strategic shifts by a new majority shareholder and uncertainty about the capital structure (capital increase possible) of the group. Wolford's credit lines have been extended until June 30, 2018. We expect the current restructuring plan to be continued to be implemented by the new shareholder(s) however we expect potential profitability improvement to be a drawn-out exercise. We thus forecast Wolford's EBITDA margin to reach 8.5% by 2019/20e and 10% in the long-term (2011 was the last year when Wolford achieved this level of profitability).

Valuation: We have tweaked our operating forecasts and adjusted the risk-free rates. We base the valuation on our DCF model and decrease our one-year target price to EUR 13.50 from EUR16.00 per share which results in an upgrade of our recommendation to HOLD from REDUCE. Our valuation is based on our fundamental assessment of the company which is on the brink of a major shareholder change which could present various scenarios for minority investors.

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