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Following a strong Q2 for our top picks, is it time to cash in before a hard winter? Or should we take advantage of share price falls to hoover up undervalued names? Analysing demand, cost and pricing for all our coverage, we advise a more selective approach from here. The going is getting tougher YTD demand has been relatively robust and price increases have largely offset inflation, maintaining EBITDA levels despite margin decline. This led to better-than-expected Q2 numbers, with 60% of the companies surprising on the upside. However, leading indicators like consumer confidence, as well as further increases in energy costs, could impact both demand and the labour market in coming quarters. Additionally, and despite its low dependence on Russian gas, vs other big European countries Spain has a poor record on managing inflation. In good shape to fend off interest rate risk Spanish Mid Caps have significantly reduced their leverage compared to the previous crisis. We see almost all the companies as well prepared, with a majority of companies with fixed rates or hedged floating rates, and limited non-EUR exposure. Only Melia, needing asset disposals, and Tecnicas, impacted by limited FCF generation, could see some weakness. Additionally, exporters (Prosegur, Cash, Fluidra, Viscofan, CIE Automotive) should benefit in this environment. Time to take a stand Our 2 strategies (Defensive and Mid-term) have outperformed European Mid Caps by close to 20% in the last 3 months. While tempted to become more cyclical-biased given the sharp contraction of some names, the uncertain context obliges us to be picky. We simplify our previous lists into one, featuring Viscofan (growth and pricing power), Applus (earnings momentum, disposals), Gestamp (recovery of LV production) and Prosegur Cash (top-line acceleration, positive margin mix). We also add recently upgraded Rovi (heavily penalised, strong mid-term catalyst). We remove Logista (strong performance),...
EBRO VIS PSG MEL CAF VID TRE FDR ALM ROVI CIE LOG GEST CASH 0O9B 0QWA 0DZC 0RKF 0NYH 0J6V 0ILL 0Q8P 0MKT VID 0MKW 6503 APPSN
Excellent results in rice despite the inflation headwinds Ebro results came 8% and 4% above consensus in Q2 sales and EBITDA respectively, thanks to an excellent contribution of the rice business. Although part of the beat came on better FX, Ebro has been able to grow EBITDA 9% ex FX (18% reported). In Pasta, despite the good data from Garofalo, the division has been negatively impacted by fresh Pasta (high temperatures did not help) and lower productivity. Stockpiling strategy is bearing fruit Working capital increased by EUR160m in H1 22. This, which could be seen as a negative, is a huge protection from the volatility in raw materials, especially in rice, expected for H2 22 as a result of low harvests due to water scarcity. Additionally the size of Ebro means it is not suffering any problems of raw material price availability, while enjoying lower costs due to big purchases. Capex will be delayed while divestment has been finished Ebro reiterated that its capex should be c.EUR140m but could suffer some delays due to supply disruptions. Additionally it has announced the disposal of Roland Monterrat (EUR20m cash, generating a capital loss of EUR20m), which according to the company will conclude its disposals. We revise our numbers We adjust our EBITDA up by c.4% for 2022 and 2023 on better prospects in rice. With lower negative contribution of the deconsolidated Roland Monterrat, we increase our adj EPS by 11% and 7%. We increase our working capital estimates, lowering our FCF figures for 2023. Our TP increases by 3% to EUR17/s, including an increase in WACC from 7.5% to 8.0%.
Ebro Foods SA Ebro Foods SA
We expect a volatile Q2 reporting season With still relatively robust demand, companies should be able to compensate for inflation with price increases in order to protect absolute EBITDA levels (not margins). FX will also play a major role and could be one of the key reasons behind higher estimates for FY22. With the market starting to feel recessionary impacts we expect companies to look more closely at short-term risks. Higher interest rates could be another concern; however, Spanish names have strongly deleveraged in recent years. FY22 guidance risk - more on the downside than on the upside Year to date we have not seen any guidance changes among Spanish names. However, the new scenario of higher energy costs, a longer inflationary period than initially expected, and in some cases supply chain disruptions, may imply a cut in numbers. We see Fluidra, Tecnicas Reunidas and CAF among the companies with the greatest risk of lowering FY22 guidance, while Gestamp and Applus could surprise to the upside. Look to Applus, Gestamp and Prosegur Cash for positive surprise Beyond the possibility of an upgrade to FY guidance, we think Q2 consensus looks conservative for Applus on better volumes and FX and for Gestamp on a stronger than expected recovery of production volumes. We also think that CASH could surprise positively on a stronger quarter in Latin America. Some caution on Fluidra, CAF and ROVI into Q2 Fluidra will suffer a tough comparison base, which could lead to a volume decline for the first time in many quarters, while also having some difficulties passing through prices in the US. CAF should continue to face supply chain issues at its bus business. At Rovi, we expect figures to continue to be good, but a temporary deceleration in the vaccine contribution may disappoint.
EBRO VIS PSG MEL CAF VID TRE FDR ALM ROVI CIE GEST CASH 0O9B 0DZC 0RKF 0NYH 0J6V 0ILL 0Q8P 0MKT VID 0MKW 6503 APPSN
Kicking the can down the road While at the end of 2021 we were expecting a tough Q1 and normalising from Q2, the conflict in Ukraine and the impacts on supply chain and energy cost inflation delayed the expected normalisation. We expect further price increases in Q2 and resilient demand. We have seen no profit warnings in Q1, most likely given that volatility can work both ways. However, Q2 will continue to be difficult for companies suffering from supply disruptions and lower pricing power. BNPP Exane vs Consensus; we are still behind Consensus EBITDA figures for FY22 Our figures reflect a more cautious scenario than consensus. On average, we are 3% behind FY22 consensus EBITDA for the Spanish names we cover. In particular, we are significantly behind consensus on Ence (-11.8%), Vidrala (-8.4%), CAF (-5.8%), Gestamp (-4.3%) and Rovi (-4.3%). On the contrary, we are more positive on Tecnicas Reunidas (+3.9%), and Viscofan (+3.2%). Better performance of Spanish names In this environment, Spanish names are outperforming European peers thanks to their higher value bias, and the absence of tech names. The two strategies we outlined in mid-March have outperformed the European and Spanish Mid Cap indexes: the defensive approach by c.7pp and the mid-term picks by 3.5pp vs both indexes. We stick to our two strategies: ''Defensive'' and ''Mid-term'' Our defensive strategy includes Ebro Foods (well-placed for recession), Logista (resilient player with a robust and profitable business), Prosegur Cash (helped by FX and inflation) and Viscofan (pricing power and good top-line growth). Our mid-term strategy also includes Logista and Viscofan, as well as Applus (helped by increased activity on the OandG front and the good prospects for the Auto inspection business), CAF (strong backlog with order intake recovering) and Gestamp (continued above-industry growth and well placed to benefit from electrification).
Strong volume figure thanks to stockpiling and good service Ebro results were better than expected. Given the difficulty of not having pro-forma comparable data for Q1 21 (due to the disposal of Panzani), figures surprised positively, especially at the top line, with 24% and 19% growth respectively for Rice and Pasta. This is partly down to price increases, but mainly volume growth. The latter was helped by a good level of service (vs stock shortages at some competitors) and the effect of stockpiling in retail during March due to the fear of the war and the strikes in Spain. EBITDA impacted by raw materials, but 6% above consensus Ebro was able to cope with the difficult inflationary environment thanks to price increases (some of them already in Q3 21) and good inventory management. EBITDA margin fell 140 bp, although EBITDA grew 11%. These results cannot be extrapolated We think that these results cannot be extrapolated, due to one-off effects in volumes. Additionally, the drought season in Spain (and other regions) could jeopardise raw material prices in Q4. Finally, the company commented that in the current environment, negotiations for further price increases with the main food retailers are becoming more difficult. Neutral reiterated Q1 was better than expected. However, the current environment is very fluid and could change the growth profile quite rapidly. We think Ebro is a good safe haven in this environment and could also be favoured by a trade-down effect in coming months. However, at current stock prices, we see limited upside.
Limited direct Russia/Ukraine impact but energy and supply chain disruptions challenging Spanish Mid-Caps names have limited exposure to Russia/ Ukraine (Verallia 5% sales; Gestamp less than 1.5%), and are more protected from energy rationing as: 1) their main gas supply comes from Algeria; 2) the gas price is linked to crude oil and USD and not TTF prices. Energy cost and supply chain impacts The impact on energy prices and the supply chain disruptions could affect companies like Verallia and Vidrala (20% of costs are energy), CIE Automotive, Gestamp and to a lesser extent CAF and Fluidra (suffering from supply chain disruptions). Raw materials could also have an impact (e.g., steel for many players, while Ebro Food could suffer from wheat prices affecting durum). Our bear case scenario reflects a long-lasting conflict with recessionary impact We assume crude oil at USD150 in 2022 and USD125 in 2023 with gas rationalisation in Europe and, as a consequence, Europe entering into recession for 6/8 quarters. The most impacted companies would be auto suppliers and glass packaging names. Occam''s razor: a good theory to play this scenario ''The simplest solution is the preferred one.'' Mid-caps usually underperform during selloffs. However, this time round, Spanish names outperformed European midcaps due to lesser exposure to the conflict. We think that a pure value argument is unlikely to work in the current environment, despite Spanish midcaps trading on average at a 25%/30% discount to their historical multiples. We would prefer playing defensive names, with comfortable leverage and low exposure to Europe (and favoured by FX tailwinds). Our stock selection: Logista (+), Prosegur Cash (+), Viscofan (+), Ebro Foods (=) Following the flight to defensive names and when trying to find companies trading at a significant discount to historical multiples, with low European exposure and good dividend yield, four names stand out: Prosegur Cash, Ebro...
EBRO VIS PSG MEL CAF VID TRE FDR ALM ROVI CIE LOG GEST CASH VRLA 0O9B 0QWA 0DZC 0RKF 0NYH 0J6V 0ILL 0Q8P 0MKT VID 0MKW ZRDZF 6503 000 APPSN
Better growth than expected Ebro has released a good set of results, with 8% growth in sales in Q4 (6% above consensus) thanks to better performance in rice, with Tilda performing well and higher margin products and price increases also contributing. Pasta was more stable, despite also having price increases. EBITDA margin reached 11.4%, 50 bp above consensus, while EBITDA was 11% above estimates. Prepared to play a difficult year? Raw material prices, wages and energy will hit Ebro in 2022. However, the huge increase in working capital offers some protection for the next 2/3 quarters. The impact of this working capital turned FCF negative in 2021, but will be a cushion for 2022 in our opinion. The environment is not easy and margin expansion will be difficult. We adjust our figures We deconsolidate Panzani dry Pasta not only from 2022 (it was adjusted before) but from 2021. The better figures in 2021 together with higher price increases than initially expected drive us to increase our EBITDA 2022 and 2023 by c.7% and our EPS 2022 by more than 16%. Our valuation increases from EUR15.5 to EUR16.5. We upgrade our rating to Neutral Although the environment is not ideal, we think the company has done its homework to keep profitability stable. We do not think the company is cheap, but: 1) after the sharp share price correction since Jan 2021, and 2) in a turbulent environment, we decide to upgrade our rating to Neutral from Underperform.
The toughest quarters for inflation impact are still to come Inflation and the capacity of the companies to deal with it will be one of the key areas of focus in the coming quarters. In this report, we analyse the various impacts, sorting for those companies most at risk: Vidrala (energy costs), Prosegur (labour costs) and Ebro (raw materials). While Spanish names continue to underperform, our top picks did well In 2021 Spanish Mid Cap names underperformed vs Europeans by 8% (despite outperforming them in the latter part of the year). Spanish names are currently trading with their highest discount to European Mid Caps in the last 5 years. Our tops picks outperformed Europeans by 6%. In this report, we analyse the exposure of ESG funds to our coverage and identify new opportunities, notably Gestamp (good ESG rating but not held by ESG funds). We are becoming more cautious ahead of Q4 We have downgraded ROVI and Almirall to Neutral. Currently we have Outperform ratings on 41% of our stocks, one of the lowest figures in recent years. We believe Q4 could bring negative surprises, as companies will start to suffer from both serious inflation (with no time to pass it through) and a tough comparison, notably Vidrala, Fluidra and Audax. We maintain our 5 key names: Applus, CAF, Gestamp, Logista and Viscofan We maintain our 5 top picks. Applus (disposal of the non-profitable businesses and IDIADA tender); CAF (strong order intake and good execution at low prices), Gestamp (outgrowing auto production recovery trading with no premium), Logista (cheap name waiting for acquisition opportunities) and Viscofan (massively derated despite good earnings evolution). We also propose some pair trades Despite liquidity being an issue in some cases we propose pair trades among our coverage: Viscofan over Ebro; Verallia over Vidrala; Prosegur Cash over Prosegur; and Gestamp over CIE Automotive.
EBRO VIS ENC PSG MEL CAF VID TRE RJF FDR ALM ROVI CIE ADX EDR LOG GEST CASH 0O9B 0QWA 0DZC 0RKF 0NYH EDR 0K96 0J6V 0RB1 0ILL 0Q8P 0MKT VID 0MKW 6503 APPSN
Numbers not bad but close to peak margin Q3 results were better than expected, with sales continuing the good growth path seen in Q2, and margins remaining at peak as the inflation in raw materials and energy has not yet had a strong impact on Spanish names. We highlight the good numbers of Fluidra, Rovi and Viscofan while Tecnicas, Almirall and CAF disappointed. We think that the short term focus of the market will be on the ability of the companies to deal with cost inflation. We take a preliminary look at our coverage and conclude Applus, Fluidra and Prosegur Cash have more pricing power than Ebro. We remain more cautious than consensus Despite our recent upgrades of Viscofan and ROVI to Outperform, we are more negative than consensus overall with 56% positive ratings (vs 64% for consensus). We are also more cautious in terms of estimates, being c.2% below consensus EBITDA for 2022 on average. Spanish Mid Caps continue to underperform European peers Despite the good trends for Spanish SMC names at the beginning of the year, and despite the +12% YTD performance, this is still 7% below the European MSCI. Our top picks also suffered in quarter despite good results for almost all the names. YTD the top picks have risen +15%. Our model portfolio: Applus, CAF, Gestamp, Logista and Viscofan (new) We have added Viscofan, after our recent upgrade, to our model''s other 4 names (which remain on the list). Applus has seen a recovery in its oil division and the vehicle inspection business has been solid, while it has lagged behind peers'' valuation. Gestamp continues to outperform the industry, with a sound margin and good FCF.. CAF, despite a weaker Q3, has a strong backlog, good execution and in our view hidden value in its busses business. Logista is a defensive mid-single digit EBIT growth stock with more than 7% dividend yield. Last, but not least, Viscofan is the leader in the casing industry, gaining market share, with pricing power and a...
EBRO VIS PSG MEL CAF VID TRE RJF FDR ALM ROVI CIE LOG GEST CASH 0O9B 0QWA 0DZC 0RKF 0NYH 0J6V 0RB1 0ILL 0Q8P 0MKT VID 0MKW ZRDZF 6503 APPSN
Slightly better numbers than consensus Ebro, in a difficult quarter due to tough comparison and the impact of freight and raw material cost increases, has reported slightly better figures than consensus, mainly in Pasta. In Rice, sales were flat in Q3 and EBITDA margin was 10bp higher. Pasta performed better (the figures for which already exclude the US disposal): sales grew 7% and EBITDA margin was 113bp higher, also favoured by a better in mix than in 2020, when more plain vanilla products were sold. NP came above expectations as it included the capital gain for the US disposal. A tough environment ahead Durum wheat prices have more than doubled since August due to drought in Europe and the bad harvest in the US. Freight costs continued to increase, as did energy costs. The company is taking some measures: 1) price increases: trying to lock in everything before year end. It is encountering some difficulties, but the Chairman was confident of passing on all costs through, with perhaps some delays; 2) stockpiling raw materials: with more than EUR110m of working capital, they have 6 months of inventory. This policy, which started last year, has helped to avoid delivery interruptions, contrary to other competitors. Nonetheless, H1 22 looks quite challenging. The Chairman has affirmed the long-term priorities, which could have some impact on short-term fundamentals. Short-term outlook in line with consensus. Figures unchanged Ebro expects FY21 sales between EUR2.79bn-EUR2.83bn (compared with consensus at EUR2.75bn) and EBITDA of EUR347m-EUR352m (EUR350m consensus). We are slightly below at EUR345m. We maintain our Underperform rating and EUR16 TP While the downside to our TP is now more limited following recent relative weakness, we think that the volatile environment ahead could still provide more negative surprises. The multiples at which the stock is trading are now less demanding, but growth remains modest.
Half of the Spanish Mid Cap companies under our coverage will release Q3 results before the end of October. Q3 21 results are not necessarily a good lead indicator Inflation, shortage of supply, energy costs, overall deceleration... have had a heterogeneous impact on Spanish companies during Q3. While auto suppliers have already felt the shortage in their figures, companies like Viscofan or Vidrala haven''t, as they are hedged and purchase in advance. We are well below consensus on Ebro (-); we see guidance at risk at Gestamp (+) We are 20% below Q3 21 EBITDA consensus on Ebro Foods. For the other companies, we are very much aligned, although we expect slightly better numbers for Viscofan. We think there''s a risk that Gestamp lowers its margin guidance (keeping sales and FCF unchanged). The fact that some companies reiterate their FY21 guidance in this environment will be seen as positive by investors - this should be the case for CIE Automotive. Cautious into Q3: Ebro Foods (-) We think Ebro could disappoint. The rising raw materials (doubling of durum prices) and freight costs should impact margins while top line suffers tough comps. While we expect the company to pass through cost inflation to final customers, the effects will not be immediate. Ebro does not provide guidance, but we think the current environment should drive consensus down 4%-7%. Positive into Q3: we expect reassuring messages from CIE (=) and Applus (+) We expect CIE to report very resilient margins, which would support the ambitious FY21 EBITDA margin target. This would be in contrast to what we are seeing elsewhere in the auto suppliers space. We expect Applus to show a gradual recovery, mainly in the opex-related oil business with resiliency in the vehicle inspection business, which would suggest a recovery to pre-pandemic levels even earlier than initially expected.
EBRO VIS VID FDR CIE GEST 0DZC 0NYH 0J6V VID 0MKW APPSN
''Better, guidance upgraded'' These have been the lines we have heard the most from Spanish Mid Caps over the H1 21 results season. Notably, autos and capital goods names are recovering from their slump. But for sectors like food (comps v last year) or security (recovery not evident yet) it''s proving tougher. Still, more than 40% of the companies under our coverage released positive surprises. Sales are c.3% below the peak in 2019 but this is mainly due to negative FX impact. Excluding FX, sales would have been closer to or above 2019. Margins continue to improve. EBITDA margin LTM reached 15.0% already above Q3 19 peaks. Plenty of guidance upgrades In H1 we have seen one of the highest number of guidance upgrades in recent years. Almirall, Applus, CIE Automotive, Fluidra (twice), Gestamp, Logista (twice) and Rovi have upgraded their FY21 targets. Among the rest, there are companies which have not say anything (some of them with no guidance) and some are quite comfortable to beat expectations without upgrading numbers: CAF, Indra, Vidrala or Viscofan. Spanish Mid Caps underperforming Europe Despite the good trend at the beginning of the year, with Spanish names catching up with European peers, in the last 3M, it has reversed into underperformance with Spanish SMC names flat (-1%) but -6% vs European peers. We reiterate our top picks: Applus, CAF, Gestamp and Logista In the last 3 months we initiated Sponsored Research coverage on Ence and Edreams and we have downgraded Tecnicas Reunidas to Neutral. Our four top picks remain unchanged: Applus (we see a visible recovery and a CMD as a catalyst in H2 21), CAF (strong backlog execution with growing margin, and trading at cheap multiples), Gestamp (outgrowing the market and very likely to beat guidance after upgrading it in FCF) and Logista (still delivering growth, looking for an acquisition and trading at 8% FCF yield).
EBRO VIS PSG IDR CAF VID TRE FDR ALM CIE LOG GEST CASH 0O9B 0QWA 0DZC 0RKF 0NYH 0J6V 0HA9 0Q8P 0MKT VID 0MKW ZRDZF APPSN
Weak numbers as expected Ebro released poor Q2 results, not only because of the tough comparison (strong stockpiling during Q2 20) but also due to a trickier scenario in terms of raw material prices and the return of promotions. Sales declined 6% in Q2, with rice declining -3% and Pasta -7%. In terms of EBITDA, it declined 6%, while EBITDA margin, despite being 10bp above consensus, declined 60bp vs Q2 20. Net Debt remained unchanged despite EUR195m proceeds from the Ronzoni disposal due to EUR115m impact from higher working capital. Tougher environment for the coming months The high cost of freight plus a small increase in rice raw material prices have led to a headwind that the company has quantified as c.EUR60m for the whole year (vs c.EUR50m). We think that this raw material environment together with tougher competition and tougher negotiations with food retailers could negatively impact margins during the year. We deconsolidate Panzani Following this week''s announcement (see EBRO FOODS: Disposal of Panzani) we deconsolidate the disposal from 2022 (Ebro expects to close the transaction by year end). We assume EUR60m EBITDA22 impact and c.EUR500m in sales. The EUR550m proceeds will arrive in 2022, as will a symbolic special dividend (c.EUR50m) to be paid at the end of 2021. This has no major impact on our valuation and we maintain our EUR16/s target price. Does this mean a change in profile? We think not Once the main disposals have been done, one might think that the growth profile of Ebro would improve. However, we think that the high dependence of the company on raw material volatility, and its smaller size, which could imply lower pricing power, mean we suspect this will not be the case. Trading at c.22x PE 22e means a premium of c.10% to other food producers, including the big players in Europe. We maintain our Underperform rating.
An anticipated disposal Ebro has announced the disposal of its Panzani dry pasta, couscous, sauces and semolina business to CVC, pending the approval of French unions and antitrust authorities. The business sold (not all Panzani as Ebro retains fresh pasta and rice) had sales of EUR470m in 2020 and generated an EBITDA of EUR57m (16% of total in both cases) in the peak year of 2020. The price was below previous transactions CVC will pay EUR550m, with some final adjustments on working capital and debt, which implies an EV/EBITDA of 9.6x, very much in line with the 10x Ebro is currently trading at, but below the EUR600m that the press and some investors had mooted (the potential for the transaction had been aired by the press in the last 12 months). Not entirely positive in our view We think that despite it being a business with low growth and high competition, there is not much value creation on the deal. As mentioned above, the price does not look high, the margin of the business was in line with the group''s margin and in our opinion, Ebro having a smaller size could reduce its negotiation capacity with food retailers. Net debt reduction and special dividend but lower than with previous disposals With the proceeds, Ebro will reduce debt and give a special dividend, although it will be smaller than the EUR300m following the North American disposal. The deal is expected to close by year end. We will update our model for the disposal and capital return with the H1 results. We maintain a negative view We believe the disposal of Panzani is not a positive catalyst for the shares, while results coming next Wednesday will be negatively impacted by a tough comparison, headwinds on raw materials and higher promotions. We maintain our Underperform rating on the name.
Fortune favours the bold: Spanish SMEs defied recent history to post good results almost across the board, surprising both us and consensus to the upside, as restructuring bore fruit and with some semblance of normality returning. We now turn to 2021 to see whether the recent catch-up with European mid-caps could prove durable. Our Top Picks: We add Applus to Gestamp, Logista and CAF. A complicated quarter, but a good one Because of the way covid impacts fell in both Q1 20 and Q1 21 comps are tricky, but the overall picture is healthy. On aggregate, organic growth was up 7%, while tough restructuring measures taken by many companies in 2020 led to EBITDA margins widening by 50bp vs Q4 20. For the first time we can remember for many Q1s, guidance was also increased by several companies (CIE Automotive, Fluidra and Logista), with others hinting strongly that if trends continue it will only be a matter of time before they follow suit (Gestamp, Indra, Rovi and Almirall). Catching up with Europe On a relative basis, since November 2020, Spanish mid-caps have caught up with European peers, having lagged through 2020. However, while further outperformance is on the cards in 2021, we still believe a discount to European mid-caps is justified given weaker forecast growth for the Spanish economy. Our top picks: Applus, CAF, Gestamp and Logista We add Applus to our list of top picks as we expect business mix, corporate transactions and gradual results improvements to fuel a change in investor sentiment. Meanwhile, CAF (strong backlog execution with growing margin, and trading at cheap multiples), Gestamp (outgrowing the market and very likely to beat guidance) and Logista (still delivering growth, looking for an acquisition and trading at 8% FCF yield) all remain on our list of top names.
EBRO VIS PSG CAF VID TRE RJF FDR ALM ROVI CIE ADX LOG GEST CASH 0O9B 0QWA 0DZC 0RKF 0NYH 0J6V 0RB1 0ILL 0Q8P 0MKT VID 0MKW ZRDZF APPSN
Sales started to see the impact of 2020 stockpiling Overall sales fell 9%, with a 12% decline in Rice and 4% in Pasta (once adjusted for disposals in the US). With a tough comparison, mainly in Europe and from March, we expect a tougher Q2. Better margins but cost inflation headwind to come Despite lower sales, EBITDA came in line with our estimates, which implies a better EBITDA margin (13.5% or 90 bp improvement vs -30 bp expected). One of the reasons for this improvement has to do with the lower AandP (-6.3%) and we expect this figure to increase in coming quarters. Additionally, Ebro Foods highlighted the tough raw material price environment, which is especially impacting the Rice division (raw materials, packaging, freight cost) and could have a yearly impact of EUR25m in Europe and USD15m in the US. NP was a beat due to an unusually low tax rate (20% vs 30%e; it should normalise at c.28% in coming quarters). Positive Net debt evolution due to disposals Net debt declined EUR56m vs Q4 20 due to proceeds from the disposal of the Canadian dry pasta business and despite EUR99m of working capital. According to our calculations, FCF was c.EUR-40m, or EUR50m positive excluding working capital. The company announced the disposal of its Ronzoni brand in the US in April, which had been put up for sale in Q4 20. We adjust our estimates, including the proceeds in cash flow, with a limited impact on valuation (moving from EUR15.5/s to EUR16.0). Underperform reiterated Despite EBITDA being very much in line, we think the tougher comparison ahead and the headwind in raw materials and other costs implies a tough Q2 and a difficult recovery in FCF. Despite the recent relative underperformance, we think that the multiples at which Ebro is trading remain demanding.
More than other countries, Spanish recovery will hinge on lifting of lockdowns Exane BNPP economists are slightly less bullish than consensus on the recovery of Spain''s economy (GDP growth of 5.6% for 2021 vs 5.9%) due to its relatively high dependence on tourism (12% of GDP), unemployment uncertainties (16.1% in Q4 20 or 19.1% including furloughs) and the looming tax hikes that will impact both corporates and individuals. On a brighter note, we expect EU grants (of which Spain will be one of the biggest beneficiaries) will give some industries a boost, though it is unclear for now how these funds will be allocated. More resilient businesses have outperformed Given the lack of value cyclical business among our SandM Caps, stocks that have fared well are generally those that have had a relatively stable operational performance on a two-year basis. However, our analysis comparing EBITDA 2019-2021 growth with share performance shows some opportunities in names that have underperformed despite strong, resilient fundamentals as in the case of CAF and Logista - both among our top picks - and Tecnicas and Zardoya. We maintain a relatively cautious approach Overall we have 44% of our coverage at Outperform, with 19% of stocks rated as Underperform. This is less bullish than the Street, which has 56% of names at Outperform and only 12% at Underperform. By company we are consensual buyers on Logista, while we are clearly more negative and contrarian on Ebro Foods and Euskaltel. Focus on value names: Gestamp, Logista and CAF Our top picks outperformed in 2020 thanks to Fluidra (+37%) and CAF (+20%) but also Almirall and Logista (both +8%). We continue to prefer Logista (high single digit EBIT growth, strong normalised FCF generation trading at low multiples) and CAF (recovering sales growth, with strong pipeline helped by EU funds, trading at steep discount to peers), and add Gestamp (outgrowing the industry thanks to outsourcing and EV exposure...
EBRO VIS PSG CAF VID TRE FDR ALM ROVI CIE LOG GEST CASH 0O9B 0QWA 0DZC 0RKF 0NYH 0J6V 0ILL 0Q8P 0MKT VID 0MKW ZRDZF
Slightly better rice The figures in Rice were good, with the company continuing to pass through raw material prices to consumers, with Tilda (Basmati) performing excellently. EBITDA margin in the division reached 13.0% (+75bp) in Q4. In Pasta, results came very much in line at EBITDA level despite higher sales. The better mix (giving up private label products) helped margin improvement in the first months but we have seen already a contraction of 100 bp during Q4, which like Rice was impacted by higher AandP. Overall, EBIT and Net Debt came in very much in line with our figures. Outlook: ''normalisation'', deconsolidation and disposal of the rest of Pasta in the US Ebro did not provide any detailed feedback nor did it do an investors call. From the FY20 presentation, we could infer that H1 21 will be impacted by further increases in raw materials (especially rice) and also transport costs, which, together with more stable demand and more promotions likely needed, could impact negatively on 2021 margins. Additionally, the company has deconsolidated not only the business disposed in North America but also other brands (including Ronzoni and 2 plants) that, according to the annual report, will be disposed during 2021. The EBITDA contribution of the business disposed in the US looks much higher than initially expected. We think that this could have a negative impact on consensus estimates for 2021. We adjust our numbers. Underperform reiterated We deconsolidate the US pasta business in our figures, including EUR100m from Canada in 2021 cash flow and EUR100m impact for future disposals. Despite good Q4 20 figures, we expect a normalisation in demand in 2021, higher transport costs and a negative impact of the deconsolidation of the US brand. In our view, the company still trades at demanding multiples.
Better Q3 than initially expected... but not a true recovery Spanish Mid Caps'' results were better than expected overall, probably as a result of the conservatism of our and consensus estimates. Seven out of 18 companies reported better than expected figures with only two companies reporting worse than expected data. As in Q2, performance was not homogeneous. Some companies showed very resilient performance over the year (Ebro, Fluidra and Viscofan), others saw a recovery in Q3 as a result of the lift of the lockdowns (auto suppliers, CAF), while still others continue to suffer in the current environment as in the case of Tecnicas, and to a lesser extent, Almirall. Three big pieces of news: US elections, vaccines and Spanish budget law In the report we analyse the main impacts the recent US election results may have on our coverage. In addition, we consider the likely consequences of the news on COVID vaccines - our main winners are Rovi and Vidrala and our main losers are Ebro, Viscofan, Fluidra. Further, we analyse the new budget law in Spain, which being negative in general for all Spanish names, could have more negative consequences for those with higher business outside Spain (Tecnicas, CIE Automotive, Ebro, Prosegur Cash) as dividends repatriation for foreign subsidiaries could be taxed. Reporting on Spanish Midcaps and our model portfolio Despite the recent rally in the markets as a result of news on vaccines, the Spanish Mid Cap space continues to be in the red YTD (-2%). In terms of ratings we have become more cautious over the last six months, given the good rally of some names. We have 28% of ratings as Underperform and only 39% as Outperform, our most negative skew in two years. Our model portfolio, which includes Fluidra, Almirall, CAF and Logista, has seen +16% outperformance since September and +9% YTD. We maintain our top picks unchanged, although the upside is more limited in some of the names.
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Ebro announced the disposal of part of its Pasta business in the US Ebro announced that it has made an agreement with American Italian Pasta (part of TreeHouse group) to dispose of a group of brands in dry pasta and noodles in US and the related plant in St Louis. Ebro will maintain its Ronzoni brand. The total EV of the transaction will be USD242m for a business that generated USD200m in sales in the last 12M (Jul 19-Jun 20). This movement has come just after the announcement of the disposal of its dry pasta business in Canada for a total amount of CAD165m. The company is essentially selling c.8% of its sales, but c.6% of EBITDA. Both transactions are expected to close by the end of Q1 20. We estimate a positive impact on valuation and leverage The market was expecting a development like this, hinted at by the company 12 months ago. Pasta in the US has been underperforming in the last 4 years. Although the company has not disclosed the EBITDA impact, we assume that both businesses together could have an EBITDA margin c.10%. This would imply an implicit EV/EBITDA20 of 12.3x, on an EBITDA impacted positively due to COVID. We think that the multiple is attractive, generating c.EUR0.6/s (assuming a target multiple of 9x EV/EBITDA). Additionally the deal will significantly reduce leverage from Net Debt /EBITDA21e of 2.0x to 1.2x. Part of these proceeds we understand could be given as special dividend. As many of the data points are assumptions we maintain our figures until having more detailed information. But good brands still remaining We think that this will not be the last such move in the region. It does not make sense to us to maintain the Ronzoni brand alone (EUR10m EBITDA estimated), 2 facilities in the US or the loss-making fresh pasta business in Canada (Olivieri). The doubts we have concern the possible impact of smaller scale on the continent for the remaining business (including rice and Garofalo pasta brand).
Ebro Foods SA
Although the figures showed greater volatility, the rise in demand triggered by the COVID-19 pandemic continues to dominate Ebro’s results. Deleveraging is well on track.
Good set of results Rice sales have maintained a good pace (+13% in Q3) with a limited impact of perimeter change and branded sales growing above 20% in UK and France, thanks also in part to limited exposure to food service. Pasta grew a healthy 9.2% but was well below the levels seen in H1. EBITDA, despite some rebound in promotions and advertising, maintained positive levels. EBITDA grew c.29% in Q3 with EBITDA margin at 13.2%, practically in line with our estimates. Net debt has been reduced by EUR100m in the year, helped by positive working capital performance due to strong demand and the lower capex due to Covid restrictions. Raw material prices: Durum better than rice Raw material rice prices continue to be under pressure: in the US due to the high demand in South America and the impact of Hurricane Laura, while in Europe Italian floods and problems in Spain could reduce the harvest by 10%. Regarding durum wheat, the positive harvest in the US helped to generate lower prices which the company has taken advantage of to increase stocks. Disposal of Canadian dry pasta business Before publishing results, Ebro announced the disposal of its dry pasta business in Canada (ex Garofalo) to Barrilla. Ebro will receive c.CAD165m for a business that generates CAD103m sales (2% group). We estimate that this implies c.12x EV/EBITDA, which is a very good price but with limited impact on valuation. Outlook in line with consensus, which implies normalisation. Underperform reiterated Ebro guided for FY20 with a top-line range between EUR3.15 bn-EUR3.2bn (Exane EUR3.19bn; Consensus EUR3.2bn) and EBITDA between EUR422m-EUR432m (Exane EUR426m; Consensus EUR428m). This implies a Q4 where sales and EBITDA will be flat vs Q4 19. In our opinion, and despite the company still benefiting from lockdowns and the absence of food service activities, we expect H121 to show double-digit EBITDA declines, below consensus. Remain Underperform.
Too early to cheer While Q3 should see sales start to inflect (organic top line +2.8%) and the expansion of furlough programmes should spark some margin improvement, most companies are still far from a meaningful recovery in our view. This likely explains why Spanish Mid Caps continue to underperform, down -17% YTD vs -9% for MSCI Europe MidandSmall caps. Fluidra and Prosegur likely to report positive results The current environment is having wildly different impacts on the different companies we cover. On the positive side we highlight Fluidra, for which we expect double-digit sales growth in Q3 following a strong July thanks to a boost not only from aftermarket activities but also new pools. We similarly expect positive figures from Prosegur, not because of its CASH division but rather the rest of the business on the back of a recovery in security, better margins in alarms due to lower acquisition costs, and a steep reduction in corporate centre costs. We are cautious on Tecnicas Reunidas and Almirall We expect poor results again from Tecnicas Reunidas, which has seen construction for several of its projects delayed by Covid, especially those in Saudi Arabia. We expect sales to decline at a rate in line with the prior quarter, with no significant recovery in margins from the Q2 trough. Almirall meanwhile has been impacted by the lack of a meaningful recovery in the US market and is still hurt by Aczone generics, though Ilumetri data has been positive and the company could start talking about a recovery in Seysara. Adjusting numbers ahead of Q3 We adjust some estimates and target prices ahead of the Q3 results season. Notable changes include our hikes for Prosegur on lower corporate costs, better alarm margins and the treasury stock cancelation, and on the flip side cuts to Tecnicas to reflect the above-mentioned delays.
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