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SVENSKA CELLULOSA AB SCA-B
SVENSKA CELLULOSA AB SCA-B
Q4 – mixed performance; 2017 – crucial year
31 Jan 17
After three consecutive quarters of organic growth decline (‘nil’ in Q3 16), management would have taken a sigh of relief when SCA posted 2% organic growth during Q4 16. Although, compared with the earlier years, the growth (2% in 2016 vs. average 4% since 2012) was clearly below potential. Besides the Q4 surprise, overall growth pressure was evident Q4 sales were SEK31bn (+6% yoy and qoq; 2% organic growth), primarily driven by Tissues (4% organic growth), especially in emerging markets (+11%). Even Forest Products grew by 4% – first organic growth achieved since Q4 15. Both these divisions’ performance was driven by healthy volumes while prices were flat. On the other hand, Personal Care weakened further (organic sales decline of 1% vs. ‘nil’ in Q3 16) on account of: 1/ lower sales of baby diapers – primarily due to stiff competition in emerging markets; and 2/ flat incontinence products (53% of Personal Care sales). FY16 sales came in at SEK117bn (+1.7% yoy), 1.3% ahead of AlphaValue’s expectations. But both Tissues and Personal Care witnessed moderating organic growth (3%) in FY16 vs. 5% and 7%, respectively, in FY15. Exceptionals overshadowed the operating efficiencies Adjusted EBIT: Q4 – SEK3.6bn (+7.1% yoy; +0.8% qoq); FY16 – SEK13.8bn (+8% yoy; 5.4% ahead of AlphaValue’s estimates) Despite the growth headwinds, and the material weakness in the pound and Mexican peso (impact elucidated in the ‘Analysis’ section), a better product mix and cost savings/improvements (including the benefit of lower raw materials costs; Q4 – SEK184m; FY16 – SEK380m) supported overall Hygiene’s profitability. While Forests’ profitability normalised (as expected) primarily due to higher energy and raw material costs. In margin terms, SCA ended 2016 on a high note, achieving an 11.8% operating margin (+70bp vs. 2015). However, materially high Q4 exceptionals (costs related to the closure of operations in India, and the BSN Medical and Wausau Paper acquisitions) of SEK696m resulted in attributable net profit plummeting (-51% yoy; -36% qoq) to SEK1.4bn. Even on a FY basis, exceptionals (FY16: SEK2.7bn vs. FY15: SEK2.1bn) and tax provisions (FY16: SEK1.3bn vs. FY15: SEK300m) resulted in net attributable profit correcting (20%) to SEK5.6bn. Healthy cash flows partly compensated for the spending binge In addition to the operating profit resilience, material working capital release (Q4 – SEK1.5bn; FY16 – SEK2bn) helped reported OCFs surge to SEK4.9bn (+13% yoy; +14% qoq) and SEK15.6bn (+11%) for Q4 and FY16, respectively. Yet aggressive growth investments (such as increased capacity in Östrand pulp mill and a new incontinence products plant in Brazil) of SEK9.4bn (+23%) and acquisitions (SEK4.4bn) during the year resulted in net debt increasing 12% (vs. FY15-end) to SEK32bn. Management proposed a full-year dividend of SEK6 per share (+4.3%) – 9.9% below AlphaValue’s estimate.
Amidst intensifying business pressure, is the hygiene strategy being reinvented?
29 Dec 16
SCA has decided to acquire BSN Medical (BSN) – a medical solutions company focused on wound care, compression therapy and orthopaedics – from EQT (a private equity group) for an EV consideration of €2.74bn – o/w €2.43bn is attributable to intangibles (€1.5bn of goodwill; the remainder is trademarks). Interestingly, management targets this transaction to be 100% debt-funded. During 9M 16, BSN reported net sales of €627m (SEK5.9bn) and adjusted operating profit of €103m (SEK965m), translating into an operating margin of 16% vs. 12% for SCA’s hygiene business. Subject to regulatory approvals, the transaction closure is targeted for Q2 17. In another surprise move, SCA has decided to exit its hygiene business in India (even though only 0.1% of sales in 2015) – citing near-term profitability headwinds as the key reason for exiting.
Weakening (emerging market) growth is unnerving
10 Nov 16
SCA’s operating performance continued to weaken, with the Q3 16 results coming behind both consensus and AV’s estimates. Sales were flat (both yoy and qoq) at SEK29bn. Organic growth erosion – ‘NIL’ vs. 2% in Q2 16 and 3% in Q1 16 – intensified through 2016. Moreover, the sluggish emerging market’s (31% of sales) organic growth of 4% (vs. 6% in Q2 16 and 9% in Q1 16) was a major disappointment. Hygiene (personal care + tissues), which has been a backbone of SCA’s business growth, witnessed serious difficulties in Q3. Personal care’s organic growth was flat (vs. 5% in Q2 16 and 6% in Q1 16), while tissues’ growth was reduced to only 1% (vs. 3% in Q2 16 and 4% in Q1 16). Surprisingly, prices and volumes were flat in both divisions, except for a minute 1% price/mix improvement in tissues. On the other hand, the weakness in forest products (sales down 4.4% yoy and 4.1% qoq) was broadly anticipated. Despite the top-line disappointment, there was some profitability consolation. Adjusted EBIT came in at SEK3.6bn (+5.8% yoy; +7.1% qoq), primarily benefiting from cost savings and lower input costs – more than offsetting higher selling/marketing expenses in hygiene and the effect of a weaker pound. Unlike the comparable quarters, which were marred by hefty impairments, and one-time tax and anti-trust cases related provisions, a relatively blemish-free Q3 resulted in an attributable net income of SEK2.2bn (vs. SEK502m in Q3 15 and SEK76m in Q2 16). Reported OCFs remained healthy at SEK4.3bn (-4.4% yoy; +13% qoq), while capital spend (SEK2.2bn; +23% yoy; +7.9% qoq) was aggressive – due to the Östrand pulp mill expansion and construction of a new incontinence products facility in Brazil. Net debt was down (3.6% vs. end Q2) to SEK34bn. The highlight of the quarter was the decision to split SCA into separately-listed entities – hygiene and forest products. While this proposal is to be presented at the 2017 AGM, the listing of the new entity – which would be hygiene – is targeted by H2 17.
Waning organic growth and extraordinary charges add to the bottom-line's woes
20 Jul 16
SCA’s Q2 16 results were below consensus estimates, with fading organic growth and extraordinary charges being the major setbacks. Organic sales growth, a key performance measure, was reduced to only 2% (vs. 3% and 5% in Q1 16 and Q4 15, respectively). Below is an illustration of SCA’s organic growth by segments for the past six quarters: Besides slowing growth in hygiene (SCA’s strategic focus), an extremely difficult operating environment in forest products (both weak prices (-3%) and volumes (-4%)) has been a key problem area. Moreover, all the organic growth came from emerging markets (+6%; 31% of sales), while the mature markets (69% of sales) were flat. Sales and adjusted EBIT came in at SEK29bn (-0.5% yoy; +3.2% qoq) and SEK3.4bn (+6.3%; +4.9% qoq), respectively. Despite growth pressures, the hygiene business margin was up 100bp yoy due to the continuation of cost savings and lower input (energy and raw material) prices in tissues. However, in the case of forest products, even the benefit of lower input prices were insufficient to avert a faster than expected profitability erosion. A provision of >SEK1bn has been made for ongoing anti-trust cases in Chile, Colombia, Poland, Spain and Hungary. Also, SEK340m of restructuring costs have been recognised pertaining to tissue plant closures in France and Spain. Although, some cushion comes from the SEK200m capital gain on the divestment of IL Recycling. Further down, SCA’s adversities amplified with the recognition of a SEK1.3bn provision for ongoing tax cases in Sweden and Austria. As a result, the net profit for the quarter was almost wiped-out – SEK79m vs. SEK2.1bn in Q2 15. Given the (so far) non-cash impact of the one-off charges, SCA’s reported OCFs remained healthy (SEK3.8bn; +25% yoy; +49% qoq). The group ended Q2 with a net debt of SEK35.5bn vs. SEK33.4bn at end Q1.
Early signs of waning organic growth
03 May 16
Unlike previous years, SCA’s start to 2016 was a bit disappointing. Even though profitability was marginally ahead of consensus estimates, thetop-line was weak as currency benefits retreated (resulting in a 4% negative impact), organic growth reduced to 3% – the lowest since Q4 14 and forest products’ price/mix weakened (-5%). Q1 sales were SEK28.2bn (+0.8% yoy; -3% qoq) and adjusted EBIT came in at SEK3.2bn (+13% yoy but down 5.4% qoq). While Forest Products’ EBIT weakness (-19% yoy; -10% qoq) was anticipated (as the gains of 2014-15 seemed unsustainable), the hygiene (tissues + personal care) business too came under some sequential pressure (down 5-10%). Net profit came in at SEK1.9bn (+13% yoy; -32% qoq), although the sizeable sequential impact was primarily due to SEK970m of gains on the sale of the Industrivärden (direct) stake in Q4 15. Reported OCFs were up 22% to SEK2.5bn as the yoy profitability benefit was supported by relative working capital efficiencies – use of SEK721m vs. >SEK1bn in Q1 15. Although with the closure of the Wausau acquisition, SCA’s net debt increased to SEK33.4bn vs. SEK28.8bn at end-2015. The Forest Products division is expected to come under more pressure in Q2 16, as management has guided SEK60m of negative earnings impact due to maintenance shutdowns. In April 2016, SCA sold its 33% stake in IL Recycling for SEK236m with management guiding for a capital gain of SEK200m to be recognised in Q2 16.
Organic growth on track, though Yuan devaluation bothered a bit
29 Jan 16
SCA’s business growth story remains intact, despite growing economic upheaval in most of its focus markets. While the full-year results were ahead of expectations, Q4 witnessed some sequential slowdown in Forest Products and flattening growth in Hygiene (Personal Care + Tissues). *Achieved highest annual organic sales growth since 2012* Sales: Q4 – SEK29bn (+6% yoy; +4% organic growth); 2015 – SEK115bn (+11%; +5% organic growth; in-line with AV estimates) Q4 organic growth was supported by strong volume growth (+7%) in Personal Care and an improving price/ mix (+2%) in Tissues. Even Forest Products managed a modest 1% organic growth. Hygiene growth was once again driven by a robust contribution from emerging markets (+11%) and resilient mature markets (+2%). Another key factor was a weaker SEK (down 14% vs. the US dollar). Although weakening global economic sentiment and a stabilising SEK translated into flat sequential growth. For the full-year, organic growth trends in emerging and mature markets were similar to Q4, while SEK tailwinds rendered a 23% benefit. *Profitability ahead of expectations* Adjusted EBIT: Q4 – SEK3.4bn (+7.2%; flat qoq); 2015 – SEK12.8bn (+9.2%; 2.1% ahead of AV estimates) While costs savings (especially SEK260m in Q4 and SEK930m in 2015 from the Georgia-Pacific operations) continued to deliver, the benefit from lower energy prices amplified (SEK128m in Q4 and SEK275m in 2015) as the year unfolded. However, USD-denominated raw material prices (mainly pulp – impacting the tissue business), higher marketing spend (especially on incontinence products) and the discontinuation of recognition of gains on forest swaps with effect from 2015 (vs. SEK336m of gains in 2014) culminated in a full-year margin contraction of 20bp – though better than our earlier expectation of a 40bp contraction. Net attributable profit: Q4 – SEK2.8bn (+96%, +4.6x qoq); 2015 – SEK7bn (+6.1%; 6.3% ahead of AV estimates) An exceptional gain of SEK697m (including SEK970m profit from the sale of 2.8% direct stake in Industrivärden) and absence of hefty asset impairments (unlike Q3) culminated in an abnormally-high Q4 bottom-line. SCA now holds an indirect 7.9% stake in Industrivärden (primarily through its pension funds). *Healthy cashflows supported strong dividends* The 2015 operating performance was reflected in the group’s cashflows, with full-year reported OCFs galloping by 18% to SEK14bn. Although capex was up by 32% to SEK7.6bn due to growth investments in Brazil (incontinence products) and at the Östrand pulp mill in Sweden, net debt was reduced to SEK29bn (-18%; lowest level since 2006), partly facilitated by c.SEK2bn of proceeds from the Industrivärden divestment. However, completion of the SEK4.2bn Wausau Paper acquisition in January 2016 is again likely to result in a build-up of borrowings. Nevertheless, the management proposed a full-year dividend of SEK5.75 per share (+9.5%) – 2.2% ahead of AV's estimate.
Outperformance in the bag
24 Mar 17
IG Design has had a very good second half trading and has issued a year-end update indicating that numbers will exceed market estimates. We have lifted our FY17 and FY18 numbers by 8-10% at the pre-tax and EPS levels, following an 11% uplift to earnings with the interims. Particularly notable is the comment on strong cash flow, with the group reaching its target of average leverage less than 2.5x EBITDA two years ahead of plan. With the earnings and cash flow momentum, strong balance sheet and progressive dividend, there is good potential for further share price upside.
24 Mar 17
We note the share transaction yesterday, and think the stock will benefit from the increased liquidity. We continue to believe there is good valuation upside to the shares. However, we are terminating coverage of Watkins Jones from this morning and withdrawing our forecasts from the market.
Panmure Morning Note 20-03-2017
20 Mar 17
Today’s strong H1FY17 trading statement is encouraging on multiple levels; (1) H1FY17’s revenue growth of c.+23% to £32m indicates revenue growth running well above our forecast assumption of +15% for FY17 (August 2017); (2) the revenue growth continues to be broad-based across the two main brand groups (Focusrite and Novation) and all of TUNE’s global regions (USA, Europe, and RoW); (3) H1FY17’s constant currency revenue growth of c.+12% is a sequential acceleration from the c.+9.5% of H2FY16 and c.+5.5% of H1FY16; and (4) H1FY17’s net cash of £9.4m is well ahead of our forecast of £7.7m by August 2017, reflecting strong revenue/profit conversion combined with much improved w/c control. In short, we think there is excellent scope for our FY17 forecasts to be raised at the time of the H1FY17 results on May 3. We maintain our BUY.
20 Mar 17
Focusrite has positioned itself in a way that makes its shares a particularly attractive investment: leadership in a niche product area protected from general consumer swings; an international market structure that makes it relatively currency agnostic; a habit of profit over delivery; a strong and further strengthening balance sheet; and an undemanding valuation. This first half trading statement confirms every one of those points.