We attended ANDRITZ ’s capital markets day in Austria recently and came away more convinced that: (1) Hydro margins are more sustainable; (2) market weakness in Metals is likely to continue with structurally lower margins (c4% of Metals is exposed to automotive power trains); and (3) Pulp & Paper looks solid, with potential greenfield activity next year. We sharply reduce our EPS estimates by 6-10% for FY 2017-19 to reflect the weak Q2 results, yet our DCF-driven price target only edges down marginally to EUR49.00, backed by an unjustified multiple discount to mid-cap peers, which has worsened by 515bp since Q2 results to 50%. We remain Holders and await further clarity on order trends in Q3.

Weakening financial profile: ANDRITZ reported weak Q2 results, with sales down 5.6% and underlying EBITA down 12.7% yoy mainly due to weakness in Hydro (excluding EUR23.4m in one-offs from the gain on the sale of the Schuler Technical Centre in China). While we continue to see increasing service business content as a cushion to the bottom line, we acknowledge that this margin insulation remains somewhat limited to Hydro and Metals, where service represents a lower share of sales.

Still no meaningful recovery in Hydro and Metals: Our bearish view on Hydro and Metals has been reaffirmed by declining order intake (-40% and -21% yoy respectively in Q2), reflecting weak greenfield and brownfield activity. Continued weakness in Brazil and long project lead times suggest limited upside risk in Hydro (despite the recent irrigation pumps order from India, worth more than EUR60m), while reduced order intake will continue to weigh on Metals revenues and profits.

Raising Pulp & Paper forecasts: We lower our 2017/18 Hydro revenue forecasts by c6% (more prolonged market weakness) and Metals revenues and margin by c2-3% and 80-150bp (lower orders and profitability than we originally expected). We increase our Pulp & Paper revenue (c2%) and margin forecast (+20-25bp) on the back of solid market environment in pulp (despite no new greenfield orders), tissue and packaging. Our EPS revisions are also driven by a higher net financial result (EUR400m of promissory notes (Schuldscheindarlehen) issued in June).

Valuation: ANDRITZ is currently trading at 8x 2018 EBITA, reflecting a 39% discount to mid-cap capital goods peers with a similar margin profile (eg Duerr , Jungheinrich, Krones and Vossloh ). The stock is also trading at a discount to Valmet at 10x, which, in our opinion, has a stronger margin profile with its automation business and end-market exposure.