Fairly valued at current levels

●  Q3 results weaker than expected: Wienerberger delivered Q3 results that were 6% below consensus expectations at the EBITDA level and reduced its 2017 EBITDA guidance to 6% lfl growth from 9% previously. We believe that the main driver of this was the weak performance in Clay Building Materials Western Europe (CBMWE), whereby Belgium bewertetcontinued to face insulation shortages and Germany was challenged by a labour bottleneck. Consequently, we reduce our forecasts for this year but this is somewhat offset in outer years by our more positive view on Pipes and Pavers (P&P) in eastern Europe. We maintain our Hold recommendation.

●  CBMWE weakness attributable to Belgium and Germany: Versus our estimates, the miss at the group level was attributable to CBMWE, and in particular Belgium and Germany. In Belgium, the supply shortage of MDI- based insulation has had a knock-on effect on building construction activity as 90% of new homes use this form of insulation. The group does not expect this to recover this year while we do not think that any recovery next year will be immediate. In Germany, housing permits have fallen by 6% ytd, with the group previously stating that the slowdown pre-election was a large driver. However, management also mentioned on the call that there is a shortage of skilled construction labour, meaning that it is unlikely that there will be a quick fix. 

●  P&P business mixed but eastern Europe improving: The high-margin international pipe business continues to be weak, and there continues to be restrained demand and competitive pressure in the French piping business. However, the group has managed to pass through price increases to begin offsetting the increase in plastic granulate pricing throughout this year. In eastern Europe, the group stated that public-sector tendering activity for infrastructure projects is showing signs of recovery.

●  We reduce our operating forecasts to reflect the miss in CBM: We reduce our 2017E EBITDA forecasts by 2%, implying 5% lfl growth. Guidance of 6% lfl growth implies that the group will have to deliver 13% lfl growth in Q4, which will be challenging in our view. Our overall top-line and EBITDA forecasts remain broadly unchanged for 2018-19E as the decrease in our CBMWE forecasts offset the increase to our P&P eastern Europe expectations. 

●  Valuation: The shares trade on 7.2x 2018 EV/EBITDA, in line with historical levels. Although we think there are some drivers of positive earnings momentum (ie France, the Netherlands and eastern Europe CBM), there are also several risks (French pipes, international pipes, German CBM and UK imports) leaving us cautious about what will drive the share price from here.