●  Profit warning: Yesterday after market close Zumtobel released a profit warning, together with preliminary figures for H1 2017/18. After a disappointing Q1, both segments took a turn for the worse in Q2. Management reduced its guidance for FY 2017/18 to EUR50m-60m adjusted EBIT (previously: “slight improvement” from EUR72m) and a 5% decline in revenues (previously: “slight improvement”). We expected Zumtobel to generate EUR74.1m in adjusted EBIT and 0.6% revenues growth.

●  Downgrade to Sell: While the outlook for 2017/18 is clearly negative, we are more concerned about what the recent developments imply for Zumtobel’s long-term potential. We believe that the company’s long-term strategy is unclear and the company should continue to underperform as it is battling internal issues against a difficult market backdrop. We believe that disagreements about the strategic positioning of Zumtobel between the board of management and the supervisory board will continue to impede on future growth.

●  Difficult market environment persists: Pricing pressure both in luminaires and components continues to be aggressive and Zumtobel is seeing delays of projects in its single largest market, the UK. Company- specific issues exacerbated these negative developments as Zumtobel had to take provisions on a road lighting project and continues to face internal operating challenges.

●  Q2 a disappointment, another warning in H2 likely: Group revenues of EUR307.2m in Q2 were down by 10% yoy and Zumtobel merely broke even on adjusted EBIT in Q2 (EUR2.1m, 0.7% margin versus EUR32.0m and 9.4% margin in Q2 2016/17). We cut our numbers and do not believe that Zumtobel can recover lost profits in H2 and meet its revised guidance. Our EUR39m EBIT estimate for 2017E is 22% below the low end of the revised guidance, which we believe is still too optimistic.

●  We expect further valuation downside: Our revised DCF-based price target of EUR9.5 implies 0.46x EV/sales 2018E for a 4.6% EBIT margin in the same year. Our price target offers 13% downside to the closing price.