Inbox: Nach dem Kursminus ist Semperit für RCB jetzt ein Hold

- We upgrade Semperit to HOLD from REDUCE as the share price has fallen towards our unchanged target price of EUR 23.5
- 2017e will be a year to forget, shaped by a weak underlying performance and massively distorted by one-off
- All eyes remain centred on the restructuring steps to be implemented in the wake of the strategy review that should be completed by the end of 2Q 18
- No details are available so far but purchasing/procurement, the penetration of new markets are core pillars. We also expect further restructuring of the production footprint
- The focus topic remains the Sempermed segment. While we assume that cost cutting could bring the business back to a low to mid-single-digit EBIT margin, we also think that a divestment is a serious option
- We acknowledge that the turnaround story is tempting but also argue that the share price still discounts a substantial earnings recovery. We expect a tripling of EBIT in 2018e and almost a doubling yoy in 2019e

We upgrade Semperit to HOLD from REDUCE as the share price has fallen towards our unchanged target price of EUR 23.5. 2017e will be a year to forget, shaped by a weak underlying performance and massively distorted by one-off effects (potentially more to come in 4Q). Thus, all eyes remain centred on the restructuring steps to be implemented by the new management. The strategy review supported by a consultancy firm commenced in October and should be completed by the end of 2Q 18. For the time being the management does not provide insight on the specific restructuring areas/measures and associated costs (apart from the general hint that significant charges could occur). However, it is apparent that a more efficient purchasing/procurement organisation and streamlined logistics are core pillars and that the penetration of new markets and customer industries is mulled in order to beef up the growth profile. Moreover, we also expect further restructuring of the production footprint in order to enhance economies of scale in the production. For the time being we think that Semperit appears largely fairly valued. We acknowledge that the turnaround story is tempting but also argue that the share price still discounts a substantial earnings recovery, which suggests that not every savings measure announced will lead to upgrades of market forecasts. On our forecasts (we expect a tripling of EBIT in 2018e and almost a doubling yoy in 2019e) we find the stock trading at a 2019e P/E of 14.7x, a single-digit discount to the peer group. The stock admittedly looks attractive on EV/EBITDA of 6.6x which offers a 30% discount, but its EV/EBIT of 11.1x is almost in line with the peer group.

Quo vadis Sempermed turnaround and/or divestment? The focus topic, however, remains the Sempermed segment, which should record the second consecutive year in red figures in 2017e (excl. one-offs, 2015 was about break-even if the Thai JV contribution is stripped out). While we assume that cost cutting could bring the business back to a low to mid-single-digit EBIT margin, we see limitations to a higher profitability (median of ~9% in the decade before Latexx Partners acquisition) given scale disadvantages and price pressure from its Asian competitors. Moreover, from a ROCE and cash conversion point of view the Malaysian operations are likely to remain dilutive. We think that a divestment is a serious option which would free up management capacity, enable a stronger growth focus on the industrial businesses and would restore Semperits financial flexibility (we assume an increase of net debt towards ca. EUR 190 mn in 2018e excl. cash drain from further restructuring initiatives).

Valuation: The total-return target price of EUR 23.5 (incl. DPS of EUR 0.30) is based on an equally weighted economic profit method and a DCF model. While the former approach renders a fair value of about EUR 21, the latter suggests approximately EUR 25.