Raute - Initiating coverage with HOLD

Name: Evli
Price range: $

In the last 3 years, Raute’s strong performance has been largely driven by European investment activity. We estimate that the activity normalizes in 2019, which reflects negatively on Raute’s net sales and EBIT-% in 2019-2020. Meanwhile, we estimate that the share of technology services grows and drives Raute’s long-term growth and profitability. We initiate coverage of Raute with a HOLD rating and a target price of EUR 27.0 per share. The rating and target price are based on Raute’s historical valuation and our DCF model.

Recent growth driven by project deliveries to Europe

In 2017, 67% of Raute’s net sales was project sales which are highly cyclical and drive Raute’s EBIT-% together with fixed costs. During the last 3 years, Raute’s sales and EBIT have hit new records, largely driven by European investment activity. We estimate that order intake from Europe normalizes in 2019 since growth in the European construction output is estimated to decelerate in 2018. As a result, we estimate y/y declining net sales and EBIT-% in 2019 and 2020.

We estimate that tech services drive long-term growth

In 2021-2023, we estimate that Raute’s net sales grow at a CAGR of 3.6%, driven by growth in technology services (5.0% CAGR). Raute has not disclosed the profitability of technology services but, based on peer data, we estimate that the increasing share of services supports Raute’s long term EBIT-%. In contrast, we estimate that project sales grow at a CAGR of 2.5%, limited by slow GDP growth in developed economies and challenging competitive environment in emerging economies.

HOLD with a target price of EUR 27.0 per share

In our valuation approach, we emphasize 2020 estimates since we see that they represent Raute’s performance at a neutral stage of the investment cycle. On our estimates, Raute’s 2020E EV/EBIT amounts to 9.7x. This is clearly above the 2012-2017 median trailing 12m EV/EBIT of 7.0x and limits valuation upside, even though the growing share of technology services reduces volatility and risks. Meanwhile, our DCF model implies EUR 28.0 per share, assuming a 6.5% terminal EBIT margin.

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