Raute - Market uncertainty justifies caution

Name: Evli
Price range: $

Raute reports Q2 results this week, on Wed, Jul 31. The company downgraded its FY 2019 guidance recently, on Jun 25. Raute had previously expected flat revenue and operating profit for FY 2019, but now expects revenue and EBIT to be lower than last year. We keep our target price at EUR 25.5 per share; our rating is now BUY (HOLD).

We expect strong Q2 EBIT margin due to inventory timings

Even though Raute recently moderated its guidance for FY 2019, we expect Q2 to have been quite strong in terms of operating margin; Raute’s Q1 operating margin amounted to a relatively weak 6.3% due to unfavorable timing of certain inventory-related line items, which the company said were some EUR 0.5- 1.0m in magnitude. We therefore expect Q2 operating margin at 8.1% (vs 7.3% a year ago and 6.3% in Q1). Our EUR 35.6m revenue and EUR 2.9m EBIT estimates for Q2 compare to the respective EUR 38.2m and EUR 2.7m consensus estimates.

Lowered FY 2019 outlook as project deliveries were delayed

Raute lowered guidance on Jun 25 due to delayed schedules of certain challenging project deliveries and postponed negotiations concerning some larger orders not yet closed. Upon lowering its outlook, Raute said it continues to view the operating environment stable and sees healthy activity related to potential mill capacity expansion projects. However, Raute also cited elevated uncertainty due to increased share of smaller customers, whose decision-making is more unpredictable. We expect 2019 revenue to decrease by a double-digit percentage to EUR 158m (EUR 156m consensus) and EBIT to decline to EUR 11m (same as consensus) due to project uncertainties and slower order book development (EUR 84m Q1’19 vs. EUR 142m Q1’18).

Low multiples warranted due to outlook uncertainties

Raute trades around 4x EV/EBITDA and 5x EV/EBIT on our 2019 estimates. We leave our estimates unchanged for now and retain our EUR 25.5 target price. Our new rating is thus BUY (HOLD) as Raute’s share price has declined since our previous update.

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