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Suominen - Profit ascent more elusive

Suominen’s Q3 EBIT, at EUR 1.1m, missed our EUR 3.8m estimate by a wide mark. Suominen achieved rather stable volumes compared to our expectations, however this was achieved at the cost of margins. While the soft results were partly due to inventory reductions and reorganization costs, we turn slightly more cautious with respect to margin estimates. Our new TP is EUR 2.25 (2.50), reiterate HOLD.

Suominen sees nonwovens markets largely stable

Suominen posted EUR 103.4m in Q3 revenue (-1% y/y), close to our EUR 104.4m estimate. The figure was helped to the tune of 3% by the strengthening of USD relative to EUR. Volume losses were moderate, the pricing of Suominen’s nonwovens remaining flat. Suominen’s profitability improvement proved modest compared to our expectations as declining raw materials prices and significant inventory reductions during Q3 led to flat pricing. Suominen recorded a 7.4% gross margin, whereas we expected 9.9%. Suominen says the inventory reductions had a EUR 0.5m negative effect on profitability i.e. the gross margin would have amounted to roughly 8% without such reductions. The company says it is now close to the targeted inventory level. Operating profit was further strained by EUR 0.2m items related to the reorganization of business areas, as Suominen now reports business for the areas Americas and Europe. FX had a negative EUR 0.6m effect through raw materials purchases.

We have adjusted our margin estimates downwards

We remain cautious following the report as margin improvement is proving harder than we expected. In order to reach a 5% operating margin, a level where corresponding returns on capital could be deemed adequate, Suominen needs to achieve both improving (or at the minimum flat) volumes and gross margin north of 10%.

Current valuation reflects modest expectations

While Q3 volumes were better than we expected, we see the softness in margins as another source of uncertainty, and thus the steepness of Suominen’s ongoing profit improvement remains clouded. We retain our HOLD rating, our new TP being EUR 2.25 (2.50).

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