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Suominen - Waiting for earnings to turn

Suominen has faced clear challenges in recent years and there is way to go to reach the historical earnings level. Own efforts and Bethune’s improving outlook support the outlook for earnings gradually turning to the better. Valuation on 2019E multiples looks moderate, but evidence of earnings turning remains to be delivered. We retain “Hold” rating for Suominen’s shares.

Business has suffered in recent years

Capacity increases by competitors in certain product areas have had a clear negative impact on Suominen’s business in 2016, 2017 and H1’18. Particularly price/mix and profitability have been key issues. Suominen addresses these via its 3P program. Some early results were delivered in H1’18. Bethune’s increasing contribution should help in gradually turning price/mix to the better. We expect earnings in 2018E to remain modest, in line with guidance, but expect earnings to gradually improve in 2019-2020E, driven by both Bethune and Suominen ex-Bethune.

Bethune’s outlook seems to be finally improving

After a lengthy period of ramp-up troubles, Suominen’s new production line in Bethune finally reached positive gross profit towards the end of Q2’18. Management indicated production volumes in July 2018 were good, which improves outlook for a gradual turn finally taking place. We expect Bethune to have a more significant topline impact from H2’18 and its gross profit contribution to turn to positive in H2’18.

Waiting for earnings to turn - “Hold” reiterated

Suominen’s valuation looks unattractive with 2018E multiples, but on 2019E multiples valuation looks much more moderate: on our 2019E estimates Suominen trades 5.4x EV/EBITDA, 10.3x EV/EBIT and 13.1x P/E, which are close to Suominen’s historical multiples. While valuation does not look particularly challenging on 2019E estimates, evidence of earnings turning to better is needed to justify material upside. With 2019E multiples close to historical valuation we keep “Hold” rating intact with target price of EUR 3.4 (3.5). If Suominen was to move towards its financial targets, there would be clear upside to valuation.

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