Vaisala - Valuation running ahead of things
A good finish to a solid year
Vaisala ended a solid 2019 with a good Q4 that beat expectations. Q4 net sales grew 9% y/y to 118.1 MEUR (118 Evli, 116 cons) and EBIT improved +27% to 17.7 MEUR (16 MEUR Evli/cons.). Dividend proposal is 0.61 (0.60 Evli/cons.). Net sales growth was driven by good level of delivery volumes thanks to record high order book during end of last year. Q4 EBIT improvement was driven by gross margin improvement of 170 bps due to net sales growth and scale benefits.
Both business areas fuelled by M&A
W&E Q4 net sales grew 5% (1% excl. FX and M&A) to 81.9 MEUR (80.0 Evli), with growth in all regions except China. W&E Q4 EBIT was 12.1 MEUR (10 Evli). W&E order intake growth was -3%, -8% growth excl. FX and M&A, due to less larger projects during Q4. IM Q4 net sales grew 18% (5% excl FX and M&A) to 36.3 MEUR (38.0 Evli) and was strong in all regions. IM Q4 EBIT was 5.5 MEUR (7.6 Evli). IM order intake grew by 19%, 8% excl. FX and M&A. Both acquired companies, i.e. Leosphere (W&E) and K-patents (IM), have been successfully integrated to Vaisala’s platform and contributed significantly in FY’19 growth. Half of IM’s FY’19 net sales growth came from K-Patents acquisition, while W&E FY’19 net sales growth excluding FX and M&A was 2%. Vaisala has indicated the possibility of further add-on acquisitions in liquid measurements area. With its platform, strong balance sheet and current valuation, Vaisala is in a good position to continue value accreditive acquisitions in our view.
2020 outlook slightly soft as expectations already in upper end
Vaisala estimates its 2020 net sales to be in the range of 400–425 MEUR and EBIT in the range of 38–48 MEUR, which practically means 0-5% growth and 9-12% EBIT margins. Given that our previous 2020 estimates, as well as consensus figures (FY’20E net sales 423M, EBIT 48.3 MEUR) were already in the upper end of the outlook, the guidance is cautious. Vaisala expects W&E market segments to be stable or somewhat grow, while industrial and liquid measurement market segments are expected to continue to grow.
Estimates unchanged, valuation is running ahead of things
Apart from a slight trim to our sales estimates, our estimates are unchanged for the coming years. With the acquired businesses integrated into Vaisala’s sales channel and continued stable to good organic momentum in both W&E and IM, we see Vaisala’s targeted above 5% sales growth achievable and road to >12% margins progressing well. The underlying main driver for growth is continued good growth in industrial business supported by further bolt-on acquisitions. As a result, we estimate IM share of Vaisala’s EBIT to grow to 66% in ‘21E (vs. 56-57% in ’17-’18), driving ~10% EBIT growth in coming years. Vaisala’s share har continued to rally, pushing new all-time highs. On our estimates, Vaisala is trading at PPA amortizations adjusted EV/EBIT multiples of 24.7x and 22.4x for ‘20E and ‘21E, a ~50% premium to our peer group median despite exhibiting lower profitability profile than our peer group. On our adjusted ‘20E P/E multiples, premium is roughly 50% as well. Despite Vaisala’s strong sustainability profile, growing dividend, and especially IM’s highly profitable growth with possibility of further add-on acquisitions, we see current valuation too stretched given our current growth and earnings estimates (which do not account for further M&A). We maintain previous TP of EUR 29.5, which values Vaisala at EV/EBIT 23.5x and 21x on ’20-21E, still at ~40% premium to our peer group. Due to continued share price rally our recommendation is now SELL (prev. HOLD).