Suominen - Focus on volumes

Suominen posts Q3 results next week, on Tue, Oct 22. Suominen’s gross margin improved to 9.3% in Q2, and as raw material prices further slipped during Q3 we now expect the company’s gross margin at 9.9% for the quarter. However, we remind Q2 volume losses proved larger than we expected, and thus we retain our cautious view ahead of the report. Our target price remains EUR 2.50, rating HOLD.

Margin improvement story continues to solidify

The prices of key raw materials (i.e. viscose, polyester and pulp) have extended their soft streak during the recent months. European softwood pulp prices declined by more than 10% during Q3, therefore bringing the total price decline for the past year to about 25%. The price trends are roughly similar for viscose and polyester, whereas polypropylene prices have remained stable since spring. Assuming stable pricing for Suominen’s nonwovens, we have consequently made moderate upwards adjustments to our gross margin (and thus EBIT) estimates. We now expect Q3 gross margin at 9.9% (we previously expected 9.2%). This implies an EBIT of EUR 3.8m, or 3.6% operating margin (previously estimated at EUR 3.1m and 3.0%). As the pricing of raw materials registers with a lag of few months, we expect further improvement for Q4, which brings our new EBIT estimate for FY ’19 to EUR 14m (previously EUR 12m).

Q2 volume losses proved a strain on EBIT

While we are confident regarding additional improvement in gross margin, we note volume losses pose a risk for our EBIT estimates. Even though Suominen posted Q2 gross margin above our estimate (9.3% vs our 8.7% estimate), the 15% volume decline in Q2 led to EBIT falling short of our estimate by almost 20%. We expect volume losses to have amounted to 9% in Q3.

In our view valuation is neutral given the uncertainty

Suominen is currently achieving a turnaround in earnings, and trades ca. 20% below peer group multiples on our estimates for ’20 and ’21. Nevertheless, we see the uncertainty due to volume losses posing a risk for our earnings estimates. We therefore reiterate our EUR 2.50 TP and HOLD rating ahead of the report.

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