Suominen - Improvement gradient still uncertain

Suominen reports Q4 results on Wed, Jan 29. Our estimates stand unchanged. We expect positive FY ’20 guidance given ’19 figures represent a rather soft comparison base. Our TP is now EUR 2.50 (2.25), rating remains HOLD.

Expect a stable Q4 result compared to preceding quarters

We note nonwovens demand unchanged since Q3, and thus leave our estimates intact. We estimate Q4 revenue at EUR 107m i.e. down by few percent y/y due to volume losses. All the nonwovens’ raw materials prices basically flatlined during Q4 and so we expect gross margin stable at 8.4%. We also expect other costs to have remained in control and thus see EBIT at EUR 2.5m (EUR -0.4m a year ago). We see stabilizing prices and volumes helping Suominen to continued improvement with FY ‘20e EBIT at EUR 16.1m (compared to ‘19e EUR 9.2m).

FY ’20 guidance should be positive for both sales and EBIT

Although Suominen’s FY ’19 figures will likely translate to an EBIT twice that of ’18, the company’s profitability is still far off from satisfactory. We thus expect continued meaningful profitability improvement this year. Suominen recently published its new strategy and financial targets for 2020-25. The targets were moderated; Suominen now aims for sales growth above that of the relevant market. As Suominen’s markets grow ca. 3% p.a. we would expect this to imply a CAGR of some 3-5%. In order to reach the targeted above 12% EBITDA margin (which would imply an EBIT margin close to 8%) by ‘25, Suominen not only needs to achieve improved operational efficiency but also robust sales growth. We look forward to Suominen commenting on the outlook for the two currently reported geographies, Europe and Americas, as well as any color on the possible Asia expansion (about which the company has talked over the years). We would also like to hear about turning customer relationships stickier since the nonwovens markets are still well-supplied.

We update our TP but remain HOLD due to uncertainty

Our updated TP is EUR 2.50 (2.25) as peer multiples have gained in recent months. Our rating is still HOLD. Valuation starts to look attractive longer term (‘21e EV/EBITDA ~4.5x and EV/EBIT 10x) yet in our view there’s too much uncertainty. We expect Suominen to declare EUR 0.04 dividend per share for ’19.

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