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- Suominen - Wait to see improving volumes
Suominen - Wait to see improving volumes
Margins continued stable, volume losses were larger in Q2
Suominen’s Q2 revenue, at EUR 104m, declined by 6% y/y and missed our estimate by 8%. Strong USD added some 3% y/y, and considering the implemented price increases, we estimate ca. 15% of delivery volumes were lost y/y (we estimate the losses to have amounted to ca. 10% in Q1). We expect Suominen to lose 10% of volumes in ‘19 (expect FY revenue to decline by 1%). We expect stable GM for the rest of ’19, and hence EBIT at EUR 12m. Suominen guides flat revenue and improving EBIT for FY ’19.
Suominen changes its business area structure
Suominen has reorganized its business areas, opting for a geographical split (Americas and Europe) instead of the previous application-based reporting (Convenience and Care). The new structure will be effective from Q3 onwards. Suominen says the new organizational model should further help improve efficiency especially when it comes to optimizing regional capacity utilization. There was scant news about Bethune, although the company said the China-US trade war could potentially help Suominen’s competitive positioning in the US market as Chinese imports are hurt by tariffs. Suominen also noted the EUR 6m capacity improvement investment in its Green Bay, WI, plant will support additional volumes from Q3 onwards. Regarding the European market, Suominen says competition among nonwovens producers remains tight but stable.
Estimates
Suominen has achieved an earnings turnaround in ’19 as improved pricing and stabilizing raw material costs have led to a clear improvement in gross margin from the lows of ’18, when the margin was hit by significantly higher input costs. The implemented price increases have, however, led to volume losses. Even though profitability has improved lately, we expect FY ’19 EBIT margin at a relatively low 2.9%. Going forward Suominen needs to achieve higher volumes in order to reach further improvement in EBIT margin. Following the Q2 report, we have revised our FY ’19 EBIT estimate down to EUR 12m (previously EUR 13m), while our revenue estimate stands at EUR 425m (EUR 436m). For ’20 we expect further improvement in EBIT margin (3.9%), assuming gradual improvement in delivery volumes.
We wait to see evidence of stabilizing (improving) volumes
Although Suominen’s valuation is not demanding (ca. 6x EV/EBITDA ‘19e vs. 6.5x historically), volume uncertainty still remains. As the price hikes pass through during ‘19, we are waiting to see evidence of stabilizing (and improving) volumes that would lead to further EBIT improvement in ‘20. We lower our TP to EUR 2.50 (2.85) due to volume uncertainty, and thus our rating is now HOLD (BUY).