Oerlikon: Gaining traction

We identified 11 companies able to go beyond Trump’s tweets and respect the following criteria :

  • Good «Fundamental Strength »
  • Market cap between €1.5bn and €20bn
  • Singular business model (capital light, excellent cash conversion, natural industry consolidator…)

Oerlikon, with headquarters in Switzerland, is active in 37 countries and 186 locations. The company operates in three different business divisions: Surface Solutions, Manmade Fibres and Drive Systems. In 2017, the company generated total revenues of CHF2.84bn with over 15,000 employees. There is no industry/process that does not need deposit surfacing to harden materials/reduce frictions.

Strong Q2 development – management gives positive outlook

Oerlikon reported another strong quarter with group order intake up 26.8% to CHF677m against Q2 17. Revenues grew even more by 36.6%, reaching CHF665m, with the book-to-bill ratio staying above 1x.

Reported figures are restated and account already for the disposal of Drive Systems which has been sold to Dana Incorporated, announced on 30 July 2018 and shown as a discontinued operation. EBITDA grew over-proportionally by 63.8% to CHF113m, reflecting a very positive operating trend.

The EBITDA margin reached 17.1% compared to 14.2% in Q2 last year. EBITDA includes a one-off of CHF9m from the disposal of Drive Systems; excluding this effect the margin would have stood at 15.6%, still well above last year’s figure.

Management raised the outlook and expects the margin to be in the same range for the full year. EBIT is increased by more than 100% to CHF72m, giving a margin of 10.8%. ROCE (rolling 12-months) goes from 6.3% last year to 10.7%.

Divestment of Drive Systems
Oerlikon announced the divestiture of Drive Systems to Dana Incorporated at the end of July with an enterprise value of CHF600m, approximately equalling the cash proceeds for the sale at closing.

Closing is expected to take place in late 2018 or in Q1 19 subject to regulatory approvals in a number of countries. The divestment is one step within a chain of events to sharpen strategically the focus of the company and concentrate on the core business line Surface Solutions and the segment Advanced Materials.

The divestiture is expected to result in cumulative exchange differences of CHF-285m and a lower tax rate of below 30% for the full year. Drive Systems has shown a positive development with sales growth in all regions and an increase in profitability. From now on, Drive Systems will be reported as a discontinued business and all figures have been restated accordingly.

EBITDA margin above guidance in Surface Solutions
The Surface Solutions segment achieved profitable growth of 16.6% in sales to CHF394m, helped by some FX gains mainly related to the reporting currency CHF; without this, growth would have been 12.7%. Acquisitions and material surcharges in total added CHF16m to the top line in Q2. Sales for the full year are expected to increase by up to 10%. Order intake basically followed the trend with an increase of 16.2% to CHF395m.

The FX effect on margins was only marginal. The EBITDA margin at 20.2% was slightly above the guided range of 18-20% (including AM investments) and mirrored the strong operating performance of the underlying business.

This was helped by a strong momentum in General Industry and robust growth in Automotive, Aerospace and Tooling coming from all regions with Europe and North America performing best.

Power Generation remained a more challenging market, especially large gas turbines. EBIT increased by 12.5% to CHF45m.

Market position strengthened
The Manmade Fibres segment showed a strong improvement in comparison to last year’s quarter with order intake increasing by 45.4% to CHF282m and sales even more by 81.9% to CHF271m.

Eliminating the FX effects would have been resulted in growth rates of 35.8% and 69.5% respectively. This development supported a sharp upturn in profitability with EBITDA climbing from CHF3m to CHF32m and EBIT to CHF26m after having been slightly negative at CHF-2m in Q2 17.

The EBITDA margin moved up to 11.8% and is heading towards guidance. The EBIT margin reached 9.5%. Positive developments should support the business going forward. Pricing continues to improve with strong demand in filament and texturing equipment, especially from China, and strong order growth in BCF and CP coming from the US and Turkey.

Oerlikon maintained its leading market position and could even strengthen it further. Sales could exceed CHF1.1bn in 2018 with capacity ramp-up.

On the back of the positive business development, management raised its targets for 2018, particularly with regard to sales increasing by about 25% to CHF2.6bn compared to the original guidance of CHF2.4bn.

Order intake should exceed CHF2.6bn in 2018 and the EBITDA margin move up from 15% to more than 15.5%. The capex figure is expected to remain at CHF230m for the full year.

Management stressed again the sound, unleveraged balance sheet with an equity ratio of 44% and net cash of CHF363m. Management will continue to add business in core segments over time and invest in capacity upgrades.

The tax rate should converge towards 25% over the next years. We will adjust our model with regard to the disposal of Drive Systems and the positive operating performance and retain our Buy recommendation.

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