Suominen - Improvement on the cards

Suominen has disappointed expectations several quarters in a row. The company now posted EUR 3.0m Q1 EBIT, a figure clearly above our EUR 2.0m estimate. The earnings beat was driven by improved gross margin; the product of price hikes and stabilizing raw materials costs. Volume outlook is still uncertain, yet in our view Suominen’s earnings have now bottomed out. We increase our target price to EUR 2.85 (2.40) per share, while retaining our HOLD rating.

2019 volume outlook remains uncertain

The company has managed to improve its gross margin through price hikes, however this has meant losing volumes. We expected the company to lose Q1 volumes by around 5% y/y. Therefore the 9% Q1 volume decline we estimate from the disclosed figures came as a negative surprise. We had previously expected volume declines of around 8% for the remaining quarters of 2019, while estimating 7% volume decline for the whole year. We now expect 2019 volumes to decline by 9%.

History suggests 11-12% gross margin potential

Suominen achieved an 8.1% Q1 gross margin (vs. our 7.0% expectation and 7.4% a year ago). The GM had previously touched the low of 6.2% in Q4’18. We expect the 2019 GM to improve to 8.7% as higher prices continue to pass through. We estimate Suominen to reach a roughly 11% GM by 2021 as the recent years’ oversupply situation balances out. According to our analysis, this would imply an EBIT margin of ca. 5% in 2021E.

We increase our target price to EUR 2.85 per share

We expect Suominen to reach 3.1% EBIT margin in 2019, while estimating further margin upside to the tune of 200bps by 2021 on the back of stabilizing nonwovens market. In our view a 5% EBIT margin is a reasonable assumption in a long-term valuation context. However, given the company’s recent challenges we are not yet ready to fully weight this long-term potential in our TP. We do note that the 5% margin assumption would justify a share price materially above EUR 3 per share. Suominen now trades at 6.1x EV/EBITDA ‘19e, a 20% discount to peer multiples.

Open Report