Investment summary: Addressing change
Outotec (OTE1V.HEL) has a market-leading position in the global mining equipment sector. However, the four major mining companies have announced plans to reduce total capex from $50bn in 2012 to $35bn in 2014. Outotec is addressing this by growing services (spare parts/maintenance) and investing into high growth areas such as energy and water treatment. With this comes a new operating structure comprising two business divisions (Metals, Energy & Water and Minerals Processing) feeding into three geographical regions (the Americas, EMEA, Asia-Pac). Outotec has laid the groundwork to evolve from an equipment supplier to a local partner offering solutions that cover the full life cycle of a mine site. Sales and order growth delivered in Q1 was ahead of market expectations, although margins declined y-o-y due to product mix. The stock trades at a premium to peers (2013 P/E is 13.9x) and there may be a risk to 2013 consensus earnings.
Comment on Q1 results
Q1 results were a mixed bag. Sales grew by an impressive 23% to €502.9m. However, margins declined due to higher equipment sales (operating profit grew by 14% to €35.0m). Order intake grew by 15% to €491, slightly beating expectations. The total order backlog declined slightly y-o-y to €1,939m. There has been a marked shift in miners’ capex from greenfield to brownfield sites, which management is addressing by becoming a ‘life cycle’ supplier.
Consensus estimates: Margin risk
Management has guided for sales of €2.1-2.3bn in 2013. The consensus estimate should be met or exceeded if Q1 performance is sustained. Q1 is a seasonally light quarter, but sales still came in at €502m. However, the operating margin (ex-PPA) declined to 7.0% (vs 7.5%) due to no licence fees and fewer project completions. Official guidance for an operating margin of 9.5-10.5% in FY13 may be challenging.
Valuation: A touch rich
The P/E and dividend yield for 2013 are 13.9x and 3.0% respectively, which is at a premium to the mining equipment and the industrials sector. Given the risk to 2013 consensus margins and the potential for a slowdown in mining capex, we also think there is downside risk to earnings in the near term.
To Read the Entire Report Please Click on the pdf File Below.
Outotec (OTE1V.HEL) has a market-leading position in the global mining equipment sector. However, the four major mining companies have announced plans to reduce total capex from $50bn in 2012 to $35bn in 2014. Outotec is addressing this by growing services (spare parts/maintenance) and investing into high growth areas such as energy and water treatment. With this comes a new operating structure comprising two business divisions (Metals, Energy & Water and Minerals Processing) feeding into three geographical regions (the Americas, EMEA, Asia-Pac). Outotec has laid the groundwork to evolve from an equipment supplier to a local partner offering solutions that cover the full life cycle of a mine site. Sales and order growth delivered in Q1 was ahead of market expectations, although margins declined y-o-y due to product mix. The stock trades at a premium to peers (2013 P/E is 13.9x) and there may be a risk to 2013 consensus earnings.
Comment on Q1 results
Q1 results were a mixed bag. Sales grew by an impressive 23% to €502.9m. However, margins declined due to higher equipment sales (operating profit grew by 14% to €35.0m). Order intake grew by 15% to €491, slightly beating expectations. The total order backlog declined slightly y-o-y to €1,939m. There has been a marked shift in miners’ capex from greenfield to brownfield sites, which management is addressing by becoming a ‘life cycle’ supplier.
Consensus estimates: Margin risk
Management has guided for sales of €2.1-2.3bn in 2013. The consensus estimate should be met or exceeded if Q1 performance is sustained. Q1 is a seasonally light quarter, but sales still came in at €502m. However, the operating margin (ex-PPA) declined to 7.0% (vs 7.5%) due to no licence fees and fewer project completions. Official guidance for an operating margin of 9.5-10.5% in FY13 may be challenging.
Valuation: A touch rich
The P/E and dividend yield for 2013 are 13.9x and 3.0% respectively, which is at a premium to the mining equipment and the industrials sector. Given the risk to 2013 consensus margins and the potential for a slowdown in mining capex, we also think there is downside risk to earnings in the near term.
To Read the Entire Report Please Click on the pdf File Below.