Company Background: After a spin-off from Metso, Valmet Corporation (VALMT) was listed on the Helsinki stock exchange on January 2, 2014. The company is a global market leader, either number 1 or 2, in paper, pulp, and bioenergy manufacturing equipment. It is also the market leader in servicing all of the aforementioned equipment. The company has three segments, servicing (39% of sales), pulp & energy (35%), and paper (26%).
Investment Thesis: Sales and margins are improving and the market will eventually give the company credit for running a great business with a clean balance sheet. Price is held down by the selling dynamics impacting spin-offs, a 2013 hiccup in earnings, and negative perceptions of the paper industry. Cost cutting measures and increased sales should return earnings to previous levels, eventually leading to margin expansion.
Since 2006, the company has returned EBITA margins between 5.5% and 8%, and increased sales steadily to a peak of €3B in 2012. In 2013 sales fell by €392mm and margins fell to 2%. Paper and energy equipment sales fell short. Lower demand for newspapers drove slow paper equipment sales, and inexpensive natural gas led to fewer bioenergy equipment sales. It appears that these business lines bottomed out and are now rebounding, driven by emerging market growth. Tissue and cardboard equipment, which are also in the paper segment, remain stable growth products. The company is putting increased focus on the higher margin services business, and on much needed cost cutting. The services business had a 7.4% CAGR between 2010 and 2012. Services then grew from 34% of company sales in 2012, to 39% in 2013. More money can be made servicing the equipment than selling it. While the company has a 50% market share of installed equipment, it only has about a 14% market share in services, which is a highly fragmented space. I expect consistent high single digit growth in this space. Sales are improving. The order backlog increased from €1.9B in Q2 2013 to €2.4B in Q2 2014.
To increase margins the company is laying people off, standardizing products, and subcontracting work to low-cost countries. Close to 2,000 workers have been let go, including white-collar employees. The company has a €100mm cost savings plan that will be completed in 2014. 2013 margins were also depressed by a one time project delay in Brazil that cost the company €30mm in profit. Just these two events alone make up half the peak 2011 EBITDA of €265mm. Management has guided towards EBITA margins of 6-9% in 2015. In just the last three quarters EBITA margins have gone from -3.7% Q4 2013 to 3.7% in Q2 2014.
The company is making strides to restore margins and increase sales, but analysts have not priced in the recovery. Management is now incentivized with VALMT stock instead of Metso stock, so they will work hard to continue to produce results.
Valuation: At the current price of €8.20 per share, the company has an EV of ~€1.2B. This is approximately 6.7x 2015 EBITDA, hitting only the bottom end of analyst estimates. Assuming an 8.5x 2015 EV/EBITDA multiple, the median of VALMT’s Nordic peer companies, VALMT could be worth €10.50. 2015 Margins could come in realistically between 5.5% and 8%, and sales could grow between 3% and 10%, creating a valuation range of €9.50 to €15.50.
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