Pirelli/Continental: pin-up profits
Italian tyremaker’s float has interesting implications for its German rival
Pirelli likes to tout its calendar as a cut above the kind of soft porn that adorns the average garage wall. It is taking a similar approach to its stock market flotation, with interesting implications for a German rival.
The Italian group, owned since 2015 by ChemChina, wanted a premium valuation for its shares, which begin trading in Milan on October 4. It tells a good story. The industrial tyre business has gone to ChemChina, leaving a company more focused on supplying owners of premium vehicles with new slicks. Such high-value tyres already account for four-fifths of profit. Sales are expected to grow at least 9 per cent a year through to 2020.
More specialised manufacturers tend to command a premium valuation multiple over the likes of France’s Michelin or Goodyear of the US, which supply tyres for all sorts of other vehicles and aircraft. The poster child for this is Finland’s Nokian Renkaat, which has industry-leading margins — and a rating to match.
At the €6.50 a share issue price, Pirelli will not quite match the Finns. Nor should it. Nokian has earned its crown over many years: operating margins have doubled over the past 15 years. Net profit has risen tenfold in that time. It is much smaller than Pirelli and its particular niche — winter tyres for demanding conditions — is arguably more defensive.
Pirelli will still be valued well above its main peers. That should not go unnoticed by shareholders in Continental. The German group consists of an automotive division, which makes powertrains and electronics, and a tyres business. The latter is not dissimilar to Pirelli, with a focus on premium products sold to consumers and an operating margin of over 20 per cent last year.
Continental’s enterprise value is 6.7 times earnings before interest, tax, depreciation and amortisation, based on Bernstein forecasts. Pirelli’s multiple is closer to eight. That implies Conti’s high-quality tyre division hides under a conglomerate discount. The German company is not keen on a demerger. But that tyre unit’s figures would look good on any investor’s wall.