* Outotec - Cutting estimates further driven by lower mining investment prospects
We cut our estimates 6-8% to reflect weaker mining investment environment
In connection with our latest review on the mining equipment and services end markets (Mining capex
weakness through 2017; downside risks stemming from China still high, 8th September 2015, Guillermo
Peigneux et al), we cut our EPS by c.8% on average. We leave our margin assumptions relatively
unchanged, which factor in prolonged cost under absorption and cost savings (+€25mn) aimed at
partially offsetting this cost under absorption. Our numbers are at the low end of Outotec’s revenue
guidance for 2015 (€1.2-€1.4bn) and at the low end of Outotec’s margin range of 5% to 7%. For 2016
we see further revenue declines (17%) and flat 5% EBITA margins.
Backlog pressures and weak order intake to hamper 2016
We are not particularly constructive on mining end markets as demand for the industry will continue to
be structurally challenged by growth uncertainty and deflationary pressures which will put further
pressure on margins, in our view. We forecast Outotec’s backlog at the end of 2015 to €1.06bn, which
will not underpin revenues next year. We have 2016 orders down at €1.13bn (c. €283mn per quarter).
We see revenues at €1.17bn for 2016e. That alone implies consensus 2016 revenue expectations need
to be cut 12%. All in all, we are over 20% below consensus clean EBITA estimates for the forecast
period.
Balance sheet could impact valuations further
Cash flow is eroding, resulting in all the €87mn net cash position at the end of 2013 (-€5.8mn in 2014)
disappearing and now, in the middle of 2015, Outotec has a net debt including pension liabilities of
€105mn (for the first time since 2003). We think this weakness will continue, driven by low activity in
order intake, lower advance payments and delays in the timing of milestone payments, resulting in
further cash losses.
Valuation: PT cut to €4.0 per share
Our price target goes down in line with our estimate changes and is based on the average of FCF
valuation methodologies. Outotec’s valuation is unattractive in our view, trading at 14x EBIT and 18x
earnings on our 2016 estimates. At our price target, Outotec trades on 10x EV/EBIT, in line with the
sector's average mid-cycle estimates.
* Metso - Mining continues to be a drag: Cutting price target and estimates further
Price target and estimates down, weakness in end market persist.
In connection with our latest review on the mining equipment and services end markets (Mining capex
weakness through 2017; downside risks stemming from China still high, 8 September 2015, Guillermo
Peigneux et al), we cut our 2017E earnings by ~8% and our price target from €25 to €21 per share.
Although we remain concerned about Metso's end-market growth, our concerns seem to be better
priced in consensus estimates as well as current valuations, hence we keep our Neutral stance on the
stock.
Metso Minerals to continue without momentum, Flow Control under pressure
We are not particularly constructive on mining or on O&G capex end markets as demand for the industry
will continue to be structurally challenged by growth uncertainty and deflationary pressures, which will
put further pressure on margins, in our view. Even though Metso Mining equipment has limited
downside from current depressed levels, we think it is too early to see a trough in orders for now, as we
see further downside stemming from after-market weakness. However, we see these concerns better
priced into Metso's shares, compared with peers such as Sandvik, FLSmidth and Outotec.
Limited downside to consensus estimates vs. its mining equipment peers
The downside to consensus estimates is narrowing as consensus downgrades to Metso earnings
estimates are taking place at a faster pace than for its industrial peers. From a revenue perspective we
see downside to consensus with clean EBIT 6% below on average, coming from over c.15% downside to
consensus estimates previously. In addition, downside to consensus estimates could be partially or totally
mitigated by opportunistic acquisitions after the disposal of Process Automation (~€350mn).
Valuation: At our price target Metso sits below 10x EBIT 2017E
We downgrade our price target from €25 per share to €21 per share, in line with our earnings and net
debt changes combined. Our price target is the average of our FCF and multiple valuation
methodologies. Our price target puts Metso on just below 10x mid-cycle EV/EBIT. At our price target
Metso trades on 1.15x EV/revenues, 9.7x EBIT and 14.8x earnings.