Main market debate moves to a potential takeover
* Taking down FY2016 EBIT by 19%, FY2017 by 13%
Following H1 sales trading statement we downgrade our FY16 EBIT by 19% to reflect
the: 1) excess costs persist in Seating especially on the seat shell activity; 2) cost
overruns related to the ramp up of several programs. We also downgrade our FY17e
EBIT by 13% to reflect Zodiac targets to get back to operational performance in 18
months. Uncertainty regarding the timeline of a potential turnaround remains high. Our
mid-term sales numbers remain unchanged (circa 3%) and reflect small market share
losses and a tougher pricing environment going forward. We believe capacity restraints
and the oligopolistic structure of the industry protect Zodiac from steeper market share
losses.
* Main market debate moves to a potential takeover
According to recent press, Zodiac could be a possible acquisition target for Safran (Buy,
PT €67). We believe it is likely that Zodiac's share price could be driven by newsflow
around a potential takeover. We believe the probability of a tak-over has recently
increased, but remains dependent on the willingness of Zodiac's main shareholders –
the families - to consider a potential deal. We discuss in more details the context of a
potential deal in our accompanying note on Safran and we published an interactive
model to better assess the financial implications of a potential takeover.
* Balanced risk reward: downside case €12 valuation, upside case €26 valuation
The risk reward remains balanced, with our downside case (10% margin, 0% revenue
growth) yielding a fair value of €12, while our upside case (14.5% margin, 5% growth)
yielding a fair value of €26.
* Valuation: trades on 17.1x calendar 2016e, 22.2x calendar 2016e
Our €17.5 (prior €18) price target is based on 9% WACC, 5 year profit growth of 18%
CAGR from FY15/16E and cash conversion of 82%, which implies a fair value multiple
of 18.8x FY15/16E EV/EBITA.