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UBS Investment Research
Bekaert Surging growth faces a challenging climate
Initiating coverage with a Neutral rating and €111 price target We initiate coverage on Belgian engineering company Bekaert with a Neutralrating and €111 price target. Bekaert’s two core competences are advanced metaltransformation, and advanced materials and coatings. Its main products are madefrom wire rod, ie, steel wire, which is used to reinforce tyres among other uses.
First quarter 2008 trading update highlights accelerating growth Bekaert reported first quarter 2008 sales growth of 15.3%, reflecting a significantacceleration from the 8.2% recorded in 2007. Organic growth totalled 13.5%versus 8.0% in 2007. The strong growth was driven by Bekaert’s Asian and Latin American platforms, as well as its building products business.
A challenging external environment Bekaert faces several challenges: (1) a global economic slowdown; (2) rising steelprices; (3) increasing energy costs; (4) foreign currency movements; and (5)increasing competition. We forecast 6.3% sales and 6.0% EBIT CAGR over theperiod 2007-10. Our 2010 EBIT estimate is 3% below consensus.
Valuation: €111 price target is derived using UBS VCAM Bekaert shares are trading at 5.8x 2009E EV/EBITDA – a 44% premium to Chinese radial tyre cord manufacturer Xingda (Buy, price target HK$2.41), but a10% discount to steel products manufacturer Korea Iron & Steel (not rated). Ourprice target of €111 is derived using our proprietary value creation analysis model(VCAM).
Highlights (€m) 12/06 12/07 12/08E 12/09E 12/10ERevenues 2,010 2,174 2,410 2,517 2,608EBIT (UBS) 163 186 210 216 222Net Income (UBS) 154 161 169 171 176EPS (UBS, €) 7.17 8.08 8.54 8.69 8.97Net DPS (UBS, €) 3.01 2.52 2.70 2.85 3.00 Profitability & Valuation 5-yr hist av. 12/07 12/08E 12/09E 12/10EEBIT margin % - 8.6 8.7 8.6 8.5ROIC (EBIT) % - 12.0 12.6 12.3 12.3EV/EBITDA (core) x - 6.3 6.4 6.1 5.7PE (UBS) x - 12.2 12.8 12.5 12.2Net dividend yield % - 2.6 2.5 2.6 2.8 Source: Company accounts, Thomson Financial, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of €109.00 on 06 Jun 2008 17:06 EDT Mark van der Geest Analyst [email protected] +31 205 510184
David Kerstens Analyst [email protected] +31-20-551 0164
Global Equity Research Belgium
Industrial, Diversified
12-month rating Neutral Prior: Not Rated 12m price target €111.00/US$172.64 -
Price €109.00/US$169.53 RIC: BEKB.BR BBG: BEKB BB
9 June 2008 Trading data (local/US$) 52-wk range €113.40-76.54/US$171.63-110.57Market cap. €2.14bn/US$3.33bnShares o/s 19.7m (ORD)Free float 60%Avg. daily volume ('000) 34Avg. daily value (€m) 3.5 Balance sheet data 12/08E Shareholders' equity €1.19bnP/BV (UBS) 1.8xNet Cash (debt) (€0.59bn) Forecast returns Forecast price appreciation +1.8%Forecast dividend yield 2.5%Forecast stock return +4.3%Market return assumption 9.7%Forecast excess return -5.4% EPS (UBS, €) 12/08E 12/07 From To Cons. ActualH1E - 4.21 - 3.69H2E - 4.33 - 4.2912/08E - 8.54 -12/09E - 8.69 - Performance (€)
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Source: UBS www.ubs.com/investmentresearch
This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 32. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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Contents page
Investment Thesis 3 — Initiating with a Neutral rating ...............................................................................3 — Bekaert’s growth accelerated in first quarter 2008.........................................................3 — China will remain Bekaert’s main growth driver ....................................................3 — Positive outlook for Chinese steel cord.................................................................3 — Bekaert faces several challenges.........................................................................4 — Our 2010 EBIT forecast is 3% below consensus ..................................................4 — Sensitivity analysis ...............................................................................................4 — Risk factors ..........................................................................................................4 — Catalysts ..............................................................................................................5
Valuation 6 — Share price down 5% in the past 12 months.........................................................6 — Bekaert trading at 5.8x 2009E EV/EBITDA...........................................................6 — DCF model points to €111 price target .................................................................7 — Sensitivity analysis ...............................................................................................8
Company profile 9 — Brief history........................................................................................................11 — Strategy .............................................................................................................11 — Management ......................................................................................................11 — Shareholders......................................................................................................12
Attractive growth opportunities in emerging markets 13 — Global tyre market fuels Bekaert’s growth ..........................................................13 — Chinese steel cord – the main growth driver.......................................................16 — Latin American wire............................................................................................17 — Building products................................................................................................19 — Two longer-term growth engines: Russia and India ..............................................20
Bekaert’s key challenges 21 — How cyclical is Bekaert?.....................................................................................21 — Steel price rising faster than expected................................................................22 — Energy prices also continue to move upwards....................................................23 — Bekaert’s sensitivity to the US dollar ..................................................................23 — Increasing competition from Asia........................................................................24
Financial position and outlook 25
Mark van der Geest
+31 205 510184
David KerstensAnalyst
[email protected]+31-20-551 0164
Bekaert 9 June 2008
UBS 3
Investment Thesis Initiating with a Neutral rating We initiate coverage on Belgian engineering company Bekaert with a Neutralrating and €111 price target.
The company is the world’s leading independent producer of steel wire, steelwire products, steel cord and advanced synergistic products. Bekaert’s marketand technological leadership is based on its core skills, namely, metaltransformation and a wide range of coating technologies.
Bekaert reported first quarter 2008 sales growth of 15.3%, reflecting asignificant acceleration from the 8.2% recorded in 2007. Organic growth totalled13.5% versus 8.0% in 2007. The strong growth was driven by Bekaert’s Asian and Latin American platforms, as well as its building products business.
Bekaert faces several challenges and uncertainties, including: (1) a globaleconomic slowdown; (2) rising raw material and energy prices; (3) foreigncurrency movements; and (4) increasing competition. We forecast 6.3% averagesales and 6.0% average EBIT CAGR during the period 2007-10, driven mainly by the steel cord business in China. Our 2010 EBIT estimate is 3% belowconsensus.
Bekaert shares trade on 5.8x 2009E EV/EBITDA – a 44% premium to Chinese radial tyre cord manufacturer Xingda (Buy, price target HK$2.41), but a 10%discount to steel products manufacturer Korea Iron & Steel (not rated). Ourprice target of €111 is derived using our proprietary value creation analysismodel (VCAM).
Bekaert’s growth accelerated in first quarter 2008 On 14 May, Bekaert reported first quarter 2008 consolidated sales of €593m, implying annual growth of 15.3% – a significant acceleration from the 8.2% recorded in 2007. Organic growth totalled 13.5% in first quarter 2008 versus 8.0% in 2007, with price/mix contributing 7.0% and higher volumes 6.5%, according to our estimates. The accelerating growth in first quarter 2008 shows, in our opinion, that Bekaert is not as cyclical as the market often tends to believe.
China will remain Bekaert’s main growth driver Bekaert’s combined first quarter 2008 sales growth (including all joint venture sales) amounted to 11.4%, driven by Chinese steel cord (75.7% sales growth), Asian wire (24.7%), Latin American wire (18.4%) and building products (16%). We estimate that Chinese steel cord accounts for nearly 20% of first quarter 2008 sales, making this by far Bekaert’s most important growth driver.
Positive outlook for Chinese steel cord Around 75% of Bekaert’s Chinese steel cord is used to reinforce tyres. The production of passenger cars, (light) trucks and buses in China has grown on average by more than 20% a year during the past five years. While the growth rate in China is expected to slow slightly, we still expect Chinese demand for
13.5% organic sales growth in first quarter 2008,…
…driven by 75.7% sales growth in Chinese steel cord
Nearly 50% of its investment budget is accounted for by China
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steel cord to grow by at least 10% a year over the coming five years. Bekaert invested c€200m in China during 2006-07, accounting for nearly 50% of its total investment budget, in order to capture the full potential of the Chinese market.
Bekaert faces several challenges Although we expect Bekaert to continue to produce relatively strong growth, driven by its investments in emerging markets, the company faces several challenges and uncertainties ahead, including:
(1) A global economic slowdown, which will likely have a negative affect on Bekaert’s volume growth;
(2) Steel prices rising faster than previously expected, which will put pressure on Bekaert’s ability to pass these onto its customers;
(3) Continuing rising energy prices;
(4) Foreign currency movements, which currently negatively affect Bekaert’s performance;
(5) Continuing fierce competition from Asia.
Our 2010 EBIT forecast is 3% below consensus We are 1% above the 2008 consensus EBIT estimate, driven by a 1% higher sales forecast. For 2009, we are in line with consensus on sales, but 1% below in terms of EBIT, as we are slightly more cautious on Bekaert’s margins due to the ongoing pressure from raw material prices. For 2010E EBIT, we are 3% below consensus, as we are somewhat more cautious on sales and the EBIT margin.
Table 1: UBS versus consensus
Consensus UBS UBS versus consensus
€ m 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E
Sales 2,395 2,516 2,661 2,410 2,517 2,608 1% 0% -2%
EBIT 195.3 206.2 215.4 197.7 203.4 209.0 1% -1% -3%
EBIT margin 8.2% 8.2% 8.1% 8.2% 8.1% 8.0% 0.0% -0.1% -0.1%
Net profit 163.6 170.1 172.1 168.6 171.0 176.4 3% 1% 2%
EPS, € 8.20 8.55 8.68 8.57 8.69 8.97 5% 2% 3%
Source: UBS estimates
Sensitivity analysis Our €111 price target is derived using our proprietary value creation analysis model (VCAM). In our valuation analysis, we show the sensitivity of our DCF model to sales growth, WACC, the EBIT margin and capex/sales. A 100bp change in the EBIT margin affects the VCAM outcome by roughly €10 a share while a 100bp change in sales growth generates an impact of c€9 a share.
Risk factors Economic cycle: Bekaert’s operations are not immune to the economic cycle,
as its products are used in the automotive and construction sectors among others.
Challenges for Bekaert include:
…a slowing global economy;…
…rising raw material costs;…
…and fierce competition from Asia
Our estimates are slightly below 2010 consensus estimates
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Pricing power: Some of Bekaert’s suppliers (ArcelorMittal) and customers (Michelin, Bridgestone, Goodyear) have pricing power.
Raw material costs: Bekaert’s main raw material is wire rod and, as such, it is exposed to movements in the steel price.
Competition: The market for tyre steel cord in China, an important market for Bekaert, is very competitive.
Foreign currency movements: Bekaert, as a truly global company, is exposed to movements in foreign currencies, notably the US dollar, renminbi and Slovakian koruna. Most of the effect is translational.
Catalysts We see the following catalysts for Bekaert’s share price:
First half 2008 results, due 1 August;
Potential alliances or acquisitions;
News on the (Chinese) tyre market.
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Valuation Bekaert shares are trading on 12.0x 2009E PE and 5.8x 2009E EV/EBITDA. Our €111 price target is derived using our VCAM.
Share price down 5% in the past 12 months Bekaert’s share price has declined by 5% in the past 12 months, thereby outperforming its Chinese competitor, Xingda, by 53%, but underperforming Korea Iron & Steel by 38%. In our view, the performance confirms the success of Bekaert’s strategy in China, but also highlights increasing competition from Korea Iron & Steel, which should be considered Bekaert’s closest peer.
Chart 1: Bekaert’s share price performance relative to BEL20 (re-based)
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Bekaert Xingda Korea Iron & Steel
Source: Thomson Datastream
Bekaert trading at 5.8x 2009E EV/EBITDA Bekaert’s shares are trading on 12.0x 2009E PE and 5.8x 2009E EV/EBITDA. Based on 2009E EV/EBITDA, Bekaert trades at a 44% premium to Xingda, but at a 10% discount to Korea Iron & Steel.
Table 2: Multiples – peer group comparison
Price
(loc cur) PE EV/EBITDA Div yield
03/06/2008 2008E 2009E 2008E 2009E 2008E
Bekaert 104.59 12.3 12.0 6.2 5.8 2.6%
Korean Iron & Steel 90,000 9.5 8.6 7.4 6.5 0.9%
Xingda 1.79 7.3 6.5 4.1 4.0 3.4%
Premium to Korean Iron & Steel 30% 39% -16% -10%
Premium to Xingda 69% 84% 50% 44%
Source: UBS estimates, Thomson Datastream
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DCF model points to €111 price target Table 3 below highlights the outcome of our DCF model for Bekaert using the UBS value creation analysis model (VCAM)1. We expect sales growth of 6.3% over the period 2008-10E to decline to a more sustainable level of c3% in the longer term, as the Chinese tyre cord market is expected to slow. In addition, we forecast EBIT margins to fall from 8.6% in 2008-10 towards 8%, given that we expect competition from Asia to intensify. Our VCAM analysis indicates a current fair value of €103 per Bekaert share, implying a 12-month price target of €111.
Table 3: UBS VCAM analysis inputs for Bekaert
Company Name: Bekaert WACC Used: 9.27%Ticker: BEKB.BR Value Creation Horizon (VCH): 15 years
Market Equity PV [€ m]: 2,021 Current Price [€/sh]: 100.85VCAM Equity PV [€ m]: 2,056 VCAM Equity PV [€/sh]: 102.5812-mo. VCAM Target [€ m]: 2,220 12-mo. VCAM Target [€/sh]: 110.80VCAM Present EV [€ m]: 3,006 Estimated Dividend Yield: 2.7%
Forecast Stages (yrs): 1-3 4-5 6-10 11-15 16-25 CAGR*Key Analyst InputsSales Growth: 6.3% 3.2% 3.0% 2.5% [VCH=15] 3.6%EBIT Margin: 8.6% 8.3% 8.0% 7.8% [VCH=15] na Capex/Sales: 7.7% 6.0% 5.5% 5.0% [VCH=15] na Growth RatesEBIT: 2.6% 2.2% 2.3% 2.1% [VCH=15] 2.3%NOPAT: 1.8% 1.7% 1.8% 2.0% [VCH=15] 1.9%EPS: 7.1% 6.5% 6.3% 6.4% [VCH=15] 6.5%Invested Capital: 6.7% 5.7% 5.0% 4.4% [VCH=15] 5.2%UNFCF: 47.3% 3.5% 3.1% 2.9% [VCH=15] 10.7%Economic ProfitabilityROIC: 10.4% 9.6% 8.2% 7.2% [VCH=15] na Economic Profit [€ m]: 26 9 -36 -81 [VCH=15] [neg]Absolute [€ m], except per share amountsSales: 2,698 2,872 3,334 3,792 [VCH=15] 3.1%EBIT: 227 237 265 295 [VCH=15] 2.3%NOPAT: 233 241 263 291 [VCH=15] 1.9%EPS: 10.37 11.75 15.92 21.70 [VCH=15] 6.5%UNFCF: 133 143 166 192 [VCH=15] 10.7%Capex: 173 169 180 188 [VCH=15] -0.7%Invested Capital: 2,366 2,644 3,382 4,186 [VCH=15] 5.2%Multiples EV/EBIT EV/EBITDA EV/NOPAT EV/UNFCF P/E Based onCurrent Market Multiple 9.1x 5.4x 8.7x 29.3x 11.9x 0% of FY07VCAM Present Value Multiple 9.7x 5.8x 9.3x 31.4x 12.1x 59% of FY08VCAM Target-Implied Multiple 10.5x 6.3x 10.0x 33.9x 13.0x 41% of FY09
0% of FY10All financial and economic profitability figures represent the final year in the designated period.All required inputs for the UBS VCAM have been made.*All CAGRs represent current fiscal year to the Value Creation Horizon for the company.
Source: UBS VCAM
1. The UBS value creation analysis model (VCAM) provides an economic framework for exploring and analysing company value creation. The model’s core methodology is based on the well-established intrinsic valuation principles of discounted cash flow (DCF) and economic profit analysis (EPA). VCAM is an economically robust intrinsic valuation tool used by UBS analysts for calculating the present value of a stock, given long-term company performance expectations.
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Sensitivity analysis Chart 2 highlights Bekaert’s present value while varying each of the following: WACC, sales growth, the EBIT margin and the capex/sales ratio. The chart illustrates how Bekaert’s present value changes, given variations in each of the inputs. For example, a 100bp change in the EBIT margin affects the VCAM outcome by roughly €10 a share while a 100bp change in sales growth generates an impact of c€9 a share.
Chart 2: UBS VCAM sensitivities for Bekaert
Price versus WACC Price versus Sales Growth
Price versus EBIT Margin Price versus Capex / Sales
Notes: Sensitivities are derived from assuming Sales Growth, EBIT Margin, or Capex / Sales is flat annually for years 4 through the VCH. Years 1 through 3 do not vary, and always represent the assumptions on the Inputs Page.For each chart, one parameter is varied while the others are held constant. Those held constant are set as they appear on the Inputs Page. "PV" = "Present Value".
176.51
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106.4093.21
82.7274.22
100.85
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102.58
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Source: UBS VCAM
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Company profile Bekaert is a Belgian business-to-business company, built on two core competences: advanced metal transformation, and advanced materials and coatings. This unique combination of competences is Bekaert’s strength.
The company’s main raw material is wire rod, ie, steel wire with a diameter of about 1cm, which it converts by mechanical deformation and heat treatment into wires that can be as fine as 1/50th of the thickness of a human hair. These wires are then turned into cable and cord, which can be woven or knitted into cloth or processed into ultra-fine filters and fibres, for use in a wide range of industrial applications in virtually all sectors of the economy. The automotive sector is the most important, accounting for roughly 33% of company sales. Bekaert also develops coating technologies for its steel wires and fibres.
Employing roughly 15,200 people, Bekaert is organised into three divisions: advanced wire products, advanced materials and advanced coatings. In 2007, the company reported record sales of €2,174m (+8.2% y/y) and achieved an EBIT margin of 8.6% before non-recurring items.
Bekaert has many unconsolidated joint ventures, especially in Latin America. Consequently, the company and we often refer to combined sales, ie, sales including 100% of sales in these joint ventures. In 2007, the combined sales of Bekaert amounted to €3,419m, of which Latin America accounted for 36%.
Chart 3: Divisional sales breakdown, 2007 Chart 4: Geographical sales breakdown, 2007
Advanced
wire products 85%
Advanced
coatings 6% Advanced
materials
9%
North America24%
Europe 48%
Latin America3%
Asia23%
Other 2%
Source: Company information Source: Company information
Advanced wire products (85% of 2007 sales)
Bekaert produces a highly diverse range of advanced wire products, which are used in many sectors. The product range runs from very high tensile wires to ultra-thin metal fibres of 1 micron. The development of wires with higher tensile strength allows thinner wires to be used without compromising flexibility. High tensile wires are bunched to form steel cord.
Bekaert’s main raw material is wire rod
Bekaert recorded record sales of €2.1bn in 2007
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Chart 5: Combined sales breakdown – advanced wire products (2007)
Wire Latin
America
39%
Wire Asia
1%
Steel Cord China
12%
Steel cord others
23%
Other advanced
wire products
1%
Wire Europe
12%
Wire North
America
7%
Building Products
5%
Source: Company data
Advanced materials (9% of 2007 sales)
The advanced materials segment covers applications of fibre technologies, combustion technologies and composites. On the basis of its expertise, the company uses ultra-thin metal fibres to produce environment-friendly filters, gas burners, and combustion systems for both residential and industrial applications. Bekaert also develops products for other applications in textiles and conductive plastics.
Chart 6: Sales breakdown – advanced materials (2007)
Fibre
technologies
38%
Stainless
17%
Composites
10%
Combustion
technologies
35%
Source: Company data
Advanced coatings (6% of 2007 sales)
The advanced coatings segment covers industrial coatings and specialized films. Within the industrial coatings activity platform, Bekaert deploys its expertise in the application of coatings to various materials, mainly glass and metal. The company manufactures a range of window films for vehicles and buildings to keep out the sun’s heat, filter out ultraviolet radiation and hold glass together in the event of breakage.
Advanced materials are mainly ultra-thin metal fibres
Advanced coatings consists of industrial coatings and specialized films
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Brief history Bekaert was founded in 1880 by Leo Leander Bekaert. Towards the end of the 19th century, he started producing barbed wire in answer to farmers’ fencing requirements.
Bekaert embarked on international growth in the 1920s, first in Western Europe, later in Latin America, and then from the 1970s in North America. The internationalisation of the Bekaert Group accelerated in the 1990s with expansion in Asia. The use of steel cord for rubber reinforcement, especially in radial tyres, and developments in advanced materials played a major role in this international growth.
With the company keen to strengthen its presence in various growth markets, an important step towards this goal was achieved in 2003 when Bekaert acquired substantial positions in advanced wire products in central and eastern Europe. In China, Bekaert more than quadrupled its production capacity from 60,000 tonnes of steel cord at the end of 2002 to 250,000 tonnes by the end of 2007. New growth opportunities in Russia and India are also being studied.
Strategy Bekaert strives to improve its profitability in order to create sustainable shareholder value. This has to be achieved alongside the following pillars:
Further reinforcing its position as the global market leader.
Offering its customers: (1) high valued added products and services, often resulting from close collaboration with customers; and (2) unique and preferred solutions by opening up new markets.
Constantly reinforcing its technological leadership through continuous innovation.
Aiming for operational excellence in all its activities.
Combining organic growth with alliances, joint ventures and acquisitions.
Setting strict targets for profitability in order that all segments create economic value.
Management The company has a two-tier management structure with a board of directors and a group executive. The board of directors is the company’s supreme decision-making body in all matters other than those in respect of which decision-making powers are assigned to the general meeting of shareholders by law or the articles of association. The board of directors delegates its management and operational authority to the Bekaert group executive.
The board of directors consists of 14 members, chaired by Baron Buysse. CEO Baron De Graeve is also a member of the board of directors, as are several members of the founding family.
Founded in 1880
Use of steel cord for rubber reinforcement fuelled international growth
Bekaert has quadrupled its Chinese production capacity in the past five years
Strategy geared to creating sustainable value for shareholders
Bekaert has a two-tier management structure
Baron Buysse – chairman of Bekaert
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Bekaert’s group executive is supervised by the board of directors. The executive has five members and is chaired by CEO Baron De Grave.
Shareholders Bekaert has 19.67m shares outstanding, which are traded on Euronext Brussels. Bekaert is a member of the BEL20 index, which consists of the 20 largest listed companies in Belgium.
Bekaert’s free float amounts to 61.4% and Stichting Bekaert is the company’s main shareholder, owning 37.9% of the shares. Barclays has declared a 3.08% interest in Bekaert.
Apart from Stichting Bekaert’s holding, the company’s shareholder base has changed quite a lot in recent years, become more institutional and more international. In 2001, only 15.1% of Bekaert’s shares were held by institutional investors, whereas by 2008 this had risen to 42.7%. Furthermore, in 2001, 80% of the institutional shareholders were Belgian, whereas in 2007, this number has decreased to only 20%.
Chart 7: Institutions now own 43% of the shares vs 15% in 2001 Chart 8: Main institutional shareholders in the US 2007
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006 2007 2008
Principal shareholdings Registered shares
Manangement stock options Public (unidentified)
Belgian institutions International institutions
Belgian
20%
US
23%
UK
14%
France
11%
Germany
9%
Netherlands
4%
Other
19%
Source: Company information Source: Company information
Operational responsibility rests with CEO Baron De Grave
Bekaert is a member of the BEL20 index
Free float is 61.4%; founding family owns 37.9%
Bekaert’s shareholder base has become more institutional and more international
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Attractive growth opportunities in emerging markets Bekaert’s growth profile is steadily improving, as it invests heavily in emerging markets. We estimate that Bekaert’s consolidated sales from emerging markets increased from €438m in 2002 to €969m in 2007 – a CAGR of 17%. As a percentage of total consolidated sales, we estimate that emerging markets accounted for 45% of sales in 2007 versus 24% in 2002. In addition, Bekaert holds significant (minority) stakes in companies that are predominantly active in emerging markets, resulting in a contribution from joint ventures and associates of €47m in 2007 (29% of net profit) – up from €19m in 2002 (CAGR 20%).
Table 4: Geographical sales exposure (€m)
CAGR As % of total
2002 2003 2004 2005 2006 2007 2002-07 2002 2007
North America 553 484 587 619 597 511 -2% 30% 24%
Europe 1051 1051 1282 938 965 1051 0% 56% 48%
Latin America 30 22 31 32 32 71 19% 2% 3%
Asia 201 210 242 292 369 506 20% 11% 23%
Other 28 28 40 34 35 35 5% 2% 2%
Total consolidated sales 1864 1796 2182 1915 1. 1998 2174 3% 100% 100%
Western Europe estimate 872 851 1053 679 665 694 -4% 47% 32%
Eastern Europe estimate 179 201 229 259 300 357 15% 10% 16%
Europe 1051 1051 1282 938 965 1051 0% 56% 48%
Mature markets 1425 1334 1640 1298 1262 1205 -3% 76% 55%
Emerging markets 438 462 542 617 736 969 17% 24% 45%
Source: Bekaert, UBS estimates. 1. Decline mainly due to the divestment of the European Fencing business
Global tyre market fuels Bekaert’s growth Bekaert’s most important growth driver is steel cord, which is mainly used to reinforce tyres. These so-called radiant tyres were invented in the 1950s by French tyre producer Michelin. Radiant tyres already account for more than 95% of tyres in mature markets, whereas in China, radiant tyres still only account for roughly 80% of tyres and in Russia, 75% of tyres are radiant.
Bekaert’s growth profile is improving, due to increasing exposure to emerging markets
Steel cord to reinforce tyres is Bekaert’s main growth driver
Bekaert 9 June 2008
UBS 14
Chart 9: Radialization is ongoing
0
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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010
W. Europe Japan N. America China Russia
Source: Bekaert, UBS estimates
Chart 10: Tyre cord growth since 1950
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
Central Europe
India
Indonesia
China
Turkey
Australia
Brazil
USA
Spain
Belgium
Source: Company data
Bekaert 9 June 2008
UBS 15
According to industry consultant Tire Business, the size of the global tyre market was US$113bn in 2006 and had grown by 6.3% CAGR during the past 20 years.
Passenger cars and light trucks are the main product line, accounting for 60% of the total tyre market; trucks are the second largest product line, with a 28% share.
Chart 11: Breakdown of tyre market per product line (2007)
Passenger
Car & Light
Truck
60.0%
Truck
28.0%
Two-wheel
3.5%Earthmover
6.0%
Agriculture
2.0%Aircraft
0.5%
Source: Michelin
It is important to note that roughly three out of four tyres are replacement tyres. Therefore, exposure to the cyclical OEM market is relatively limited.
The tyre market is relatively consolidated with the top three producers accounting 50% of the market
Chart 12: Global tyre manufacturers — market share, 2006
Michelin
17%
Bridgestone
17%
Goodyear
16%
Others
27%
Cooper
2%Hankook
3%
Kumho
2%
Sumitomo
3%
Yokohama
3%Continental
6%
Pirelli
4%
Source: Tire Business, August 2007
Tyre market has grown by 6.3% a year during the past 20 years
Passenger cars and trucks account for 88% of the market
75% of the market is replacement and 25% is OEM
The top three tyre producers account for 50% of the market
Bekaert 9 June 2008
UBS 16
The main tyre manufacturers are both customers as well as competitors of Bekaert when it comes to steel cord. Bekaert contends that the percentage of captive production versus the free global market used to be 50/50 in 1990 whereas today, the breakdown is more 35% captive versus 65% free market. For example, the Chinese tyre manufacturers do not want to invest in the production of steel cord, as they prefer to focus on making tyres and buy steel cord, which accounts for 6-15% of the cost of a tyre.
According to Bekaert, it is the global market leader in the non-captive market for steel cord with an estimated market share of 55-60% – up from 50% 10 years ago. In 2007, Bekaert’s sales of steel cord totalled €1.1bn.
For the passenger and light truck tyre market, Michelin expects demand to grow by 2.5% on average during 2007-17, with Asia and Latin America being the main growth drivers.
Table 5: Demand for passenger and light truck tyres (m units)
2007 2017E CAGR
North America 344 387 1.2%
South America 67 101 4.2%
Europe 379 468 2.1%
Asia 289 424 3.9%
Other 78 107 3.2%
World 1157 1487 2.5%
Source: Michelin, UBS estimates
Chinese steel cord – the main growth driver Bekaert’s steel cord business in China has been the company’s main growth driver in recent years and we expect this to continue over the next few years. The company’s consolidated sales of steel cord in China have increased from about €119m in 2003 to an estimated €330m in 2007, implying a CAGR of 29%. As a percentage of total consolidated sales, we estimate that Chinese steel cord has increased from 5% in 2002 to 15% in 2007. Bekaert’s steel cord capacity in China has more than quadrupled, from 60,000t in 2002 to 250,000t at the end of 2007.
Chinese growth is driven by two main factors: (1) more vehicles; and (2) the replacement of traditional tyres with radial tyres (which include steel cord). Vehicle production in China has increased from 2.3m units in 2000 to an estimated 10.3m in 2007, reflecting a CAGR of 24%. We expect vehicle production to increase by more than 10% in the coming three years.
Main tyre producers are customers and competitors
Bekaert is the market leader in the non-captive market with a 55-60% market share
Tyre demand expected to grow by 2.5% in the next 10 years
Chinese steel cord sales grew 29% CAGR during 2003-07
Growth in China driven by vehicle production and switch to radial tyres
Bekaert 9 June 2008
UBS 17
Chart 13: Vehicle production in China
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
2001 2002 2003 2004 2005 2006 2008E
Passenger Truck Bus
Source: UBS estimates
As shown in Chart 9 on page 14, we expect the penetration of radial tyres to increase from 80% in 2007 to 90% in 2008, and to 95% in both 2009 and 2010. Chart 14 highlights our projections for Bekaert’s combined sales of steel cord in China (which includes sales from joint ventures and associates on a 100% basis).
Chart 14: Bekaert’s sales of steel cord in China (€m)
0
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200
300
400
500
600
700
800
900
2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: UBS estimates
Latin American wire Latin American consolidated sales amounted to only €71m in 2007 and accounted for only 3% of total sales. However, based on combined sales, Latin America generated €1,248m, representing 36% of the total combined sales. Successful joint ventures in Brazil, Chile, Colombia, Ecuador, Peru and Venezuela explain the sales performance.
Combined sales from Latin America account for 36% of the total
Bekaert 9 June 2008
UBS 18
Chart 15: Combined sales of Latin American wire
0
200
400
600
800
1000
1200
1400
2003 2004 2005 2006 2007
Source: Company information
We estimate that Bekaert’s three (45-55%) joint ventures with ArcelorMittal in Brazil account for roughly 80% of Bekaert’s combined sales in Latin America. In 2007, the company gained full control of Vicson in Venezuela, resulting in Bekaert securing an 87.5% interest in Colombian wire producer Proalco.
Figure 1: Overview of Bekaert’s Latin American interests, 2007
Source: Bekaert
In Latin America, Bekaert offers the full range of wire products from welding and steel wool wire, which are commodities, to nylon-coated wire, which offers better margins. Bekaert’s fencing wire and mattress spring wire is particularly successful.
Bekaert’s main joint ventures are with ArcelorMittal in Brazil
Bekaert 9 June 2008
UBS 19
With steel use per capita in Latin America equating to about 20% of the steel use per capita in Western Europe and North America, we expect Bekaert to achieve annual average sales growth of more than 10% in Latin America during 2007-10.
Chart 16: Latin American wire
0
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600
800
1000
1200
1400
1600
1800
2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: UBS estimates
Building products Combined sales of building products amounted to €155m in 2007, accounting for 4.5% of combined sales and an estimated 7% of consolidated sales. Combined sales of building products increased by 16.0% in first quarter 2008, driven by increased market penetration in Turkey and the Middle East.
Building products consist of the following four main applications: (1) concrete-reinforcing fibre; (2) fibre to reinforce masonry (residential, industrial, commercial and public buildings); (3) fibre to strengthen stucco; and 4) road-reinforcing fibre. The main product is Dramix to reinforce concrete, which was developed in the 1980s, but only recently started to take-off.
We expect sales of building products to continue to grow by more than 10% a year to 2010 at least, mainly driven by strong demand from the Middle East, eastern Europe, Latin America as well as the new investment in Indonesia.
Chart 17: Building products – combined sales
0
50
100
150
200
250
2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: UBS estimates
We expect double-digit sales growth for Latin American wire
Building products sales growth driven by Turkey and the Middle East
We forecast double-digit sales growth for building products
Bekaert 9 June 2008
UBS 20
Two longer-term growth engines: Russia and India In January 2008, the company announced that it would invest more than €97m in a new steel cord plant in the Lipetsk Special Economic Zone in Russia, about 400km south of Moscow. This decision follows from a failed attempt in 2007 to acquire the Russian company ZAO Uralkord. The investment will take place in phases during 2008-13; the first phase is scheduled to enter production in 2010. Capacity in 2010 should be 15,000t, which the company aims to double by 2013. Bekaert wants to capture the growth potential from rapidly rising local demand for steel cord products for vehicle tyre reinforcement. According to Bekaert, Russian annual growth for steel cord is expected to be about 7%. Note that Bekaert has already supplied the CIS markets for many years and already has a sizable customer base.
Besides the existing steel cord activities, Bekaert runs two projects in India: one in stainless steel (applications include spring wire and welding wire), and one for flat and shaped wire (used in flexible pipes and automotive components). The stainless steel project involves a joint venture with Indian company Mukand. Bekaert’s 50% stake in the venture involves an €18m greenfield investment, which should generate €30m of combined sales by 2009 (less than 1% of combined sales). The project in flat and shaped wire consists of a €15m investment and should generate consolidated sales of €20m by 2012.
€97m investment in Russia
€33m investment in India
Bekaert 9 June 2008
UBS 21
Bekaert’s key challenges Bekaert faces several challenges and uncertainties in the years ahead, including: (1) a global macroeconomic slowdown; (2) rising steel prices; (3) increasing energy costs; (4) foreign exchange fluctuations; and (5) increasing competition in and from low-cost countries.
How cyclical is Bekaert? According to management, one of the two most important misconceptions about Bekaert is its cyclicality. The market appears to perceive Bekaert as a cyclical stock whereas the company itself says its cyclicality is rather limited.
The (perceived) cyclicality relates mainly to Bekaert’s exposure to automotive (35% of combined sales), construction (roughly 26% of combined sales) and basic materials/mining (nearly 10% of sales). In general terms, the argument against Bekaert’s cyclicality is that global regions have different cycles where weakness in one region (for instance the US at present) is being offset by strong growth in other regions (emerging markets at present).
Another argument against Bekaert’s cyclicality is that 75% of its sales to the automotive industry goes into replacement tyres, which are much less exposed to the economic cycle than OEM tyres.
To get a feel for Bekaert’s true level of cyclicality, we provide an overview of Bekaert’s sales and EBITDA during the past 10 years in Chart 18 below. Note that in 2001, the year of the previous US recession, sales increased by 2.3% versus 2000 while EBITDA declined by only 16%, implying a year-on-year margin drop of 260bp to 11.5%. Net profit declined by 53% in 2001.
Chart 18: Sales and EBITDA from continuing operations (€m)
0
500
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1500
2000
2500
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070
50
100
150
200
250
300
350
Sales (lhs) EBITDA (rhs)
Source: Bekaert
Since 2001, Bekaert’s portfolio has shifted away from the US and Europe, and towards emerging markets; in 2007 North America accounted for 24% of consolidated sales, versus 30% in 2001, while the importance of Europe fell from 58% of total sales in 2001 to 48% in 2007. The group’s growth profile has therefore improved and its cyclicality has reduced.
Automotive, construction and basic materials/mining are important end markets Economic cycles differ by region
EBITDA declined by 16% in 2001
Bekaert’s portfolio has shifted away from the US and Europe, and towards emerging markets
Bekaert 9 June 2008
UBS 22
Still, Bekaert’s performance highlights that the company is not immune to the cycle. UBS forecasts for GDP growth are below consensus; as such, we see downside risk to market estimates for Bekaert’s volume growth.
Table 6: UBS versus consensus on GDP growth (%)
2008E 2009E
2006 2007 UBS Consensus Difference UBS Consensus Difference
EU 2.9 2.7 1.5 1.9 -0.4 1.3 2.0 -0.7
North America 2.9 2.2 0.9 1.4 -0.5 2.0 2.3 -0.3
South America 5.2 5.1 4.1 4.4 -0.3 3.8 4.3 -0.5
World 4.8 4.6 3.3 2.9 0.4 3.4 3.2 0.2
Source: UBS, Consensus Economics
Steel price rising faster than expected We estimate that wire rod, ie, steel wire of about 1cm diameter, accounts for roughly 80% of Bekaert’s raw material bill. In 2007, Bekaert’s cost of goods sold amounted to €1,740m – up 7.7% on the year; its gross margin was 20%.
Year-to-date, steel prices have risen by more than 50% on the back of higher raw material prices. At the end of April, UBS significantly increased its estimates for global steel prices for 2008 and 2009. At the end of May, UBS again increased its price forecasts for European steel by 5% for 2008 and by 11% for 2009, driven by higher coking coal prices.
Chart 19: Wire rod price in Latin America ($/MT) Chart 20: Wire rod price in east China (CR/MT)
0
100
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300
400
500
600
700
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1000
Oct-0
3
Feb-0
4
Jun-
04
Oct-0
4
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5
Jun-
05
Oct-0
5
Feb-0
6
Jun-
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Oct-0
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7
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07
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7
Feb-0
8
0
1000
2000
3000
4000
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Mar
-05
Jun-
05
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Dec-0
5
Mar
-06
Jun-
06
Sep-
06
Dec-0
6
Mar
-07
Jun-
07
Sep-
07
Dec-0
7
Mar
-08
Source: Thomson Datastream Source: Thomson Datastream
Most of Bekaert’s businesses operate on a cost-plus basis, meaning that the company is well able to pass higher raw material prices on to its customers. Contracts are typically agreed on a quarterly basis. At the end of May, Bekaert’s sales people generally know what the input prices for third quarter of the year are going to be. During 1999-2007, the average gross margin was 20.0%, with a minimum of 18.3% (in 2001, the last year with a US recession) and a maximum of 22.6% in 2004, when steel prices rose 50% and Bekaert benefited from a positive inventory effect of more than €30m. We expect gross margins to decline moderately in the next three years.
Bekaert not immune to the cycle
We estimate (steel) wire rod accounts for roughly 80% of raw material costs
Steel prices up more than 50% ytd
Bekaert is able to pass on to its customers most of the increase in raw material costs
Bekaert 9 June 2008
UBS 23
Chart 21: Bakaert gross margin
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: Company data, UBS estimates
Energy prices also continue to move upwards We estimate that Bekaert’s energy bill amounted to roughly €130m, or 6% of sales, in 2007. For 2008, we expect a 50% hike in average electricity prices as a result of higher fossil fuel prices, higher CO2 prices (€23/t) and reduced power imports from Russia.
Chart 22: Nordpool electricity price (€/MWh)
0
10
20
30
40
50
60
70
80
2005 2006 2007 2008E 2009E 2010E 2011E 2012E
Source: UBS estimates
Bekaert has several initiatives for lowering its energy consumption. Even so, we believe it will prove difficult to pass on to customers the full increase in energy prices in a slowing demand environment.
Bekaert’s sensitivity to the US dollar According to management, a second misconception about Bekaert is that it is highly sensitive to changes in the euro/US dollar exchange rate.
Risks from foreign currencies are hedged for at least six months to the extent that they influence the company’s cash flows (transaction risk). The translation risk is not hedged.
Energy costs equate to c6% of sales
Several initiatives to reduce energy use
Transaction risk is hedged
Bekaert 9 June 2008
UBS 24
The main currencies relevant for Bekaert are: the US dollar, Chinese renminbi, Slovak koruna, Czech koruna, Brazilian real and Chilean peso.
Table 7: Foreign currencies most relevant to Bekaert
2006 2007 % change % of consolidated sales
€/Brazilean real 0.365 0.379 4% 0%
€/100 Chilean pesos 0.150 0.139 -7% 2%
€/Chinese renminbi 0.099 0.095 -4% 17%
€/Czech koruna 0.035 0.036 2% 1%
€/Slovak koruna 0.027 0.030 10% 1%
€/US dollar 0.794 0.730 -8% 20%
Source: Company information, UBS
We estimate that the 8% decline in the euro/US dollar in 2007 had a negative impact of about 1.6% on sales and 1.4% on net profit, as the company finances in local currencies (resulting in a positive impact from the lower US dollar on financial expenses). As many currencies in Latin America and Asia are linked to the dollar, the total impact from the lower euro/US dollar to Bekaert is probably higher, although we believe less than 3% on the bottom line.
In first quarter 2008 foreign currencies had a negative impact on sales of 5.3%, mainly driven by the 13% decline in the US dollar and the 5% decline of the Chinese renminbi. We estimate the impact on the bottom line at about 4%.
Increasing competition from Asia Bekaert faces increasing competition from low-cost Asian producers in many of the markets in which it operates. In its 2007 results publication, the company cited:
Strong competition in Brazil and Chile from growing Asian wire imports;
A still extremely competitive composites market;
Intense competition in industrial coatings.
In addition, the steel cord sector in China remains highly competitive, with Xingda battling Bekaert for market leadership.
We estimate a 3% negative impact from the US dollar on net profit in 2007
5.3% negative impact from currencies on first quarter 2008 sales
Bekaert 9 June 2008
UBS 25
Financial position and outlook Bekaert has a very solid balance sheet with net gearing of 45%, 50% solvency and a net debt/EBITDA multiple of around 1.7x. During the past few years, the company has bought back shares in order to leverage up the balance sheet.
Table 8: Balance sheet (€m)
2006 2007 2008E 2009E
Cash and cash equivalents 52 58 47 48
Other short-term assets 862 919 964 1032
Total short-term assets 914 977 1011 1080
Fixed assets 824 918 1002 1086
Goodwill 77 70 70 70
Investments accounted for using the equity method 238 216 222 229
Other assets 164 132 132 134
Total assets 2217 2313 2438 2599
Short-term debt 218 253 266 279
Other short-term liabilities 377 388 406 435
Total short-term liabilities 594 640 672 714
Long-term debt 274 322 339 362
Other long-term liabilities 227 203 202 204
Equity 1121 1147 1225 1318
Total equity and liabilities 2217 2313 2438 2599
Net debt/equity 39% 45% 45% 45%
Net debt/EBITDA 1.68 1.73 1.84 1.86
Solvency 51% 50% 50% 51%
Source: UBS estimates
We expect Bekaert to report sales growth of 11% in 2008, to €2,410m, driven by 4% higher volumes and 7% higher prices, as a result of the sharp increase in raw material prices and energy prices. Currencies are expected to have a negative effect of 4%, whilst the net movement in acquisitions and divestments – notably the consolidation of Vicson as of 1 October 2007 – will have a 4% positive impact on sales. Our 2008 sales forecast is 1% ahead of consensus.
We expect the EBIT margin to increase by 20 basis points to 8.2%, in line with consensus, as price competition in China appears to be less intense in 2008 versus 2007.
For 2009, we forecast sales growth of 4%, to 2,517m, driven by 4% higher prices and 1% higher volumes, partly offset by a negative currency effect of 1%. We expect the EBIT margin to drop by 10 basis points to 8.1%, as it will prove
Solid balance sheet
Bekaert 9 June 2008
UBS 26
more difficult to pass on higher raw material prices in a lower-growth environment.
For 2010 we estimate 4% sales growth, to €2,608m, and another 10-basis-point drop in the EBIT margin, to 8.0%.
Table 9: Income statement, € m
2006 2007 % chg 2008E % chg 2009E % chg 2010E % chg
Advanced wire products 1,689 1,844 9 2,077 13 2,181 5 2,268 4
Advanced materials 185 204 10 210 3 213 1 216 1
Advanced coatings 136 124 (9) 120 (3) 120 0 121 1
Other 0 2 3,900 2 (3) 2 3 2 6
Total sales 2,010 2,174 8 2,410 11 2,517 4 2,608 4
Advanced wire products 189 215 14 245 14 253 3 261 3
Advanced materials 16 17 6 17 (1) 17 (1) 16 (1)
Advanced coatings 3 3 0 3 (12) 3 (5) 2 (4)
Other (45) (49) 7 (55) 13 (56) 3 (58) 3
REBIT 163 186 15 210 13 216 3 222 3
Other costs (17) (12) (30) (12) 3 (12) 3 (13) 3
Operating income 146 175 20 198 13 203 3 209 3
Non-operating income (7) (8) 0 0 0
Interest income 4 2 2 (40) 2 (9) 5 124
Interest expense (29) (35) (40) (22) (42) (0) (44) 5
Earnings before tax 114 133 159 (1) 163 5 169 4
Income tax (18) (19) (32) (14) (34) 5 (37) 9
Minority interest (5) (9) (10) (10) (10)
Pre-exceptional earnings 142 152 160 5 162 5 167 3
Extraordinary items 0 0 0 0 0
Net income 142 152 7 160 5 162 5 167 3
Number of shares (average), m 21.5 19.7 -8 19.7 0 19.7 0 19.7 0
Reported EPS, € 6.62 7.75 17 8.18 5 8.57 5 8.69 1
Pre-exceptional EPS, € 6.62 8.18 23 8.57 5 8.57 5 8.69 1
Gross DPS, € 3.01 2.52 2.70 4 2.70 3 2.85 6
Source: UBS estimates
UBS 27
Bekaert
Income statement (€m) - - 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chRevenues - - 1,914 2,010 2,174 2,410 10.8 2,517 4.4 2,608 3.6 Operating expenses (ex depn) - - (1,654) (1,754) (1,878) (2,077) 10.6 (2,167) 4.3 (2,249) 3.8 EBITDA (UBS) - - 289 279 310 349 12.3 367 5.2 377 2.9 Depreciation - - (121) (116) (124) (139) 12.0 (151) 8.8 (156) 3.0 Operating income (EBIT, UBS) - - 168 163 186 210 12.6 216 2.9 222 2.8 Other income & associates - - 69 44 39 42 9.8 43 2.0 45 5.0 Net interest - - (27) (25) (33) (38) 16.1 (40) 4.8 (40) -1.4 Abnormal items (pre-tax) - - (32) (17) (12) (12) 3.0 (12) 3.0 (13) 3.0 Profit before tax - - 178 165 180 202 12.0 206 2.3 215 4.0 Tax - - (30) (18) (19) (32) 66.9 (34) 7.5 (37) 8.7 Profit after tax - - 147 147 161 170 5.4 172 1.3 178 3.1 Abnormal items (post-tax) - - 54 0 0 0 - 0 - 0 - Minorities / pref dividends - - (12) (5) (9) (10) 11.8 (10) 1.1 (10) 2.5 Net income (local GAAP) - - 190 142 152 160 5.1 162 1.4 167 3.1 Net Income (UBS) - - 158 154 161 169 5.0 171 1.4 176 3.1 Tax rate (%) - - 17 11 11 16 49.1 17 5.1 17 4.5 Pre-abnormal tax rate (%) - - 26 18 16 21 32.6 22 4.5 23 4.3 Per share (€) - - 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chEPS (local GAAP) - - 8.78 6.62 7.67 8.11 5.9 8.25 1.8 8.51 3.1 EPS (UBS) - - 7.31 7.17 8.08 8.54 5.7 8.69 1.9 8.97 3.1 Net DPS - - 2.03 3.01 2.52 2.70 7.0 2.85 5.7 3.00 5.3 Cash EPS - - 12.91 12.58 14.32 15.56 8.7 16.37 5.2 16.88 3.1 BVPS - - 50.27 49.95 55.24 60.56 9.6 65.96 8.9 71.47 8.4 Balance sheet (€m) - - 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chNet tangible fixed assets - - 800 824 918 980 6.8 1,009 2.9 1,017 0.9 Net intangible fixed assets - - 125 134 122 124 1.9 127 1.8 126 -0.4 Net working capital (incl. other assets) - - 662 632 655 704 7.4 731 3.9 755 3.2 Other liabilities - - (105) (91) (82) (82) 0.1 (82) -0.1 (81) -2.0 Operating invested capital - - 1,482 1,500 1,613 1,726 7.0 1,784 3.4 1,818 1.9 Investments - - 238 238 216 222 3.0 229 3.0 236 3.0 Total capital employed - - 1,721 1,737 1,828 1,948 6.5 2,013 3.3 2,053 2.0 Shareholders' equity - - 1,079 1,072 1,098 1,191 8.5 1,297 8.9 1,406 8.4 Minority interests - - 51 49 48 49 1.0 49 1.0 50 1.0 Total equity - - 1,130 1,121 1,147 1,240 8.2 1,347 8.6 1,456 8.1 Net debt / (cash) - - 450 480 561 587 4.7 543 -7.5 472 -13.1 Debt deemed provisions - - 140 136 121 121 0.0 123 2.0 126 2.0 Total capital employed - - 1,721 1,737 1,828 1,948 6.5 2,013 3.3 2,053 2.0 Cash flow (€m) - - 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chOperating income (EBIT, UBS) - - 168 163 186 210 12.6 216 2.9 222 2.8 Depreciation - - 121 116 124 139 12.0 151 8.8 156 3.0 Net change in working capital - - (50) (32) (42) (27) -34.8 (24) -13.2 (22) -6.0 Other (operating) - - (82) (34) (13) (6) -51.3 17 - 18 10.8 Operating cash flow - - 157 213 255 315 23.3 360 14.2 373 3.8 Net interest received / (paid) - - (27) (25) (33) (38) 16.1 (40) 4.8 (40) -1.4 Dividends paid - - (52) (74) (57) (53) -7.3 (56) 5.7 (59) 5.3 Tax paid - - (26) (17) (25) (32) 28.2 (34) 7.5 (37) 8.7 Capital expenditure - - (152) (161) (200) (209) 4.5 (192) -8.3 (178) -7.3 Net (acquisitions) / disposals - - 72 (43) (11) 0 - 0 - 0 - Other - - - 81 101 63 -38.0 64 1.9 68 5.8 Share issues - - (24) (50) (108) (14) -87.0 0 - 0 - Cash flow (inc)/dec in net debt - - 51 (76) (76) 32 - 102 220.4 128 25.5 FX / non cash items - - - 46 (4) (58) 1242.2 (58) -0.4 (57) -1.4 Balance sheet (inc)/dec in net debt - - - (30) (80) (26) -67.5 44 - 71 60.8 Core EBITDA - - 289 279 310 349 12.3 367 5.2 377 2.9 Maintenance capital expenditure - - (80) (80) (85) (90) 5.9 (85) -5.6 (85) 0.0 Maintenance net working capital - - 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax - - 209 199 225 259 14.8 282 9.0 292 3.7
Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.
UBS 28
Global Equity Research Belgium
Industrial, Diversified
12-month rating Neutral 12m price target €111.00
Company profile Bekaert is a company built on two core competences: advancedmetal transformation, and advanced materials and coatings. Its basicraw material is wire rod, steel wire about the thickness of a finger,which it converts by mechanical deformation and heat treatment intowires that can be as fine as 1/50th the thickness of a human hair.These wires are then turned into cable and cord, woven or knitted intocloth, or processed into ultra-fine filters and fibres, for a wide range of industrial applications in virtually all sectors of the economy.
Value (EV/OpFCF & P/E)
12/06 12/07 12/08E 12/09E 12/10E0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
EV/OpFCF (LHS) P/E (RHS)
Profitability
12/06 12/07 12/08(E) 12/09(E) 12/10(E)7.900%
8.029%
8.157%
8.286%
8.414%
8.543%
8.671%
8.800%
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
13.00%
EBIT margin (LHS) ROIC (RHS)
ROE v Price to book value
12/06 12/07 12/08(E) 12/09(E) 12/10(E)12.50%
13.00%
13.50%
14.00%
14.50%
15.00%
1.3x
1.4x
1.5x
1.6x
1.7x
1.8x
ROE (LHS) Price to book value (RHS)
Growth (UBS EPS)
12/06 12/07 12/08(E) 12/09(E) 12/10(E)1900
2014
2129
2243
2357
2471
2586
2700
-5.0%
0.0%
5.0%
10.0%
15.0%
Revenue (LHS) UBS EPS Growth (RHS)
Bekaert
Valuation (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EP/E (local GAAP) - 12.5 13.0 13.6 13.3 12.9 P/E (UBS) - 11.4 12.2 12.8 12.5 12.2 P/CEPS - 6.5 6.9 7.0 6.7 6.5 Net dividend yield (%) - 3.7 2.6 2.5 2.6 2.8 P/BV - 1.6 1.8 1.8 1.7 1.5 EV/revenue (core) - 0.8 0.9 0.9 0.9 0.8 EV/EBITDA (core) - 5.7 6.3 6.4 6.1 5.7 EV/EBIT (core) - 9.8 10.6 10.7 10.3 9.7 EV/OpFCF (core) - 8.0 8.7 8.7 7.9 7.4 EV/op. invested capital - 1.1 1.3 1.3 1.3 1.2 Enterprise value (€m) 12/06 12/07 12/08E 12/09E 12/10EAverage market cap 1,762 2,001 2,130 2,144 2,144 + minority interests 50 49 49 49 50 + average net debt (cash) 465 521 574 565 507 + pension obligations and other 138 128 121 122 124 - non-core asset value (816) (730) (636) (655) (675) Core enterprise value 1,599 1,968 2,238 2,225 2,151 Growth (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10ERevenue - 5.0 8.2 10.8 4.4 3.6 EBITDA (UBS) - -3.5 11.2 12.3 5.2 2.9 EBIT (UBS) - -3.1 14.5 12.6 2.9 2.8 EPS (UBS) - -1.9 12.7 5.7 1.9 3.1 Cash EPS - -2.6 13.8 8.7 5.2 3.1 Net DPS - 48.4 -16.1 7.0 5.7 5.3 BVPS - -0.6 10.6 9.6 8.9 8.4 Margins (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EEBITDA / revenue - 13.9 14.3 14.5 14.6 14.5 EBIT / revenue - 8.1 8.6 8.7 8.6 8.5 Net profit (UBS) / revenue - 7.7 7.4 7.0 6.8 6.8 Return on capital (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10E EBIT ROIC (UBS) - 10.9 12.0 12.6 12.3 12.3 ROIC post tax - 9.0 10.1 10.0 9.6 9.5 Net ROE - 14.3 14.8 14.7 13.7 13.0 Coverage ratios (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10E EBIT / net interest - 8.5 7.1 6.6 6.5 6.8 Dividend cover (UBS EPS) - 2.4 3.2 3.2 3.1 3.0 Div. payout ratio (%, UBS EPS) - 41.9 31.2 31.6 32.8 33.5 Net debt / EBITDA - 1.7 1.8 1.7 1.5 1.3 Efficiency ratios (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10E Revenue / op. invested capital - 1.3 1.4 1.4 1.4 1.4 Revenue / fixed assets - 2.1 2.2 2.2 2.2 2.3 Revenue / net working capital - 3.6 3.9 4.0 3.9 3.9 Investment ratios (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10E OpFCF / EBIT - 1.2 1.2 1.2 1.3 1.3 Capex / revenue (%) - 8.0 9.2 8.7 7.6 6.8 Capex / depreciation - 1.4 1.6 1.5 1.3 1.1 Capital structure (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10E Net debt / total equity - 44.8 51.1 49.3 41.8 33.6 Net debt / (net debt + equity) - 30.9 33.8 33.0 29.5 25.1 Net debt (core) / EV - 29.1 26.4 25.6 25.4 23.6
Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of €109.00 on 06 Jun 2008 17:06 EDT Market cap(E) may include forecast share issues/buybacks. Mark van der Geest Analyst [email protected] +31 205 510184
David Kerstens Analyst [email protected] +31-20-551 0164
Bekaert 9 June 2008
UBS 29
Bekaert 9 June 2008
UBS 30
Bekaert 9 June 2008
UBS 31
Bekaert 9 June 2008
UBS 32
Bekaert
Bekaert is a company built on two core competences: advanced metal transformation, and advanced materials and coatings. Its basic raw material is wire rod, steel wire about the thickness of a finger, which it converts by mechanical deformation and heat treatment into wires that can be as fine as 1/50th the thickness of a human hair. These wires are then turned into cable and cord, woven or knitted into cloth, or processed into ultra-fine filters and fibres, for a wide range of industrial applications in virtually all sectors of the economy.
Statement of Risk
Bekaert's operations are not immune to the economic cycle as its products are used in the automotive sector and construction sector amongst others. Bekaert has suppliers and customers with quite some pricing power. Bekaert's main raw material is wire rod and as such it is exposed to movements in the steel price. The market for tire steel cord in China, an important market for Bekaert, is very competitive. As a truly global company Bekaert is exposed to movements in foreign currencies, notably the $, renminbi and Slovakian koruna although most of the effect is translational. Finally, Bekaert faces the risk of insourcing by customers, notably in the tyre industry. Xingda valuation: We use a DCF to derive our PT of HK$2.41. Risks: Our major concern for Xingda is the possible price hike of its raw materials, wire rod, since the steel price has been rising dramatically. Although the company has raised its ASP twice in January and April 08 respectively and has changed the pricing strategy from annual basis to quarterly basis to cope with the steel rod price hike, there is still the possibility that further steel price hikes will bring pressure to the company’s profit margins.
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.
Bekaert 9 June 2008
UBS 33
Required Disclosures This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. Additional information will be made available upon request. UBS Investment Research: Global Equity Rating Allocations
UBS 12-Month Rating Rating Category Coverage1 IB Services2
Buy Buy 59% 38%Neutral Hold/Neutral 34% 35%Sell Sell 7% 26%UBS Short-Term Rating Rating Category Coverage3 IB Services4
Buy Buy less than 1% 67%Sell Sell less than 1% 25%
1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2008. UBS Investment Research: Global Equity Rating Definitions
UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition
Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.
Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.
Bekaert 9 June 2008
UBS 34
KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are : Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE) : Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Company Disclosures
Company Name Reuters 12-mo rating Short-term rating Price Price date Bekaert BEKB.BR Not Rated N/A €105.92 05 Jun 2008 Xingda International Holdings 1899.HK Buy N/A HK$1.81 06 Jun 2008
Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date This report was sent to the issuer prior to publication solely for the purpose of checking for factual accuracy, and no material changes were made to the content based on the issuer's feedback. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. Bekaert (€)
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Price Target (€) Stock Price (€)
No Rating
Source: UBS; as of 05 Jun 2008
Bekaert 9 June 2008
UBS 35
Xingda International Holdings (HK$)
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Price Target (HK$) Stock Price (HK$)
Neutral 2Buy
NeutralNo Rating
Source: UBS; as of 06 Jun 2008 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.
Bekaert 9 June 2008
UBS 36
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