voestalpine - Downgrade to “hold” on insufficient upside potential   

voestalpine released a solid set of 3Q 12/13 results that fully met our and market expectations. The management reiterated the full year guidance of EBITDA and EBIT of EUR 1.4 bn and EUR 800 mn, respectively. Increased pricing pressure in some business areas is an issue but the company remains generally satisfied with the volume development and capacity utilisation rates. Reflecting the application of lower risk-free rates throughout our Austrian stock universe we raise the target price marginally to EUR 29 from 28.50 but downgrade the stock to “hold” from “buy”. voestalpine has been the best performing steel stock in Europe in the last year and we now see only limited upside to our target price. Additionally we argue that the company is unlikely to deliver positive earnings surprises in the shorter-term. We see Steel profitability under pressure in the next two quarters due to rising raw material costs and the lagging effect from selling price increases. We continue to like the underlying investment case and regard valuation as far from being stretched, however in the short-run the stock lacks a catalyst.

3Q results release largely a non-event: Revenues fell 6% to EUR 2.72 bn with all divisions coming in largely as expected. EBIT rose 20% to EUR 174 mn vs. RCBe EUR 170 mn and consensus EUR 172 mn. Metal Engineering posted a strong quarterly performance with EBIT of EUR 74.5 mn and margin of 10.7% well ahead of our forecasts of EUR 63 mn and 9%, respectively. Special Steel EBIT of EUR 43.8 mn fell short of our estimate of EUR 50 mn. Deviations in Steel (EUR 42.5 mn vs. est. EUR 45.6 mn) and Metal Forming (EUR 32.4 mn vs. est. EUR 30.5 mn) were minor. Due to a lower than expected tax rate (20.6% vs. RCBe 22.5%) net profit of EUR 80.4 mn (EPS EUR 0.47) exceeded our and market estimates by 5%.

Tweaking forecasts: Against the backdrop of in-line 3Q we have only tweaked our FY 12/13e EBITDA, EBIT and EPS projections by 1% to EUR 1.39 bn, EUR 803 mn and EUR 2.36, respectively. Lower Steel (EBIT cut by 6%) and Special Steel (EBIT -9%) are compensated by higher assumptions for Metal Engineering (+6%) and Metal Forming (+4%). For the years FY 13/14e and FY 14/15e EPS projections are down 1% to EUR 2.81 and EUR 3.81, respectively.

Blended valuation yields TP of EUR 29: The total return target price of EUR 29 (incl. DPS EUR 0.85) is derived from an equally weighted blend of DCF (perpetual growth 1%, terminal EBITDA margin 12.5%) and EV/CE (post-tax ROCE 7.2% vs. WACC of 8.2%) models. Trading at an EV/EBITDA multiple of 5.6x and a P/E 9.4x on FY 13/14e, voest continues look inexpensive compared to the sector.