Masterflex SE — Regulatory Filings 2012

Nov 21, 2012

Masterflex SE ^M

Germany / Industrial Products & Plastics Primary exchange: Frankfurt	9M 2012 results	RATING PRICE TARGET	BUY €7.50
Bloomberg: MZX GR		Return Potential	53.7%
ISIN: DE0005492938		Risk Rating	High

DEMAND INCREASES AGAIN IN Q3 2012

Masterflex has published 9M 2012 results which were slightly below our expectations. Even though the company reported a gradual improvement in year-on-year sales growth in Q3 2012, 9M 2012 sales growth of 4.8% y/y was below the firm's full year guidance of 8% to 10% y/y. However, Masterflex' 9M 2012 EBIT margin of 14.1% was in line with the company's FY 2012 guidance. For the current fiscal year, the firm still expects sales to range between €57m and €58m as well as an EBIT margin of around 14%. Management concedes that FY 2012 sales guidance is ambitious based on the firm's 9M results. However, even though it is possible that the firm will miss its sales guidance for the current fiscal year, profitability targets should be met. Based on revised estimates, our DCF model yields an unchanged price target of €7.50. We maintain our Buy recommendation.

Mixed results in foreign markets 9M 2012 sales increased by 4.8% y/y (H1/12: 4.0% y/y) to €42.03m (FBe: €42.94m; 9M/11: €40.10m). While sales development in Russia and the Czech Republic was better than expected, revenue contribution from the US, Brazil and especially France was below the company's internal forecast. As expected, personnel costs (as a percentage of sales: 35.6%; FBe: 34.7%; 9M/11: 33.5%) increased due to the firm's regional expansion strategy. Material costs (as a percentage of sales: 31.3%; FBe: 30.8%; 9M/11: 30.5%) remained stable at around 30% of sales. EBIT came in at €5.91m (FBe: €6.19m; 9M/11: €5.86m), which corresponds to an EBIT margin of 14.1% (FBe: 14.4%; 9M/11: 14.6%). Net income from continuing operations amounted to €3.08m (FBe: €3.17m; 9M/11: €2.73m).

Further improvement in equity position 9M operating cash flow improved slightly y/y to €2.14m (9M/11: €1.91m) due mainly to the improvement in bottomline results. Net cash flow was €-1.88m (9M/11: €-10.23m due mainly to the repayment of financial debt). Liquid funds at the end of September thus decreased YTD to €2.67m (end of FY11: €4.54m). (p.t.o.)

FINANCIAL HISTORY & PROJECTIONS

	2010	2011	2012E	2013E	2014E	2015E
Revenue (€m)	46.06	53.00	55.97	60.44	65.52	70.63
Y-o-y growth	n.a.	15.1%	5.6%	8.0%	8.4%	7.8%
EBIT (€m)	6.45	7.50	7.81	8.61	9.43	10.30
EBIT margin	14.0%	14.2%	14.0%	14.2%	14.4%	14.6%
Net income (€m)	-2.33	3.88	3.73	4.99	5.74	6.42
EPS (diluted) (€)	-0.49	0.44	0.43	0.57	0.66	0.73
DPS (€)	0.00	0.00	0.00	0.00	0.00	0.00
FCF (€m)	2.65	2.10	2.62	3.71	4.18	4.84
Net gearing	192.9%	123.3%	72.7%	44.8%	23.7%	7.1%
Liquid assets (€m)	14.40	4.54	2.80	5.60	7.48	1.69

RISKS

Risks to our price target include debt servicing, dependency on raw material prices and burdened profitability due to regional expansion.

COMPANY PROFILE

Masterflex SE focuses on developing and manufacturing high grade connection and hose systems made of innovative high-tech plastics. The firm is a global market leader in high-tech hose systems.

MARKET DATA	As of 20 Nov 2012
Closing Price	€ 4.88
Shares outstanding	8.73m
Market Capitalisation			€ 42.60m
52-week Range		€ 4.42 / 5.77
Avg. Volume (12 Months)			8,365
Multiples	2011	2012E	2013E
P/E	11.7	12.2	9.1
EV/Sales	1.2	1.2	1.1
EV/EBIT	8.8	8.4	7.7
Div. Yield	0.0%	0.0%	0.0%

STOCK OVERVIEW

Liquid Assets	€ 2.67m
Current Assets	€ 20.87m
Intangible Assets	€ 4.09m
Total Assets	€ 51.98m
Current Liabilities	€ 13.17m
Shareholders' Equity	€ 18.39m
SHAREHOLDERS
SVB GmbH & Co. KG/Schmidt	19.9%
Familienmitglieder Bischoping	5.3%
BBC GmbH	4.6%
Other	8.1%

Free Float 62.1%

COMPANY DATA As of 30 Sep 2012

Financial debt (short- and long-term) decreased slightly to €23.19m (end of FY11: €23.87m). The firm's equity position improved to €18.84m (end of FY11: €16.24m), which corresponds to an equity ratio of 36.2% (end of FY11: 31.9%).

Guidance for FY 2012 confirmed, but… Masterflex confirmed guidance for the current fiscal year and still expects sales to range between €57m and €58m and an EBIT margin of around 14%. However, management does not rule out FY 2012 sales missing the company's increasingly ambitious-looking guidance due to weaker than expected development on some foreign markets – even though there has been a gradual improvement in year-on-year sales growth in Q3 2012. Masterflex confirmed its profitability guidance without any reservations. Despite higher expenditures associated with ramping up international activities, the company predicts an EBIT margin of around 14%.

Adjustments to our forecasts We have adjusted our estimates for FY 2012 and subsequent years for the delay in ramping up activities in new regional markets and the weaker than expected development in existing markets. However, since management confirmed that profitability is a higher priority for it than sales growth, we are confident that Masterflex will be able to maintain a certain level of profitability (also via further internal optimisation/restructuring). In our view, the company's general growth path is intact – not only with regard to innovation (introduction of new products at next year's "Hannover Messe" is not unlikely), but also regarding international expansion. Activities in Eastern Europe are progressing well, and Brazil in particular is expected to fuel future transatlantic growth due to upcoming major sports events, amongst others (Olympic Games and Soccer World Cup). Moreover, Masterflex is also slowly gaining traction in Asia. For example, Masterflex expects first noteworthy orders from China during the remainder of the year. Changes to our estimates are shown in figure 2 below. Our updated DCF model yields an unchanged price target of €7.50. We reiterate our Buy recommendation.

All figures in €m	Q3-12A	Q3-12E	Delta	Q3-11A	Delta	9M 2012A	9M 2011A	Delta
Sales	13.76	14.67	-6.2%	12.92	6.5%	42.03	40.10	4.8%
EBIT	1.89	2.17	-12.8%	1.75	8.2%	5.91	5.86	0.9%
margin	13.8%	14.8%	-	13.6%	-	14.1%	14.6%	-
Net income*	1.03	1.21	-15.3%	1.00	3.1%	3.08	2.73	12.9%
margin	7.5%	8.3%	-	7.7%	-	7.3%	6.8%	-
EPS (in €, diluted)*	0.11	0.14	-15.3%	0.10	3.1%	0.33	0.28	12.9%

Figure 1: Estimates vs. reported figures

*net income from continued operations

Source: First Berlin Equity Research, Masterflex SE

Figure 2: Changes to estimates

		2012E			2013E			2014E
All figures in €m	Old	New	Delta	Old	New	Delta	Old	New	Delta
Sales	57.61	55.97	-2.9%	62.91	60.44	-3.9%	68.19	65.52	-3.9%
EBIT	8.09	7.81	-3.5%	8.99	8.61	-4.3%	9.85	9.43	-4.2%
margin	14.0%	14.0%	-	14.3%	14.2%	-	14.4%	14.4%	-
Net income*	3.99	3.95	-0.9%	5.35	4.99	-6.8%	5.99	5.74	-4.2%
margin	6.9%	7.1%	-	8.5%	8.2%	-	8.8%	8.8%	-
EPS (in €, diluted)*	0.46	0.45	-0.9%	0.61	0.57	-6.8%	0.69	0.66	-4.2%

*net income from continued operations

Source: First Berlin Equity Research

FIRST BERLIN RECOMMENDATION & PRICE TARGET HISTORY
----------------------------------------------------	--

Report No.:	Date of publication	Previous day closing price	Recommendation	Price target
Initial Report	5 December 2011	€4.61	Buy	€7.10
24	↓	↓	↓	↓
5	26 April 2012	€4.95	Buy	€7.50
6	9 May 2012	€4.87	Buy	€7.50
7	14 August 2012	€4.81	Buy	€7.50
8	Today	€4.88	Buy	€7.50

Jens Hasselmeier

First Berlin Equity Research GmbH

Mohrenstraße 34 10117 Berlin

Tel. +49 (0)30 - 80 93 96 83 Fax +49 (0)30 - 80 93 96 87

info@firstberlin.com www.firstberlin.com

FIRST BERLIN POLICY

In an effort to assure the independence of First Berlin research neither analysts nor the company itself trade or own securities in subject companies. In addition, analysts' compensation is not directly linked to specific financial transactions, trading revenue or asset management fees. Analysts are compensated on a broad range of benchmarks. Furthermore, First Berlin receives no compensation from subject companies in relation to the costs of producing this report.

ANALYST CERTIFICATION

I, Jens Hasselmeier, certify that the views expressed in this report accurately reflect my personal and professional views about the subject company; and I certify that my compensation is not directly linked to any specific financial transaction including trading revenue or asset management fees; neither is it directly or indirectly related to the specific recommendation or views contained in this research. In addition, I possess no shares in the subject company.

INVESTMENT RATING SYSTEM

First Berlin's investment rating system is five tiered and includes an investment recommendation and a risk rating. Our recommendations, which are a function of our expectation of total return (forecast price appreciation and dividend yield) in the year specified, are as follows:

STRONG BUY: Expected return greater than 50% and a high level of confidence in management's financial guidance BUY: Expected return greater than 25%

ADD: Expected return between 0% and 25%

REDUCE: Expected negative return between 0% and -15%

SELL: Expected negative return greater than -15%

Our risk ratings are Low, Medium, High and Speculative and are determined by ten factors: corporate governance, quality of earnings, management strength, balance sheet and financing risk, competitive position, standard of financial disclosure, regulatory and political uncertainty, company size, free float and other company specific risks. These risk factors are incorporated into our valuation models and are therefore reflected in our price targets. Our models are available upon request to First Berlin clients.

Up until 16 May 2008, First Berlin's investment rating system was three tiered and was a function of our expectation of return (forecast price appreciation and dividend yield) over the specified year. Our investment ratings were as follows: BUY: expected return greater than 15%; HOLD: expected return between 0% and 15%; and SELL: expected negative return.

ADDITIONAL DISCLOSURES

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