The steel technology group Bekaert sees a tipping point in sales. Combined with savings, this will lead to just about the same operating profit by the end of 2020 as last year, despite a pandemic eating up sales. Investors and analysts are enthusiastic.
Does Bekaert still need a new definitive CEO after Matthew Taylor’s departure just before the corona crisis broke out in February? That is the pressing question now that it appears that the interim CEO, the Austrian Oswald Schmid, seems to be doing fine after two quarters of saving costs, hoarding cash and ‘being closer to the customer’.
The steel technology group reported in its third-quarter update on Friday that the company is at a “tipping point” in most markets. Obviously, this is largely due to the pick-up in car sales, which significantly increases the demand for steel cord for the reinforcement of rubber tires – Bekaert’s largest division. Turnover there was 50 percent higher than in the second quarter. Total sales increased by 24 percent.
But regardless of market conditions, the 61-year-old engineer, who joined Bekaert in early 2019 as Director of Operations (COO) after top positions at the elevator builder Schindler and the tire manufacturer Continental, has also managed to maintain profit margins despite declining volumes and to strengthen the balance. He achieved that first through savings, many of which are structural, he says, so that they have a lasting effect.
In addition, Schmid was very quick in February (when the virus was already proliferating in Asia) maintain the company’s liquidity. He took out lines of credit from the outset, hoarding cash by postponing the dividend and repayment of a European loan. Nevertheless, the net debt was reduced to 834 million euros, 30 percent less than at the end of September last year.
Despite the recovery trends, turnover shrank by 8 percent year on year to 985 million euros last summer. Analysts had a sharper decline expected. After nine months, Bekaert is facing a 16 percent decline in sales to 2.76 billion euros. That’s better than the decrease by a fifth in the first half year.
Bekaert does not indicate where the turnover will be at the end of this year. Car sales have picked up since the reopening of the economy, but the second wave of corona will have an impact again, as this week showed the monthly figures of the automotive industry federation ACEA. After the positive month of September, 7.8 percent fewer new cars were registered in the European Union in October.
Bekaert does look ahead to the profit. Thanks to cost savings and tight working capital controls, operating profit will be close to last year’s 242 million euros, despite lower sales. A very positive surprise: the analyst consensus has so far estimated at 196 million euros, almost a quarter less.
The forecast for a stable operating profit with lower sales means that the profit margin must also improve, compared to the 5.6 percent for fiscal year 2019.
The recovery signals and the profit forecast give the stock
wings. The increase of more than a quarter since September will be extended. Bekaert is thus further catching up on the annual loss. (see graph)
Blow-out guidance, responds ING analyst Stijn Demeester. He attributes the profit recovery to structural interventions in the two largest divisions, Rubber Reinforcement and Steel Wire Applications. Demeester also praises the lower-than-expected debt ratio of less than twice the gross operating profit.
KBC Securities colleague Wim Hoste sees a clear sign in the outlook that the restructuring and upgrade of the portfolio is bearing fruit. He increases his advice to buy additional (accumulate), the target price goes from 25 to 28 euros.
Kempen analyst Emmanuel Carlier expects the positive trends to continue in the fourth quarter. He is aiming for a free cash flow of 180 million euros for this and next year.
With these encouraging results in hand, the demand for a definitive successor for Taylor and Schmid could not fail. During the conference call, Schmid put it here: “Our first priority was to manage the crisis. A rush in the search for a new CEO is not an issue. So you will have to exercise some patience. ‘