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Alpha Finance: Increases target price for Frigoglass

Alpha Finance in a report published on January 25th notes that the management of Frigoglass expects trading conditions for the coolers division - which account for 80% of total sales -  to remain challenging short to medium term wise across Europe.

Momentum across Asia/Africa is expected to offset this, however. Alpha Finance expects a modest pick up on sales at low to mid sds for 2013e. Dilution of the product/geographical mix as Asia/Africa are expected to account for increased share of overall volumes, should be a drag on the average product pricing. 

However, raw material costs currently are flattish compared with 2012, which, in combination with opex retrenchment, should help drive an EBITDA margin of 10.3%, up from 9% in 2012e, the latter being kept below potential due to the dilution in 2012e from the expansion in US and restructuring activities in China.

Glass division is expected to exhibit mid to high sds growth for 2013e, as we cycle the outage in Nigeria during Q1 12 and with Jebel Ali gradually upgraded to offer enhanced products. EBITDA margin is expected to stay at around 25-26%.   

Working capital improvement is a priority

Priorities for the short to medium term is a) the turnaround of the dilutive cooler business in US, China and the Jebel Ali glass business in Dubai, b) improvement of inventory management. The latter, notes that it is critically important, as it should improve the cash cycle and reduce working capital needs, as the initiatives primary effect would target reduction of receivables and inventories. Medium term wise, this "clean-up" is expected to improve the cash flows and reduce short term financing needs, despite borrowing costs remaining at elevated levels.

Double digit normalised FCF yield from 2014 onwards

Alpha Finance has increased the target price to €7.00, driven by improved cash flows going forward as a result of lower working capital needs, as well as slightly lower WACC (9.5%-10.8%). As WC needs are gradually reduced, annual normalised FCF is expected to be a little more than €30mn, which is an attractive low dds yield on current market cap.  According to the report, expects EPS 13e at €0.33, growing to €0.55 in 2014e, as restructuring initiatives should have been completed and utilization rates should pick up.

Q3 12 results reminder

Frigoglass reported weak Q3 12 results. Sales retreated 13% to €101mn (below estimates), thereof cooler sales were down 24% and glass sales up 21%. Profitability was negatively impacted by low utilization rates at manufacturing facilities and a worse geographical mix. China, North America and Jebel Ali are still dilutive by 460bps on EBIT margin according to Management. EBITDA was €5mn, down 68% with coolers division being loss-making. Bottom line the Company reported net losses of €10mn. Management expects consolidated sales of Q4 12 to be up yoy, which implies FY 12 sales of at least €556mn (FY 11 sales were €555mn). While capacity utilization is expected to grow in Q4 12, trading conditions are expected to remain weak short to medium term wise. Focus is on driving operating efficiencies and turning around the dilutive operations in China, US and the Jebel Ali business.
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