We have revised our scenario to take into account more prudent assumptions for sawing wire.
Bekaert, as global market leader in sawing wire (market share > 50%), is challenged by several players (Xingda, Henan Hengxing, …) entering the market. Xingda commenced production of sawing wire in December 2010 with a capacity estimated region 5kt, expanding to region 15kt p.a. by the end of this year. Xingda is said to have positioned itself at prices 20% to 25% below Bekaert, partially needed to offset greater production losses. In the 1Q11 trading update, Bekaert stated that “in the solar energy sector, increased competitive capacities are coming on stream” and the company is implementing “timely and appropriate measures, including adequate price adjustments, to maintain its strong market position in China”.
Asia Pacific last year accounted for 38.3% of the consolidated sales and 70.8% of EBITDA before other elements and eliminations. The EBITDA margin generated in Asia Pacific amounted to 44.9%, significantlyexceeding the group margin of 22.2%. We estimated Bekaert’s EBITDA margin in sawing wire last year at 65% corresponding to € 283.9m of EBITDA or 35.9% of total (excluding other and eliminations). This leaves € 276.5m in EBITDA for advanced wire products, excluding sawing wire, in Asia Pacific.
Our scenario for Bekaert includes the following assumptions for sawing wire. For the photovoltaic market, we have applied a scenario which lies in between EPIA’s moderate and policy-driven scenario, assuming the market to grow to 32.5 GW by 2017. Over the same period, we expect Bekaert to increase its sawing wire volumes from an estimated 45kt last year to 73kt by 2017 while we included a 25% drop in prices (mainly front loaded). The impact on our scenario is mainly in 2011 with sawing wire EBITDA dropping 26.9% y/y.
We have revised our scenario to take into account the above assumptions. As a result, we have cut our adjusted EPS assumptions for 2011, 2012 and 2013 by respectively 15.8%, 16.6% and 19.2% to € 5.76, € 5.97 and € 6.11. More details on the main changes to our scenario can be found in a Flash note, which will be sent later today.
Conclusion:
Bekaert’s share price this month was hit by a perfect storm consisting of general bearish markets and in particular solar market concerns. While we have significantly trimmed our estimates and target price, we believe the current share price level provides an interesting entry point rating the shares at BUY with a € 68 price target. The company continues to offer a well diversified product portfolio and strong emerging markets exposure.