We have revised our forecasts to reflect the de-consolidation of D’Ieteren Lease from 2012 onwards, the latest trading update and the weaker € . Our EPS forecasts for 2011, 2012 and 2013 have been lowered by respectively 1%, 7% and 5%. The stock is trading at very attractive valuation multiples. Our € 50 target price implies P/E’s for 2012 and 2013 of respectively 12.5x and 11.4x. We maintain our BUY rating.
Management expects moderate organic sales growth for the remainder of the year as market share gains should offset continued market declines. Moreover the recent strengthening of the $ and the L should help the top line. We are forecasting 1.1% sales growth for 4Q11 to arrive at -0.9% for full year. In 2H11 Belron faces easier comparables in terms of profitability because the 2H10 EBIT was dampened by € 13m extra costs related to a glass shortage. Moreover, 2H11 margins should benefit from cost reduction measures what were already implemented in 1H11 in response to the slowdown in demand. Belron will face relatively easy comparables in 1H12 because organic sales growth was down 1.6% in 1H11. The US operations will also start to benefit next year from the new (25,98 USD, 1,44%) contract. This major insurer is moving third party claims administration from LYNX Services to Safelite from January 2012. We estimate that the contract will result in a 6% rise in Safelite’s repair and replacement jobs. In Europe, the number jobs should continue to be negatively impacted by recessionary pressures. Given the above, we count on 1.2% sales growth next year or -2.0% at identical exchange rates and a flat in REBIT margin (8.5%).
Impact of deconsolidation of D’Ieteren Lease:
Last month, D’Ieteren and (110,5 EUR, -0,90%) Financial Lease Services have announced the creation of a joint venture, D’Ieteren Finance (VDFin), that will provide a full range of financial services related to the sale of group vehicles on the Belgian market. D’Ieteren group will transfer D’Ieteren Lease to VDFin. D’Ieteren will have a 50% minus 1 share in the joint-venture. VDFin contribution to D’Ieteren’s net profits will show up under equity accounting. On a pro forma basis, D’Ieteren Auto’s sales and REBIT would have been € 169m and € 26m lower if the transaction had occurred on 1 January 2010.
Subsidies on low emission cars will most likely be stopped under the new government. Moreover, efforts to lower the deficit will probably include higher taxes on company cars. Given the above, we foresee a 10% decline in D’Ieteren’s car sales next year. Moreover, D’Ieteren Auto’s top line will decline as D’Ieteren Lease’s activities will be transferred to VDFin. Given the above we arrive at a 15% decline in reported sales and a REBIT margin of 2.8% in 2012.