2H11 operating profit was below expectations:
EBIT of € 208m was below our estimate of € 235m. The main culprit was Survey, which fell € 24m short of expectations, while overhead was € 6m higher than expected. Geotechnical was a bit better than expected, and Geoscience was in line. Very strong currency and fair value adjustments in the net financial result and a considerably lower than expected tax rate saved the day, so net profit was € 18.6m better than expected. The quality, however, was below expectations.
Balance sheet remains leveraged:
Net debt of € 1,292m was € 117m higher than expected, and it was the fourth consecutive time that it exceeded expectations. It has grown by a factor 2.5x since 2009 due to capex, investments in multi client data, acquisitions, and a strong increase in WC (+€ 210m since 2009, ex library). Leverage ratio's seems fine. However, operating earnings have been more or less flattish since 2009. Hence,net debt keeps on replacing market cap within the EV, thus hampering the potential for share price appreciation.
Downgrade to Hold:
We have lowered our TP to € 56 (from € 59), based on the average fair value from our DCF-model and historic valuation multiples. The reduction is based on slightly lower earnings estimates and higher net debt estimates, while other EV components have a small negative impact. Our target price no longer offers sufficient upside to justify a Buy rating. Hence, we lower our recommendation to Hold (from Buy).