We updated our Agfa model as silver declined to the lowest level since October 2010. Agfa consumes about 300 tonnes of silver p.a. (this excludes consumption for contracts where there are silver clauses, which passes the risk on to the client). Agfa’s silver consumption declines by about 10% per year, as it is used for film products (mainly in GS and to a lesser extent also in HC), for whichdemand is in structural decline. Agfa does not hedge its silver exposure. On top of this, Agfa also consumes about 100k to 125k tonnes of aluminium per year for its plates business in Graphics. The aluminium exposure is usually partly hedged by Agfa. Given the high exposure to these raw materials, the higher prices are weighing on earnings, although Agfa partially offset this effect with price increases pushed through in the course of 2011.
Agfa’s silver exposure continues to fall due to shifts in the product mix towards products with lower silver content (Hardcopy film instead of X-Ray film in HC, and digital plates instead of film in GS). The sensitivity is now around a € 5m impact on gross profit per $ 1 change in the silver price (down from € 12m in late 2010).
As a result of the decline in the silver price we increase our 2013E REBIT to € 182.2m (was € 177.3m) and our 2014E REBIT to € 204.8m (was € 195.8m). As there is a 3 months time lag, there will be no impact of the recent decline in the silver price in 1H13.
The gross margin increased in 4Q12 already to 28% thanks to the restructuring efforts and a lower metal bill, driven by lower metal prices and silver consumption. In the longer term, Agfa targets to improve its REBITDA margins by another 3% thanks to necessarily gross margin improvements. The gross margin improvements should come from:
- better procurement
- increasing the efficiency of its service activities
- improve factor efficiency
- a more focussed product range.
We reiterate that in 2013, Agfa will focus on:
- keeping SG&A costs under control
- gross margin improvements
- growing the top line of Agfa Graphics’ inkjet business Agfa Healthcare’s digital radiography and IT businesses.
Conclusion
Positive news for Agfa as there is a sensitivity of around € 5m on Agfa’s gross profit per $ 1 change in the silver price. The effect will be seen as from 2H13 as there is a three months time lag. Next to this we expect that Agfa’s growth engines – industrial inkjet and healthcare IT – will continue to perform well. Efforts to improve operational efficiency should enable further improvements to the gross margin and REBIT. We maintain our Accumulate rating and € 1.7 target price.