2013 Mar 13 — Zumtobel AG

Berenberg Capital Markets Equity Research Zumtobel AG Losing patience William Mackie Analystt Analys +44 20 3207 7837 [email protected]

Maggie Paxton Analystt Analys +44 20 3207 7934 [email protected]

Chris Armstrong Specialist Sales + 44 20 3207 7809 [email protected]

13 March 2013

Capital Goods & Industrial Engineering

Zumtobel AG Small/Mid-Cap: Capital Goods & Industrial Engineering

For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.


Table of contents Losing patience

4

All eyes on Thorn

5

The rose and the thorn

7

Tridonic: at the start of a new journey

11

Down to Hold

13

Financials

16

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)

19

Contacts: Investment Banking

22


Losing patience ● Downgrade to Hold: We downgrade to Hold and reduce our price

●

●

●

●

target to EUR10.60 following the Q3 results and our visit to see management. We cut our adjusted EPS by 37% and 25% for FY 2013 and FY 2014 respectively to reflect lower-than-expected margins at Thorn and Tridonic as well as a tougher demand environment. We are encouraged by Zumtobel’s performance, and while Tridonic will have to navigate a difficult period of structural change, Mr Felder’s (Tridonic CEO) strategy should provide a sound start. Weak demand outweighs self-help: The Q3 results indicated that underperformance at Thorn and a difficult market have offset much of the benefit from the restructuring already carried out. Tridonic’s near-to-medium term outlook is uncertain because of technology shifts while Thorn’s recovery will likely be protracted. Hence we value the group on nearer-term trading but note that the intrinsic value of the group may be closer to EUR14.6 on a SOTP basis. Sale of Thorn unlikely in our view : The debate on the options for Thorn (restructure or sell) has intensified. We do not believe a sale of Thorn is likely given 1) the promise of margin expansion from selfhelp measures; 2) the doubtful probability that an attractive purchase price can be achieved; and 3) a lack of potential buyers. Losing patience: In our view, the restructuring process of Thorn – which targets EBIT margins of 6% – is likely to take at least 2-3 years and involve significant costs to maintain R&D at a high level, reduce capacity and invest in sales channels. Meanwhile, resource allocation to Thorn could take attention away from investments required at the profitable Zumtobel brand. Further restructuring measures may also prompt scepticism among investors following numerous attempts to improve Thorn’s performance coupled with rapidly reducing patience over the progress of the group’s profitability. Unexciting valuation : The share is trading on 12.4x 2014E PER, which compares with a historical average of 12.3x, while uncertainty over the future of the Thorn brand and the structural shifts at Tridonic hangs over the stock. Our price target is derived from a blended average of DCF and multiple-based valuation methods and implies 11% upside.

Y/E 30.04., EURm

Sales EBITDA EBIT Net profit Y/E net debt (net cash) EPS (reported) EPS (recurring) CPS DPS Gross margin EBITDA margin EBIT margin Dividend yield ROCE EV/sales EV/EBITDA EV/EBITA EV/EBIT P/E Source: Company data, Berenberg Bank

2011

2012

2013E

2014E

2015E

1,228 128 76 51 144 1.19 1.29 2.83 0.50 33.4% 10.4% 6.2% 2.9% 10.9% 0.6 5.8 8.4 9.8 13.4

1,280 87 33 14 143 0.33 0.39 1.59 0.20 31.1% 6.8% 2.6% 1.4% 4.5% 0.5 7.5 13.9 20.3 37.8

1,283 88 30 13 141 0.31 0.39 1.45 0.15 31.5% 6.8% 2.3% 1.6% 4.1% 0.3 5.0 9.9 14.7 24.2

1,315 111 56 34 124 0.79 0.79 2.36 0.24 32.0% 8.5% 4.3% 2.5% 7.6% 0.3 3.8 6.1 7.6 12.0

1,355 133 76 50 94 1.15 1.15 2.76 0.46 32.5% 9.8% 5.6% 4.9% 9.8% 0.3 3.1 4.5 5.4 8.2

Hold Rating system

Absolute

Current price

Price target

EUR 9.45

EUR 10.60

12/03/2013 Vienna Close Market cap EUR 408m Reuters ZUMV.VI Bloomberg ZAG AV Changes made in this note Hold (Buy) Rating Price target EUR 10.60 (12.00) Chg

2013e 2014e 2015e old Δ% old Δ% old Δ% 1295 -0.9 1361 -3.4 1444 -6.2 Sales 41.68 -28.6 67.65 -17.2 91.63 -17.3 EBIT 0.55 -44.3 1.05 -25.3 1.52 -24.4 EPS Source: Berenberg Bank estimates

Share data Shares outstanding (m) Enterprise value (EUR m) Daily trading volume

43 436 110,000

Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month -14.2 % 3 months -3.2 % 12 months -20.5 %

12 7 ATX -15.0 % -5.9 % -29.6 %

Key data Price/book value Net gearing CAGR sales 2012-2015 CAGR EPS 2012-2015

1.1 38.5 % 1.9 % 52.1 %

Business activities: Provider of professional lighting solutions, luminaires, lighting management and lighting components for indoor and outdoor applications

Non-institutional shareholders: Zumtobel family 35.3%

13 March 2013 William Mackie Analyst +44 20 3207 7837 [email protected] Maggie Paxton Analyst +44 20 3207 7934

[email protected]


All eyes on Thorn Downgrade to Hold: Following Zumtobel’s Q3 results and profit warning, we cut our adjusted EBIT forecasts by 19% and 17% for FY 2013 and FY 2014 respectively. The reductions reflect higher margin forecasts for the Zumtobel brand, offset by a deteriorating margin at Thorn. We also reduce our margin assumptions for Tridonic to reflect a weaker market environment. Our adjusted EPS estimates are slashed by 37% and 25% for FY 2013 and FY 2014 respectively, largely due to a higher forecast tax rate and the inclusion of losses from associates. We reduce our price target to EUR10.60 from EUR12 and downgrade our recommendation to Hold, reflecting disappointing performance at Thorn coupled with a more challenging market environment. All eyes on Thorn, it is no longer just a margin expansion story: Previously we viewed Zumtobel as an undervalued stock which – unfairly in our view – attracted a distressed valuation of <0.3x EV/Sales. We believed internal actions would see margins expand beyond their trough levels. Management has since executed a number of effective internal measures; these are most apparent in the Components division, where EBIT margins improved from -3.4% in Q3 2012 to 1.3% in Q3 2013 on the back of cost-cutting measures and product relaunches. Although management has further actions to implement, we believe the ongoing underperformance of Thorn coupled with challenging market conditions will offset such measures in the near term. The Q3 results demonstrated that the vulnerability of the group lies primarily in the Thorn brand, which – despite extensive restructuring – continues to drag on the g roup’s performance. Now, all eyes are on Thorn and discussions on its potential sale have intensified. Management indicated at the Q3 results that a decision to fix or sell Thorn will be made in the coming months. Thorn sale unlikely to be realised in the near term : As indicated during the Q3 results, management are considering the options for Thorn, specifically whether to restructure or sell the business. We do not believe a sale is likely because of: a) the prospects of margin improvement from further restructuring, as is likely to be proposed by the Head of Thorn (Martin Brandt, also Group COO); b) a purchase price that is unlikely to be attractive in comparison to the long-run value if restructuring measures are successful, particularly given the company’s currently weak performance; and c) a lack of buyers. No quick fix for Thorn but improvements possible : Having returned to breakeven levels in FY 2012 from a loss-making position (we believe margins were in negative double digits at some points), management has shown that measures already implemented have yielded some results. We believe restructuring could further expand margins but highlight that the allocation of resources (cost and management time) could limit the investments at the Zumtobel brand. Mr Brandt remains confident that Thorn can achieve 6% EBIT margins; we expect this process to take at least 2-3 years and to involve significant restructuring costs. Intrinsic value but risks around execution and structural change : In this note, we illustrate the intrinsic value of the group with a sum-of-the-parts valuation (approximately EUR14.6 per share). However, as we do not anticipate an exit from Thorn in the near term, and due to risks around the execution of further restructuring measures (particularly at Thorn), we value the group based on its nearer-term trading potential at EUR10.6. We expect the margin improvement at Thorn to be protracted as the product portfolio is gradually redeveloped and sales channels are shifted. Returns at Tridonic may remain depressed, as it navigates the transformation from conventional to LED technology over the following years;


however, we are encouraged by the strategy set by Tridonic’s new CEO Alfred Felder. Similarly, we believe the Zumtobel brand is close to achieving 10% margins, which we assume will be reached by FY 2015 (c.7.5% in FY 2013 on our estimates) as further efficiencies are realised and LED margins gain parity with conventional solutions.


The rose and the thorn The focus is now on Thorn

Our upgrade to Buy in July 2012 was based on the thesis that self-help measures would lead to margin improvements which were not reflected in the distressed valuation at the time. Until the Q3 2013 results, the share price had performed, increasing 55% from July 2012 as management actions showed through in quarterly results. However, the Q3 results demonstrated that the internal margin expansion story has shifted to one now focused on the Thorn brand. Good work undone

Having seemingly been on a positive trajectory after broadly reaching breakeven in FY 2012 and H1 2013, Thorn returned to a loss-making position and demonstrated the vulnerability of its business model in times of market weakness – offsetting much of the benefit from the restructuring measures already carried out. We believe the Zumtobel brand is profitable; thus the negative profitability of the Lighting segment in Q3 2013 (-0.6% margin) was driven by Thorn alone. Although further internal measures in the group are possible, it is clear that Thorn’s performance coupled with a weak market environment are now the factors with the greatest bearing on group profitability. As we see the group at present, Zumtobel is the stalwart with rising profitability and a proven ability to outgrow the market. Meanwhile, Tridonic has expanded margins but the transformation to LED could dampen margins in the near/medium term. Thorn remains the laggard at present with structural problems in its sales channels and product portfolio. We visited management, including Alfred Felder (the new CEO of Tridonic) and Klaus Vamberszky (Head of Technology) at their headquarters in Dornbirn in order to gain a better understanding of the issues facing the group. Figure 1: Lighting margin progression

Figure 2: LED Lighting penetration 60

250

10.0%

50

8.0%

200

40

6.0% 150

4.0%

100

2.0%

30 20 10

0.0% 50

0

-2.0%

0

160% 140% 120% 100% 80% 60% 40% 20% 0%

-4.0% Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Sales

LED Lighting

Adj EBIT %

Source: Company data, Berenberg Equity Research

LED Growth


Zumtobel remains resilient (40% of group sales) Zumtobel remains the stalwart of the group where we expect margins to expand from c.4.7% in FY 2012 to c.7.5% in FY 2013 despite increased selling and R&D investments for LED (Figures 3 and 4). Management has been weeding out poorperforming sales people and has benefited from gradually improving LED margins through price increases, design changes and input cost reduction. As we highlighted in our note Brighter prospects in LED margins (published on 11 February 2013), the streamlining of marketing efforts and the implementation of a new

LED %


CRM solution should also drive efficiencies. While management is largely satisfied with Zumtobel’s European manufacturing footprint, the brand’s strategy will be to increase US and Asian exposure through localised production and assembly as well as the design of region-specific products (increasingly by local designers). Albeit from a low base, Zumtobel’s Chinese sales should double yoy in FY 2013 to c.EUR6m. We believe Zumtobel is on a healthy track and has more to show in terms of margin expansion. As has been the case since Thorn’s acquisition, Zumtobel’s growth has been held back by the underperformance of Thorn, which has hampered investment as well as taking up management time. In order to gain a meaningful presence in the US and Asia, acquisitions are necessary; this is likely to be stifled by the drag created by Thorn. Figure 3: Group development costs 25

Figure 4: Group selling expenses 8.0% 7.0%

20

90

29.0% 28.0%

85

27.0%

6.0% 5.0%

15

4.0% 10

26.0%

80

25.0% 24.0%

75

23.0%

3.0% 2.0%

5

1.0%

0

0.0%

22.0%

70

21.0% 65

20.0% Q1'11Q2'11Q3'11Q4'11Q1'12Q2'12 Q3'12Q4'12Q1'13Q2'13Q3'13

Q1'11 Q2'1 1 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Development costs

% sales


S el li ng e xp en se s


Thorn: crunch time (30% of group sales) Thorn’s weakness in Q3 demonstrated its vulnerability resulting from high exposure to wholesalers (c.50% of sales) and government projects (outdoor lighting). The business model suffers from inconsistent brand positioning as well as an unfocused sales strategy at present. Only two options remain for the brand, in our view: 1) further restructuring efforts or 2) its sale. As highlighted in the Q3 conference call, the situation has intensified and a decision will be made in the coming months. We expect a decision to have been made before the announcement of the FY 2013 results in June although it may not be communicated in full until after this time. 1) Restructuring: To date, management actions at Thorn have been aimed at tackling operational issues. Such actions include the reorganisation of production sites as well as improving delivery performance and quality levels, which helped to bring Thorn from a loss-making position to breakeven in FY 2012. To become profitable, material and sales costs must be reduced. 



% s al es

Material costs: Despite Thorn’s lower brand positioning compared to Zumtobel, we believe material costs are significantly higher as a percentage of sales. The complexity of the product range remains too high despite the number of product families having been cut from 350 to 210 since Mr Brandt took his role (COO and Head of Thorn) in 2009. Previously 85% of products were loss making (EBIT level); a third of them have been replaced. With the addition of new products, approximately half of products are loss making at present. Selling expenses: Thorn’s SGA costs are on a par with those at Zumtobel’s as a percentage of sales yet approximately half of Thorn’s sales go through


wholesaler channels. The disparity in margin is most apparent in Thorn’s direct sales channels. Thorn remains at the mercy of the more competitive, lowermargin wholesaler business which is more exposed to volatility, as well as the high selling costs associated with its direct sales channels. Moreover, Thorn’s European manufacturing footprint needs to be reduced. Given the costs which would be associated with closing plants in Spennymoor (UK, lease until 2029) and France, its Swedish plant in Landskrona (230 staff) is the most obvious option. We expect Landskrona would need to be kept open in order to supply regional products; however, a headcount reduction of less than half could still cost EUR5m-10m in restructuring expenses. The solution is likely to be protracted

Thorn management has a three-year roadmap for product redevelopment to reduce the cost and complexity of the portfolio while it is clear that a realignment of sales channels is likely to be an evolutionary process rather than a rapid switch. We believe management would prefer to focus on direct sales, and as such, further sales investments will be required. Moreover, the brand is likely to have to keep much of its exposure to wholesalers in the near term at least, in order to maintain volumes and production utilisation. A shift towards wholesalers could leave Thorn exposed to high competition and greater volatility, as indicated in the Q3 results, coupled with a structurally lowermargin channel. It is also worth noting that wholesaler business still requires Thorn to specify projects as well as involve the wholesaler in the specification of other projects which use Thorn products. In other words, Thorn will still have to make direct selling efforts in this indirect sales channel. Not a quick fix

Management still believes Thorn can achieve 6% EBIT margins, as communicated at the capital markets day in April 2012. We do not believe this is a near-term prospect; it may be possible in 2-3 years or longer and would come at a cost (restructuring, greater selling expenses and a sustained level of development costs). We highlight that this option could result in disappointment amongst investors who have watched recovery measures at Thorn since its acquisition in 2000 and may see better potential for resource allocation in the Zumtobel brand; the latter could benefit from acquisitions outside Europe. 2) Sell: The price that could be achieved for Thorn is clearly fundamental to this option. Although Thorn has a poor operating track record, there is an intrinsic value to Thorn through its customer relationships which should not be underestimated. In Figure 5, we show a DCF of the potential value of Thorn assuming restructuring measures are successful and EBIT margins of 6% can be achieved by FY 2016; we arrive at an EV of EUR227m. We also assume a tax rate above the group average to reflect the tax rates in Th orn’s key markets of the UK, France and Australia in addition to a depreciation and amortisation to capex ratio of 1x.


Figure 5: DCF valuation of Thorn assuming 6% EBIT margins from FY 2016 201 2 Sales

399

grow th Adj EBIT Adj EBIT margin % Tax rate %

2 013 E

2014E

2 015 E

402

418

430

0.7%

4.0%

3.0%

2016 E

2%

0

-8

4

13

26

-2.0%

1.0%

3.0%

6%

25.0% 30.0%

30.0%

30.0%

19.2%

2 018E

2 019 E

2020E

2 021E

2 022 E

439

0.0%

NOPAT

2017E 448

457

466

475

485

494

2%

2%

2%

2%

2%

2%

27

27

28

29

29

30

6%

6%

6%

6%

6%

6%

30.0%

30.0%

30.0%

30.0%

30.0%

30.0%

0

(6)

3

9

Depreciation & Amortisation

14

14

14

15

Amortisation as % sales

3.4%

3.4%

3.4%

3.4%

-14

-14

-14

-15

-15

-15

3.4%

3.4%

3.4%

3.4%

3.4%

3.4%

Capex, net Capex as % sales Capex/depreciation

1

Change in w orking capital Free operating CF (FoCF) Discount factor

0 1.00

Discounted FCF

18 15

21

16

17

3.4% 3.4%

3.4%

3.4%

3.4%

3.4%

3.4%

-16

-16

-16

-16

-17

3.4%

3.4%

3.4%

3.4%

3.4%

1

1

-3

-2

-6

20

16

1 (0)

20

16

-3 0.89

20

16

1 (7)

19

15

-1 0.96

19

1

1

1

1

1

1

-2

-2

-2

-2

-2

-2

TV

30

21

6

17

17

17

18

18

18

19

19

0.82

0.76

0.71

0.65

0.61

0.56

0.52

0.48

0.48

0

5

13

12

11

11

Cumulative discounted FCF

10

10

9 74

Terminal value

153

Total

227

Investments Net debt

140

Net pensions

70

Minorities

0

Net adjustments

-210

Equity value

17

NOSH

43.1

Share price

0.4

WACC

8%

Growth rate

2%


Figure 6: Sensitivity analysis of Thorn’s EV Sales 227

Adj EBIT

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.5%

167

166

165

164

162

161

159

5.0%

186

186

186

185

184

183

182

5.5%

206

206

206

206

206

206

205

6.0%

225

226

227

227

228

228

228

6.5%

244

246

247

248

249

250

251

7.0%

264

266

268

269

271

273

274

7.5%

283

286

288

291

293

295

298

Source: Berenberg Equity Research

Zumtobel would have to achieve a higher price than this potential value, and is likely to seek a control premium. We highlight that these figures do not include the debt and pension liabilities associated with Thorn which total EUR210m, split EUR140m and EUR70m respectively (according to the balance sheet, they could be greater on crystallisation). Therefore, a sale of Thorn at these levels may not sufficiently cover the liabilities if they were not transferred to a potential buyer. Given the uncertainty over the success of restructuring potential at Thorn in light of over a decade of underperformance, bargaining power may also be limited. Consequently, we believe that on balance the option to restructure will appear more favourable.


Tridonic: at the start of a new journey As illustrated in Figure 7, procurement savings, product redesigns to reduce the breakeven point and manufacturing capacity cuts have gone some way to improving divisional margins from the trough in Q3 2012. Now that the most obvious levers for margin expansion have been pulled, market volumes are key. Figure 7: Components margin progression

Figure 8: LED Components penetration

120

20.0%

100

15.0%

80

10.0%

20

60% 50%

15

40%

10

30%

60 40 20 0

5.0%

5

0.0%

0

20% 10% 0%

-5.0% Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Sales

Adj EBIT %


LED Comp

LED Growth


An encouraging plan of action: We met with Alfred Felder, Tridonic’s new CEO who was previously Osram’s Senior Vice President Sales, to gain greater insight into his strategy. As LED penetration increases, Mr Felder will have to oversee the shift of Tridonic from a consolidated landscape to a fragmented one, from an oligopoly to a polygopoly, and from long to short innovation cycles. Tridonic is shifting from a position of 25% market share (conventional) to only 5% (LED). Tridonic, like other component suppliers, will have to face the challenge of managing the decline of its conventional business while maintaining high levels of R&D in order to stay in the race during the LED transformation.

The structural changes in the industry cause considerable uncertainty over the profit pool available and returns may stay subdued over the next 1-2 years as R&D investments remain high and competition dynamics change. Following our meeting with Mr Felder however, we came away with the view that Tridonic has a sound starting position and a strategy to help it maximise its opportunities. Mr Felder’s LED strategy revolves around the following areas.

•

An integrated approach to products with faster innovation : The focus will now be on shifting from a product business to a solution-based approach which requires competencies in semiconductors, LED and software, to give a more integrated approach. At present, the LED portfolio lacks breadth and the pace of innovation is too slow. Encouragingly, Tridonic enjoys a high degree of customer intimacy and Mr Felder believes that customers are willing to wait for Tridonic to improve its offering – the majority of the customers he has met with are only starting to become interested in LED products. Moreover, R&D projects have now been restricted to a one-year duration compared with innovation cycles of 2-3 years previously. Currently Tridonic’s R&D budget is directed entirely to LED products.

•

Internationalise: Tridonic remains Europe-centric with minimal exposure to the Middle East and Asia, although it does have manufacturing capacity and

LED %


R&D in China. Looking ahead, Mr Felder would like to have a more decentralised, global approach.

•

Partnering : Tridonic does not have the R&D capacity to develop a comprehensive portfolio. Instead, it will look for partnering opportunities – particularly in Asia.


Down to Hold We decrease our adjusted EBIT estimates by 19% and 17% for 2013 and 2014 respectively. In the Lighting segment, we increase our margin assumptions for the Zumtobel brand but reduce our margin expectations at Thorn to reflect its exposure to challenging sales channels (wholesalers and government projects). At Tridonic, we reduce our margin assumptions to reflect a weaker market environment coupled with a more subdued market outlook as structural changes may weigh on profitability more than expected despite restructuring measures. Changes to losses from associates and a higher tax rate lead us to cut our adjusted EPS forecasts by 37% and 25% for 2013 and 2014 respectively. Summary of changes

•

Given market uncertainty, we reduce our growth expectations. As the switch to LED goes on, higher selling prices of LED products will help drive the top line in Lighting.

•

We assume the Zumtobel brand continues to expand its margin, reaching 10% in FY 2015.

•

We assume Thorn’s margin improvement is a protracted process with margins of 3% in FY 2015 and 5% thereafter.

•

We assume margin erosion in electronic ballasts as we expect cost-reducing measures to be more than offset by ongoing pricing pressure. Similarly, we believe the high growth being enjoyed by LED modules and converters will results in greater than previously expected margin improvements. Note that whilst pricing pressure could offset volume effects in modules, it will also help the margins of the converter range.

•

Our forecasts do not incorporate the exit from magnetic ballasts; this is likely to begin in earnest in FY 2014 and involve one-time costs.


Figure 9: Forecast changes EURm, Apr y/e Revenue Lighting Components Reconciliation Group revenue Revenue growth Lighting Components Group revenue growth EBIT - adj Lighting Components Reconciliation Group adj EBIT Adj EBIT margin Lighting Components Group Adj EBIT margin

Old estimates 2013E 2014E 2015E

New estimates 2013E 2014E 2015E

978

1,031

1,104

968

1,007

1,037

-1.0%

-2.4%

-6.0%

392

407

420

384

376

387

-2.1%

-7.7%

-7.7%

(74)

(77)

(80)

(69)

(68)

(70)

-7.2%

-12.6%

-12.6%

-0.9%

-3.4%

-6.2%

1,295

1,361

1,444

1,283

1,315

1,355

3.0%

5.5%

7.0%

2.0%

4.0%

3.0%

(100)

(150)

(400)

-4.0%

4.0%

3.0%

-6.0%

-2.0%

3.0%

(200)

(600)

0

1.0%

5.1%

5.9%

-0.3%

2.4%

3.0%

(127)

(271)

(290)

35

56

73

54

71

0%

-3%

-4%

15

20

27

13

12

16

-17%

-41%

-42%

(8)

(9)

(9)

(10)

(10)

(10)

26%

19%

19%

45

68

92

37

56

76

-18.9%

-17.2%

-17.3%

3.5%

5.4%

6.7%

3.6%

5.4%

6.8%

34

(4)

15

3.9%

5.0%

6.4%

3.3%

3.2%

4.1%

(61)

(179)

(238)

5.0%

6.3%

2.9%

4.3%

5.6%

(64)

(71)

(75)

EURm, Apr y/e

New estimates 2013E 2014E 2015E

Revenue growth

1,295 1.0%

1,283 -0.3%

1,315 2.4%

1,355 3.0%

1266

1294

1353

37 2.9%

56 4.3%

76 5.6%

31

44

61

0.39

0.79

1.15

0.40

0.68

1.02

1,361 5.1%

1,444 5.9%

Consensus

45 3.5%

68 5.0%

92 6.3%

Consensus

EPS - adj

2

3.5%

Old estimates 2013E 2014E 2015E

Adj EBIT margin

Change (% or bps) 2012E 2013E 2014E

0.62

Consensus

1.05

1.53

Change (% or bps) 2013E 2014E 2015E -0.9%

-3.4%

-6.2%

(127)

(271)

(290)

-18.9%

-17.2%

-17.3%

(64)

(71)

(75)

-36.9%

-25.3%

-24.4%


Already fairly valued

We roll our valuation forward to 2014, incorporating multiple and DCF-based methods. Our new price target of EUR10.6 implies only 11% upside to the current share price. The share is trading on a 2014E PER of 12.4x, in line with its historical average of 12.3x. We believe there is increasing hope among investors that Thorn will be sold (which we do not believe will be the case) as well as rapidly reducing patience with regard to the group’s performance. Our adjusted EPS forecasts for 2013 and 2014 are 6% below and 13% above consensus respectively. We highlight that the g roup’s financial structure is sound with net debt to EBTIDA of 1.75x as at Q3 2013, giving us comfort that Zumtobel has some time on its side and financial flexibility during an uncertain period. Management has reduced net debt from EUR185m in Q3 2012 to EUR141m as at Q3 2013 and achieved FCF at 9M 2013 of EUR19m, compared with EUR-20m at 9M 2012. No refinancing is required until 2016 and the syndicated loan limit has been reduced from EUR500m to EUR400m (EUR195m drawn), resulting in lower financial expenses.


Figure 10: Price target derivation Method EV/Sales PER

PT 10.4 9.7

Figure 11: Financial structure 180

1.8

Com m ent

160

1.6

Based on 0.5x target multiple,2014E

140

1.4 A 1.2 D T

Based on 12.3x his torical multiple , 2014E

EV/EBITDA

11.3

Based on 6x target multiple,2014E

DCF

11.1

9% WACC, 1% grow th

Ave rage

10.6

120

I

1.0 B E

m 100 R U 80 E

60

0.6

40

0.4

20

0.2

0

0.0 2008

2009 FCF


2010 Ne t Debt

Figure 12: SOTP valuation based on potential FY 2015 earnings Zumtobel Thor n Trid oni c Reconciliation Total

EV/Sales 1 0.6 0.5 1.4


2011

2012

EV 607 258 194 -98 961

% of EV 63% 27% 20% -10%

EV/Share 14.1 6.0 4.5 -2.3 22.3

Adjustme nt Market Cap Di sc ou nt (2y rs) NOSH

210 751 0.84 43.1

Share price

14.6

2013E

Net Debt/EBITDA


In Figure 12, we show a potential break-up valuation of the group. We assume that by FY 2015 Zumtobel, Thorn and Tridonic will achieve 10%, 6% and 5% margins respectively. While we believe there is an embedded value within each brand, we do not expect corporate action to realise it in the near term. Furthermore, we see risks around the restructuring process at Thorn and structural uncertainties around the LED shift under way at Tridonic. We therefore value the group based on nearer-term trading at present (Figure 10).

Sales 607 430 387 -70 1355

/ t e d t e N

0.8 b


Financials Profit and loss account Year-end April (EUR m) Sales Cost of sales Gross profit Sales and marketing General and administration Other operating expenses Unusual or infrequent items EBITDA Depreciation EBITA Amortisation of goodwill Amortisation of intangible assets Impairment charges EBIT Interest income Interest expenses Other financial result Financial result EBT Taxes Net income from continuing operations Income from discontinued operations (net of tax) Net income Minority interest Net income (net of minority interest) Source: Company data, Berenberg Bank estimates

2011 1,228 818 410 305 37 -7 0 128 39 88 0 13 2 76 2 10 -9 -16 60 7 53 2 51 0 51

2012 1,280 883 398 331 38 -6 0 87 39 48 0 13 2 33 2 11 -5 -14 19 4 15 1 14 0 14

2013e 1,283 879 404 334 41 0 0 88 44 44 0 15 0 30 1 10 -4 -13 16 4 12 0 12 -1 13

2014e 1,315 894 421 335 39 -10 0 111 42 70 0 14 0 56 1 10 -4 -12 44 10 34 0 34 0 34

2015e 1,355 914 440 325 41 -1 0 133 43 90 0 14 0 76 2 10 -4 -12 64 14 50 0 50 0 50


Balance sheet Year-end April (EUR m) Intangible assets Property, plant and equipment Financial assets Fixed assets Inventories Accounts receivable Other current assets Liquid assets Current assets TOTAL Shareholders' equity Minority interest Long-term debt Pensions provisions Other provisions Non-current liabilities Short-term debt Accounts payable Other liabilities Current liabilities TOTAL Source: Company data, Berenberg Bank estimates

2011 235 234 49 517 190 187 40 86 503 1,020 375 3 213 103 12 328 17 141 156 314 1,020

2012 242 242 47 532 173 210 34 88 505 1,036 366 3 227 124 11 362 4 131 169 304 1,034

2013e 245 231 45 521 174 199 32 85 491 1,013 367 2 223 118 12 353 4 132 154 291 1,013

2014e 252 226 45 523 181 204 32 102 520 1,043 395 2 223 118 12 353 4 135 154 294 1,043

2015e 259 221 45 525 187 210 32 133 562 1,087 434 2 223 118 12 353 4 140 154 298 1,087


Cash flow statement EUR m Net profit/loss Depreciation of fixed assets Amortisation of goodwill Amortisation of intangible assets Other Cash flow from operations before changes in w/c Change in inventory Change in accounts receivable Change in accounts payable Change in other working capital positions Change in working capital Cash flow from operating activities Capex, excluding maintenance Payments for acquisitions Financial investments Income from asset disposals Cash flow from investing activities Increase/decrease in debt position Purchase of own shares Capital measures Dividends paid Others Effects of exchange rate changes on cash Cash flow from financing activities Increase/decrease in liquid assets Liquid assets at end of period Source: Company data, Berenberg Bank estimates

2011 51 37 0 13 21 121 -47 -11 10 0 -55 66 -57 0 -5 1 -62 -6 1 0 -7 -7 0 -18 -14 71

2012 14 39 0 13 3 69 25 -23 -8 0 9 78 -57 0 0 1 -56 16 0 0 -23 -7 5 -15 13 84

2013e 12 44 0 15 -8 62 -2 11 1 0 15 78 -52 0 2 0 -50 -4 0 0 -9 -13 0 -26 2 85

2014e 34 42 0 14 12 102 -7 -5 3 0 -9 93 -57 0 0 0 -57 0 0 0 -7 -12 0 -19 17 102

2015e 50 43 0 14 12 119 -5 -6 4 0 -7 111 -59 0 0 0 -59 0 0 0 -10 -12 0 -22 30 133


Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investment -related disclosures” and the “Legal disclaimer” at the end of this document. For analyst certification and remarks regarding foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) Company Zumtobel AG

(1) (2) (3) (4) (5) (6)

Disclosures no disclosures

Berenberg Bank or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. Berenberg Bank acts as Designated Sponsor for this company. Over the previous 12 months, Berenberg Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. Berenberg Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. Berenberg Bank holds a trading position in shares of this company. Berenberg Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of this company, calculated by methods required by German law as of the last trading day of the past month.

Historical price target and rating changes for Zumtobel AG in the last 12 months (full coverage) Date 16 July 12 13 March 13

Price target - EUR 12.00 10.60

Rating Buy Hold

Initiation of coverage 13 April 11

Berenberg distribution of ratings and in proportion to investment banking services

Buy Sell Hold

44.85 % 17.17 % 37.98 %

66.67 % 7.41 % 25.93 %

Valuation basis/rating key The recommendations for companies analysed by Berenberg Bank’s equity research department are either made on an absolute basis (“absolute rating system”) or relative to the sector (“relative rating system“), which is clearly stated in the financial analysis. For both absolute and relative rating system, the three- step rating key “Buy”, “Hold” and “Sell” is applied. For a detailed explanation of our rating system, please refer to our website at http://www.berenberg.de/research.html?&L=1

NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as described on our website may be breached temporarily.

Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Straße 108, 53117 Bonn and Lurgiallee 12, 60439 Fr ankfurt am Main


General investment-related disclosures Joh. Berenberg, Gossler & Co. KG (“Berenberg Bank ”) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by Berenberg Bank are divided into two groups: those under “full coverage” (regular updates provided); and those under “screening coverage” ( updates provided as and when required at irregular intervals). The functional job title of the person/s responsible for the recommendations contained in this report is “Equity Research Analyst” unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1

Legal disclaimer This document has been prepared by Berenberg Bank. This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. Berenberg Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. Berenberg Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. Berenberg Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services.

Analyst certification I, William Mackie, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates. I, Maggie Paxton, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates.


Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

United States of America This document has been prepared exclusively by Berenberg Bank. Although Berenberg Capital Markets LLC, an affiliate of Berenberg Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information.

Third-party research disclosures Company

Disclosures

Zumtobel AG

no disclosures

(1) (2) (3) (4) (5)

Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.

Copyright Berenberg Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without Berenberg Bank’s prior written consent. © June 2012 Berenberg Bank


Contacts: Investment Banking E-mail: [email protected]; Internet www.berenberg.de

Equity Research BANKS Nick Anderson James Chappell Andrew Lowe Eleni Papoula BEVERAGES Philip Morrisey Josh Puddle

ECONOMICS +44 (0) 20 3207 7838 +44 (0) 20 3207 7844 +44 (0) 20 3465 2743 +44 (0) 20 3465 2741

+44 (0) 20 3207 7892 +44 (0) 20 3207 7881

BUSINESS SERVICES William Foggon Simon Mezzanotte Arash Roshan Zamir Konrad Zomer

+44 (0) 20 3207 7882 +44 (0) 20 3207 7917 +44 (0) 20 3465 2636 +44 (0) 20 3207 7920

CAPITAL GOODS Frederik Bitter Benjamin Glaeser William Mackie Margaret Paxton Alexander Virgo Felix Wienen

+44 (0) 20 3207 7916 +44 (0) 20 3207 7918 +44 (0) 20 3207 7837 +44 (0) 20 3207 7934 +44 (0) 20 3207 7856 +44 (0) 20 3207 7915

CHEMICALS Jade Barkett Asad Farid John Philipp Klein Jaideep Pandya

+44 (0) 20 3207 7937 +44 (0) 20 3207 7932 +44 (0) 20 3207 7930 +44 (0) 20 3207 7890

CONSTRUCTION Chris Moore Robert Muir Michael Watts

+44 (0) 20 3465 2737 +44 (0) 20 3207 7860 +44 (0) 20 3207 7928

DIVERSIFIED FINANCIALS Pras Jeyanandhan Richard Perrott

+44 (0) 20 3207 7899 +44 (0) 20 3207 7925

Dr. Holger Schmieding Dr. Christian Schulz Robert Wood

+44 (0) 20 3207 7889 +44 (0) 20 3207 7878 +44 (0) 20 3207 7822

FOOD MANUFACTURING Fintan Ryan James Targett

+44 (0) 20 3465 2748 +44 (0) 20 3207 7873

GENERAL RETAIL & LUXURY GOODS Bassel Choughari +44 (0) 20 3465 2675 John Guy +44 (0) 20 3465 2674

HEALTHCARE Scott Bardo Alistair Campbell Charles Cooper Louise Hinds Adrian Howd Tom Jones

+44 (0) 20 3207 7869 +44 (0) 20 3207 7876 +44 (0) 20 3465 2637 +44 (0) 20 3465 2747 +44 (0) 20 3207 7874 +44 (0) 20 3207 7877

HOUSEHOLD & PERSONAL CARE Seth Peterson +44 (0) 20 3207 7891 Andrew Steele +44 (0) 20 3207 7926

INSURANCE Tom Carstairs Peter Eliot Kai Mueller Matthew Preston Sami Taipalus MEDIA Robert Berg Emma Coulby Laura Janssens Sarah Simon

+44 (0) 20 3207 7823 +44 (0) 20 3207 7880 +44 (0) 20 3207 7800 +44 (0) 20 3207 7913 +44 (0) 20 3207 7866

+44 (0) 20 3207 7900 +44 (0) 20 3207 7821 +44 (0) 20 3465 2639 +44 (0) 20 3207 7830

MID-CAP GENERAL Gunnar Cohrs Bjoern Lippe Anna Patrice Alexandra Schlegel Stanislaus von Thurn und Taxis

+44 (0) 20 3207 7894 +44 (0) 20 3207 7845 +44 (0) 20 3207 7863 +44 (0) 20 3207 7896 +44 (0) 20 3207 2631

REAL ESTATE Kai Klose Estelle Weingrod

+44 (0) 20 3207 7888 +44 (0) 20 3207 7931

TECHNOLOGY Adnaan Ahmad Sebastian Grabert Daud Khan Ali Khwaja Tammy Qiu

+44 (0) 20 3207 7851 +44 (0) 20 3207 7834 +44 (0) 20 3465 2638 +44 (0) 20 3207 7852 +44 (0) 20 3465 2673

TELECOMMUNICATIONS Wassil El Hebil Usman Ghazi Stuart Gordon Laura Janssens Paul Marsch Barry Zeitoune

+44 (0) 20 3207 7862 +44 (0) 20 3207 7824 +44 (0) 20 3207 7858 +44 (0) 20 3465 2639 +44 (0) 20 3207 7857 +44 (0) 20 3207 7859

TOBACCO Erik Bloomquist Kate Kalashnikova

+44 (0) 20 3207 7870 +44 (0) 20 3465 2665

UTILITIES Robert Chantry Andrew Fisher Oliver Salvesen Lawson Steele

+44 (0) 20 3207 7861 +44 (0) 20 3207 7937 +44 (0) 20 3207 7818 +44 (0) 20 3207 7887

Sales Specialist Sales CONSUMER Rupert Trotter

E-mail: [email protected]; Internet www.berenberg.de +44 (0) 20 3207 7815

HEALTHCARE Frazer Hall

+44 (0) 20 3207 7875

INSURANCE Trevor Moss

+44 (0) 20 3207 7893

TECHNOLOGY Jean Beaubois

+44 (0) 20 3207 7835

LONDON Miel Bakker John von Berenberg-Consbruch Ronald Bernette Matt Chawner Toby Flaux Sean Heath David Hogg Ben Hutton James Matthews David Mortlock Peter Nichols George Smibert Max von Doetinchem Paul Walker

+44 (0) 20 3207 7808 +44 (0) 20 3207 7805 +44 (0) 20 3207 7828 +44 (0) 20 3207 7847 +44 (0) 20 3465 2745 +44 (0) 20 3465 2742 +44 (0) 20 3465 2628 +44 (0) 20 3207 7804 +44 (0) 20 3207 7807 +44 (0) 20 3207 7850 +44 (0) 20 3207 7810 +44 (0) 20 3207 7911 +44 (0) 20 3207 7826 +44 (0) 20 3465 2632

HAMBURG Susette Mantzel Marco Weiss

+49 (0) 40 350 60 694 +49 (0) 40 350 60 719

FRANKFURT Michael Brauburger Nina Buechs André Grosskurth Boris Koegel Joachim Kopp

+49 (0) 69 91 30 90 741 +49 (0) 69 91 30 90 735 +49 (0) 69 91 30 90 734 +49 (0) 69 91 30 90 740 +49 (0) 69 91 30 90 742

PARIS Christophe Choquart Dalila Farigoule Clémence La Clavière-Peyraud Olivier Thibert

+33 (0) 1 5844 9508 +33 (0) 1 5844 9510 +33 (0) 1 5844 9521 +33 (0) 1 5844 9512

ZURICH Stephan Hofer Carsten Kinder Gianni Lavigna Benjamin Stillfried

+41 (0) 44 283 2029 +41 (0) 44 283 2024 +41 (0) 44 283 2038 +41 (0) 44 283 2033

CRM LONDON Greg Swallow Laura Cooper CORPORATE ACCESS LONDON Patricia Nehring

+44 (0) 20 3207 7833 +44 (0) 20 3207 7806

+44 (0) 20 3207 7811

+44 (0) 20 3207 7829

INDUSTRIALS Chris Armstrong Kaj Alftan

+44 (0) 20 3207 7809 +44 (0) 20 3207 7879

Sales Trading HAMBURG Paul Dontenwill Christian Endras Gregor Labahn Chris McKeand Fin Schaffer Lars Schwartau Marvin Schweden Tim Storm Philipp Wiechmann

+49 (0) 40 350 60 563 +49 (0) 40 350 60 359 +49 (0) 40 350 60 571 +49 (0) 40 350 60 798 +49 (0) 40 350 60 596 +49 (0) 40 350 60 450 +49 (0) 40 350 60 576 +49 (0) 40 350 60 415 +49 (0) 40 350 60 346

LONDON Stewart Cook Simon Messman Stephen O'Donohoe

+44 (0) 20 3465 2752 +44 (0) 20 3465 2754 +44 (0) 20 3465 2753

PARIS Sylvain Granjoux EVENTS LONDON Natalie Meech Charlotte Kilby Hannah Whitehead

+33 (0) 1 5844 9509

+44 (0) 20 3207 7831 +44 (0) 20 3207 7832 +44 (0) 20 3207 7922

E-mail: [email protected]

US Sales BERENBERG CAPITAL MARKETS LLC Member FINRA & SIPC

UTILITIES Benita Barretto

Andrew Holder Colin Andrade Cathal Carroll Burr Clark Julie Doherty

+1 (617) 292 8222 +1 (617) 292 8230 +1 (646) 445 7206 +1 (617) 292 8282 +1 (617) 292 8228

Kelleigh Faldi Kieran O'Sullivan Emily Mouret Jonathan Saxon

+1 (617) 292 8288 +1 (617) 292 8292 +1 (646) 445 7204 +1 (646) 445 7202

HAMBURG BIELEFELD BRAUNSCHWEIG BREMEN DÜSSELDORF FRANKFURT MUNICH STUTTGART LONDON LUXEMBOURG PARIS SHANGHAI VIENNA ZURICH

2013 Mar 13 — Zumtobel AG

Recommend Documents