Leoni

Update: 30^th Aug 2016

Encouraging 1H16 Results

Leoni’s share has gained by 26% since we initiated a position in the company on 27^th of June 2016 at EUR 26.4 (see initiation report published on 2^nd June 2016).

The company announced an encouraging 1H16 results. Consolidated revenue was relatively flat at EUR 2.23bn mainly attributed to the fall in copper prices and exchange rate which otherwise masked a healthy increase in volume sales.

Wiring Systems Division increased its volume sales by 4.5% YoY, mainly attributed to the continuing strong automotive sales in USA and China while weak double digit decline in sales of less significant auto markets such as Brazil and Russia partly detracted the sales increase. The company continues to strengthen its already dominant market share in Europe. With the launch of several new models by German, European and US carmakers, we forecast that revenue in this segment will continue to be well supported in the coming years.  EBIT from this segment continue to be weak mainly due to the substantial one-off restructuring expense of EUR 19.7m, resulting in EBIT to fall by 58% YoY to EUR22.1m. The division continues to execute on its restructuring plan with the pooling of central functions and the reduction of the organisation structure which will culminate in leaner and more cost efficient operations.

These actions will result in the reduction of the workforce by 1100 employees by the end of 2016 and a cost benefit of EUR 30m p.a. from 2017.  We continue to believe that 2016 will mark the trough earnings in this division and forecast that the winding down of the restructuring process and sustained industry tailwinds will support the earnings growth of this division starting from 2017. The company also announced that it has received 2 major follow-on orders from PSA Group worth in excess of EUR 500m altogether.

The Wire & Cable Solutions Division experienced strong organic revenue growth of 9.7% YoY driven by the continued structural demand for high quality speciality cables for the automotive and industrial segments. Particularly strong growth in Europe and US were able to offset weaker cable sales in China. Revenue growth was however massively dampen by currency and copper price effects which resulted in an overall negative growth of 6.1% YoY. Strong increase in EBIT margins due to favourable changes in product mix (increase in specialised products) however drove a 22% YoY increase in EBIT to EUR 39.8m, even after including one-off restructuring cost of EUR 1.3m. Strong growth in new orders of EUR 882.2m in 1H16 continues to point to sustain increase in EBIT going forward.

Loeni’s recovery momentum was however hit by a fraudulent activity with the usage of falsified documents, identities and through the use of electronic communications channel.  This resulted in an outflow and potential loss of EUR 40 million of company funds in August 2016. While this is unfortunate episode, we believe that this is a one-off case. 2016 is turning out to be another year of ‘kitchen sinking’ for Leoni. We are optimistic that the resumption of growth, low base and the lack of one-off effects will drive the upside of Leoni’s financial result in 2017.