Over the last 18 months Lenzing’s operations progressed very well:
first, management increased the share of specialty products with the successful roll out of a new state of the art Tencel line reducing the dependence on commodity price fluctuation;
second, management conducted an aggressive cost reduction initiative;
third, management sold out non-core businesses at good prices and restructured some of the low margin viscose fibre plants.
In addition to that, certain external factors have supported operations in enhancing profitability from a cyclical low in 2013:
first, the strength of the USD;
but more importantly the temporary shut down of competitors’ plants in China due to the enforcement of environmental requirements has led to significant price increases of viscose fibres in 2015.
For 2015, I expect the company to generate an EBITDA of roughly EUR 300 m and net income of roughly EUR 110. After a period of large investment spending until the end of 2014, free cash flow generation in 2015 will be strong reaching roughly EUR 180 m. However, management has already indicated that capex will reaccelerate in 2016. With the incoming cash, net debt has declined to EUR 333 m. Taking into account an equity value of EUR 1,950 m the market is now valuing the company with an EV/EBITDA multiple of 7.6 times and a P/E of 17.7 times.
Looking ahead, I see a number of risks on the horizon. According to management, it is likely that most of the shut down capacity in China will re-enter the market soon. In addition, distributors are already facing problems in passing on price increases to end users. Hence, if the price differential between viscose and its substitute cotton/polyester is becoming too large, end users will switch to another commodity. With oil prices (the commodity used for the production of polyester) staying low this might be the case anyway. Moreover, it seems that polyester is getting more and more used for sports fibres or in combination with cotton due to a number of product innovations over the last years.
On a different note, a new management team has recently taken over. I believe most of the restructuring has already been done under the former management. Nevertheless, new management often has a tendency to reveal problems at the beginning of the their tenure leading to negative (short term) consequences for the stock price.
Putting this all together, I am not a buyer at the current share price. Therefore, I start selling my position today realizing a total return of 64% and an IRR of 42%.
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