Bekaert: Cyclical But Trading Too Cheap At A 13% Free Cash Flow Yield (OTCMKTS:BEKAY)

Introduction

It has been 4 years since I final mentioned Bekaert (OTCPK:BEKSF) (OTCPK:BEKAY) and again in 2019 I argued that Bekaert was value taking a look at, however I wasn’t too certain concerning the firm’s capacity to generate sturdy free money flows which ought to permit the Belgian firm to give attention to decreasing its web debt. Just some quarters after that article was revealed, COVID hit and Bekaert positively wasn’t resistant to the financial shock created by the worldwide well being disaster. However it seems like Bekaert dealt with every thing nicely and has come out of the COVID pandemic as a stronger firm with extra strong money flows and a stronger steadiness sheet. And whereas it took some time, the inventory is now buying and selling greater than 100% increased than the place it was once I revealed a ‘purchase’ score in a 2018 article.

Bekaert has its main itemizing on Euronext Brussels the place it’s trading with BEKB as its ticker symbol. The typical quantity in Brussels is 42,000 shares per day which represents a financial worth of roughly 2M EUR. There are presently roughly 53M shares excellent (together with the influence of the recent share buyback program), leading to a market capitalization of roughly 2.4B EUR.

2022 was strong, however I will be on the lookout for affirmation in 2023

As a reminder, Bekaert is a big producer of metal wire with 75 manufacturing amenities. 23 of these amenities are in Europe whereas Bekaert additionally has a robust publicity in Asia and South America, as you’ll be able to see beneath.

Bekaert cut up up its actions in 4 enterprise items of which the ‘rubber reinforcement’ and ‘metal wire options’ are an important items as they characterize about 2.3B EUR in consolidated income which represented virtually 2/3^rd of all the consolidated income in 2022.

The 2 remaining enterprise items are the specialty enterprise unit (which manufactures merchandise to strengthen concrete, masonry and plaster in addition to rubber hoses and belts) and the Bridon-Bekaert Ropes Group which produces metal wire ropes and cords. The excessive publicity to the rubber reinforcement sector means Bekaert’s efficiency is correlated to the tire market as considered one of its extra vital suppliers.

Whereas Bekaert reported a strong revenue growth in 2022, sadly its COGS elevated at a quicker tempo which finally resulted in a 13% lower of the gross revenue. And as you’ll be able to see beneath, sadly the opposite working bills additionally elevated as promoting bills jumped by about 10% whereas the executive bills decreased by simply 3%. Because the ‘different working income’ (resulting from a decrease restructuring revenue versus 2021, when an asset was offered) additionally decreased, the EBIT dropped to 366M EUR.

Sounds fairly dangerous however be mindful there have been virtually 100M EUR in non-recurring gadgets included within the working bills and on an underlying foundation, the EBIT was roughly 459M EUR representing an EBIT margin of 8.1%. I’ve to commend Bekaert for being very clear in relation to the non-recurring gadgets as the corporate revealed a really detailed desk with all the main points. As you’ll be able to see beneath, about 55M EUR was associated to a non-cash impairment cost whereas about 30M EUR of the non-recurring gadgets was included within the COGS.

And regardless of these 92.8M EUR in non-recurring gadgets, the reported web revenue was nonetheless a really first rate 289M EUR (together with a 54M EUR contribution from the outcomes of associates and joint ventures) of which 269M EUR was attributable to the shareholders of Bekaert. This represented an EPS of 4.78 EUR based mostly on the common share depend of 56M EUR all through 2022. Excluding the non-recurring bills would have added 1-1.25 EUR per share to the after-tax end result which might have are available in shut to six EUR per share.

That is a fairly good end result and as a considerable portion of the non-recurring gadgets gave the impression to be a non-cash cost, I used to be anticipating a robust web money circulation end result from Bekaert. Trying on the money circulation assertion, the working money circulation was 505M EUR and this included 117M EUR in money taxes paid though solely 81M EUR was owed based mostly on the 2022 end result. We should always nevertheless additionally deduct the 32.5M EUR in web curiosity funds, the 18.5M EUR in distributions to non-controlling pursuits and 20M EUR in lease funds (which is included within the reimbursement of interest-bearing debt). On an adjusted foundation, the working money circulation was 470M EUR. Bekaert additionally obtained a 68M EUR dividend from investees however I elect to make use of the 54M EUR in web attributable revenue from these associates and joint ventures. Because of this on an underlying and normalized foundation, the incoming money circulation was 514M EUR.

The entire capex was 185M EUR, which leads to a web free money circulation results of roughly 329M EUR or roughly 6.2 EUR per share. And as Bekaert spent about 205M EUR on its capex + lease funds versus the full depreciation and amortization bills of 203M EUR, the sturdy free money circulation doesn’t imply Bekaert is ‘under-investing’ in its property as its capex quantity is sort of equal to its depreciation bills. Additionally vital: the free money circulation end result consists of about 28M EUR in money funds to cowl worker profit obligations (which helps to cut back the pension fund deficit).

In fact that was 2022 and the financial panorama has positively modified within the first six months of this yr and that is why it was vital to see the company’s Q1 trading update. And whereas the corporate’s income decreased within the first quarter, it reconfirmed its mid-term EBIT margin targets. Sadly, the Q1 buying and selling replace didn’t embody any detailed monetary outcomes, however as Bekaert will launch its extra detailed H1 report throughout the subsequent few weeks, we’ll know extra then.

As a reminder, Bekaert has set its 2022-2026 targets to generate a 3% annual income improve and to take care of an EBIT margin of 9/11% all through that 5 yr interval. If I’d now apply the decrease finish of that vary to the 2022 income of 5.65B EUR, the income ought to attain 6.3B EUR in 2026 and making use of a 9% EBIT margin ought to lead to a complete EBIT of 567M EUR. After deducting 40M EUR in curiosity bills (I count on the curiosity bills to extend by 25% resulting from increased rates of interest, partially offset by a decrease gross debt and web debt degree) and making use of a mean tax fee of 28%, the online revenue could be 379M EUR earlier than, and about 425M EUR after incorporating the contribution from associates and joint ventures. Assuming a 40M EUR web revenue attributable to non-controlling pursuits (that is only a guesstimate at this level however it’s twice the attributable revenue from 2022), the online revenue attributable to Bekaert’s shareholders could be 385M EUR for an EPS of round 7 EUR per share (topic to an acceleration of the share buyback packages which may additional scale back the share depend and thus improve the per-share efficiency).

Funding thesis

I’m inspired by Bekaert’s mid-term outlook, however I’m not certain what to think about the Q2 efficiency as Bekaert undoubtedly should really feel the influence of a slowdown of the world economic system. So though the corporate sounds upbeat, I believe I will should set my expectations a bit decrease for this yr and solely count on extra development from subsequent yr on (if the recession would not hit Bekaert too laborious). Thankfully the steadiness sheet stays sturdy with 728M EUR in money and 1.16B EUR in gross debt (excluding the 77M EUR lease liabilities). This implies the debt ratio is presently lower than 0.7x the adjusted EBITDA and because the present YTM for the 4 yr bonds is simply 3.70%, the market clearly is not frightened about Bekaert’s monetary energy.

I presently don’t have any place in Bekaert however I personal a few of its bonds (which appeared like a good suggestion on the time they had been issued in 2020 when a 2.4% YTM was a great lead to a zero rate of interest atmosphere). I could nevertheless promote the bonds and provoke an extended place within the fairness as a (pre-tax) YTM of three.7% isn’t very interesting on this market. And whereas I acknowledge Bekaert is a cyclical firm and whereas I most likely should not count on an excessive amount of from the corporate in 2023, the inventory is presently buying and selling at simply round 4.5 occasions its EBITDA and, given Bekaert’s personal EBIT development projections and talent to retain free money circulation to cut back its web debt, the EV/EBITDA ratio will proceed to lower on the present share worth. Making use of a 6x EBITDA a number of based mostly on a flat efficiency in 2023, Bekaert needs to be buying and selling within the mid-60 EUR vary.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please pay attention to the dangers related to these shares.