Balda Initiation Of Coverage
Edison | Apr 24, 2015 12:45AM ET
Rich on cash and growth prospects
Balda AG O.N. (XETRA:BAFG) is a leading international supplier of moulded plastic solutions to manufacturers of medical and technical products, counting key industry leaders as its main clients. Its buy-and-build strategy targeting advanced medical plastics is supported by its vast cash resources resulting from the sale of its mobile telephony assets in 2012. Using DCF, we value Balda at €221m/€3.76 per share, of which financial reserves comprises 87%.
Well resourced to advance its strategic agenda
The €480m sales proceeds from TPK Holding in 2013 have given Balda financial clout to grow its core medical business. It aims to broaden its geographic and customer diversity, while shifting from being a component supplier to making more advanced medical devices such as pill dispensers and syringe systems for OEMs. Having paid €283m in dividends since 2012, we believe Balda may make further special dividends, mainly if M&A deals do not meet its stringent valuation criteria.
Financial forecasts: Margin upside propels growth
Having delivered solid growth in sales and profits in H115, we see continued expansion of Balda’s margins due to improved overhead absorption, manufacturing efficiency and product mix. More stringent technical and regulatory requirements in medical plastics should support the industry’s overall profitability, in our view. During 2014-18, we forecast CAGR sales of 10% in line with the medical plastic market and a 710bp rise in the EBITDA margin to propel 52% CAGR EBITDA.
Growth, M&A and law suits affect valuation most
The main upsides to our valuati
On accretive acquisitions, further dollar strength and stronger sales growth and margin expansion than forecast. The main risks include problems with future acquisition integration, substantial costs associated with legal proceedings, mainly with former Balda managers, and the loss of a major client contract. Its two largest clients represent 35% and 15% of sales, respectively.
Valuation: The underlying business comes for free
Based on DCF, we value Balda at €221m/€3.76 per share using a 10% discount rate and 1.5% terminal growth rate comprising €193m cash and financial investments and €28m present value of future free cash flows. Accordingly, Balda’s underlying business comes for free. The likely redeployment of cash into the business may create additional value and further improve investor perception of Balda.
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