Outotec (OTE1V.HEL) has a market-leading position in the global mining equipment sector. However, the four major mining companies have announced plans to reduce total capex from $50bn in 2012 to $35bn in 2014. Outotec is addressing this by growing services (spare parts/maintenance) and investing into high growth areas such as energy and water treatment. With this comes a new operating structure comprising two business divisions (Metals, Energy & Water and Minerals Processing) feeding into three geographical regions (the Americas, EMEA, Asia-Pac). Outotec has laid the groundwork to evolve from an equipment supplier to a local partner offering solutions that cover the full life cycle of a mine site. Sales and order growth delivered in Q1 was ahead of market expectations, although margins declined y-o-y due to product mix. The stock trades at a premium to peers (2013 P/E is 13.9x) and there may be a risk to 2013 consensus earnings.
Comment on Q1 results
Q1 results were a mixed bag. Sales grew by an impressive 23% to €502.9m. However, margins declined due to higher equipment sales (operating profit grew by 14% to €35.0m). Order intake grew by 15% to €491, slightly beating expectations. The total order backlog declined slightly y-o-y to €1,939m. There has been a marked shift in miners’ capex from greenfield to brownfield sites, which management is addressing by becoming a ‘life cycle’ supplier.
Consensus estimates: Margin risk
Management has guided for sales of €2.1-2.3bn in 2013. The consensus estimate should be met or exceeded if Q1 performance is sustained. Q1 is a seasonally light quarter, but sales still came in at €502m. However, the operating margin (ex-PPA) declined to 7.0% (vs 7.5%) due to no licence fees and fewer project completions. Official guidance for an operating margin of 9.5-10.5% in FY13 may be challenging.
Valuation: A touch rich
The P/E and dividend yield for 2013 are 13.9x and 3.0% respectively, which is at a premium to the mining equipment and the industrials sector. Given the risk to 2013 consensus margins and the potential for a slowdown in mining capex, we also think there is downside risk to earnings in the near term.
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