Strong VBG TE performance stabilises group profitability

EBITA down 5-3% on growth deceleration in MCC/Edscha

8x EV/EBITA on 8% EBITA CAGR ’18-’21e

Growth deceleration kicks in earlier than expected
In the midst of trade wars, automotive and industrial weakness, and worries of an impending slowdown in truck registrations, VBG delivered flat organic growth. Sales arrived 8% below our expectations, however, mainly due to a larger organic deceleration than we anticipated in MCC. Management remains confident in continued high demand, but we believe that the double-digit organic growth seen in MCC for the last five quarters has come to an end. For H2’19, we expect c. 6% organic growth in MCC on the back of continued market share gains and penetration. VBG TE delivered considerably stronger margins than we had forecast, which kept group EBITA margins flat y-o-y despite the lower profitability in Edscha and MCC. Management is now also seeing weakness in the industrial Ringfeder division, in line with what we have seen from companies such as SKF and Sandvik. On the positive side, Ringfeder’s profitability improvement programme is progressing well.

We expect lower growth, but MCC to offset weaker trailers
We lower EBITA by c. 5% for ‘19e-‘20e on the back of a Q2 report in which EBITA arrived 13% below our expectations. Positive FX revisions result in EBITA only coming down by 3% for ’21e, however. Despite our expectations for weaker trailer demand in ’20e, we believe MCC will stabilise both growth and margins, resulting in an 8% EBITA CAGR for ’18-’21e and 6% for ’19e-’21e.

8-10% FCF yields, trading c. 10% below historical valuation
VBG has been able to deliver >100% FCF conversion for the last 20 years, on average. With its 8-10% FCF yields, we believe that the company has the ability to add c. 15% to ’19e sales through M&As, or to distribute cash flows via high dividend yields. VBG’s current EV/EBIT valuation is c. 10% below its historical 10-year valuation and our DCF scenario an
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