Bekaert: A Strong Contender in Steel Wiring for the Automotive Sector

Small Caps 0 replies 0 votes 2241 views Tags:  automotive industryBekaertearningsEBIT marginfinancial performancerevenue growthsteel wiring

Did you know that almost half of Bekaert's business is related to the automotive sector? They provide steel wire threads used in tires to strengthen them. It's an essential component in the automotive industry.

Let's dive into their recent financial performance. In 2022, Bekaert's underlying earnings were very strong. However, the reported results were not as impressive due to a non-cash impairment charge. Despite this setback, the company is optimistic about the future. They expect to increase their revenue by 3% annually until 2026 and aim to boost their EBIT margin to 9-11%.

Based on the lower end of that range, Bekaert's earnings per share (EPS) are projected to reach around 7 EUR in 2026. This demonstrates their commitment to growth and profitability.

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Now, let's take a closer look at Bekaert's performance. In 2022, they faced some challenges. Their cost of goods sold (COGS) increased at a faster pace than their revenue, resulting in a 13% decrease in gross profit. Additionally, operating expenses, such as selling expenses, went up, impacting the company's earnings before interest and taxes (EBIT).

However, it's important to note that a significant portion of these expenses were non-recurring items, which are not part of the company's regular operations. On an underlying basis, Bekaert's EBIT was approximately 459M EUR, with an EBIT margin of 8.1%. That's a pretty solid performance.

Even with the non-recurring expenses, Bekaert reported a net income of 289M EUR, including contributions from associates and joint ventures. Shareholders of Bekaert were attributed 269M EUR, resulting in an EPS of 4.78 EUR. Excluding the non-recurring expenses would have pushed the EPS closer to 6 EUR per share.

Let's shift our focus to cash flow. Bekaert's operating cash flow in 2022 was 505M EUR, which includes cash taxes paid. After adjusting for interest payments, distributions to non-controlling interests, lease payments, and other factors, the adjusted operating cash flow was 470M EUR. On an underlying and normalized basis, the incoming cash flow amounted to 514M EUR.

Considering capital expenditures of 185M EUR, Bekaert generated a net free cash flow of approximately 329M EUR, equivalent to around 6.2 EUR per share. It's worth mentioning that Bekaert is not under-investing in its assets, as their capex is nearly equal to their depreciation expenses. The strong free cash flow also helped to reduce the pension fund deficit.

Looking ahead, Bekaert's mid-term outlook is promising. Despite the economic changes in the first half of this year, the company reaffirmed its mid-term EBIT margin targets in its Q1 trading update. However, we'll have to wait for the more detailed H1 report to get a clearer picture of their performance.

Bekaert has set its targets to achieve a 3% annual revenue increase and maintain an EBIT margin of 9-11% from 2022 to 2026. Based on their 2022 revenue of 5.65B EUR, this translates to a revenue goal of 6.3B EUR in 2026, with an EBIT of 567M EUR. After deducting expenses, including interest and taxes, the net income is projected to be around 425M EUR, with an EPS of approximately 7 EUR per share.

Considering all these factors, I'm optimistic about Bekaert's prospects. While the company may face some challenges in 2023, given its cyclical nature, the stock is currently trading at an attractive valuation, around 4.5 times its EBITDA. With Bekaert's growth projections and focus on reducing net debt, the EV/EBITDA ratio is expected to decrease further. Applying a 6x EBITDA multiple, the stock could potentially trade in the mid-60 EUR range.

Personally, I don't currently hold a position in Bekaert, however, given the current market conditions and the pre-tax yield to maturity (YTM) of 3.7%, I might consider (if I had any) selling bonds and initiating a long position in the equity instead.

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