ATON EQUITY RESEARCH. NOKIAN TYRES: Winter Freeze, a Profit Breeze
02 Nov 2012
Available for Immediate Download
We cut our target price for Nokian Tyres from EUR43.1/share to EUR38.9/share to incorporate weaker demand in the Central European market. At the same time, we continue to rate the company a BUY, and reiterate our view that Nokian Tyres presents compelling exposure to the Russian automobile market. The weak 3Q12/9M12 numbers were expected given that Nokian Tyres issued a profit warning a few weeks ago (please see our note NOKIAN TYRES: How Bad is Bad? published 17 Oct 2012). In its interim financial report published on 30 Oct the company noted that 3Q12 net revenue increased a mere 6.3% YoY (and 16% QoQ) to EUR368.0mn while operating profit contracted 10.4% YoY (-22% QoQ) to EUR85.5mn. Subdued demand in the Central European market, resulting in a suboptimal product mix, and a low average realised selling price were named among the major reasons for the poor financial performance. Our full-year 2012 and 2013/14 financial forecasts have been revised downwards to incorporate weaker demand in Central Europe; we cut our target price to EUR38.9/share from EUR43.1/share. However, we continue to argue that Nokian Tyres presents an interesting opportunity to capitalise on the Russian auto market which, in stark contrast to the EU, remains very much alive. The EU auto market reduced to a shadow of its former self. According to the European Automobile Manufacturers’ Association (ACEA) new EU passenger car registrations declined in Sep 2012 for the 12th consecutive month and 9M12 auto sales fell 7.6% YoY to 9.4mn. Germany, the EU’s biggest market, recorded a 1.8% YoY dip in new auto sales in 9M12 (2.4mn cars). Russia is a stark contrast. New car sales in Russia rose 14% YoY to 2.2mn in 9M12, making it the second-largest and fastest growing European car market after Germany, according to the Association of European Businesses in Russia. Additional potential in sight. During the results conference call Nokian Tyres’ CEO Kim Gran said that the potential dividend pay-out could be around 50% going forward. Additionally, the company may consider paying a special dividend if its cash generating ability results in a cash pile, due to the lack of investment opportunities. Winter has come. With winter temperatures below zero for almost five months in Russia, winter tyres tend to be regarded as a ‘must-have’ in this country. And while winter’s onset is unpleasant, it is also inevitable and drivers must be as well prepared as possible. The snow has arrived in Nokian’s core markets (with the Moscow region in particular being hit by a severe snowstorm last weekend), and the seasonal increase in demand is already in the air, suggesting rather strong 4Q sales. A consumer view. From the standpoint of consumers with many years of winter driving experience in Russia, we note that Nokian Tyres’ marketing department has done well this year, as in previous years. The company’s flagship Hakkapeliitta winter tyres (a premium segment where Nokian’s market share is close to 40% in Russia) are featured in many magazines, billboards and TV ads. What is more interesting is that in Moscow, we have noticed them not only on premium car wheels but also on sub-premium brands such as Toyota, Ford and Nissan. To view the full report, please see the attached pdf.