PEGAS NONWOVENS S.A. Team H January 28, 2015
Investment Highlights 766 CZK BUY TARGET PRICE Recommendation Non-cyclical and growing industry 19% Market position and solid customer base upside Good growth prospects 642 CZK December 18, 2014 Sound financials Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Business Description
Introduction Revenue Breakdown by Product Leading nonwoven textile producer in the (% of sales 2013) Europe, Middle East and Africa market Hygiene sector: baby diapers, feminine and adult incontinence products Market Profile (ticker PGSNsp.PR) Closing price 18/12/2014 (CZK) 642 52-week price range (CZK) 588.50 – 659.80 Average daily volume 6,191 As % of shares outstanding 0.0671% Hygiene Commodity Free float 100% Hygiene – Technologically Advanced Market capitalization (CZK mil) 5,999.110 Non-hygiene Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Business Description Annual revenue (EUR thousand) 250000 200000 150000 100000 50000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1992 1998 2001 2007 2013 New production lines timeline 1996 2000 2011 2004 Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Industry Overview & Competitive Positioning
Industry traits Porter‘s Five Forces Model Non-cyclicality Threat of New Entrants Growth potential Threat of Bargaining Substitute Power of Products Suppliers High barriers to entry Low threat of substitutes Bargaining Competitive Power of Rivalry in the Customers Industry Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Competitive Advantage Investment in Research & Development (EUR thousands) 5,000 4,000 Technologically advanced, 3,000 unique processes 2,000 1,000 0 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Superior quality Electricity Staff costs 5% 5% Depreciation 7% Vertical integration of R&D Others 6.5 Polymers % 75% R&D 1.5% Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Competitive Advantage Changing revenue composition as a basis for growth Modernization of production lines 350,000 300,000 Location of 250,000 production sites 200,000 150,000 100,000 50,000 0 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Standard textiles for hygiene products Light-weight + bico materials for hygiene Non-hygiene products Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Costs and Customers in the Industry Procter & Gamble partnership Polymer granules as the main epense Recognition awards Multi-year contract on Egyptian production Mutual dependency Strong relations with key large customers Others 22% Procter & Gamble 45% Cost composition (2013) Other 4 largest customers Share of sales by customer (2013) 33% Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Valuation
Discounted Cash Flow Valuation Key Assumptions Key drivers Growth in sales of special materials in hygiene Increasing revenue per ton (high-tech and ultra light-weight) 3.5 350,000 3.0 300,000 250,000 2.5 200,000 2.0 150,000 1.5 100,000 1.0 50,000 0 0.5 2012A 2013A 2014E 2015E 2016E 2017E 2018E 0.0 Sales of special hygiene Sales of standard hygiene 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Sales of non-hygiene Revenue per ton (EUR thousands) Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Discounted Cash Flow Valuation 747 CZK Components of WACC One-year target price Risk-free rate 4% Market risk premium 6.18% Capital expenditures stabilization Beta 0.65 vs Revenue growth 45,000 25% Error term 0.06 40,000 20% 35,000 15% Cost of equity 13.99% 30,000 10% 25,000 5% Cost of debt 3.24% 20,000 0% 15,000 -5% Corporate tax rate 19% 10,000 -10% 5,000 -15% WACC 10.04% 0 -20% Capital expenditures (EUR thousand) Revenue growth Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Multiples Valuation Price/Book Price/Earnings EV/EBITDA value 13.2 9.0 1.85 890 CZK 778 CZK 764 CZK Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Target Price Price/Book EV/EBITDA value Discounted Price/Earnings Cash Flow 766 CZK One-year target price 19% upside Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Financial Performance
Financial Performance EUR/CZK exchange rate Strong forecasted revenue growth 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 January 28, 2014 – January 27, 2015 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E EBITDA margin 21.7% 20.3% 19.4% 20.5% 19.6% 18.1% 16.6% 15.5% Net profit margin 8.4% 11.1% 0.7% 9.6% 9.6% 9.0% 8.4% 7.9% Operating profit 16.2% 14.1% 12.8% 14.7% 14.6% 13.5% 12.5% 11.6% margin Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Financial Performance Decrease in long term debt levels Progressive dividend policy 165,000 450% 2.50 400% 160,000 2.00 350% 155,000 300% 150,000 1.50 250% 145,000 200% 1.00 140,000 150% 135,000 100% 0.50 130,000 50% 125,000 0% 0.00 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Long term debt Debt as % of EBITDA Gross dividend (EUR/share) Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Risk Analysis
Risk matrix Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Key Customers and Costs 100% • all customers Importance of the large 78% • 5 customers corporate customers 45% • 1 customer Composition of customers as % of sales (2013) Sensitivity of the target price to energy and staff costs Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Expansion to Egypt: Upside Risk 827 CZK ZK UPSIDE TARGET PRICE Upside scenario: annual revenue (EUR thousand) 766 CZ CZK TARGET PRICE 29% upside 19% upside 642 CZK December 18, 2014 Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Conclusion
Conclusion Strong Competitive position performance location of production sites, financial performance, constant growth, dividend innovation and quality, customer relations payouts Industry Expansion traits in Egypt non-cyclicality and BUY growth Company Industry Financial Risks & Valuation Conclusion Overview Positioning Performance Opportunities
Thank you for your attention! Team H January 28, 2015
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