Q3 was another good quarter. Sales growth in local currencies accelerated to 10%, from 5% in Q2. EBIT increased by 21% y/y but the EBIT margin was at more sustainable level than in Q2, with no more impact from temporary cost savings, according to Tikkurila. DIY demand normalised but remained at a high level. Going forward, some reversal in demand is likely but we believe that a large part of Tikkurila’s performance improvement in 2019-20 was driven by its own actions and is, therefore, more structural.
Very strong cash flow has quickly reduced net debt.
Free cash flow in 9M 20 was EUR73m, up 67% y/y and representing 12% of market cap. Net debt declined by 76% y/y to only EUR19m, which is 0.2x of LTM EBITDA. We expect Tikkurila to increase its 2020 dividend to EUR 0.80, which was the level paid in 2013-17 before the earnings challenges resulted in a dividend cut in 2018. M&A could also be possible but we believe acquisitions would not rule out dividend increases. We note that lower-than-expected net debt reduces the share’s valuation on EV/EBIT.
Estimate changes.
We increase our 2020-22 EBIT estimates by 1-2% following a strong Q3. We expect adjusted EBIT to increase by 45% to EUR67m in 2020 but decline somewhat in 2021E (-7%), mainly because we assume normalisation in Q2 21 from the all-time high EBIT in Q2 20.
Valuation.
Tikkurila’s shares have underperformed their peers and are valued at very low 2020-21E multiples. We estimate EV/EBIT 2020E of only 9.3x, which is a 47% discount to the median of Tikkurila’s paint peers and 26% below Tikkurila’s own 10Y historical average NTM multiple of 12.5x. For 2021, we estimate EV/EBIT of 9.7x, which is 34% below the peer group median. Tikkurila’s valuation has decoupled from those of its peers, even though the whole industry has experienced similar, unexpected, DIY demand trends. We maintain our 12-month fair value range of EUR16-18.
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