Viscofan’s Share Price Has A Revaluation Potential Of 6.5%

We are updating our target price on Spanish midcap Viscofan, with a HOLD recommendation. Although our estimates were at the low end of the company’s previous guidance, we are now updating them (revenues 2016e -2.5%, EBITDA -2.5%, Net Profit +0% vs previous forecasts) after the downward revision from the company for 2016. Viscofan is the only supplier in the world to make artificial casings for meat products in the four commercially available technologies (cellulose, collagen, fibrous and plastic).

We reach our evaluation for Viscofan via discounted cash flows, obtaining a target price of 51,2 eur/share (former TP of 57,9 eur/share). After the drop following the presentation of first half results, Viscofan’s share price now has a revaluation potential of 6.5%. We reiterate our HOLD recommendation.

Weak organic growth, solid fundamentals in the medium and long-term

We are adjusting our estimates based on weaker-than-expected organic growth, mainly affected by Latin America due to the much more unfavourable environment in Brazil. That said, LatAm still offers strong growth potential for the company in the future, as a result of the substitution of natural casings with artificial ones.

Overall, we continue to see catalysts in the medium and long-term based on the increase in the population, the improvement in eating habits and technology development.

Negative currency impact

There is still a negative currency impact, given that all the currencies Viscofan is exposed to have weakened. The company has revised its exchange rate estimates due to a more adverse-than-expected currency environment. (Usd/Eur 1,11 from 1,10 and Brl/Eur 3,87 from 4,20). Given all that, we expect a hit of -0,66 pp yr-on-yr on 2016 sales due to the exchange rate.

Solid free cash generation

Viscofan will increase its net cash in 2016e (vs 0,4x DN/EBITDA 2014 and 0x DN/EBITDA 2015), given its strong capacity for cash generation. This is despite higher than usual capex requirements due to the start up of operations at the plastics and fibrous casing factories in Cáseda, as well as the additional production line at the collagen plant in Uruguay. As a result, we don’t rule out acquisitions (or an increase in capex) in the event of interesting opportunities emerging, although always maintaining financial discipline.

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