23 August 2010
Prepared as an exercise in small-cap equity research marketing;
Readily available public sources only, no management interviews or channel checks;
This is not a solicitation or recommendation to buy or sell securities
Royal Ten Cate: Faster, cheaper and better than the market thinks
1. Faster, cheaper and better
than the market thinks
An investment case for Royal Ten Cate, Gert Steens, 23 august 2010
OBLONSKI 1
2. The original animated version of this presentation is
available as a HD video on YouTube
http://bit.ly/OblonskiTenCateAugust2010
Here on Slideshare, this presentation will continue as a handout PDF
3. Disclosure & Disclaimer
• Prepared as an exercise in small-cap equity
research marketing
• One week preparation time without pre-existing
knowledge of the company or its markets
• Readily available public sources only, no
management interviews or channel checks
• This is not a solicitation or recommendation to buy or sell securities
2
6. Event, Impact, Valuation, Action
Event: Interim Results Presentation 26 aug ’10, not much news as earnings
have been pre-released a month ago. Do expect meat on the bone
regarding order books.
Impact: Market belief in medium-term (cyclical) growth and management
skills
Valuation: Add the “cyclical spice” to today’s DCF valuation (which
appears based on no further acceleration of top and bottom line), and the
stock is up 40%. KTC would be trading in line with its peers at that level.
Note: That would still leave a further (medium-term) ride of 25% (DCF)
on the table for those who trust the underlying trend growth in the core
divisions!
Action: ...
5
7. Portfolio Pruning
;.1<.=>.#;126>6?#@!!A@$&#
$!!"# $!!"#
,!"#
+!"# 89:-1#
,!"#
+!"#
From a plastics and textile conglomerate
to a specialty textiles group
"#./#01.23#4-5-62-7#
!"#$%&'()*)
*!"# *!"#
!+,$$)
)!"# )!"#
(!"# (!"#
Risk of commoditisation replaced by
-./)0"123"$)*)
opportunity of innovation
'!"# '!"#
&!"# &!"# 4#56)
%!"# %!"#
High-end customer intimacy
$!"# $!"#
7"&&8,)
!"# !"#
Currency mismatch repaired
!#
#
%! #
%! #
%! #
%! #
-#
$#
%#
&#
'#
(#
)#
*#
!+
!,
-
-
-
$!
$$
$%
$&
!
!
!
!
!
!
!
!
%!
%!
%!
%!
%!
%!
%!
%!
%!
%!
Source: Company Annual Reports, Oblonski estimates Manufacturing outsourced or aligned with end
$!!"# user
,!"# 8349#7:#
+!"#
;7.<=#
Product development >
Market development >
*!"#
)!"# >7.9?#
@A3./B6#
(!"#
Corporate development
'!"#
&!"# 8349#7:# Single core is the combination of materials
CD.7E3#
%!"# knowledge, textile technology and chemical
$!"# processing
>F#
!"# No more conglomerate cash-flow wastage and
%!!$#-./0/1# %!!$# %!!,#-./0/1# %!!,#
234516571# 234516571# value absorption
Source: Company Annual Reports 6
8. Business Model as a Source of Value
VALUE
PROPOSITION
KEY ACTIVITIES CLIENT
Special purpose
Product dev’t RELATIONSHIP
materials with
Market dev’t Development
strict and narrow
Production partner
specifications
Platform
Differentiation
management
NWC management
KEY PARTNERS CUSTOMER
Norm-setting SEGMENTS
bodies Military
Science Goverment
Suppliers Infra Contractor
Manufacturers Sports Club
Assemblers Aerospace
Equipment makers Car makers
COST KEY RESOURCES CHANNEL REVENUE STREAM
STRUCTURE Scientific network Direct, Payment for
Value-driven End-user network Assembler, physical delivery
Raw Materials Working Capital Manufacturer Lumpy project
Outsourcing Plant&Equipment business
Raw Materials Raw Mat prices
Textile technology passed on with 6-
Chemicals month lag
processing tech
Product managers
7
9. Defense against competitive forces
Process
Technology
Product
End-us
Differentiation er
intimac
Materials y
Science
8
10. Growth = Trend + Cycle
8*0"'!"#"$%"&'9,/%-)2':*0",-&/'-$3';<<=;><"'?0"$3'
Singling out the two core divisions, and
stripping out currency effects
,*$&/-$/',%00"$,1"&2'-34%&/"3'5*0'$"/'-,6%1&17*$&'
and consolidation changes, reveals
!"#"$%"&''()*+'&,-)".'
strong underlying trends.
93#'?"@7)"&'A'8*BC'(/0"$3'DEFGH'CF-F.' Stripping out the trend reveals
I"*&J$/K'A'I0-&&'(/0"$3'DEF<H'CF-F.'
Source: Company Annual Reports, Oblonski estimates
obvious cyclicality.
!"#$
%##!$
%##($
%#!#,$
%#!!,$
%#!%,$
%###$
%##%$
%##&$
%##'$
%##)$
%##*$
%##"$
%##+$
-8<?3@A9&B7AC&6789:&;8<8928=&D8<84& Advanced Textiles & Composites is late-cycle, as
*+#%&
*)(%&
*"($#%&
*")$(%&
expected, on a 7% trend.
*)#%& *"#$#%&
;8<8928=>&&/0123456789:&!&"&
*"(%& *'$(%& ,-.&/0123456789:&!&"& Geosynthetics & Grass is earlier-cycle than
*"#%&
*(%&
*($#%&
*)$(%&
expected, on a 6% trend.
*#%& *#$#%&
2011E
!"""#
!""$#
!""!#
!""%#
!""&#
!""'#
!""(#
!"")#
!""*#
!""+#
!"$",#
!"$$,#
!"$!,#
!"$%,#
!(%& !)$(%&
REVEN
!"#%& !($#%&
10-12% UES AR
!"(%&
Source: Company Annual Reports, Oblonski estimates
!'$(%&
BELOW E STILL
!)#%& !"#$#%&
/6EF&GDHI$&1789:&*JKL%&MK3KN& ,E,&GDHI$&1789:&*JK#%&MK3KN& TREND
OPF-&,-.&G;HI$&1789:&*QK#%&MK3KN& 9
11. Advanced Textiles & Composites
*!!# '!"# Advanced Textiles
)!!# &$"#
$!!# • Product: protective fabrics and outdoor fabrics
+,-#./00/12#
&!"#
(!!# • Customers: military (uniforms, esp USA), professional wear, tent
%$"# makers
'!!#
• Competitors:
%!"#
&!!# • Recent: US army upheld order flow b/o change of camo pattern,
%!!# !$"# Norwegian navy orders uniforms from KTC materials
!# !!"# • Market Development, brand management
• Product Development: applied Xennia inkjet technology
!" #
!" #
!" #
!" #
!" #
!" #
!" #
!" #
!" #
!" +#
!" ,#
!" ,#
!" ,#
,#
""
"$
"!
"%
"&
"'
"(
")
"*
$"
$$
$!
$%
"
!"
Source: Company Annual Reports, Oblonski estimates
-3432536# +789:#;-3432536# -<=:#
Composites
• Product: fiber-based armour, space & aerospace materials
• Customers: military vehicle OEMs, Airbus, Boeing,
• Competitors: Hexcel, Cytec
• Recent: Long-term supply agreement with Boeing. surprising
misjudgement regarding OEM to be chosen for US army vehicle order
• Product Development
Source: Oblonski estimates
10
12. Geosynthetics & Grass
*!!# '!"# Geosynthetics
)!!# &$"#
• Product: technical fabrics and non-wovens
$!!#
&!"# • Customers: civil engineering and construction industry, agri business
./0#1233245#
(!!# • Competitors: Low&Bonar (UK), Huesker (D), Colbond (NL)
%$"#
'!!# • Product development key
%!"#
&!!#
%!!# !$"#
!# !!"#
&!!!#
&!!%#
&!!&#
&!!'#
&!!(#
&!!$#
&!!)#
&!!*#
&!!+#
&!!,#
&!%!-#
&!%%-#
&!%&-#
&!%'-#
Source: Company Annual Reports, Oblonski estimates
0-6-57-8# .9:;<#=0-6-57-8# 0>?<#
Grass
• Product: synthetic turf
• Customers: sports facilities
• Competitors: Low&Bonar, KTC has est 60-70% global market share
• Market development, cost containment, NWC management
• Recent: downstream expansion for quality control
Source: Oblonski estimates
11
13. Printing, Components, Holding Costs
'($& Printing (Xennia, 79% owned)
'#$&
• Product: inkjet systems technology, software and materials for
#($& industrial applications
!"#$%&''&()$
)##& ##$& • Customers: textile sector, medical, food, ceramics
!#($%&
• Competitors: ?
• Product and market development
!'#$%&
• Recent: multitude of agreements with OEMs
!'($%&
#& !"#$%& Components (Enbi)
"###&
"##'&
"##"&
"##*&
"##)&
"##(&
"##+&
"##,&
"##-&
"##.&
"#'#/&
"#''/&
"#'"/&
"#'*/&
• Product: rubber and foam rollers for printers, copiers, ATMs
Source: Company Annual Reports, Oblonski estimates
0/1/23/4& 56789&:0/1/23/4& 0;<9&
• Customers: the well-known brands
• Competitors: local-for-local
• Effciency
Source: Oblonski estimates
12
14. Financial Model
&!!)% ("!$%
2/31%:;<%=:>?1:@%5A>@BC/<%?;%)%BD%EFBG>%H/I/;G/J%
.!)%
-!)% '"#$%
,!)%
0/1%2/31%4%567829%%
+!)% '"!$%
#!)%
*!)% &"#$%
(!)%
'!)% &"!$%
&!)%
!)% !"#$%
'!!(% '!!*% '!!#% '!!+% '!!,% '!!-% '!!.% '!&!/% '!&&/% '!&'/% '!&(/%
8:;K?3@/%L?$/<%9JJ/1J%% 0/1%MBFN?;K%=:>% 7;1:;K?3@/%L?$/<%9JJ/1J%
0/1%2/31%)%H/I/;G/J%OPQRS% 0/1%2/31%4%567829%OHQRS%
Source: Company Annual Reports, Oblonski estimates
• late-cycle return to trend-2% (G&G) and trend-5% (AT&C) by 2013e
• margin expansion 50/50 cost and mix effects
• base EBITA margin 2012e-2013e 10,7%, pre-tax ROCE 23% (excl goodwill)
• EBITA margin 2011e higher than 2008
• EPS 2011e>2008, !2,23 c 7% above consensus
• growth absorbs most available cash flow
• capex>depreciation from 2012e
13
19. News to watch for
• Ten Cate order book, esp in Composites
• Ten Cate client roster, esp in Advanced Textiles
• Ten Cate Net Working Capital
• Ten Cate acquisition & capex spending
• US defense spending
• Civil engineering budgets, government support
• Build rate Boeing 787 Dreamliner and Airbus A380
• Polypropylene, polyethylene, aramid, carbon fiber prices
! OECD general cyclical recovery
18