German industrials spotlight Industrial machinery

15 May 2013 . Industrial machinery stocks are attracting EPS upgrades.

. Export growth and falling metal prices are positive for earnings. Analysts Graeme Kyle +44 (0)20 3077 5700 . We highlight three that may interest investors. Roger Johnston +44 (0)20 3077 5722 Grinding on [email protected] Click here to access industrials research We find it interesting that several industrial machinery stocks appear at the top of our rising revisions screen this month. Earnings in this sector are sensitive to the economic cycle, which appears at odds with weak macroeconomic data released in MDAX Industrials Index recent weeks. In particular, German GDP fell by -0.6% in Q412 and the Ifo business 210 expectations survey fell to 101.6 in April (vs 103.6 in March). In addition, GDP 190 170 growth in China slowed to +7.7% year-on-year in Q1 vs market expectations of 150 +8%. We believe there are other, more specific, factors at play including the 130 110 continued success of German global exports and the potential for gross margins 90 across the sector to expand as metal prices decline. On a wider scale, central 70 continue to provide ongoing liquidity and maintain interest rates at low levels; 50 Nov/09 Nov/10 Nov/11 Nov/12 Nov/08 this encourages capital flow into cheaper, riskier assets such as industrial May/08 May/09 May/10 May/11 May/12 May/13 machinery stocks. We identify three companies in this sector that screen well and Ifo Business Expectations should attract investors; Koenig & Bauer, KSB and Schaltbau. Koenig & Bauer is a we have previously highlighted and is one of only three stocks to make 115 110 the top 20 in both our value and momentum screens. 105 100 Koenig & Bauer: Value rank four; momentum rank 11 95 90 Koenig & Bauer’s core business is printing presses. This stock, highlighted as a 85 value opportunity in our March edition, is even more interesting now it is attracting 80 2013 EPS upgrades. Since we last commented on the company, on 6 March, the 75 Jul/09 Apr/08 Oct/10 Apr/13 Jan/12 Jun/12 Mar/11 Feb/09 Dec/09 Nov/12 Sep/08 Aug/11 stock has risen by 10% despite management postponing its official 2013 guidance. May/10

This is a deep value stock (P/BV=0.6x), which may have already factored in a lot of CRB Metals Index (3 years) negative newsflow. 1,200 KSB: Net gearing -15%; value rank 10 KSB produces pumps and valves, mainly for the energy and shipbuilding industries. 1,000 KSB has a decent operating track record with a five-year average ROE of 15.2%. The stock looks good value on various multiples including a free cash flow yield of 800 6.3% (using a five-year average FCF) and a 2013 P/E and dividend yield of 9.2x and 3.2% respectively (using Bloomberg consensus forecasts). 600 Feb/12 Feb/13 Nov/11 Nov/12 Aug/11 Aug/12 May/11 May/12 Schaltbau: 2013 consensus EPS +10% over one month Source: Deutsche Bundesbank Schaltbau produces electromechanical components principally for railways and rolling stock. At the Q1 stage management cited strong organic growth in and the Americas and raised guidance for 2013 sales and EBIT to €390m and €35.9m respectively. On these numbers, 2013 EV/Sales = 0.75x and 2013 EV/EBIT = 8.1x, which look fair. Further upgrades are required to drive the shares higher.

Exhibit 1: Overlooked and undervalued Stock name Sub-sector Market cap Quality Value Rank (€m) Net gearing EBIT margin* P/BV EV/ % % EBITDA KOENIG & BAUER Industrial machinery 296 (27) 1.3 0.6 2.0 1 STEICO SE Building products 54 (4) 5.1 0.7 3.0 2 SALZGITTER AG Steel 1,801 (7) 0.0 0.4 4.1 3 NORDWEST HANDEL Trading companies & distributors 43 (51) 0.6 0.9 1.9 4 EUROKAI KGAA Marine ports & services 290 28 10.5 0.8 4.0 5 JOYOU AG Building products 261 (6) 16.8 0.8 4.2 6 NORDDEUTSCHE STE Building products 23 68 4.4 0.7 4.6 7 YOUBISHENG GREEN Paper packaging 50 (51) 23.4 1.1 1.1 8 BREMER LAGERHAUS Marine ports & services 222 120 5.8 0.6 5.1 9 KSB AG Industrial machinery 796 (15) 7.0 1.0 3.7 10 AG Diversified metals & mining 2,177 3 4.2 1.0 4.0 11 RHEINMETALL AG Industrial conglomerates 1,445 7 6.9 1.0 3.5 12 GREIFFENBERGER Industrial machinery 27 131 2.1 0.8 4.2 13 DEUTZ AG Industrial machinery 505 10 4.5 1.1 4.0 14 AG Specialty chemicals 2,811 29 12.3 1.0 4.1 15 AG Trucking 797 144 10.9 1.3 3.6 16 HOMAG GROUP AG Industrial machinery 221 (24) 2.9 1.4 3.2 17 TELEGATE AG Diversified support services 154 (93) 20.7 1.5 1.0 18 NABALTEC Specialty chemicals 52 105 3.8 1.0 5.5 19 BAUER AG & engineering 364 119 5.3 0.8 6.4 20 Source: Bloomberg. Note: *Three-year historical average. Data as at 30 April 2013.

Exhibit 2: Rising revisions Stock name Sub-sector Market Performance* % EPS revisions % Rank cap (€m) 1m 3m 12m 1m 3m 12m SFC ENERGY AG-BR Electrical components & equipment 38 (3.0) (16.7) 3.6 28.6 400.0 175.0 1 BAYWA AG-VINK. Trading companies & distributors 1,305 2.4 2.5 37.6 2.9 9.1 42.2 2 MBB INDUSTRIES Industrial conglomerates 125 4.2 (4.3) 163.3 1.0 9.5 80.0 3 HOMAG GROUP AG Industrial machinery 221 (2.1) 20.7 37.6 1.6 19.3 3.6 4 KUKA AG Industrial machinery 1,151 (0.2) 21.2 90.7 1.4 5.9 40.8 5 R STAHL AG Industrial machinery 226 17.4 20.9 33.5 1.3 8.3 11.4 6 DUERR AG Industrial machinery 1,493 3.9 19.5 83.6 0.8 10.2 39.7 7 SCHALTBAU HOLD Industrial machinery 230 17.8 7.1 42.0 9.9 6.1 2.1 8 AG Industrial machinery 1,674 (3.5) 13.8 26.9 1.5 4.8 (0.1) 9 OHB AG Aerospace & defence 282 (3.8) 6.0 28.4 1.0 1.1 10.6 10 KOENIG & BAUER Industrial machinery 296 (1.2) 26.0 44.2 12.2 33.4 (12.6) 11 SE Diversified support services 3,581 (0.2) 8.1 21.4 1.1 3.8 (0.4) 12 JOYOU AG Building products 261 (8.6) 13.2 25.3 0.9 0.9 0.3 13 CENTROTEC SUSTAI Building products 271 6.5 (1.0) 28.3 0.0 3.1 3.2 14 BERTRANDT AG Research & consulting services 880 (5.0) 8.9 60.5 0.0 0.8 5.1 15 HERMLE BERTH-PFD Industrial machinery 674 1.3 27.8 59.1 0.0 0.0 16.1 15 EHLEBRACHT AG Building products 37 (1.0) 5.5 24.4 4.8 4.8 (12.0) 17 WASHTEC AG Industrial machinery 149 0.9 18.2 16.3 0.0 11.1 (7.9) 18 Industrial machinery 869 10.7 28.0 40.0 0.6 3.6 (4.2) 19 BRENNTAG AG Trading companies & distributors 6,601 4.9 20.9 39.7 0.1 2.5 (1.9) 20 Source: Bloomberg. Note: *Total return. Data as at 30 April 2013.

German industrials spotlight | 15 May 2013 2

Appendix 1: Screening methodology

Universe We include all non-DAX30 stocks classified under GICS Level 1 Industrials or GICS Level 1 Materials, subject to a minimum market cap of €10m. This provides a universe of 140 stocks, some of which are excluded from the analysis due to lack of data.

Exhibit 1: Overlooked and undervalued Our first screen looks for financially sound companies trading on low multiple of assets (P/BV) and low multiple of core profits (EV/EBITDA). The universe of stocks is ranked first by P/BV and secondly by EV/EBITDA. An equal weighted composite rank is then computed.

This screen provides us with a list of top 20 ‘value’ stocks which may have been neglected by investors.

This may be due to structural reasons such as low free float or poor liquidity. It may also indicate a business that is in serious operational or financial difficulty. Alternatively, a low rating may simply be a result of cyclical pressures. Empirical evidence suggests that stock-markets de-rate industrial stocks too aggressively when earnings are at or are close to cyclical troughs.

Exhibit 2: Rising revisions

Generally speaking, stock-markets struggle to value companies with cyclical earnings streams.

Analysts struggle to model operating leverage, particularly in asset intensive companies such as those found in the Industrials sector. As a result, consensus earnings may be upgraded continually as business conditions improve. Empirical evidence suggests this alone can drive positive share price performance.

Our second screen looks for companies with positive earnings revisions. The stock universe is ranked by percentage change to 2013 consensus earnings over one-month, three-months, and 12- months respectively. An equal weighted composite rank is then computed.

This screen provides us with a list of top 20 ‘momentum’ stocks which have the potential to both produce positive earnings surprises and attract a higher stock-market rating, particularly if valuation is supportive.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Berlin, Sydney and Wellington. Edison is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is not regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com. DISCLAIMEREDISON INVESTMENT RESEARCH LIMITED CopyrightEdison Investment 2013 Edison Research Investment Limited Research (Edison) Limited. is a leading All rights international reserved. investment This report research has been company. prepared Edison and issued and its by subsidiaries Edison for publication(Edison Group) globally. have All won information industry recognition,used in the publicationwith awards of both this reportin has andbeen compiled frominternationally. publicly available The team sources of 110 that includes are believed over 60 to analysts be reliable, supported however by awe department do not guarantee of supervisory the accuracy analysts, or completeness editors and assistants. of this report. Edison Opinions writes containedon more than in this 400 report companies represent across those every of the sector research and works department directly of with Edisoncorporates, at the fund time managers, of publication. investment The securities banks, brokers described and in other the Investment advisers. Edison’s Research research may not is be read eligible by institutional for sale in investors,all jurisdictions alternative or to certainfunds and categories wealth managersof investors. in moreThis research than 100 is countries. issued in Edison,Australi afounded by Edison in 2003, Aus andhas officesany access in London, to it, is New intended York, only Sydney for "wholesale and Wellington. clients" Edison within is the authorised meaning andof the regulated Australian by theCorporations United Kingdom’s Act. The FinancialInvestment Services Research Authority is distributed (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). in the by Edison US to major US institutional Edison investorsInvestment only. Research Edison (NZ) US is Limited not registered (Edison asNZ) an is investment the New Zealand adviser subsidiary with the Securities of Edison. and Edison Exchange NZ is registeredCommission. on theEdison New US Zealand relies uponFinancial the "publish Serviceers' Providers exclusion" Register from (FSPthe definition number of247505) investment and isadviser registered under to Section 202(a)(11)provide wholesale of the Investment and/or generic Advisers financial Act ofadviser 1940 andservices corre only.sponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readersDISCLAIMER may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as,Copyright personalised 2013 Edison advice. Invest Also,ment our website Research and Limited. the information All rights provided reserved. by This us shouldreport hasnot bebeen construed prepared by and any issued subscriber by Edison or prospecti for publicationve subscriber globally. as Edison’sAll information solicitation used toin effect,the publication or attempt of tothis effect, report any has transaction been compiled in a security.from publicly The availableresearch sourcesin this document that are believedis intended to befor reliable,New Zealand however resident we do professional not guarantee financial the accuracy advisers or or completeness brokers (for use of this in their report. roles Opinions as financial contained advise inrs this or brokers)report represent and habitual those investors of the research who are department “wholesale of clients”Edison atfor the the time purpose of publication. of the Financial The research Advisers in Act this 2008 document (FAA) is (as intended described for Newin sections Zealand 5(c) resident (1)(a), professional(b) and (c) of financial the FAA). advisers It is not or intended brokers for (for use clients.in their rolesThis isas not financial a solicitation advisers or orinducement brokers) and to buy, habitual sell, investorssubscribe, orwho underwrite are “wholesale any securities clients” formentioned the purpose or in of the the topic Financial of this Advisers document. Act This 2008 document (FAA) (as is describedprovided for in sectionsinformation 5(c)(1)(a), purposes (b) o andnly and (c) ofshould the FAA). not be It isconstrued not intended as an for offer retail or clients.solicitation This for is notinvestment a solicitation in any or securities inducement to mebuy,ntioned sell, subscribe, or in the topicor underwrite of this document. securities. Edison This document has a restrictive is provided policy for relating information to personal purposes dealing. only andEdison should Group not does be construed not conduct as anany offer investment or solicitation business for investment.and, accordingly, Edison does has nota restrictive itself hold policy any positions relating to in personalthe securitiesdealing. Edison mentioned Group in does this report. not conduct However, an investment the respective business directors, and, officers,accordingly, employees does not and hold contractors any positions of Edison in the may securities have amentioned position in in any this or report. related However, securities their mentioned respective in this directors, report. officers, Edison oremployees its affiliates and may performcontractors services may have or solicit a position business in any from or any related of the securities companies mentioned mentioned in this in thisreport. report. Edison The orvalue its affiliates of securities may mentionedperform services in this orreport solicit can business fall as well from as any rise of and the arecompanies subject tomentioned large and in sudden this report. swings. The In v alueaddition of it may besecurities difficult mentionedor not possible in this to report buy, sell can or fall obtain as well accurate as rise information and are subject about to the large value and of sudden securities swings. mentioned In addition in this it report.may be Past difficult performance or not possible is not tonecessarily buy, sell or a obtainguide toaccurate future performance. information about Forward the -valuelooking of informationsecurities or statementsmentioned inin thisthis report.report containPast performance information is that not isnecessarily based on assumptions,a guide to future forecasts performance. of future Forward results,- lookingestimates information of amounts or statementsnot yet determinable, in this report and contain therefore information involve known that is andbased unknown on assumptions, risks, uncertainties forecasts andof future other factorsresults, whichestimates may ofcause amounts the actual not yet results, determinable, performance and therefore or achievements involve known of their and subject unknown matter risks, to be uncertainties materially different and other from factors current which expectations. may cause For the the actual purpose results, of the performance FAA, the content or achievements of this report of their is of subjecta general matter nature,to be materially is intended different as a sourcefrom current of general expectations. information For only the andpurpose is not of intended the FAA, to the constitute content aof recommendation this report is of a or general opinion nature, in relation is intended to acquiring as a sourceor disposing of general (including information refraining only from and acquiring is not intended or disposing) to constitute of a securities.recommendation The distribution or opinion of in this relation document to acquiring is not a or “personalised disposing (including service” refraining and, to the from extent acquiring that it orcontains disposing) any financialof securities. advice, The is distribution intended only of this as adocument “class service” is not aprovided “personalised by Edison service” within and, the to meaning the extent of thethat FAA it (ie withoutcontains taking any financial into account advice, the is particular intended financialonly as asituation “class service” or goals provided of any person). by Edison As withinsuch, itthe should meaning not beof therelied FAA upon (ie withoutin making taking an inve intostment account decision. the particular To the financial maximum situation extent orpermitted goals of by any law, person). Edison, As its such, affiliates it should and contractors,not be relied andupon their in making respective an investment directors, of decision.ficers and To employees the maximum will notextent be liablepermitted for any by law,loss Edison,or damage its affiliates arising as and a result contractors, of reliance and beingtheir respective placed on directors,any of the officers information and employeescontained inwill this not report be liable and fordo anynot guaranteeloss or thedamage returns arising on investments as a result ofin reliancethe products being discussed placed on in any this of publication. the information FTSE contained International in this Limited report (“FTSE”) and do not© FTSE guarantee [2013]. the “FTSE®” returns onis ainvestments trade mark inof the productsLondon Stock discussed Exchange in this Group publication. companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/orRegistered FTSE ratings in England, or underlying number 4794244,data. No furtherEdison distribution Investment of Research FTSE Data Limited is permitted is authorised without and FTSE’s regulated express by the written United cons Kingdoment. Financial Services Authority. www.edisoninvestmentresearch.co.uk. Registered on the New Zealand Financial Service Providers Register, number 247505, Edison Investment Research (NZ) Limited is registered to provide wholesale and/or generic financial adviser services and is regulated by the BerlinNew +49 Zealand (0)30 Financial 2088 9525 Markets Authority. London +44 (0)20 3077 5700 New York +1 646 653 7026 Sydney +61 (0)2 9258 1162 Wellington +64 (0)4 8948 555 GermanFriedrichstrasseLondon +44 industrials 95(0)20 3077 5700 spotlight280 High | 15 HolbornNew May York 2013+1 646 653 7026 245 Park Avenue, 39thSydney Floor +61 (0)2 9258Level 116233, Square WellingtonLevel 15,+64 171 4894 Featherston 8555 St 3 10117Lincoln Berlin House, 296-302 High Holborn London, WC1V245 Park7EE Avenue, 39th Floor 10167, New York Level 33, Australia264 Sq, George 264 George St, Sydney St, HP Tower,Wellington 171 Featherston 6011 St, GermanyLondon, WC1V 7JH, UK United Kingdom NY 10167, New York, US US Sydney, NSW 2000,NSW Australia 2000, Australia WellingtonNew Zealand6011, NZ