kimb l international (kbal us; usd 11.32) al

Kimball International (KBAL_US; USD 11.32) US – Furniture (Manufacturing/Retail) Risk Level: Medium

Forecasting & Valuations

(USD mn except ratio) FY2019 FY2020E FY2021E Revenue 768,070 691,263 774,215 EBIT 49,475 12,443 53,421 Net Income (adjusted) 39,344 10,266 41,962 EPS (adjusted) 1.06 0.28 1.13 EPS Growth 15.6% -73.9% 308.7% PE 10.7 40.9 10.0 Div. yield 5.10 11.61 4.73 P/B 2.7% 3.0% 3.4% ROE 2.17 1.62 1.46 Debt/capital 18.2% 3.6% 13.5% Net Cash (Debt) 0.0% 0.0% 0.0%

Strong Valuations, High Cash & Growth, Undervalued Kimball International (NASDAQ:KBAL) is a company with a strong history, and that has helped it in establishing itself as a leading player in the fragmented commercial furniture business. The company has a 15.0% FCF Yield on EV (Enterprise Value) on FY21e and 13.4% on FY19 actual/trailing. We think identifying the FCF Yield on EV, rather than the share price/market cap is more appropriate given the high amounts of net cash on the B/S. Kimball’s Net Cash position with NO debt, is $106 mn ($2.86 cash/share). This represents a robust 25.0% net cash to Market Cap. Cash and FCF Yield are the alpha metrics for this stock. The company operates on a trailing ex-cash P/E of 10.7x on 2019 EPS, making it extremely cheap relative to the entire US market multiple of around 21x trailing on the S&P 500, and 26x on the S&P small-cap index. On our EPS estimates the company maintains a forward-looking P/E of 10.0x and ex-cash P/E of 6.7x on FY2021. Demand orders in certain segments will take a hit this year, however, given the company’s diversified business, manufacturing facilities beginning to restart operations, undervalued metrics and very impressive cash position; we see a resurgence in Kimball’s stock following minor downturns during the current market and economic turmoil. Price Target: S-T: $15.00, L-T: $20.50 We give a price target of $15.00 (representing +36% total return potential) based on our ex-cash P/E of 10.0x (regular P/E of 12.0x); and FCF Yield on EV of 11.6% (10% on Market Cap) on our steady-state FY2021e. Even on a trailing basis, our $15.00 target seems reasonable and would imply ex-cash P/E of 12.0x (regular P/E of 14.1); and FCF Yield on EV of 9.5% (8.1% on Market Cap) on 2019 actual results. As is evident from the valuation metrics being similar for 2021est with 2019 actuals, our steady-state/normalized estimates as things recover in FY21 are reasonable and are within range of our FY19 actuals. Our medium-term target, based on a 2-3 year view, is $20.50. This is based on an ex-cash P/E of 14.6x (regular P/E of 16.4x); and FCF Yield on EV of 8.1% (7.3% on Market Cap) on FY2021e. This $20.50 target price represents +84% total return potential as the stock tries to recover back to pre Covid-19 highs. The current price is down -43% YTD which is a very attractive entry point in our view. The stock price has been stabilizing the past one month, suggesting that it is likely at its bottom. Investors should note that KBAL’s stock traded as high as $21.67 as recently as January this year, and before the Covid-19 disruptions.

Investment Merits

• Alpha-cash position; 15% FCF yield on EV, 25% Net Cash to mkt cap

• Cheap, forward P/E of 6.7x on FY21. Share buyback 7% of outstanding.

• Strong order backlog of $187 mn, 4Q shipments of $100 mn expected.

• Strong 3Q (March-end): net income +19%, EBITDA +21%, gross margin up 210 bps

Performance Chart

Buy June 3, 2020

Target Price USD 15.00 Current Price USD 11.32 Upside Potential 36%

Company Profile / Data

Market Cap. $424.4mn Shares Outstanding 37mn 52 Week Range

$8.19 / $22.40

w w w . v i p g l o b a l r e s e a r c h . c o m

Analysts: Milan Mehta ([email protected]) Shachi Seksaria

Kimball has attractive valuations on P/E, FCF yield, and the company is also aggressively buying back its own stock. They have a strong balance sheet to weather the current Covid-19 impact. 3Q results ending March were encouraging with strong +19% net income and +21% EBITDA growth – please see further details below. As the US economy starts to recover from the Covi-19 recession, while we see negative revenue/earnings decline in 2020, we are forecasting a rebound in our 2021 estimates. The impact of Covid-19 No one is interested in discretionary spending, let alone on furniture during these abysmal times. Luckily, Kimball operates in the commercial sector. As office spaces and factories look to make floor adjustments to follow social distancing guidelines, we think this will correlate positively for the furniture industry. This can bring in sales for the coming quarters, especially since Kimball is well-diversified into many verticals, mitigating risk from relying on few customers. Despite this, we still estimate the next 2 to 3 quarters to yield poor results of -10% revenue declines, until things start to normalize by fiscal Q3 (ending March 2021). Until then, Kimball sits on a healthy order backlog of $187 mn, of which $100 mn is expected to ship in the current 4Q (ending June) acting as income to cushion the blow. Business with government should be relatively stable, with 9-months (ended March) sales increases of 6%, relative to negative results from other verticals. Hospitality (-10%) will surely be impacted negatively, as hotels and other entertainment venues are generating poor results, and the entire industry looks to put unnecessary expenditure on the backburner until things start to improve. Despite the setbacks, Kimball has a long history. It has seen many recessions from which it has rebounded from and come out strong, and we suspect the same here. Management has not provided much guidance on updates, but on a positive note the company had a solid 3Q (ended March) with a resurgence in manufacturing (8 out of 10 facilities), net income and gross margin increases. The company has taken measures to reduce their cost footprint, reducing CapEx to 1/2 and suspending share buybacks to curtail burning through any excess amounts of cash, their most stable metric during this time. High Free Cash Flow Generation The company has a 15.0% FCF Yield on EV (Enterprise Value) on FY21e and 13.4% on FY19a. We think identifying the FCF Yield on EV, rather than the share price, is more appropriate given the high amounts of cash on the B/S. Its current FCF Yield on Market Cap/Price is still encouraging at 10.8%. This extra cash is positive, given Kimball’s heavy reliance on manufacturing, and acts as reassurance given the current grim operating environment. The FCF Yield for FY20 and FY21 is 4.8% and 12.0% respectively. For the FY18 and FY19, Kimball had an FCF of $24.6 mn on a 71% conversion rate and $44 mn on a 112% conversion rate. This conversion rate is suggestive that Kimball is generating surplus cash greater than its net income, which is a safety net. Uses for this cash include acquiring new contracts, investing in organic growth at 4-7%, and organizing a share repurchase program (stock buyback) for employee and stock benefits to offset stock compensation dilution.


Kimball has a $187 mn order backlog, of which $100 mn is expected to ship in 4Q ending June. Companies will make changes in their work environment to adjust to social distancing guidelines, benefitting the furniture business.

The company has an extremely attractive FCF Yield on EV of 15.0%, and 10.8% on the market cap. The conversion rate for FCF on 2019A was 112%. They can use this cash for buying back stock, acquiring new contracts or for organic growth (7% in FY19)

Catalysts for FutureFuel are improvements in the biofuel space as a result of BTC being restored.

Strong cash positions will lead to potential

dividend payouts.

Strong Net Cash Position The company has a strong Net Cash position with NO debt of $106 mn. This represents a robust 25.0% cash ($2.86 cash/share) to Market Cap. Its cash has averaged almost 20% on market cap over the last three years. It has been using this excess cash to invest into higher growth areas of its business operations that are receiving more orders: cash is allocated in high-growth verticals like hospitality and healthcare. Kimball International Furniture: Long History, Brand Recognition Kimball International is a furniture company that has strong brand value retained over the many years that it has been operating. Having been a successor to W.W Kimball and Company, the world’s largest piano and organ manufacturer in the 19th and 20th century, the Kimball we see today, as a result, has a very strong brand image and history rooted in its name. The corporation has been publicly listed for 44 years. It has ~3000 employees and 12 manufacturing facilities Kimball operates 3 primary furniture brands: Kimball, National, & Kimball Hospitality. Latest 3Q Results: Positive, Margins Growth, Strong Order Backlog as Business Resumes The company did well financially, notwithstanding the Covid-19 negative impact of $18 mn. It reported a 0.5% increase in net sales from the same quarter a year ago. Even though this was a meagre increase, overall gross margins compensated, improving 210 basis points on increased price levels on their product lines and the company’s savings sought from their transformation plan. Net income rose 19%, adjusted EBITDA increased of 21% and adjusted EBITDA margin increased by 160 basis points. The company had 4 facilities that were operating at the end of March, by the end of April they had 8 up and running out of total 10 representative of the US manufacturing footprint. There facilities have opened at a 60-65% run-rate. Working capital shows slight rise in receivable delays on case-on-case basis, reduced orders are leading to reduced inventory levels accordingly, and they are working on these requirements. Institutional (Public Sector) and Commercial end markets grew by 4% and 5% in net sales respectively. Order backlogs were US$ 187 mn, of which US$ 100 mn is anticipated to ship in the current 4Q (ending June). Delays in shipments because of temporary production halts and delivery pushouts totaled approximately $18 million during the quarter. However, number of orders grew in the single digits, despite these delays and pushouts. Going into the 4Q, Kimball plans to preserve its strong balance sheet by reducing CapEx by 50%, curtailing discretionary spending, and suspending share buybacks for the time being.

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The net cash stands at 25.0% ($2.86/share) to market cap. The company has a long history of operations. Latest 3Q results ending March, showed an increase in net income of 19%, EBITDA increase of 21% and gross margin increase of 210 bps. Operations have started, with 8 out of 10 manufacturing facilities starting up in U.S in April. Working capital have seen receivable delays, and re-adjustments in inventory. OVERALL à a strong quarter. The order backlog will help financially for the upcoming 4Q.

Buying Back of Shares The company has continuously been buying back shares over the last three FYs, in order to offset dilution, and make use of its excess utility to satisfy greater share market gains. Their current authorization stands in at 2.7 million shares, or 7% of shares outstanding. We expect this to be a continuing trend to come, with the exception of a few one-off circumstances during Covid-19. Buybacks will play in good favor amongst shareholders and will be seen positively by potential investors. Attractive Dividend Yield of 3.1% Kimball offers investors a steady Dividend Yield of 3.1% [12-months trailing], and they have been doing so for the last 67 years. We expect the dividend, given our forecasts, to steadily increase to approximately 42 cents/share (on FY22e) given the firm’s growing linear payout cycle. Kimball recently announced a 9 cents/share dividend for Q3 of FY20 and the last 3-year CAGR for payouts was approximately 9%. We also have reason to believe that the company will offer Special Dividend payouts factoring in its ample cash reserves. Strong Income Statement Numbers, Organic Growth Focused The reason for the substantial reduction in revenues (-55%), net income (-77%) and EPS (-78%) numbers during the FY13-14, was because Kimball International split into two separate public companies. The company spun off into an Electronic Manufacturing Segment and another Furniture counterpart, representing 58% and 42% of the total sales, respectively. Kimball has done really well post the split and spin-off of the furniture segment from its larger parent. The 5-year Revenue CAGR has been 7.1%. We believe Kimball to be a prime example of a company exhibiting secular growth, and this is a trend we extrapolate going forward, given its historically consistent Net Income and EPS increments. Sales are strongest in the Commercial, Hospitality, and Healthcare verticals with double-digit YoY growth from 2018-2019 of 10%, 17% and 25%, respectively. They have produced healthy gains because of strong business sentiment and demand, caused in part by a flourishing U.S. economy. In 2019, U.S. GDP was 2.3%, stock markets were at all-time highs and B2B sales were growing. These growth numbers will dampen this year because of Covid-19, but we believe the company will sustain because of this diversification strategy, i.e. if one vertical contracts, they can rely on another. Order demand increased by 15% for institutional (healthcare, education and government), -9% for commercial, and 12% for hospitality in latest Q3 (ended March). Hospitality has seen strong QoQ growth, with prior quarter-ended Dec results posting 31% growth, leading Kimball to reinvest its cash to leverage on this higher growth vertical. Hospitality will see a stark reversal towards negative results, in our view, for the 4Q ended June because of sour economic conditions. We expect the economy to start rebounding from Covid-19 in the 2nd half of the current calendar year. As a result, stimulus packages, in US trillions of dollars, will be directed towards businesses for recovery; and this will yield to increasing revenues (due to heightened order demand) for Kimball. Kimball’s revenues in FY19 were $768 mn and were an increase of 9% (7% organic) from the previous year.


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The biofuel business was

aided by blenders’ tax credit [BTC] which was

there in 2019 which resulted in a weak

market for renewable fuels. With its

reinstatement biodiesel revenues shot up 20% in

Q12020 YoY. The BTC tax is in mandate till Dec

‘22, for now.

Bought back 2.7 million shares (7% of total shares

outstanding). Share buybacks will be a continuing trend

alongside Dividend Payouts, with the company’s 3.1% yield. Special Dividends in the cards,

with high FCF and cash reserves.

Company split in 2013-’14. Has done well since. Commercial, Hospitality and Healthcare

verticals posted strongest YoY results. Order demand for

furniture products still rising.

Risks for FutureFuel are

change in laws, customer losses, price

fluctuations, and economic slowdowns.

Seasonal Business The company operates in a seasonal environment. This effects their revenue on a yearly basis. Their business verticals are affected the most during these seasons:

• Lower furniture sales in the “Education” segment in Dec and March ending quarter.

• Lower furniture sales in the “Hospitality” segment in high-hotel occupancy periods such as the summer period. During this time, the hospitality sector veers away from expenditure, especially on infrastructure development, leading to less business for Kimball.

• Lower sales in general in the March ending quarter because of buying season of the government.

Industry Data Strong industry growth in North American commercial furniture market, as provided by HIS Markit, of 3.3%. Here is some more research information from verifiable sources that we were able to find on Kimball’s 3 major sources of sales: Commercial, Hospital, and Hospitality markets

• The Commercial Market in the US has the potential to grow by USD 5.64 billion during 2020-2024. The overall market is expected to grow to US$ 14.31 bn by 2025 from US$ 10.74 bn in 2017. That’s a 3.2% CAGR from 2017-2025, according to grand view research data.

• Global Hospital Market is expected to grow at a CAGR of 9.8% in forecasted period till 2023 (in report updated April 2020). America is the largest market, because of high healthcare expenditure and increasing demand for better infrastructure and furniture by people, according to market research future report.

• Hospitality Market is expected to add US$ 9.2 bn in accretive value from 2016 to 2022, a 3.1% CAGR. Improving overall economic conditions, a rising real estate sector and purchasing power of the US consumer has supplemented this rapid rise. This is according to data from allied market research.

The 3 major verticals in which Kimball operates are poised for CAGRs of 3% and greater.


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A highly seasonally business, the furniture industry doesn’t have stellar growths numbers like other industries, but despite this, a 3% CAGR is a good number to set the bar against, close to U.S. GDP growth.


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Catalysts Strong Order Growth: High Demand Market, Hospitality and Institutional The company has a strong order backlog of $187 mn, of which $100 mn is expected to ship out in the current June ending quarter. The orders received for the quarter ended March were very optimistic YoY. Mean order increase across all verticals was 4.5%, with hospitality increasing 12% and institutional 15%, declines in commercial of 9%. Kimball have moved to re-align their investments to meet these orders, accordingly. Diversified Business Kimball’s diversified business model will mitigate the risk stemming from having only few vendors in one particular vertical. By being overdiversified, the company has greatly reduced its chance of losses and potential downside risk. New CEO: Good for Company Direction The newly appointed CEO, Kristie Juster, has been running Kimball for 10 months. She has joined Kimball Int’l having previously worked at a well reputed company, Newell Brands, and this could help bring new direction and scope for Kimball in the long-term. Strong FCF Generation On EV, since the company has high net cash, Free Cash Flow generation is very attractive, at 15.0%, an alpha metric. It can be used for inorganic or organic growth, increasing dividend payouts, or committing to buybacks for share count dilution. Cash Reserves Acts as a Safety Net The Covid-19 impact is reduced because of the buoyant amount of cash reserves relative to the market cap. This illiquid cash of $106 mn will act as a safety net for the company for the next fiscal term, preserving Kimball’s financial state. Dividend Yield Increase Dividend Yield is at 3.13%, but we believe there is potential for steady growth as CAGR payout cycle increases 9% year-over-year. Additionally, special dividend is always an option, as the company’s surplus FCF is evident. Buyback of Shares Kimball has been buying back shares over the last three years, partially in order to increase share market gains. They have bought back 7% of shares outstanding, and this is positive outcome for shareholders of the company. Coronavirus: An opportunity, amidst downturn Covid-19 has really brought down the economy to unprecedented lows. It has caused Kimball’s stock price to dip, which has actually made it an opportune time to invest. Previously, we saw a company that was overvalued with a high P/E over 20x, and a chart that one would say he/she had really “missed the boat” on. With Covid-19 impact, the stock has shown its undervalued side, presenting an opportunity with a more attractive valuation and stock price. Project execution and customer orders will contract resulting in weak sales, but on the plus side, with Kimball’s strong market and financial position, recovery is very much in the cards, near-term. The U.S. will help to see this “road to recovery” process through, given that only a few months back the economy had scaled to all-time highs and so did Kimball’s stock, we think government stimulus and presidential elections will help in the turnaround.

They have a new CEO, Kristie Juster who can provide renewed direction for the company. Their cash reserves a big safety net during this time. Buybacks is a strong plus in this company for investors.


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Stimulus; 2020 Elections Though the U.S. has been affected the worst, its morale hasn’t, as stimulus packages and low fed rates <=.25% for the economy are number one priority. It’s still the “land of opportunity”, Elon Musk recently stated in the media as reasons for SpaceX’s historic launch, furthermore Trump is focused on a swift recovery. Markets overall have corrected approximately +30% from their lows already. In any circumstance, elections in November will see better numbers, and it will be a prelude to better times ahead. Risks Coronavirus: Bottoming out is hard to predict The coronavirus has definitely left a felt mark on the economy and business, especially the manufacturing and purchasing sector, globally. It will have to comply to state laws such, as social distancing, and the impact on its supply chains, customers and logistics is not fully known. The commercial and hospitality sector, when combined contribute almost 1/2 of Kimball’s income. These will be affected. Heavy Competition: Dominated by Many Players The company operates in a highly competitive environment. Their competition is a threat to sales and market share, including Steelcase Inc., Herman Miller, Knoll, HNI Corporation, etc. Competitors also encompass a large number of other smaller, privately-owned furniture manufacturers, both domestic and foreign based in nature. Working Capital Delays in receivables, bad debts could be on the rise as businesses remain cash-strapped and payments fall on the backburner. Inventory adjustment are being made, according to order demand, to working capital requirements. Conclusion Kimball has had a great 3Q (ended March) results, with margins and EBITDA gains. The company is well-diversified, with Commercial, Hospitality, and Healthcare being their key growth drivers. All these will take a hit but, the company operates in multiple segments, reducing downside risk in effect. Production facilities are starting to open up, as the run-rate moves above midway. We think that their stock price has the potential to bounce back to its previous high, as whatever impact they have had is only a result of Covid-19, so we are very bullish. Our price estimate of $15.00 recognizes a +36% total return potential, and medium-term 2-3 year estimate $20.50 a +84%. The strong FCF and Net Cash are the alpha metrics on this stock.

Heavy competition besets this industry, but Kimball is a leading player with a long history. WC could be affected by delays in receivables and bad debts, as the company adjusts to changes in the orders received. The stock has the potential to bounce back to previous highs, on strong 3Q ended March results setting the way for healthy financials looking forward.

Kimball 1-year price chart [Source: Bloomberg terminal]


Income Statement ($ million) FY 6/2018 FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E FY 6/2023E Revenue 704,554 768,070 691,263 774,215 846,991 928,302 y/y 1.7% 9.0% -10.0% 12.0% 9.4% 9.6% Cost of Revenue -468,923 -513,518 -470,059 -518,724 -560,708 -612,679 Gross Profit 235,631 254,552 221,204 255,491 286,283 315,623 Gross margin (%) 33.4% 33.1% 32.0% 33.0% 33.8% 34.0% Other Operating Revenue 0.0 0.0 0.0 0.0 0.0 0.0 as a % of sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Selling, General & Admin Expense -184,568 -206,014 -207,379 -201,296 -216,830 -233,932 as a % of sales 26.2% 26.8% 30.0% 26.0% 25.6% 25.2% Other Operating expenses 937.0 -1,382.5 -774.2 0.0 -928.3 as a % of sales 0.0% -0.1% 0.2% 0.1% 0.0% 0.1% Operating Income 51,063 49,475 12,443 53,421 69,453 80,762 y/y -9.9% -3.1% -74.9% 329.3% 30.0% 16.3% Operating margin (%) 7.2% 6.4% 1.8% 6.9% 8.2% 8.7% Interest Expense -221 -174 -175 -200 -280 -160 Interest income 1,057 1,931 1,000 1,050 1,045 1,033 Equity in (losses)income of affiliates 953 978 800 762 634 546 Other recurring (expenses)/income -527 -540 -542 -607 -709 -801 Amortization of intangibles 0.0 0.0 Goodwill impairment 0.0 0.0 Other non recurring (expenses) income Pretax Income (reported) 52,325 51,670 13,526 54,426 70,143 81,380 y/y -9.8% -1.3% -73.8% 302.4% 28.9% 16.0% Pretax Income (adjusted) 52,325 51,670 13,526 54,426 70,143 81,380 y/y -9.8% -1.3% -73.8% 302.4% 28.9% 16.0% - Income Tax Expense -17,886 -12,326 -3,260 -12,464 -16,484 -19,857 effective tax rate (%) 34.2% 23.9% 24.1% 22.9% 23.5% 24.4% - Minority Interests 0 0 0 0 0 0 Income Before XO Items 34,439 39,344 10,266 41,962 53,660 61,523 y/y -8.2% 14.2% -73.9% 308.7% 27.9% 14.7% - Extraordinary Loss Net of Tax 0.0 0.0 0.0 0.0 0.0 0.0 Net Income (reported) 34,439 39,344 10,266 41,962 53,660 61,523 y/y -8.2% 14.2% -73.9% 308.7% 27.9% 14.7% Exceptional (L)G 0.00 0.00 Net Income (adjusted) 34,439 39,344 10,266 41,962 53,660 61,523 y/y -8.2% 14.2% -73.9% 308.7% 27.9% 14.7% Basic EPS (reported) 0.92 1.07 0.28 1.14 1.46 1.67 Basic EPS (adjusted) 0.92 1.07 0.28 1.14 1.46 1.67 Basic Weighted Avg Shares 37,314 36,842 36,842 36,842 36,842 36,842 Diluted EPS (reported) 0.92 1.06 0.28 1.13 1.45 1.66 y/y -7.3% 15.6% -73.9% 308.7% 27.9% 14.7% Diluted EPS (adjusted) 0.92 1.06 0.28 1.13 1.45 1.66 y/y -7.3% 15.6% -73.9% 308.7% 27.9% 14.7% Diluted Weighted Avg Shares 37,494 37,064 37,064 37,064 37,064 37,064


Reference Items FY 6/2018 FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E FY 6/2023E EBITDA 66533.0 66055.0 29033.0 71227.7 88087.0 101184.9 Dividends per Share 0.27 0.31 0.34 0.38 0.42 0.46 Dividend payout ratio 29.3% 29.1% 122.8% 33.6% 29.0% 27.7% Dep & Amor. 15470.0 16580.0 16590.3 17806.9 18633.8 20422.6 as a % of sales 2.2% 2.2% 2.4% 2.3% 2.2% 2.2%

66533.0 66055.0 29033.0 71227.7 88087.0 101184.9 Balance Sheet ($ million) FY 6/2018 FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E FY 6/2023E Assets + Cash & Near Cash Items 52,663 73,196 81,179 117,573 150,584 180,205 + Short-Term Investments 34,607 33,071 33,071 33,071 33,071 33,071 + Accounts & Notes Receivable 62,276 63,120 71,967 67,876 76,577 86,472 + Inventories 39,509 46,812 25,757 22,739 23,043 28,536 + Other Current Assets 18,804 13,386 13,386 13,386 13,386 13,386 Total Current Assets 207,859 229,585 225,360 254,645 296,661 341,670 + Long-Term Investments + Gross Fixed Assets 264,546 276,536 283,449 292,739 316,455 351,730 - Accumulated Depreciation -180,059 -185,865 -202,455 -220,262 -238,896 -259,319 + Net Fixed Assets 84,487 90,671 80,993 72,477 77,559 92,412 + Other Long-Term Assets 17,683 21,142 21,142 21,142 21,142 21,142 + Goodwill & other Intangible Assets 21,431 23,268 23,268 23,268 23,268 23,268 Total Long-Term Assets 123,601 135,081 125,403 116,887 121,969 136,822 Total Assets 331,460 364,666 350,763 371,532 418,630 478,492 Liabilities & Shareholders' Equity + Accounts Payable 48,214 47,916 32,196 36,950 43,013 40,286 + Short-Term Borrowings 21,253 24,611 + Other Short-Term Liabilities 2,662 3,038 Total Current Liabilities 50,609 57,519 57,519 57,519 57,519 57,519 + Long-Term Borrowings 122,738 133,084 89,715 94,469 100,532 97,805 + Other Long-Term Liabilities 161 136 136 136 136 136 Total Liabilities 15,537 14,956 14,956 14,956 14,956 14,956 + Total Preferred Equity 138,436 148,176 104,807 109,561 115,624 112,897 + Share Capital & APIC + Retained Earnings & Other Equity 4,032 5,721 5,721 5,721 5,721 5,721 Total Shareholders' Equity 251,761 279,328 276,992 304,870 342,963 387,437 + Minority Interest -62,769 -68,559 Total Liabilities & Equity 193,024 216,490 282,713 310,591 348,684 393,158


Cash Flow ($ million) FY 2018 FY 2019A FY 2020E FY 2021E FY 2022E FY 2023E + Net Income 34,439 39,344 10,266 41,962 53,660 61,523 + Depreciation & Amortization 15,470 16,580 16,590 17,807 18,634 20,423 + Other Non-Cash Adjustments 12,195 237 + Changes in Working Capital -15,238 8,806 Cash From Operating Activities 46,866 64,967 26,856 59,769 72,293 81,946 + Proceeds from sale of assets 5,817 1,291 + Capital Expenditures -21,575 -19,693 -6,913 -9,291 -23,716 -35,275 + Cash paid for acquisitions -18,201 -4,288 + Purchase of available-for-sale securities -42,497 -40,778 + Maturities of available-for-sale securities 42,839 42,406 + Other. (Min. Purchase, proceeds, etc.) -1,147 -1,124 Cash From Investing Activities -34,764 -22,186 -6,913 -9,291 -23,716 -35,275 + Dividends Paid -10,084 -11,435 -12,602 -14,084 -15,567 -17,049 + Repurchases of Common Stock -8,936 -9,132 + Repurchase of employee shares for tax -2,822 -1,675 + Proceeds from sale-leaseback obligation + Increase in Capital Stocks + Decrease in Capital Stocks + Other Financing Activities -27 -23 Cash from Financing Activities -21,869 -22,265 -12,602 -14,084 -15,567 -17,049 Net Changes in Cash -9,767 20,516 7,342 36,394 33,011 29,621 Opening cash 63,088 53,321 73,837 81,179 117,573 150,584 Closing cash 53,321 73,837 81,179 117,573 150,584 180,205

Capex as a % of sales 3.1% 2.6% 1.0% 1.2% 2.8% 3.8% Reference Items FCF ($ million) 25,291 45,274 19,944 50,479 48,578 46,671 FCF margin (%) 3.6% 5.9% 2.9% 6.5% 5.7% 5.0% FCF per share 0.67 1.22 0.54 1.36 1.31 1.26 Price/FCF per share 23.04 9.27 21.04 8.31 8.64 8.99 FCF Yield 4.3% 10.8% 4.8% 12.0% 11.6% 11.1%


Ratio Analysis FY 6/2018 FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E FY 6/2023E Per Share Data ($) Basic EPS (adjusted) 0.9 1.1 0.3 1.1 1.5 1.7 Diluted EPS (adjusted) 0.9 1.1 0.3 1.1 1.4 1.7 Dividend per share (DPS) 0.3 0.3 0.3 0.4 0.4 0.5 Book Value per share (BVPS) 4.6 5.2 7.0 7.8 8.8 10.0 Margins (%) Gross Margin 33.4% 33.1% 32.0% 33.0% 33.8% 34.0% Operating Margin 7.2% 6.4% 1.8% 6.9% 8.2% 8.7% EBITDA Margin 9.4% 8.6% 4.2% 9.2% 10.4% 10.9% Pre-Tax Margin (adjusted) 7.4% 6.7% 2.0% 7.0% 8.3% 8.8% Net Income Margin (adjusted) 4.9% 5.1% 1.5% 5.4% 6.3% 6.6% Growth (%) FY 6/2018 FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E FY 6/2023E Sales growth 1.7% 9.0% -10.0% 12.0% 9.4% 9.6% EBIT growth -9.9% -3.1% -74.9% 329.3% 30.0% 16.3% Net Income (adjusted) growth -8.2% 14.2% -73.9% 308.7% 27.9% 14.7% EPS (adjusted) growth -7.3% 15.6% -73.9% 308.7% 27.9% 14.7% Dupont ROE (%) 17.8% 18.2% 3.6% 13.5% 15.4% 15.6% Margin (%) 4.9% 5.1% 1.5% 5.4% 6.3% 6.6% Turnover (x) 2.1 2.1 2.0 2.1 2.0 1.9 Leverage (x) 1.7 1.7 1.2 1.2 1.2 1.2 ROA 10.4% 10.8% 2.9% 11.3% 12.8% 12.9% Net cash / equity 45.2% 49.1% 40.4% 48.5% 52.7% 54.2% FCF Calculation Op. cash 46,866 64,967 26,856 59,769 72,293 81,946 capex -21,575 -19,693 -6,913 -9,291 -23,716 -35,275 FCF ($ million) 25,291 45,274 19,944 50,479 48,578 46,671 FCF margin (%) 3.6% 5.9% 2.9% 6.5% 5.7% 5.0% FCF per share 0.67 1.22 0.54 1.36 1.31 1.26 Price/FCF per share 23.04 9.27 21.04 8.31 8.64 8.99 FCF Yield 4.3% 10.8% 4.8% 12.0% 11.6% 11.1% 5.1% 13.4% 5.9% 15.0% 14.4% 13.8% Net Cash calculation Cash + short term investments 87,270 106,267 114,250 150,644 183,655 213,276 Less: long term debt + Short Term Debt Net Cash 87,270 106,267 114,250 150,644 183,655 213,276 Net Cash per Share 2.3 2.9 3.1 4.1 5.0 5.8


Valuation ratio's FY 6/2018 FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E FY 6/2023E P/B 3.4 2.2 1.6 1.5 1.3 1.1 P/E 16.9 10.7 40.9 10.0 7.8 6.8 P/S 0.8 0.6 0.6 0.5 0.5 0.5 EV/sales 0.7 0.4 0.5 0.4 0.4 0.4 EV/EBITDA (on today's B/S) 7.4 5.1 11.6 4.7 3.8 3.3 EV/EBITDA (on forward estimates) 7.4 4.8 10.7 3.8 2.7 2.1 EV/EBIT 9.7 6.8 27.1 6.3 4.9 4.2

EV/FCF 19.6 7.4 16.9 6.7 6.9 7.2

Dividend Yield (%) 2.4% 2.7% 3.0% 3.4% 3.7% 4.1%

Div payout on FCF 39.9% 25.3% 63.2% 27.9% 32.0% 36.5%

14.7 8.4 32.6 6.7 4.6 3.5

Receivable days

Inventory days

payables days 30 30 38 32 33 34

Current ratio 30 31 20 16 15 17

Enterprise Value Calculation FY 6/2018 Current

Market Cap. 542.0 514.9

+ Minority Interest 0.0 0.0

+Total Debt (ST & LT Debt) 0.0 0.0

- Cash & Equivalents 317.0 317.0

Enterprise Value 225.0 197.9

FY 6/2019 FY 6/2020E FY 6/2021E FY 6/2022E

Market Cap. 424,432 424,432 424,432 424,432

+ Minority Interest 0 0 0 0

+Total Debt (ST & LT Debt) 0 0 0 0

- Cash & Equivalents 106,267 114,250 150,644 183,655

Enterprise Value 318,165 310,182 273,788 240,777 w w w . v i p g l o b a l r e s e a r c h . c o m

DCF model 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2025E 2027E 2028E (in $ million) EBIT 51,063 49,475 12,443 53,421 69,453 80,762 75,007 75,757 76,514 77,280 78,052 % growth -10% -3% -75% 329% 30% 16% -7% 1% 1% 1% 1% Taxes @ 34.2% 23.9% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% EBIAT 33,608 37,673 9,444 40,546 52,715 61,299 56,930 57,499 58,074 58,655 59,242 % growth -8% 12% -75% 329% 30% 16% -7% 1% 1% 1% 1% + D&A 15,470 16,580 16,590 17,807 18,634 20,423 18,752 9,470 9,564 9,660 9,757 - Capital expenditures -21,575 -19,693 -6,913 -9,291 -23,716 -35,275 -18,752 -9,470 -9,564 -9,660 -9,757 - Change in net WC -15,238 8,806 0 0 0 0 275,625 31,846 2,194 2,216 2,238 Free Cash Flow to Firm 12,265 43,366 19,122 49,063 47,633 46,446 332,555 89,346 60,268 60,871 61,479 FCY y/y growth -76% 254% -56% 157% -3% -2% 616% -73% -33% 1% 1%

Value per Share

Cost of capital WACC 5.0%

Terminal Growth 3.0% 4.0% 5.0% 6.0% 7.0% PV of Free Cash Flow 606,062

-0.5%

54

43

35

30

27 PV of Terminal Value 755,056

-0.2%

57

44

36

31

27 Add: Net Cash 36,500

0.0%

60

46

37

32

27 Less: Minority Interest 0

0.3%

64

48

39

32

28 Total Equity Value 1,397,619

0.5%

68

50

40

33

28 Shares outstanding 37,494 DCF value 37


Value Investment Principals Ltd. USA Office 6 East Main Street, Suite 6D, Ramsey, NJ 07446, USA www.vipglogalresearch.com Milan Mehta [email protected] USA: (1) 617-848-8279 Shachi Seksaria [email protected] I, Milan Mehta, certify that the opinions expressed in this report accurately reflect my personal views about the subject and its underlying securities. I further certify that the performance of stocks or securities in this report is not directly tied to my compensation, though my compensation is based on firm profitability, including the investment research and management performance of Value Investment Principals Ltd. (VIP).

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