About the company

Gerresheimer AG is a German manufacturer of primary packaging products for medication and drug delivery devices made of special-purpose glass and plastics, with headquarters in Düsseldorf for the pharmaceutical and cosmetics industries. The company has production operations in Europe, the Americas and Asia.

Adding Gerrerscheimer

We initiated coverage on ‘Gerresheimer AG’ with a price target of €85 (potential capital gains of 25%). JP Morgan have a price target on the stock of €99.40 and Deutsche Bank have a price target of €82.00.

The company reported weak H117 results. However, management stressed that FY17 will likely be back-end loaded, with a rather flattish development in 3Q and a strong 4Q.

Rationale for recommendation

• Despite the weak H117 results, management stressed that FY17 will likely be back-end loaded, with a rather flattish development in 3Q and a strong 4Q

• Management confirmed the Group is on track to achieve its mid-term outlook targets:
o Ongoing strict monitoring of order book, product ramp up and contract execution
o Dedicated management of operations to balance key drivers of margin performance
o Continuing to lay important ground work to support growth strategy in the long term
o Long-term mega trends unchanged, contributing to shape business and growth environment for the future

• We expect EBIT to increase in the years ahead, both from an improvement in top line as well as cost savings

• Management is focusing on 3 main levers to increase margins. These being:
o Higher prices
o Higher volumes
o Higher productivity and efficiency

• Gerrersheimer is the leader in most markets

• Given the defensive (albeit slower-than expected) growth profile, and the lower valuation looks attractive particularly in light of multiple expansion across the rest of the Medtech sector.

• Gerresheimer is a pharmaceutical packaging company with leading positions in attractive niche markets typically characterized by high barriers to entry and a limited number of players.

• It is also one of the few companies integrated horizontally across glass and plastic, and that can reliably deliver on a global scale.

• End market dynamics are sound due to well-known mega trends (ageing population, expanded healthcare access in EM, rise of generics, trend towards self-medication, etc).

• Gerresheimer looks poised for profitable growth longer term, while near- to medium-term growth should be additionally fuelled by earnings growth.

• Strong balance sheet with cash flow continuing to increase.

• Dividend policy: 20-30% of net income. Current distribution is at 25%.

• Increasing exposure to emerging markets – this is a positive as the middle class in emerging markets is growing and the demand for pharmaceutical products is increasing.

Valuation

Based on 2017 estimated earnings and assuming a P/E of 20x (in line with the average of the industry and also at a discount to its historical average P/E of 27x), we suggest a price target of €85 on the stock.

Conclusion

With our positive global economic outlook, we believe Gerresheimer is well positioned to benefit from future growth. We believe the shares should be a core holding in a well-diversified portfolio.

Disclaimer:  This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.