Rieter stock falls as UBS cuts rating to “neutral,” slashes target to CHF3.30

Investing.com -- Swiss textile machinery maker Rieter Holding AG (SIX:RIEN) was downgraded to “neutral” from “buy” rating by UBS on Friday, with the brokerage citing a lack of visibility for a near-term recovery in textile machinery demand and a sharp reset in valuation expectations, sending shares down over 2%. 

UBS cut its 12-month price target to CHF3.30 from CHF11.90, reflecting lower sales and margin forecasts and the impact of the company’s capital increase tied to the Barmag acquisition.

UBS said its prior “buy” thesis was based on expectations of a materially improving demand backdrop in the textile industry, which has not materialized to the extent or duration previously anticipated. 

While some improvement has been seen, particularly in Rieter’s Components segment, UBS said demand remains muted as textile customers continue to limit capital expenditure. 

The brokerage pointed to UBS aggregate forecasts for textile companies that imply a 9% decline in capital spending in FY26e, followed by a rebound of 25% in FY27e that still remains below historical upcycle levels.

The downgrade reflects UBS’s revised outlook that shows no material acceleration in sales growth in FY26e and only a more measured recovery in FY27e. 

UBS now forecasts organic group growth to fall 20% in FY25e, followed by growth of 8% in FY26e and 12% in FY27e.

Revenues are projected at CHF674 million in FY25e, rising to CHF1.47 billion in FY26e and CHF1.65 billion in FY27e, compared with CHF859 million in FY24.

UBS also said the subdued revenue outlook limits operating leverage and reduces the scope for margin expansion in the near term. 

The brokerage does not expect Rieter’s adjusted EBIT margin to exceed the mid-cycle range of 4% to 8%, forecasting a margin of about 7.6% by FY29e. 

For FY25e, UBS forecasts an adjusted EBIT margin of negative 6.2%, improving to 4.6% in FY26e and 5.9% in FY27e. UBS said one-off transaction costs of CHF15 million and restructuring costs of CHF10 million in FY25e weigh on near-term profitability.

The acquisition of Barmag adds further operational complexity, UBS said, given the size of the business relative to Rieter. While Barmag’s margins are structurally higher, UBS said the benefits are expected to accrue only over the medium term. 

UBS included CHF20 million of guided cost synergies and accounted for CHF15 million of transaction costs and CHF10 million to CHF20 million of restructuring costs across FY25e and FY26e in its revised estimates.

UBS said a reverse discounted cash flow analysis suggests Rieter’s current share price already reflects the lowered earnings and growth assumptions, leaving upside and downside risks broadly balanced. 

The revised valuation assumes a terminal growth rate of 1.4%, a terminal EBIT margin of 5.9% and a weighted average cost of capital of 9.1%.