Rational Earnings: Guidance Appears Conservative Relative to Strong First-Half Results

Narrow-moat Rational’s RAA first-half results were above our expectations and indicate the group’s strong brand reputation, as price increases implemented in the previous year have stuck, supporting impressive revenue and EBIT growth of 23% and 46%, respectively. Revenue was boosted by the unwinding group’s elevated order book at the start of the year, caused by supply chain constraints and customers prebuying equipment prior to price increases. Rational’s order book has declined by EUR 85 million-EUR 160 million and currently reflects more typical levels, as delivery times are back to normal. Full-year guidance for high-single-digit revenue growth and a slight contraction in its EBIT margin was confirmed, implying a notable deterioration in profitability, both sequentially and against the prior year. We view Rational’s reiterated guidance as conservative and slightly raise our full-year estimates to 9% revenue growth (from 7%) and our EBIT margin to 23.2% (from 23.1%), which incorporates the strong first-half results; a less meaningful decline during the second half than management expected. Nevertheless, our fair value estimate is unchanged at EUR 570 with shares trading at a premium.

First-half revenue growth of 23% benefited from notable tailwinds, mostly the carryover impact of price increases from the prior year and normalized delivery times, as supply chain constraints ease. North America remains the biggest growth driver, delivering 50% sales growth. The recovery in China has accelerated as the year has progressed, resulting first-half revenue growth of 29% in the Asia segment. Price increases combined with declining material costs supported EBIT margin expansion of 400 basis to 24.3%. The group’s guidance implies a decline of over 200 basis points in the second half of the year and 350 basis points lower than first-half 2022. We believe this is conservative given the declines in stainless steel and logistic prices, as well as Rational’s strong pricing power.