On Tuesday, UBS initiated coverage on Brembo S.p.A (BRE:IM), assigning a Neutral rating to the stock with a price target of €10.10. The firm provided insights into the company's prospects, noting Brembo's focus on manufacturing braking systems primarily for the premium and luxury vehicle segments.
The financial services firm projects that Brembo will outperform average light vehicle production from fiscal year 2024 to 2027, estimating an average annual growth of approximately 4-5 percentage points. This growth is expected to be fueled by the company's capacity expansion and introduction of new products, leading to a compound annual growth rate (CAGR) in revenue of around 7%.
UBS forecasts that Brembo's operating profit margin (OPM) will see a gradual increase, reaching about 11.5% by fiscal year 2027, up from an estimated 11% in fiscal year 2024. In line with these expectations, earnings per share (EPS) are anticipated to grow by roughly 10% per annum. However, UBS's estimates stand 5-10% below the consensus, citing lower expectations for top-line growth and profitability.
The firm also anticipates that upcoming earnings seasons may prompt industry volume downgrades, which could lead to potential EPS reductions for fiscal year 2025 of up to 15%, assuming year-over-year revenues remain flat compared to a 6% consensus estimate. UBS suggests that these potential risks warrant a cautious approach to the stock.
Furthermore, UBS points out Brembo's significant exposure to German premium original equipment manufacturers (OEMs), which account for at least 20% of the company's revenues according to UBS estimates. These OEMs are currently experiencing double-digit volume declines in the Chinese market.
UBS speculates that it would not be surprising if Brembo's management revises its current guidance for fiscal year 2024 downwards during the third-quarter reporting period.
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