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Investing.com -- UBS Global Research in a note dated Monday downgraded Rockwool (CSE:ROCKb) to a ’sell’ rating, citing concerns over declining profit margins and subdued growth prospects, sending its shares down over 3%.
As per analysts at UBS, Rockwool’s margins have likely peaked following a period of exceptional performance driven by favorable price-cost dynamics and falling energy expenses.
The mineral wood products manufacturer saw a sharp rise in margins from 7% in the third quarter of 2022 to over 19% in early 2024.
However, UBS notes that this period of above-average profitability is showing signs of normalization, with margins expected to revert closer to historical levels over time.
The brokerage now anticipates a decline in Rockwool’s earnings before interest and taxes margin from 17.8% in 2024 to 16.3% in 2025 and further down to about 15% in the coming years.
One of the primary factors influencing this downgrade is the challenging outlook for Rockwool’s key end markets, particularly in Eastern Europe, Germany, and France.
UBS expects these regions to remain weak, putting pressure on the company’s sales growth. Additionally, the brokerage warns of potential price and cost headwinds, with only modest pricing expectations for 2025 and a projected decline in earnings from Rockwool’s Russian operations, which could shave roughly one percentage point off the company’s overall margin next year.
UBS’s valuation model suggests that Rockwool’s shares currently price in an EBIT margin of around 17% in the long term, whereas the analysts estimates a more realistic figure of 15%. As a result, UBS expects the stock to de-rate over time, further weighing on its price.
In terms of financial estimates, UBS has made downward adjustments to its projections. The brokerage has reduced its 2025 EBIT forecast by 4% and earnings per share projection by 2%, taking into account a planned share buyback program worth €150 million.
Over the longer term, UBS expects Rockwool’s EPS to grow at a compound annual rate of just 2% between 2024 and 2029, underlining the limited earnings growth potential that prompted the downgrade.
As a result of these concerns, UBS has lowered its 12-month price target for Rockwool from DKK 2,525 to DKK 2,480.
The downgrade from a previous ’neutral’ rating reflects the analysts’ belief that Rockwool’s current valuation does not adequately account for the risks associated with declining margins and weaker market conditions.
The downgrade comes amid broader market uncertainties for building materials companies, with rising energy costs, inflation, and higher interest rates posing challenges to growth.
Rockwool’s reliance on energy-intensive production and its exposure to European markets further compound these risks, making it vulnerable to economic slowdowns and shifts in demand.