Description

BUSINESS DESCRIPTION
· Gurit-Heberlein is a Swiss-based company with Healthcare and Industrial operations. Has been a de-conglomeration story the past couple of years. Sold auto operations in 2000 and used some of cash proceeds to buyback 20% of the float in early 2001. In 1999, spun-off fashion textiles business. Since then it has been focusing on building-up its two platforms, Healthcare and Industrial operations. With a large acquisition in the Industrial business late last year we think the company is in a position to divest/carve-out its Healthcare operations and unlock the value of the Industrial businesses which one is getting very cheaply given comps for the Healthcare business. Management was concerned about the businesses standing on their own if they did not have critical size, but this has been addressed with last year's acquisition. Management is not wedded to it businesses and given its past actions (significantly reducing the size of the company with the auto business sale and returning capital to shareholders) we believe that the company will do what it takes to maximize shareholder value. (Not something seen too often in European managements)
· Healthcare: (2004: 42% rev, 45% EBITDA). Dental consumables is about 70% of healthcare sales, balance is Medical products. Dental competes with SYD and XRAY and 3M/Espe. Manufacture dental consumables: impression materials (#4, 8% worldwide market-share), filing systems (6% worldwide market share), endontic posts (15% worldwide market share), oral hygene (30% worldwide market share). Medical produces respiratory products (tubes, valves, fileters) dosage devices and liquid drop dispensers. Dental consumables business is a good business. A few large players dominate the market. Pricing is generally rationale. Gurit’s Healthcare margins are below comps for a couple of reasons: (i) they do not break-out the dosage and dispenser business which is lower margins than the dental and (ii) size/scope of business. Gurit has been trying to address the former by cost improvements (Prior to current management the medical products division was losing money. Now it is a reasonable contributor). Management has addressed the size and scope issue by trying to acquire complimentary dental product lines. 2003 margins in the dental business where hit meaningfully by a relocation and plant consolidation program. 2004 margins should be back on track (16.5%+ EBITDA). SYD is a likely buyer of the dental assets. They made a smaller Swiss acquisition last year after Gurit dropped-out of competing because of price. Furthermore, SYD is interested in making foreign acquisitions to reach their stated goal of lowing its corporate tax rate. Most of Gurit’s products are complimentary to SYD’s.
· Industrial: (2004: 58% rev, 55% EBITDA). Composite Technologies (75% of Industrial Sales): Wind-energy (50% of Composite sales, #1 for blade materials, business growing 20%+ annually), Aerospace (10% of Composite sales, #3 in market share behind Hexcel and Cytec), Marine/Sporting goods (25% of Composite sales, #1 in market share) Other composites business address civil engineering, auto and general industrial. Fiber Tech: (25% of Industrial sales, 30% market share, #1 world wide for interlacing/texturing). Manufacturers highly specialized key components for machines used to process and finish synthetic yarns. Parts they provide need to be replaced every couple of years. Their parts address the air texturing market. Air texturing is taking larger share of textile market because it is faster with lower energy costs than the competing false-twist manufacturing process. As result, Fiber Tech grows over the cycle, but still is a cyclical business.

ENTERPRISE VALUE & ESTIMATES (all figures in CHF)
FD s/o 0.468
Price 860.0 CHF
EMC 402.5
Debt 84.6
Pfd 0.0
Cash 37.5
TEV 449.5

Est: EBITDA EBITA EPS Cash EPS TEV/EBITDA TEV/EBIT Price /Cash EPS
2004 86.7 62.9 73.1 102.9 5.2x 7.1x 8.4x


VALUATION
My 2004 estimates incorporate rebound in Healthcare EBITDA margins to 16.5%+, which should be achievable given that recent margins have been hit by one-time items and historical margins in this business were comparable and stable. Top line growth in Healthcare trends about 4-5%, annually. Industrial growth is higher single digits driven by the higher growth wind-energy products as well as Fiber-tech growth once cycle turns more favorable. Margins in Industrial gradually move closer to historical mid-teens EBITDA. Will be excess capex spending of about $7mm in 2004 to support wind-energy initiatives (not deducted from by 2004 Cash EPS estimate). 12x terminal mult and 12% discount rate yields about 1450 CHF/share.

If one were to take current SYD 2004 EBITDA mult of 10x and apply to Dental EBITDA of approx 30mm you would get 240mm (post 20% Swiss tax rate and assuming no basis in those assets). Would be paying 210 in TEV (3.8x EBITDA) for Industrial business which have market leading positions in growing markets.


RISKS
· Industrial markets have some cyclicality.
· Company embarks on acquisition binge. (Historically, has been a seller as often as a buyer of assets. Seems to exhibit some discipline in purchase prices)

Catalyst

CATALYSTS
· Sale/cave-out of dental/medical
· Cyclical rebound in Industrial products