January 08, 2014 - 6:41am EST by
2014 2015
Price: 23.50 EPS $2.46 $2.53
Shares Out. (in M): 40 P/E 9.5x 9.3x
Market Cap (in $M): 918 P/FCF 0.0x 0.0x
Net Debt (in $M): 431 EBIT 132 156
TEV ($): 1,347 TEV/EBIT 10.4x 8.8x

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ALL FIGURES IN EURO: RHI is an Austrian based, Vienna listed, vertically integrated global provider of high-grade refractory products, systems and services, which are indispensable for industrial high-temperature processes exceeding 1.200°C. Refractory products are the inner linings of furnaces, kilns, incinerators and heat reactors. This is a highly specialised industry with just a handful of global players. The company has a strong market position in several niche markets and a credible strategy to grow both revenues and margins. However, recently results and the share price have been under pressure due to technical problems of a newly established fusion plant in Norway. While the company is taking a considerable write down, we think these issues are of temporary nature and see this as an opportunity to enter into the capital of a credible, high quality business with longstanding operational excellence that delivers an indispensable service/product to industry. At the current share price we pay just over 8x normalised earnings based on current revenue and the average profit margin of the last 12 years (9%).



RHI has 3 divisions: steel represents 61% of sales and 30% of EBIT; the industrial division represents 36% of sales and 55% of EBIT and raw materials ( RHI own the majority of its mines directly or through legal rights) are 3% of sales and 15% of EBIT (majority internal sales). The operating margins are respectively 4,9%, 13,6%, 7,8% , or combined 9% for the Group. These figures for 2012 are similar to the long term average operating margin.


RHI is the clear market leader in the global refractory linings business in terms of sales and product quality. We believe RHI has a competitive advantage based on  superior know-how and access to rare, high quality raw materials.

Producing stable and high quality refractory products is a complex, R&D intensive process. The right chemical specification is key and is influenced by the quality of the raw materials, how they are blended, the temperature the raw materials are burnt, the pressure, the speed at which they go through the kiln etc. A purity level of 97% or 97,7% in magnesia ( raw material) for example makes a big difference in performance of the refractory product. This expertise separates RHI from most of its competitors.


Quality is measured by the temperature and also the mechanical and chemical stress the refractory product can withstand. This is important because it allows the production of high quality steel and the higher temperatures reduce the pollution generated by burning cement for example.

Quality refractory products have a longer product life and reduce the number of times a furnace has to be stopped, cooled, and dismantled  to replace the linings. In the glass industry for example, the product life for the RHI refractory product is 10 to 15 year as opposed to 2 to 3 year for the cheaper commodity products. Although RHI’s products are priced at a substantial premium the longer product life results in a lower cost over time.


Steel division: RHI generates €839Mio of sales in refractory products and €280Mio in flow control products. RHI has only 2 global competitors: Magnesita and Vesuvius.

-    Magnesita is a Brazilian company that competes mainly in refractory products for the steel industry in S-America and Europe (sales €566Mio).

-    Vesuvius is the market leader in flow control products (sales €650Mio) and also competes in the refractory market (sales €570Mio). Flow control is also a highly specialised activity that works in concert with refractory products. It regulates the flow of melted industrial produce.

-    In most markets RHI also competes with vastly smaller local companies.


In the industrials business RHI offers customized solutions based on the specific requirements of various industrial production processes. This implies that RHI is involved in the design and engineering of complete lining concepts for new furnaces. With the longer replacement cycle (shorter in steel) product quality and service are even more important in the industrial segment. The main markets are cement, glass and nonferrous metals.

The market for industrials is also more consolidated than the market for steel. The top 2 players have a combined market share of approx. 40% and the rest of the market is fragmented. The other large companies are The Refratechnik Group in the cement industry and Sefpro (a subsidiary of St Gobain) in the glass industry. In non-ferro RHI is the clear #1 with a 40% market share and a 90% market share in certain niche-markets such as copper and flash furnaces.


All competitors listed above have been around for decades indicating that barriers to entry are high. Refractory products represent only 3-4% of the production cost but influence up to 25% of the quality of the end product. RHI has a strong global sales network, an established long-term track record and long lasting relationships in a conservative industry.



RHI’s strategy for 2020 is to grow revenue to €3Bio (from €1,8Bio 2012) with an EBIT margin of 12% (9% 2012)

We break down this program as follows:


Revenue growth :2% volume, 2% prices and 2% from small M&A

a) Volume growth +2% p.a. (conservative vs 3 to 4% forecast in research reports for the global refractory industry) 

b) Prices increases 2% p.a. (below historical)

c) M&A: small and selective M&A similar to recent India deal (Oriental refractories)



Margin improvement: business plan targets EBIT margin of 12% versus 9% currently

a)  1% improvement from cheaper raw materials as a result of increasing vertical integration. The goal is to grow self-sufficiency level quickly in magnesia from 40% in 2011 to 80%. The company managed to increase the self-sufficiency level to 60% but the last 20% was expected to come from the new fusion plant in Norway. Recent problems with that plant created some doubt on management’s ability to achieve this goal.

b)  1% improvement from increase in revenue contribution from EM from 56% currently to 70%. Margins are higher in EM-business because it’s easier to increase prices in a high demand driven growing market.

c)  1% improvement from optimizing the plant structure, adjust production capacities and shift closer to customers to ensure optimal utilization of plants worldwide. RHI has made good progress on closing down plants in Europe and moving production to lower labour-cost countries with higher future structural demand.




Martin Schlaff, an Austrian investor, is the largest investor (>25%) and his son sits on the Supervisory Board. 

Franz Struzl has been CEO since 2011 and has changed the entire management board. 

Management are not substantial shareholders and receive variable compensation based on ROCE, EBIT Net Income and Working Capital targets with a maximum of 120% of fixed compensation.

New management has no track record of note and this is a weak element in our investment thesis. Following stalled investments in Brazil, the substantial investment impairments in Norway represent a set-back in management’s ambition to increase EM exposure and raw material integration. As we mentioned above, we see these problems as being of a temporary nature and a good entry point into the capital.




At the current share price of €23,50 we pay 8x 2012 earnings. The operating result for 2013 will be significantly lower than 2012 due to slightly lower revenues, negative currency effects and the negative result in Norway. (EPS 2013 est 2,46 and P/E 9,5). For 2014 management has guided to a 3% increase in revenues and operating margins of 8/9%. This translates in a multiple of 8,5x to 10x.




We believe that 8x normalized earnings is too cheap for a company with a strong market position and a sustainable competitive advantage in a market with high barriers to entry. Growing revenues, margin improvement and a re-rating of the shares offer substantial upside as the impact of recent set-backs fades and management realizes (some of) its targets.  

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


- decline of exceptional expenses as the company has made good progress on closing down plants in Europe

- technical problems with the fused magnesia production process in Norway will have a negative impact on the results for 2013 (€25-30Mio) and 2014 (€15-20Mio). RHI has hired an external consultant and taken a number of steps to address the problem. ( http://www.rhi-ag.com/linkableblob/internet_de/75918/data/CC_16.12.2013_ConferenceCall-data.pdf )

- growth of revenues and/or profit margin

- re-rating vs. Magnesita which trades at 31x 2014 estimated earnings or Vesuvius at 14x. (to gain access to the European market Magnesita acquired LWG in 2008 at 12x EBITDA)

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