November 8, 2018 / 5:55 PM / 10 days ago

Latest profit warning challenges Thyssenkrupp spin-off logic

FRANKFURT/DUESSELDORF (Reuters) - Thyssenkrupp (TKAG.DE) shares fell to a two-year low on Friday after the German conglomerate cut its profit forecast for the second time this year, raising doubts over a planned deal to split the steel-to-elevators group in two.

FILE PHOTO: A logo of ThyssenKrupp AG is pictured outside the ThyssenKrupp headquarters in Essen, November 23, 2017. REUTERS/Thilo Schmuelgen/File Photo

The profit warning late on Thursday is the second under Guido Kerkhoff, installed as the group’s permanent chief executive in July after a tumultuous summer that featured the resignation of the group’s chairman and former CEO following mounting shareholder disquiet.

It is expected to put further pressure on Kerkhoff, who is struggling to get markets excited about a landmark move to split up the group via a spin off of its elevator, car parts and plant engineering units, as no part of the business is without issues.

“I’m still sceptical over whether the split is the right decision,” said Thomas Hechtfischer, managing director of shareholder advisory group DSW, which usually represents 1 percent of Thyssenkrupp’s voting rights at its annual meeting.

“It will be difficult to convey how things are supposed to move forward when a new can of worms has just been opened.”

Shares fell as much as 12.2 percent to their lowest level since July 2016. They were down 9.8 percent at 1450 GMT.

Thyssenkrupp’s current enterprise value of around 15 billion euros ($17 billion) is roughly the same as its elevator business if viewed on a standalone basis, analysts say, with the risk of a bidder coming in to break up the business.

RISK PROVISIONS

The company, whose roots go back more than 200 years, on Thursday said it had decided to set aside risk provisions for a probe by the country’s cartel office into alleged agreements relating to heavy plate and flat carbon steel products.

“We have taken this matter very seriously from the very beginning and, with the help of an external law firm, conducted our own internal investigation,” board member Donatus Kaufmann said in a letter to employees that was obtained by Reuters.

As a result, net income in the financial year 2017/18 is expected to drop to 100 million euros, down 63 percent from the 271 million last year. The group had previously expected a significant rise in net profit.

Kaufmann said the provisions would have no impact on a planned 50-50 European joint venture with Tata Steel (TISC.NS) and that the cartel investigation relates to legacy cases.

“All persons involved are no longer working in their areas of responsibility or have left the company,” the company said.

In addition, the group set aside provisions for risks arising from quality issues at its automotive business, including higher manufacturing expenses and warranty costs. It also pointed to shipping restrictions at its steel unit and warned of lower-than-expected earnings at its elevator unit.

This partly challenges the logic behind Thyssenkrupp’s plans to spin-off elevators and car parts into one division, separating them from other assets within the group.

The group now expects adjusted earnings before interest and tax (EBIT) to fall to 1.6 billion euros, down from a previous target of 1.8 billion. Thyssenkrupp will present full-year results on Nov. 21.

Editing by Kirsten Donovan/Keith Weir

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