Strong Pirelli Q4 Results but No Dividend Expected

Pirelli & C. SpA operating results, due Monday March 12, are expected to rise, supported by the strong performance of its tyre operations in the fourth quarter. Additionally, according to analysts, it is also anticipated that the company will not pay a dividend after its 2.1 billion euro third-quarter write-down on its stake in Telecom Italia SpA.

Net loss is estimated to be in the range of 1.220 to 1.234 billion euro, against the company’s 2005 profit of 327 million, EBIT at between 368 and 394 million, up from 355 million, EBITDA between 587 and603 million, from 568 million, and sales are expected to be between 4.831 and 4.860 billion, up from 4.546 billion.

“The fourth-quarter tyre operations should be stronger than the previous quarters, with less of a rise in raw material prices,” commented one Milan analyst. “The indications for the tyre business are positive, also for the start of 2007.”

Deutsche Bank said in a note this month it expects fourth quarter EBITDA at the company’s tyre operations to be up 8.4 per cent from a year earlier at 114.9 million euro, with a slower rise in sales of 5.8 per cent to 979 million. The statement said “tyre sales growth will be substantially in line with the 6.6 per cent rise in the third quarter, thanks to a similar price/volume mix,” adding that the rise in fourth quarter EBITDA follows year-on-year falls in the second and third quarter.

Furthermore, the statement noted that improvements in EBITDA trends have been largely “thanks to the reduction in raw material costs — mainly synthetic rubber — as opposed to strong increases in the first half.” A 35 per cent rise in rubber prices was recorded between January and June 2006.

Another analyst commented that easing oil prices can be considered another positive factor for Pirelli’s tyre operations, and much mention has been made on the likely developments of the 39 per cent stake in Pirelli Tyre purchased last July by a consortium of banks after Pirelli decided not to proceed with an initial public offering.
The value of the tyre unit has gone up 30 to 40 per cent since last July, but the banks are unlikely to sell for at least 18 months because they would have to pay capital gains tax.

Analysts are uncertain whether Pirelli will buy back this 39 per cent stake, or if the shares will be put on the market in a new IPO. It has even been suggested that the banks could hold onto their share in Pirelli Tyre for 3 to 4 years. According to one analyst, this decision will depend on whether Pirelli can raise funds from selling part of its stake in the 80 per cent owned unit Olimpia SpA, which is the largest shareholder in Telecom Italia (18 per cent). Pirelli has said it is seeking investors to buy part of its Olimpia stake but is reportedly reluctant to sell at less than the book value, equivalent to 3 euro per Telecom Italia share.

Last November Pirelli wrote the Telecom Italia shares down to 3 euro from a previous 4 euro, at an overall cost of 2.1 billion euro. Telecom Italia is currently trading around 2.15 euro. Because of this large net loss, Pirelli will reportedly not be able to pay a dividend after the 0.0210 euro per share paid in 2005.