EFTA01385540

> BLT Deutsche Bank lEil 0 SGS - Tom Sykes, BUY, close CHF2579, CHF2620 tgt, 2% upside ■ SGS is a long term outperformer. In line with the Business Services team's late cycle view, we prefer more resilient stocks. SGS is a long-term outperformer offering 10% TSR. - It is a global leader in the testing and inspection field, with a CHF18bn market cap. ■ SGS beat the market in 2007-11, suggesting relative upside in the event of a potential downturn. ■ We forecast 8% 18E organic EBITA growth, with good optionality. There is also potential for cyclical upside via c27% EBITA exposure to commodities (we forecast 18E Minerals growth at 6%, up from 4%) ■ Structural growth opportunities from Consumer and Food + Agri businesses. ■ Rock-solid balance sheet means M&A upside potential. Net Debt/EBITDA is only 0.4x. • Margin upside potential. We model a 50bps improvement in 18E from commodities improvement, lower GIS provisions and procurement and back-office gains. In 19E/20E we model a further 30bps and 20bps, with our 2020E forecast of 16.3% still shy of the company's target of at least 18%. • SGS is not cheap at 24.6x 18E PIE, but we do not see a relative de-rating until well into a cyclical cut in earnings. • Catalysts: FY results 23-Jan-18, commodities related commentary on capex and opex spend & bolt-on acquisition spend Related DB Research: SGS: Store of value (Sykes' Business Services 2018 outlook: Relative outperformers for 2018 (Sykes) SGS is a long term outperformer of the market 1.0 0.1 03 ‘1 co co O SGS share price relative in USD nr e e z..r c2 OO Expon. (SGS share price relative in USD) O N Ci pc- •cr2 O 2 O O O r r CO 0) O O CO V r-- O O O nr Source: Deutsche Bank. company data Room for considerable M &A, with a rock-solid balance sheet 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Net debt/EBITDA Acquisition spend as % of EBITDA 40% 30% 20% 10% 0% -10% -20% -30% -40% AA A A o O r CA 01 V '4) OOOOO O O la t• W CO W ill CO 0 C‘I C0 Csl N N N CO CO IN CI O4 <V O N CO O4 CO Source: Deutsche Bank. company data ft.Ltsche bank Research' Etinwean Equity Focus - Janistuy 2O18 4! CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086826 CONFIDENTIAL SDNY_GM_00233010 EFTA01385540