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Deutsche Bank
Deutsche Bank Research:
The Equity View: FRESH MONEY IDEAS #3
January 7th, 2018
Distributed on: 07/01/2018 21:00:00 GMT
Deutsche Bank does and seeks to do business with companies covered in its
research reports. Thus, investors should be aware that the firm may have a
conflict of
interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment
decision. DISCLOSURES
AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 083/04/2017
7T2se3r00t6kwoPa
EFTA01432866
Table of Contents
IIThe Equity View Overview
IIConsumer
— Page 5 B&M
— Page 6 BAT
— Page 7 Bovis Homes
Page 8 Carrefour - SELL
IIFinancials
— Page 10 Aroundtown Properties
— Page 11 AXA
— Page 12 Banco Santander
— Page 13 Credit Suisse Group
Page 14 Prudential
IIHealthcare
— Page 16 AstraZeneca
— Page 17 Fresenius
Page 18 Shire
IIEnergy, Materials & Industrials
— Page 20 ABB
— Page 21 ArcelorMittal
— Page 22 BAE
— Page 23 Continental
IIEnergy, Materials & Industrials cont'dm..
— Page 24 DSM
— Page 25 Glencore
— Page 26 Kingspan
— Page 27 Linde
— Page 28 Renault
— Page 29 Royal Dutch Shell
— Page 30 RWE
IITMT
— Page 32 Eutelsat - SELL
— Page 33 Infineon
— Page 34 Informa
— Page 35 KPN
— Page 36 Sophos
— Page 37 Vodafone
IIBusiness Services, Leisure & Transport
— Page 39 Deutsche Lufthansa
— Page 40 Royal Mail - SELL
— Page 41 SGS
Page 42 Vinci
II Risk Statements
EFTA01432867
II DB Forecasts
Editors: Mark Braley, Vivek-G Midha and Mairead Smith
Deutsche Bank Research: European Equity Focus — January 2018
2
EFTA01432868
The Equity View — Fresh Money Ideas — Overview
IIThe Equity View Overview
IIThis is the third edition of this quarterly publication, where we present
each of our teams' strongest investment ideas over the next
twelve months.
IIBelow are our European "Fresh Money Ideas". In this report, each idea is
summarized and grouped together by sector (SELLs in RED):
— Consumer: B&M, BAT, Bovis Homes, Carrefour
— Financials: Aroundtown Properties, AXA, Banco Santander, Credit Suisse
Group, Prudential
— Healthcare: AstraZeneca, Fresenius, Shire
— Energy, Materials & Industrials: ABB, ArcelorMittal, BAE, Continental,
DSM, Glencore, Kingspan, Linde, Renault, Royal Dutch
Shell, RWE
— TMT: Eutelsat, Infineon, Informa, KPN, Sophos, Vodafone
— Business Services, Leisure & Transport: Deutsche Lufthansa, Royal Mail,
SGS, Vinci
IIOne slide per stock, valuation and catalysts plus links to the latest
research.
IIThe prior iteration (04-Oct-17) [AB Foods, BAT, Bovis Homes, B&M, H&M,
Imperial Brands, Ocado, Tesco, AXA, Credit Suisse,
Deutsche Wohnen, Prudential, AstraZeneca, Coloplast, Shire, ArcelorMiittal,
BP, Centrica, Covestro, GKN, HeidelbergCement, Linde,
Renault, Rio Tinto, RWE, AccorHotels, ADP, Cineworld, Deutsche Post, IAG,
Aixtron, Informa, Micro Focus, Telefonica, Telia, TF1] saw
an average price gain to 04-Jan-18 of 4.2%, vs SXXP at 0.9% (Past
performance is not a guarantee of future performance; This data
does not include transaction costs; more information is available upon
request)
Deutsche Bank Research: European Equity Focus — January 2018
3
EFTA01432869
Consumer
Deutsche Bank Research: European Equity Focus — January 2018
4
EFTA01432870
> Consumer
1 B&M — Warwick Okines, BUY, close 413p, 450p tgt, 9% upside
IIOur preference is for value retailers. The UK macro environment looks
similar to the austerity years of 2011/12. Both in groceries and in our
apparel consumer survey we can see evidence of a shift to value.
IIB&M is a price leader, with a robust 15-20% price gap to Tesco and Asda.
IIValue retailers also offer structural growth opportunities. Multi-price
discounters grew at a sales CAGR of 12% in 2006-16, illustrating their
ability to progressively gain market share.
IIB&M has ambitious store expansion plans with a UK target of 950 overall
vs. existing 552 as of Sep-17, implying 40-50 openings p.a. over nine years.
IIWe see attractive long-term growth opportunities:
— Ja Woll — a German discount retailer: we forecast a sales CAGR of
13% to 2020E.
— Heron Foods (a discounted convenience grocery retailer, purchased in
Aug-17), from expanding its existing base of 257 stores. It would also
make selling a greater range of non-ambient food products at B&M
economically attractive.
IIA strong balance sheet provides return optionality. At only 1.6x leverage
in
Mar-18 we see potential for a 15p special dividend which would imply a
5.5% dividend yield.
IIB&M trades on a CY18E P/E of 19.6x. This is only a 1.3x PEG. The
valuation does not reflect B&M's growth trajectory.
IICatalysts: Q3 results on 12-Jan.
Related DB Research:
B&M: Heron is flying (Okines)
European Non-Food Retail: Christmas turkeys and crackers (Okines)
Deutsche Bank Research: European Equity Focus — January 2018
The price gap vs. Tesco and Asda is widening — B&M is a price leader
10%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
Apr 14 Aug 14 Dec 14 Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Dec 16 Apr 17 Aug 17
vs Asda
vs Poundland
Q2 LFL better than 01, despite Easter effect in 01
EFTA01432871
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
5
vs Tesco
EFTA01432872
> Consumer
2 BAT — Gerry Gallagher, BUY, close 4914p, 6000p tgt, 22% upside
IIBAT offers 50% TSR over the next two years, only 15ppts of which is from
an EV re-rating.
IIIts broad offering in next generation products (NGP), both in heat-notburn
and vaping, puts BAT at a competitive advantage could fuel group
organic growth of c5% organic growth FY18 and c6% FY19.
IIBAT is one of the fastest growing large cap European staples yet it
trades at a discount to the European sector and its international peers.
0%
IIKey drivers:
— Strong organic EBITDA growth and debt pay down (c28ppts).
EBITDA growth could fuel 10% pa EPS growth, while debt pay-down
further shifts the EV to equity.
— Attractive dividend (c7ppts upside over next two years).
— Re-rating to 13.1x 18E EV/EBITDA (c15ppts upside) and still at a
discount to staples and international peers. Concerns regarding
potential plans by the FDA to reduce cigarettes' nicotine content
(announced in July 2017) have brought the multiple down to 12.4x.
— The FDA regulatory process takes many years. By its conclusion, NGPs
may already be well-established.
IICatalysts: US tax reform (could add 5-8% to EPS); FY17 results end Feb;
FDA comments through 2018
Related DB Research:
What's going on (Gallagher)
You can't have your cake and eat it (Gallagher)
Deutsche Bank Research: European Equity Focus — January 2018
10%
EBITDA (operational) growth
Assoc. and mins.
Incremental EPS at higher P/E multiple
Operational drivers are key— we see substantial EBITDA growth to come
10
12
14
16
0
2
4
6
8
FY17
FY18
6
EFTA01432873
FY19
FY20
EBITDA (GBPbn) (LHS)
Growth (RHS)
0%
5%
10%
15%
20%
25%
30%
35%
40%
20%
We see potential for 50% TSR over the next two years
Operational drivers: 27.8%
EV/EBITDA remains at 12.3x
21.5%
5.0%
1.3%
30%
Debt paydown
P/E expansion ex operational drivers
DPS
Re-rating: 14.8%
12.0%
2.9%
7.4%
40%
50%
EFTA01432874
> Consumer
3 Bovis Homes — Glynis Johnson, BUY, close 1185p, 1368p tgt, 15% upside
IIManagement's targets for 2020 are credible (EBIT margins >18% and
ROCE >25%) and provide scope for upside. We see scope for expansion
from the following sources:
— Land bank intake margin is 26.4%, above the gross margin target of
23.5%
— Contingency costs assumed in the current land bank and all new land
intake should edge lower. These have increased from 2.5% to 4% of
build cost, but the CEO has guided that these should fall.
— We have not included any benefits from new housetypes from 2018.
This could help bring cost savings and economies of scale.
— Admin costs are targeted to be below 5% of sales. They are at the top
of the peer group at present and so this target implies substantial cost
savings, but we believe volume improvements could help too.
II>9% dividend yield from special cash return of £180m over three years.
IIPotential for higher dividends if Bovis constrains its land buying plans.
Reducing land buying by half would increase cash available by £75m. The
CEO is incentivised to pay out more than £180m in his LTIP.
IIOrganic cash flow can support the dividend post 2020. The cash
generation potential is impressive, with a 2018E FCF yield of 18.0%.
IIStock is still cheap at 1.2x 2018E P/TNAV, despite 30% rise in last six
months.
IICatalysts: FY trading update on 12th January, FY results on 1st March.
Related DB Research:
Bovis: Benefits of strategy becoming evident (Johnson)
UK Housebuilders: 2018 Outlook — Better for longer (Johnson)
Deutsche Bank Research: European Equity Focus — January 2018
Bovis has the best yield in the sector, and one of the best in the market
0.0
0.5
1.0
1.5
2.0
2.5
3%
McCarthy
Beltway
Berkeley
Persimmon
Red row
Crest
Barratt
Taylor
Bovis
EFTA01432875
4%
5%
6%
7%
Dividend yield
We see margin upside from the land bank, with land trailing house prices
100
110
120
20
30
40
50
60
70
80
90
Halifax HPI
Greenfield land
8%
9%
10%
Rebased: Dec 2007 = 100
7
Dividend cover by FCF (x)
Mar-97
Nov-97
Jul-98
Mar-99
Nov-99
Jul-00
Mar-01
Nov-01
Jul-02
Mar-03
Nov-03
Jul-04
Mar-05
Nov-05
Jul-06
Mar-07
Nov-07
Jul-08
Mar-09
Nov-09
Jul-10
Mar-11
Nov-11
Jul-12
Mar-13
EFTA01432876
Nov-13
Jul-14
Mar-15
Nov-15
Jul-16
Mar-17
EFTA01432877
> Consumer
4 Carrefour — Maxime Mallet, SELL, close €18.3, €15 tgt, 18% downside
IIWe believe 2018 consensus is at risk. We are 13% below consensus 18E
EPS (and 15% below 19E consensus).
IICarrefour needs to invest given competitive pressures in France.
Hypers (52% of French sales) suffers from a 5% price gap vs. Leclerc and
underexposure to online grocery (with only 8% market share).
IINovember's Kantar data showed a market share loss of 60bps to 20.5%.
— This is not confined to Hypers (40bps share loss); Supers also lost
30bps of market share.
IIRecent price and promotional investments have not delivered better
customer perceptions. Price perceptions are broadly flat YoY for both
Supers and Hypers. Therefore, more will be needed.
IICarrefour's market position is already weak. French EBIT margin is at a
historical low of 2.0% in 2017E.
IIClosing the gap to peers would be expensive. Eliminating it would cost
the entirety of French EBIT.
IIThe strategic plan in January is likely to be underwhelming. The first
measures taken by the new management do not address the main issues
and it will be costly and take time to fix the group's positioning
IICash flow generation is structurally weak. The meagre 2.6% FCF yield
is linked to thin margins in a tough competitive environment and a high tax
rate of 35%.
IICarrefour still trades at a 11% premium to peers at 16x 18E EPS.
IICatalysts: strategic plan on January 23rd.
Related DB Research:
French Food Retail: A stronger November and a weaker Carrefour (Mallet)
Deutsche Bank Research: European Equity Focus — January 2018
French profitability is falling
33,000
33,500
34,000
34,500
35,000
35,500
36,000
36,500
Sales (in €m, LHS)
EBIT margin (RHS)
1.5%
2.0%
2.5%
EFTA01432878
3.0%
3.5%
4.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E
Narrowing the gap vs. Leclerc would be costly
1,000
1,200
200
400
600
800
-45
-200
0%
1%
2%
3%
4%
5%
6%
EBIT (LHS)
EBIT margin (RHS)
852
672
493
313
134
1,031
-1%
0%
1%
1%
2%
2%
3%
3%
4%
France EBIT on LHS; France EBIT margin on RHS)
8
EFTA01432879
Financials
Deutsche Bank Research: European Equity Focus — January 2018
9
EFTA01432880
> Financials
5 Aroundtown Properties — Markus Scheufler, BUY, close €6.5, €7.50 tgt, 15%
upside
IIWe like Aroundtown as a play on a stronger German economy. Its portfolio
is primarily based in German cities (88% of portfolio) and is mostly geared
towards commercial property (76% of assets).
IIKey driver #1: Acquisitions keep beating expectations. Aroundtown has
closed €3bn of acquisitions YTD at a 6.3% yield.
IIWe believe that Aroundtown should be able to continue making acquisitions
below replacement costs for the next two to three years.
IIRefinancing could drive cash flow upside.
— Re-gearing the portfolio from 35% LTV at a low 1.5% marginal cost of debt
would lock in a 500bps spread
IIKey driver #2: strong rental growth of >5% pa. We forecast a 23% FF0
CAGR to 2020E. This in turn is driven by:
— Closing the 20% gap to market rents for c90% of the portfolio.
Aroundtown's strategy is to acquire undermanaged assets, refurbish
them and realise the market upside;
— LFL rental growth of 4%;
— A fall in vacancy rates to c5% from c7%
IIKey driver #3: we expect a 12% NAV growth to 2020E, driven not just by
rental growth but also by:
— Revaluation — H1 revaluation to 5.5% yield was a positive surprise
— Better portfolio quality and thus yield compression
IIAroundtown currently trades on a discount to book value at 0.9x 2018E
IIThe next catalyst is potential inclusion in the MDAX in March
Related DB Research: 3017 results: Strong growth continues: BUY (Scheufler)
Deutsche Bank Research: European Equity Focus — January 2018
Acquisition volume continues to surprise to the upside
1,000
1,500
2,000
2,500
3,000
3,500
500
0
2015
20% upside to market rents drives LFL rental growth
100 %
88%
10
20
EFTA01432881
30
40
50
60
70
80
90
0
Below market rent
10
At market rent
2016
2017 YTD
Acquisition volume (in EURm)
Acquisition yield (%, RHS)
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
12%
EFTA01432882
> Financials
6 AXA — Oliver Steel, BUY, close €25.20, €28.50 tgt, 13% upside
IIAXA is geared to rising bond yields, especially in the US, and the DB house
view sees upside to bond yields from better macro.
— The downside in any case is modest: US 10 year would need to fall to
1.5% before further reserving fears could be valid.
IIThe solvency ratio is robust at 200%.
IIWe see re-rating potential as M&A plans are executed. This cannot be risk
free, but the scale of the plans is modest in the context of the group
(planned disposals account for 13% of group earnings); yet the shares now
trade 15% below the sector.
IIWe see earnings upgrade potential on delivery of the five-year plan.
— Management has recently reiterated its confidence in the group target
of 5% pa EPS growth in 2015-2020 (despite FX headwinds). This
implies c.7% pa growth over the course of 2018e-2020e.
IIOur forecasts are in line with management's 5% p.a. base case, but are
still
conservative. For instance, we do not incorporate any revenue benefit from
the 'simplify to accelerate' programme (focusing on only 16 principal
countries, reducing management layers).
IIThe simplification programme should deliver the equivalent of €0.3bn in
cost
savings within two years (c5% of 2016 net income).
IIIn summary, AXA is far too cheap at a 15% discount to the sector — with
the potential to re-rate in 2018. It currently trades on 9.5x 2019E, vs
conglomerate peers at 11.7x and sector at 11.Ox
IICatalysts: planned M&A during 2018; FY and 1H results.
Related DB Research:
AXA: A confident investor day update (Steel)
European Insurers: 2018 - Safety and Optionality (Steel)
Deutsche Bank Research: European Equity Focus — January 2018
Potential for significant EPS acceleration — and on delivery, re-rating
10%
12%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2016
EFTA01432883
Bd ylds
Growth
11
2017e
Efficiency
Equ mkts & FX
2018e
2019e
Tech margin
Total
M&A
2020e
Potential EPS growth
based on AXA targets
EFTA01432884
> Financials
7 Banco Santander — Ignacio Ulargui, BUY, close €5.6, €6.6 tgt, 17% upside
IISantander is a very large cap stock (market cap > €90bn) with significant
earnings momentum and an attractive valuation.
IIWe expect high-single-digit growth in Brazil over the next two years
driven by the economic recovery.
— NII should rise at a c4% CAGR for 18-19E driven by stronger loan
growth (we expect 10%/12% in 18E/19E). Santander has been the most
active in increasing lending, being the only Brazilian bank posting both
YoY and QoQ growth.
— The economic recovery should help reduce cost of risk and hence
provisions. We forecast a 59bps fall in the cost of risk through to 2019.
IICosts and provisions should deliver profit growth in Spain. Popular's
contribution could be bigger than expected driven by revenues and lower
provisions (the company expects the acquisition of Popular to deliver €550m
of synergies), and NPAs should fall over time to non-material levels.
IIThe USA has revenue and cost tailwinds to come, starting 1H18.
IIThe UK is becoming less of a drag. Competition necessitates
management's margin caution, but the outlook on costs of risk and
operations is more positive.
IIClient loyalty focus should bring fee income outperformance. Realising
the potential from the 131m customer base should deliver a 7% fee income
CAGR in 2018-19E
IISantander has a P/B of only 0.9x for an estimated 11.4% 18E RoTE.
IICatalysts — UK & Brazil newsflow and quarterly results
Related DB Research:
Reaffirming targets. Buy reiterated (Ulargui)
Deutsche Bank Research: European Equity Focus — January 2018
Santander Brasil is achieving market-leading loan growth
10%
6.4%
-15%
-10%
-5%
0%
5%
4.2%
-1.0%
-6.8%
306
Santander Brazil
406
Bradesco
EFTA01432885
Spanish NPAs over loans have been materially reduced
10%
12%
14%
16%
18%
0%
2%
4%
6%
8%
Pre Blackstone deal
12
Post Blackstone deal
49% stake in
Blackstone's
vehicle
1017
Itau
2Q17
3Q17
Banco do Brazil
7.6%
EFTA01432886
> Financials
8 Credit Suisse — Kinner Lakhani, BUY, close CHF17.8, CHF21 tgt, 18% upside
IICS has superior Wealth Management operating momentum of 13%
CAGR PBT over the next 3 years supported by its Relationship Manager
investments, One Bank strategy and strong cost control
IIIt has strong cost control with a targeted 2018 cost base of <CHF17bn,
c20% down on 2015, with recent new guidance of CHF16.5-17bn over
2019-20.
IIAttractive capital return based on c50% payout ratio through 2019 and
2020 — primarily through share buybacks and special dividends — implying a
'yield' of over 5-6%
IIThere is upside potential to our forecasts. This comes from three
sources: (i) Lower funding costs of CHF1.1bn by 2019E (Dec-17 Investor
Day), improving by CHF0.5bn vs. Dec-16 Investor Day (ii) NII benefit from
forward rate curves of CHF0.45bn over 2018-20; and (iii) Lower Group tax
rate of c23%, from c28%, in the event of US tax reform.
— Lower tax alone could drive an earnings upgrade of c7% while better NII
trends could drive a c10% upgrade. This could increase our fair value
of the stock from CHF21 to CHF24.
IICS trades on only clOx adj. 19E P/E and 1.0x 19E P/TB, while offering a
10.5% 19E RoTE.
IICatalysts: US tax reform passage, further delivery towards targets
Related DB Research:
Credit Suisse: From momentum to capital return (Lakhani)
European Banks Strategy: Road to Recovery — Intrinsic Value (Lakhani)
Deutsche Bank Research: European Equity Focus — January 2018
3 5
4 0
4.5
5.0
5.5
6.0
Quarterly adjusted cost trends show strong execution
2015
CHFbn
5.2
4.8
4.6
5.3
4.9
4.5
4.9
4.8
4.4
4.9
-4.5
EFTA01432887
2016
2017
5 8
10
20
3Q
40
expenses at constant FX rates, 4017 is a company est
10%
12%
14%
16%
18%
3017-2020E CETI glide path: attractive capital return to come
3.3%
(0.4%)
0%
2%
4%
6%
8%
13.2%
12.8%
(1.7%)
=4.5%/6.0%
dividend
yield in
19E/20E
(2.5%)
11.9%
3017 CET1
capital ratio
Net change,
4Q17-2018E
2018E CET1
captial ratio
Earnings,
Dividends,
2019-2020E 2019-2020E
Regulation
and others,
2019-2020E
2020E CET1
capital ratio
expenses at constant FX rates, 4017 is a company est
13
EFTA01432888
> Financials
9 Prudential — Oliver Steel, close 1898p, 2050p tgt, 8% upside
IIValuation is simply too low at just 5% premium to the wider sector (PE
11.5x 2019e vs broad sector at 10.8x), despite a superior growth rate
(EPS CAGR to 2020 at 10%).
IILong-term growth in Asia is the heart of the investment case: insurance
spend in Asia is only 2.5% of GDP vs 7.5% in the UK, and mutual fund FuM
only 12% of GDP vs Europe at 75%. We forecast 13-14% pa growth in Asia.
IIPru holds top 3 positions in 9 of its 11 Asian markets. Asia is 36% of IFRS
profits and 66% of new business profit.
IIIn the US (39% of profits), Pru is no. 1 in the variable annuity market by
sales, with these accounting for only 12% of US retirement AuM.
Consensus growth expectations are low following the DOL changes, with
scope for positive surprise. Tax reform could also deliver further upside.
IIThe UK — 15% of IFRS earnings — is less exciting, but offers potential
capital release and 5% re-rating from its annuity and other closed books.
IIShort-term headwinds have turned in Pru's favour: Asia sales are more
robust (double-digit growth in most countries, thus less reliant on mainland
Chinese purchases in HK); fund management inflows are positive again; US
sales are bottoming out. A partial offset is £ recovery (80% of earnings are
non-GBP).
IICapital position offers optionality: group Solvency II capital ratio end
2016 at 201%, growing at 5pts p.a., with ability to remit up from each major
unit.
IICatalysts: sale of UK annuity book, US tax changes
Related DB Research:
Global Asset Managers: At a critical juncture (Lakhani & Steel)
European Insurers: 2018 - Safety and Optionality (Steel)
Deutsche Bank Research: European Equity Focus — January 2018
Asian sales growth, the key group driver, is broadening out again
HK
Non-HK
20%
40%
60%
80%
-20%
0%
Total Asia VNB growth
-10%
-5%
0%
5%
EFTA01432889
10%
15%
20%
25%
14
Upside to target based on weighted peer sum of the parts
Implied Upside
Typical range since 2012
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
EFTA01432890
Healthcare
Deutsche Bank Research: European Equity Focus — January 2018
15
EFTA01432891
> Healthcare
10 AstraZeneca — Richard Parkes, BUY, close 5171p, 5700p tgt, 10% upside
II2018 is a likely turning point for margin and EPS momentum. We
believe EPS should grow at a c12% EPS CAGR to 2022 as it emerges from
its patent cliff and margins grow.
IIBest-in-class pipeline. Exceptional data on new oncology portfolio puts AZ
in a strong position despite MYSTIC failure.
— Expectations for the overall survival readout of MYSTIC in 1H18 are
low, so this is close to a free option in our view. A positive would deliver
>10% upside.
— The new portfolio, plus other growth products, should add >$2bn in
incremental sales in 18E.
IISubstantial margin leverage momentum improvement. Several new
launches leverage existing infrastructure and thus will have very high
margins
— We expect flat EPS in 2018, but substantial growth thereafter. The
equity story should shift to one of delivering or beating on revenue and
earnings expectations.
IIThe best-in-class growth justifies a larger premium than at present. The
shares trade on 17x 18E P/E vs. 16x for peers.
IIMultiple catalysts from pipeline. Data on existing drugs Imfinzi and
Lymparza in 1Q18, plus readouts on two potential blockbusters in
roxadustat (anemia in chronic kidney disease) and anifrolumab (lupus) in
the next 12 months.
Related DB Research:
Lynparza survey supports market leadership in potential >$7bn class; Buy
(Parkes)
Pharma: 2018 Outlook: Fundamentals solid but fewer debates than in prior
years (Parkes)
Deutsche Bank Research: European Equity Focus — January 2018
Bull/bear case: limited downside, substantial upside potential
1500p
2500p
3500p
4500p
5500p
6500p
7500p
Current
share price
1083p
4389p
228p
5700p
513p
285p
EFTA01432892
513p
7011p
Bear Pipeline -ve Mystic -ve Base
Tagrisso
Bull
Mystic +ve Pipeline
success
Substantial EPS acceleration from 2018 driven by top-line growth
10,000
15,000
20,000
25,000
30,000
35,000
5,000
0
2015A
2016A
16
2017E
2018E
2019E
2020E
2021E
2022E
Total revenues ($m)
Core EPS ($)
0
1
2
3
4
5
6
7
Bull
EFTA01432893
> Healthcare
11 Fresenius — Gunnar Romer, BUY, close €65.4, €83 tgt, 27% upside
IIStrong outlook — we expect defensive low-teens EPS growth to 2020,
given sound end market dynamics, market leadership positions, and a
strong management team.
IIWeak sentiment means the negatives are priced in. The shares have
been weak recently on concerns over IV generics pricing and the poor
performance of Akorn.
— We expect consensus estimates to trough on 4Q17 results and to
drive further buying of the shares.
— IV generics price pressure is not outside of expectation to reassure
— 'Lowering the bar' on Akorn should remove a key overhang.
II4Q17 results should be strong. We expect adj. NI up 22% CER, helped
by a full contribution from Qironsalud and soft comps at Kabi.
IIValuation is undemanding at 20x 18E P/E, in line with historical 12m
forward range of 18-22x P/E
IIA number of positive catalysts to come.
— New product launches at Kabi should surprise to the upside.
— Qironsalud integration is progressing smoothly
— Helios Capital Markets Day should be reassuring.
Related DB Research:
European MedTech & Services: 2018E Outlook: Significant Outperformance (Wang)
Deutsche Bank Research: European Equity Focus — January 2018
17
Fresenius has de-rated over 2017 closer to its historical average...
10
15
20
25
30
5
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
... driving underperformance relative to the market (here, STOXX 600)
20
40
60
80
-60
-40
—20
0
66
54
36
EFTA01432894
22 25
6
-9
-24
-43
11 10
-8
-20
25
7 11 12
14
46
Fresenius lyr fwd PE
Average since 1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
EFTA01432895
> Healthcare
12 Shire — Richard Parkes, BUY, close 3875p, 5000p tgt, 29% upside
IIWe expect new long-term targets to help rebuild investor
confidence. We expect these targets to reassure that Shire can continue to
grow despite headwinds to haemophilia. Between this, execution
on deleveraging and completion of the Neuroscience Review (at end-17),
the share price should recover.
IISynergies and deleveraging should offset headwinds in '18, delivering
revenue growth. Growth of Immunology and from recent launches should
drive top-line growth.
IIMore long-term safety data needed before Shire could be displaced in
haemophilia (24% of sales). Hemlibra is a competitive threat to Shire, but a
majority of patients will need more evidence on safety given safety issues
observed in its inhibitors trials.
IIExpert feedback suggests Shire will emerge as dominant in HAE with
Lanadelumab (launch expected in 2H18).
IIShares are far too cheap at just 8x 19E PE and 9x EV/EBITDA. Shire is
the cheapest stock in our coverage after '17 underperformance, driven by
earnings downgrades.
IIConsensus has overlooked new pipeline opportunities. We see positive
surprise potential on these programmes, particularly if clinical data
supports
attractive pricing for SHP621 (est. 150k patients in the US alone, many of
whom have few effective treatments).
Related DB Research:
Shire: Headline HAVEN 3 data incrementally better than anticipated (Parkes)
Pharma: 2018 Outlook: Fundamentals solid but fewer debates than in prior
years (Parkes)
Deutsche Bank Research: European Equity Focus — January 2018
Bull/bear case: blue sky yields almost 45% upside
1500p
2000p
2500p
3000p
3500p
4000p
4500p
5000p
5500p
6000p
Current
share price
3112p
594p
817p
4523p
EFTA01432896
258p
216p
4997p
380p
5377p
Shares are now very cheap on lyr PE vs. EU Pharma
0.4
0.8
1.2
1.6
Jan 10
18
Dec 11
Shire lyr fwd PE rel to EU Pharma
Rel to EU Pharma 4yr Ave
+1 s.d.
-1 s.d.
Dec 13
Dec 15
Dec 17
PE rel to sector (x), lY fwd
EFTA01432897
Energy, Materials and Industrials
Deutsche Bank Research: European Equity Focus — January 2018
19
EFTA01432898
> Energy, Materials & Industrials
13 ABB — Gael de Bray, BUY, close CHF26.7, CHF29 tgt, 9% upside
IIABB has a late cycle profile (60% of sales - skewed towards
process/hybrid industries). We expect the shares to track orders, rather than
earnings in 2018.
IIWe foresee a rebound in orders from a trough in 2017. 2017 was a
transition year, with large orders falling to a ten-year low. Improved macro,
favourable financing conditions and ageing assets should provide a
supportive environment.
IIIP growth has historically led capex growth by around one year, and
from unsustainably low levels we believe a rebound in heavy and process
industries is on the way. Previously-delayed, large projects in grid
connections are also expected to move forward in the US and Europe over
the next few years
IIAcquisitions should deliver benefits. The costs of the expensive
acquisitions of B&R and GE IS are now sunk, whereas the benefits of #2
positions in automation (behind Siemens) and electrification (behind
Schneider) should be substantial.
IIABB has market-leading offerings in areas such as robotics, EV fast
chargers, energy storage and smart grid offerings. R&D expenses have
increased by c.100bps since 2008, reinforcing the group's innovation
capabilities.
IIWe expect re-rating relative to the sector. Given favourable conditions,
ABB's former premium to the market should return after a hiatus since 2009.
ABB currently trades on 18.4x 18E P/E.
IICatalysts: 4Q17 results on 08-Feb
Related DB Research:
ABB: Better late (cycle) than never (de Bray)
Deutsche Bank Research: European Equity Focus — January 2018
ABB's large orders ($m) hit a low in 2017 — we expect improvement
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e
ABB 12m fwd P/E relative to sector average — premium has eroded postcrisis
0 6
0.7
0.8
EFTA01432899
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Nov-07
Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov
20
10-year average
EFTA01432900
> Energy, Materials & Industrials
14 ArcelorMittal — Bastian Synagowitz, BUY, close €28.7, €33 tgt, 15% upside
M Despite having performed well recently, we believe the stock is still
priced
for a "cautious" $7bn EBITDA scenario. This appears too bearish as spot
conditions remain strong and three structural changes have removed
part of the downside risk:
IIFirstly, Europe is seeing the strongest consolidation dynamic since the
creation of ArcelorMittal itself.
IISecond, trade policy continues to become stricter in MT's US and
European core markets.
IIThird, China is aiming to cut capacity 10-20%. Our checks (and rising
margins in China) support the view this is for real.
IIAlthough we model a steel price correction from spot (suggests $10bn
EBITDA), we believe the stock comes with three free options beyond our
base case scenario (stronger developed market margins, Brazilian recovery,
commodity price holding up better) which means it could almost double
in a blue sky.
IIMT should end 2017 with net debt of c.$10bn, vs Q4 run rate EBITDA of
$8bn. Its strong 2018 FCF yield of 8-11% suggest high potential for
attractive cash returns mid-term: $2.9bn of FCF, and just $0.3bn of divis in
our model.
IIValuation: MT trades at 5.0x 2018E EV/EBITDA, 14% discount to peers
IICatalysts: trade policy, steel margins holding up better, further rebound
in
iron ore. Q4 results 9-Feb.
Related DB Research:
Notes from the road: US NDR (Synagowitz)
Another round of upgrades and still room to go — BUY, PT to USD38
(Synagowitz)
Deutsche Bank Research: European Equity Focus — January 2018
Expectations are sensible but the shares do not reflect the ongoing earnings
recovery yet
100
120
20
40
60
80
0
Sales by end-market (2016)
Mining, Chemical & Water 1%
Packaging 4%
EFTA01432901
Other steel 11%
Transformation 12%
Construction 18%
Auto 20%
21
Other sales 8%
AM - share price performance (EUR) (LHS)
1 yr rolling EBITDA consensus (USDm) (RHS)
2 yr rolling EBITDA consensus (USDm) (RHS)
4,000
6,000
8,000
10,000
12,000
14,000
Dec/09 Dec/10 Dec/11 Dec/12 Dec/13 Dec/14 Dec/15 Dec/16 Dec/17
Distribution 26%
EFTA01432902
> Energy, Materials & Industrials
15 BAE Systems — Jaime Rowbotham, BUY, close 574p, 730p tgt, 27% upside
IIWe see scope for 63% TSR to 2020. With FCF forecast at £1.35bn in 2020,
if the stock were to trade on a 5% yield then those buying now would make
18% TSR per year. Thus now is an attractive entry point into a multi-year
defence spending up-cycle.
IIFlat earnings are masking a compelling growth story. We forecast EBIT
growth at 5% at the company level.
IIUS strength (9% EBIT CAGR to 2020) should come from growth in
Combat Vehicles & Ship Repair and Electronic Systems, and a profit
recovery at Applied Intelligence in Cyber.
IIIt should be possible to offset declining Typhoon profit contribution in
Air. The key drivers of this are Missiles (MBDA, in which BAE has a 37.5%
stake, is growing at a 12% pa EBIT CAGR), Aftermarket and the stake in
the F-35. There is upside potential to this from potential new Typhoon
orders, such as from Saudi Arabia.
IIMaritime profitability is well-underpinned under this UK government,
though there is risk from a change in government.
IICash conversion is set to improve from here on lower outflows on
working capital, provisions (as most are now non-operational) and pensions
(post the triennial review).
IIBAE trades on a discount to EU and US peers at c13.5x 19E P/E and
c9x 19E EV/EBIT, versus 14.5x and 10.5x for EU peers, and 19x and 14x
for US peers.
IICatalysts: conversion of contract opportunities
Related DB Research:
BAE: Cashing in: >60% 3-year TSR potential (Rowbotham)
Global Aerospace and Defence: Civil selective; Defence more effective
(Kerner)
Deutsche Bank Research: European Equity Focus — January 2018
PER premium/discount vs US defence
22
EV/EBIT premium/discount vs US def
£1.35bn FCF by 2020, driven by EBIT growth and better cash conversion
1000
1200
1400
1600
200
400
600
800
598
EFTA01432903
115
110
90
282
127
840
93
(25)
(40)
1350
BAE trades on a c30% discount relative to its US peers
-80%
-60%
-40%
-20%
0%
20%
40%
60%
EFTA01432904
> Energy, Materials & Industrials
16 Continental — Tim Rokossa, BUY, close €232.3, €250 tgt, 8% upside
II1) Automotive outperformance is at an inflection point. Continental has
taken Valeo's mantle as the fastest-growing European supplier. Automotive
organic growth was 9% in 03 (700bps above global production and 250bps
above Valeo).
II2) Continental is the best play on the autos 'mega trends.' Continental
is a leader in all of:
— Autonomous driving — indeed, the world's largest player. This segment
grew 41% yoy in 9M17. This is not limited to Chassis & Safety but also
includes software, consolidated in the Interior division.
— Electrification. According to Continental, its content per car could be up
to 3x higher for a full EV compared to a standard gasoline engine.
— Digitalisation
IIThe mix shift away from diesel helped turbochargers grow >50% in Q3.
II3) Rubber should accelerate further. The margin was a slight beat in Q3.
With a negative raw mat impact abating in coming quarters, and given our
expectation that price increases (+2% in Q3) will prove sticky, we expect
earnings momentum to accelerate.
II4) Valuation: Continental has €20 upside just to reach a valuation in line
with peers (current 18E P/E is only 11.2x), despite robust growth
IICash generative (€2.4bn ex M&A this year). We see scope to increase
pay-out, given CFO guidance of no major transactions in the short term.
IICatalysts: FY results 09-Jan — talk around ADAS could offset cautious
guidance
Related DB Research:
What Conti's CFO statements mean for our view on 2018 (Rokossa)
Get ready for a good 2018 (Rokossa)
Deutsche Bank Research: European Equity Focus — January 2018
Order intake backs thesis of stronger growth ahead
10
15
20
25
30
35
40
0
5
2010
23
2011
2012
EFTA01432905
2013
2014
2015
2016
2017
Continental was one of the fastest growing auto suppliers in Q3
10%
12%
14%
0%
2%
4%
6%
8%
EFTA01432906
> Energy, Materials & Industrials
17 DSM — Virginie Boucher-Ferte, BUY, close €81.8, €100 tgt, 22% potential
upside
IIWe see Nutrition (68% of EBITDA) as a key growth driver. We forecast a
9% EBITDA 2018-20E CAGR driven by cost cutting, innovation and
leverage of its broad portfolio.
— A greater proportion of the Nutrition portfolio is in higher-value and
faster-growing ingredients and 'solutions' rather than just vitamins.
IIUp to 30% upside to 18E EBITDA forecast if vitamin price increases are
sustained.
— Prices are unlikely to revert fully: China's environmental policies are
should give structural support in the long term.
IIFull exit from Materials likely, driving portfolio shift towards becoming a
rI
ure play in higher-value ingredients.
M&A should drive the next phase of development. DSM is likely to use its
strong balance sheet (0.5x 17E net debt/EBITDA) to broaden its
ingredients portfolio.
— This would unlock >€20/share of value from EPS accretion and rerating.
II
Trades on 16x 19E P/E, in line with chems but a 33% discount to
ingredients. We believe the portfolio shift should prompt re-rating.
IIOur €100 tgt implies a 20x 19E P/E — still a 15% discount to ingredients.
IICatalysts: Upside through higher value and fast growing ingredients and
"solutions". Portfolio shift optionality.
Related DB Research:
DSM: The path to E100 (and potentially more): upgrade to BUY (Boucher-Ferte)
Ingredients: 2018 Outlook: Recipe for success (Boucher-Ferte)
Deutsche Bank Research: European Equity Focus — January 2018
DSM Nutrition organic growth now compares well to peers
10%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2009
2010
1000
1500
EFTA01432907
2000
2500
3000
500
-500
0
2007
2009
24
2011
2013
2015
2017E
2019E
Lots of firepower for accretive M&A (DBe synergies 6% of sales)
Net Debt (LHS)
2011
DSM Nutrition organic growth
Food Ingredients organic growth average
2012
2013
2014
2015
2016
2017E
Net Deb/EBITDA (RHS)
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
EFTA01432908
> Energy, Materials & Industrials
18 Glencore — Liam Fitzpatrick, BUY, close 391p, 430p tgt, 10% upside.
IIStrong organic growth from return of suspended capacity. Group
volume growth is c7% pa to 2020, vs. peers at 2-3%. Giving full value for
suspended capacity yields a blue-sky valuation of >15/share.
— Suspended zinc production stands at 500 Ktpa — we have
c90/320/400kt of volume growth in 2018-20 in our numbers.
— Also there is substantial suspended copper capacity. We have 8% YoY
volume growth to 2020 in our numbers.
— On copper, we are conservative given operational and country
(DRC/Zambia) risks, so the risks to our estimates are to the upside.
IIRight base metal exposure. We are structurally bullish on copper, zinc,
nickel and cobalt.
— We believe copper will remain in deficit in 2018, which should
support the copper price increases. Our forecasts are 297c in 2018E
and 315c in 2019E, putting us 10% ahead of consensus.
— Glencore's copper business is well-positioned on scale, margins and
growth.
An
An EV play. Glencore is a longer-term structural winner of any shift to EVs
given its strength in copper, cobalt and nickel.
IIValuation is attractive at 2018 FCF yield of 14% at spot and 11% at our
base case.
IICatalysts: Copper prices/supply disruption, consensus upgrades, delivery
against volume guidance
Related DB Research:
Glencore: Investor call — what did we learn? BUY case remains intact
(Fitzpatrick)
European Mining 2018 Outlook: Upside remains: a guide to 2018 (Fitzpatrick)
Deutsche Bank Research: European Equity Focus — January 2018
We see the copper market moving further into deficit
(kt)
200
400
600
800
Surplus/(Deficit)
Surplus (Deficit) % of total demand
-600
-400
-200
0
2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e
Substantial volume growth to 2020E in zinc (below) and copper (8% p.a.)
(kt)
1000
EFTA01432909
1100
1200
1300
1400
1500
1600
600
700
800
900
2014
2015
25
2016
2017F
2018F
2019F
2020F
-2%
-2%
-1%
-1%
0%
1%
1%
2%
2%
3%
3%
4%
EFTA01432910
> Energy, Materials & Industrials
19 Kingspan — Priyal Mulji, BUY, close €38.5, €40 tgt, 4% upside
IIKingspan is a global insulation producer, focusing on high-performance
panels and boards.
IIWe expect robust organic growth (5% p.a. to 20E). Kingspan should
outperform its construction markets owing to its over-exposure to markets
with low penetration rates (the USA, EM and Mainland Europe) and endusers'
increasing focus on future-proofing buildings.
IIWe see c4% upside to 2020E DBe forecasts if Kingspan meets its
penetration targets.
IIWe are already c2-3% ahead of consensus post-'17 on top line and
trading profit.
IIM&A could drive c30% upside to our price target. We expect robust
FCF/sales of 5-8% in coming years.
— Levering to 2x net debt/EBITDA to spend on acquisitions would raise
our forecast 20E EPS by up to c20%.
— Management has cited M&A as a likely growth driver
IIKingspan trades at a 24% discount to high-growth cyclical stocks.
Comparing Kingspan's operational strengths (organic growth, EBITDA
progression, scale of deleveraging and predictability and earnings) and
EV/EBITDA to similar stocks such as Geberit and Halma illustrates that
Kingspan offers excellent value.
IICatalysts: FY17 results on 23-Feb
Related DB Research:
Kingspan: Insulated growth; Initiating on BUY (Mulji)
Building & Construction: 2018 Outlook: Still opportunity (Johnson)
Deutsche Bank Research: European Equity Focus — January 2018
11
13
15
17
19
21
23
25
9
2%
3%
4%
Renishaw
Geberit
Rotork
Leg rand
Polypipe
EFTA01432911
5%
2018-20E average organic growth pa, %
26
6%
7%
Givaudan
Spirax-Sarco
Assa Abloy
Kingspan
Halma
We expect a step-up in organic growth...
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
500
0
m but the valuation does not reflect this
Revenue, EUR m (lhs)
% YoY organic (rhs)
0%
2%
4%
6%
8%
10%
12%
14%
2018E EV/EBITDA, x
EFTA01432912
> Energy, Materials & Industrials
20
Linde — Tim Jones, BUY, close €186.1, €227 tgt, 22% upside.
IIKey driver #1: improving gas industry fundamentals from cost
efficiencies, investment discipline, consolidation and end-market
stabilisation. Capex to sales has fallen from c14% in 2012/13 to c12% in
2016, and consolidation should drive price discipline and margin expansion.
IIKey driver #2: macro tailwinds. Improvements in Europe and Asia (c60%
of Linde Gas), and continued strength in the US, should provide support to a
later-cycle business from 2018 onwards. Industry growth should improve
from 2015-16's 2%.
IIKey driver #3: Praxair merger will create a global leader in the gas
industry.
Our analysis of the combined firm suggests large synergies ($1.2bn — over
20% of pro-forma EBIT — of which $1bn is cost savings and $200m capex
savings).
— The key logic is diversification (geographical and end-user), given
complementary regional and end-market exposures.
IIAnti-trust risks should be manageable, with divestments of $2.5-3bn.
Demand for these assets is likely high.
IIWe forecast €4 3bn net income in 2020, implying a fair value of
€245/share using peer multiples We discount this back, implying our €227
target.
IITrades on 21.6x 2018E P/E, in line with peers.
IICatalysts: greater visibility on merger execution and timing
Related DB Research:
Linde - Gases growth accelerating. Still on track to E245. BUY (Jones)
Pan European Chemicals: 2018 Outlook: A "super" sector (Jones)
Deutsche Bank Research: European Equity Focus — January 2018
Current
Cost
share price synergies
Rerating to
industry
average
27
Price
Mid term
discipline target price
Lower
taxes
Relating to
industry
leader
EFTA01432913
Top line
synergies
Blue sky
scenario
15
35
180
15
Linde-Praxair combination a clear market leader
Others
18%
TNS
4%
Air Products
11%
Praxair
13%
Linde
24%
Sanao. Data includes share of sales from associate
participations and .]Vs. Note: Air Liquide includes Airgas acquisition
Linde-Praxair price target bridge
25
245
10
20
300
Air Liquide
30%
EFTA01432914
> Energy, Materials & Industrials
21 Renault — Gaetan Toulemonde. BUY, close €85.2, €115 tgt, 35% upside
IIEmerging markets are the key drivers of the growth, such as: 1) Russia
(delivering €500-700m operating profit growth); 2) Americas (mostly
focused in Brazil and bringing €300-€350m earnings growth); 3) China; 4)
Iran; 5) India.
IIWe expect the profit contribution from Europe to remain stable, at a
high level, in light of modest growth (with Brexit a further drag on the UK)
and regulatory costs.
IIEconomies of scale should drive €700m pa cost savings and thus
increased operating profit. Renault has volumes of only 3.5m units, but in
partnership with Nissan has access to a purchasing department (€120bn)
and an R&D centre (€lObn) of 10m units.
IIAcceleration of synergies with Nissan. It took 18 years (1999-2017) to
have 20% of commonality between the two. It will take 4 years (2018-2021)
to move it to 80%.
IIRenault has an attractive profile in the sector's context, including low
cost
and ultra low cost line up, main sites in low cost countries, EV expertise,
economies of scale and EM exposure
IIRenault's core is far too cheap at the current share price. The current
share price implies a share price of €25/share for Renault's core business.
This is less than 2x P/E for a business still growing EPS at 5% p.a. to
2019E.
IICatalysts: confirmation of the recovery in Russia and Brazil and the
resilience of European sales
Related DB Research:
Postcard from Curitiba (Toulemonde)
Deutsche Bank Research: European Equity Focus — January 2018
2016-22E volume growth breakdown: EM leads the way
(000 units)
Europe
Africa Middle East (Maghreb, India, Iran)
Eurasia (Russia, Turkey, CIS)
Americas Brazil, Argentina...)
Asia Pacific (China, South Korea)
Sum
o/w from Europe
Implied share price of Renault core is only €25 via SoTP
10
20
30
40
50
EFTA01432915
60
70
80
90
0
Nissan value/
Renault share
Daimler value /
Renault share
28
Net cash/pensions
core business
Renault core by
difference
Current price
€85
€25
€54
€3
€2
2016
1,805
491
649
354
167
3,468
52%
2017E
1,910
540
730
400
230
3,810
50%
2022 2016-2022E
2,000
850
1,100
600
700
5,250
38%
+200
+360
+450
+250
+530
+1,790
EFTA01432916
EFTA01432917
> Energy, Materials & Industrials
22 Royal Dutch Shell — Lucas Herrmann, BUY, close 2561p, 2700p tgt, 5% upside
IIBest-in-class absolute cash generation with $25-30bn FCF guided for
2020.
IIThis drives substantial shareholder return. Between the c6% dividend
yield and c$25bn of buy-backs, Shell is set to return c$70bn to
shareholders over the next three years. Moreover, the dilutive scrip
dividend is gone, earlier than expected.
IIStrong optionality and deep resource base. In addition to conventional
sources, Shell has broad portfolio optionality.
— The BG acquisition is firmly embedded, giving Shell an unsurpassed
position in LNG
— We expect strong volume growth in US Permian shale (towards
250kboe/d by late 2020s, with breakeven at c$45/bbl)
IIShell downstream FCF alone in 2017E is enough to cover almost half the
dividend, at c$7bn.
IIDecline rates to 2025 are lowest in the sector at c2%, in part from
Deepwater's growth potential — most particularly Brazil.
IIFurther restructuring potential from divesting Shell's 'long tail' of
largely
mature territories in the upstream portfolio. This would simplify the
business
and improve R/P ratios.
IIShell is attractively valued at a 5.7% 18E dividend yield versus the 2.8%
of its only true global peer, Exxon.
— It trades on 14.4x 18E P/E, versus Exxon's 22.5x.
Related DB Research:
Royal Dutch Shell: Clear direction and purpose (Herrmann)
European Integrated Oils: 2018 Outlook cash jaws set to open (Herrmann)
Deutsche Bank Research: European Equity Focus — January 2018
Production outlook indicates substantial growth, driven by unconventional
Iara
1,000
1,200
200
400
600
800
0
2016
Cash flow growth driven by more than just refining
FCF
11000
13000
EFTA01432918
15000
-3000
-1000
1000
3000
5000
7000
9000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
29
Refining
Marketing
OCF
2017
2018
2019
2020
2021
2022
2023
2024
2025
Prelude
Gorgon
Permian growth
Canada growth
Base decline (WM 2.1%)
Lapa
UK
US GoM
Utica growth
Pre FID (inc Libra)
Chemicals
Capex
DD&A
$M net income/cash flow
Growth barrels (kboe/d)
EFTA01432919
> Energy, Materials & Industrials
23 RWE — Martin Brough, BUY, close €17.5, €25 tgt, 43% upside
IIRWE is cheap. It trades on just 3.5x 2019E EBITDA after stripping out the
market value of its innogy stake, after an excessive sell-off over German
coal phase-out fears.
IIWe see sources of upside potential to our target:
— Securing compensation for the closed 3GW of capacity at the same
rate as the 2015 deal would add €3/share to our tgt. We have assumed
no compensation and 3GW of lignite closures.
— There is further upside potential from possible further rises in power
prices. As power prices increase from the roll-over of hedges from
€27/MWh in 2019E to €36/MWh in 2022E, cashflows should increase
by €300m pa (even after higher carbon allowance costs).
IICarbon reform still leaves structural surplus of allowances to 2030,
meaning the traded carbon price is now more likely to drop than rise. We
therefore prefer fossil over clean generators.
IIRWE is still attractive even after innogy's profit warning. It presents
innogy as an investment so the financial impact is via lower likely dividend
revenues from innogy, diluting the effect of innogy's lower future profits.
— We have maintained our RWE DPS estimates despite the likely lower
innogy distribution: the medium-term cashflow outlook is still attractive.
IICatalysts: clarity on German coal closure policy, any compensation for
closures, higher power prices or securing a control premium for an innogy
transaction could all provide upside.
Related DB Research:
RWE: Value hit from innogy warning (Brough)
Utilities 2018 Outlook: Five Trades (Brough)
Deutsche Bank Research: European Equity Focus — January 2018
Stripping out innogy stake, RWE is very cheap (figures in EURm, unless
otherwise stated)
RWE share price (E/share)
RWE market value
RWE provisions less net cash and investments
RWE market EV
Innogy share price (E/share)
Value of RWE's innogy equity stake
Value of RWE EV less innogy stake
RWE 2019E EBITDA ex innogy
Implied EV/EBITDA for RWE ex innogy (x)
Cashflows (EURm) should rebound from 2019
10,000
12,000
2,000
4,000
6,000
EFTA01432920
8,000
0
30
cash flow (Em, RHS)
Capacity (MW, LHS)
0
200
400
600
800
1,000
1,200
1,400
17.4
10,709
7,148
17,857
33
14,082
3,775
1,062
3.6
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
EFTA01432921
TNT
Deutsche Bank Research: European Equity Focus — January 2018
31
EFTA01432922
> TMT
24 Eutelsat — Laurie Davison, SELL, close €18.9, €14 tgt, 26% downside
IIOpex and capex cuts leave ETL exposed in 2018. Faced with falling
demand, SES invested to diversify and ETL made cuts. Thus ETL
outperformed SES over 2017, but is now left with more fixed trunking data,
less mobility and a weaker Government position.
IIWe see 5 new worrying datapoints for core Video clients: (1) Polsat
acquisition of fixed line operator, (2) Sky Italia exploring fibre
distribution, (3)
Naspers putting Multichoice up for sale, (4) TEF passing on Sky Brasil and,
(5) TEF set to be first platform to exit satellite altogether within 5yrs.
IIWe expect this to impact via pricing pressure in renewals. There is no
risk of major clients leaving satellite in the near-term. But the barriers
to a
move to fibre are falling as streaming costs fall and fibre coverage grows.
Government and fixed data have moved from help to hindrance. Both
ISAT and ETL flagged Government as weak in 03, and ETL lacks SES's
geographical scope. ETL also saw unexpected fixed data weakness in Q3
with a 12% decline: its lack of diversification leaves it exposed.
IIWe expect Eutelsat to miss guidance as a result. The current guidance
requires a return to growth in the next twelve months. We view that as
optimisti and expect continued revenue decline.
IIWe are 6-7% below consensus on fiscal '18 — '20.
IIThe stock is not cheap. 7x EV/EBITDA vs telcos at 5x during their ex
growth phase
IICatalysts: guidance cuts
Related DB Research:
Falling Stars: Magnificent desolation (Davison)
Media 2018 Outlook: Don't flirt with mean revert (Davison)
Deutsche Bank Research: European Equity Focus — January 2018
ETL has materially outperformed ESE (which is at five-year lows)
Eutelsat Stock Price (EUR)
10
15
20
25
30
35
SES Stock Price (EUR)
Video turned negative for both groups in 2016 after being the major growth
driver for the past 10 years
-6%
-4%
-2%
EFTA01432923
0%
2%
4%
6%
Video revenue Growth like-for-like & const. currency (% yoy)*
SES video rev. growth*
ETL video rev. growth*
Eutelsat, FY ending is June, so 3Q17 corresponds to 1Q18
number. SES did not report Video revs standalone prior to 2016
32
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
Dec-2013
Apr-2014
Aug-2014
Nov-2014
Mar-2015
Jul-2015
Oct-2015
Feb-2016
Jun-2016
Sep-2016
Jan-2017
May-2017
Aug-2017
Dec-2017
EFTA01432924
> TMT
25
Infineon — Johannes Schaller, BUY, close €24.1, €29 tgt, 20% upside
IIAutomotive semiconductors is a growth sector, benefiting from
exposure to autonomous vehicles (ADAS), electrification and digitalisation.
This should all lead to meaningfully higher semiconductor content per car.
IIInfineon is the highest-quality large-cap play in the sector with a best-
inclass
technology portfolio and strong exposure to faster growing German
premium manufacturers as well as strong direct exposure to Chinese
brands and share gains across Asia (incl. Japan)
IIA leader in tomorrow's technologies, with ambitions to drive share gains
through innovation in next-gen Auto applications such as radar, lidar, 32-bit
high-performance microcontrollers and next-gen power semis.
II2018 guidance is for impressive 9% growth (13% in USD terms vs the
semiconductor industry at 5%).
IIWe believe long-term guidance is somewhat conservative at 17%
through-the-cycle margins and 8% revenue growth, compared to 18.5% and
9%, respectively, in Q4.
IIWe expect margin leverage from the Dresden 300mm fab ramp. This is
highly cost-effective (25% cheaper than the industry standard) and should
lead to structurally higher margins.
IIDespite c40% performance YTD, at 24x CY18 P/E Infineon's
outperformance over the industry and share gains vs peers are not truly
reflected in valuation. See potential upside to >E30, reflecting long-term
margin and growth potential in bull-case DCF.
IICatalysts: 1st CMD in a long time on 12th June 2018 in London where
longterm
growth and margin potential should become much clearer
Related DB Research: It is becoming increasingly evident... (Schaller)
Deutsche Bank Research: European Equity Focus — January 2018
FX masks margin expansion and mid-teens EPS growth in 18E
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2014
2015
33
EFTA01432925
Infineon EPS
% EPS growth (RHS)
0%
10%
20%
30%
40%
50%
60%
2016
2017E
2018E
2019E
A play on Auto semis, and thus ADAS, EVs and digitalisation
Chip Card & Security, 10%
Automotive, 43%
Power Management &
Multimarket, 30%
Industrial Power Control, 17%
EFTA01432926
> TMT
26
Informa — Chris Collett, BUY, close 713.8p, 880p tgt, 23% upside
II2018 as the turning point. Investors have been sceptical of the Growth
Acceleration Plan; we think the company finally delivers >3% organic
revenue growth in 2018 (DBe +3.1%).
IIWe believe our forecasts are conservative. We estimate 6% organic
growth in Exhibitions (37% of operating profit) in 2018; growth has averaged
c9% over the past three years.
— Product re-launches and improved retention could also provide upside
to our estimate of 3% in Business Intelligence (18% of operating profit).
IIAcademic Publishing should improve (37% of operating profit). We
forecast 1% growth, but with the disposal of Garland Science, better books
integration and a dynamic new divisional CEO, there is further upside.
— Management has also reassured on a recent earnings call that margins
would be protected.
IIKnowledge & Networking turnaround (8% of operating profit). Revenue
growth turned positive in July-October 2017 after underlying declines every
year since 2013.
IIWe expect the unwarranted discount to peers to close as Informa rerates.
Informa trades at P/E discounts of 2.5pts to Wolters Kluwer (despite
identical organic growth) and 4.5pts to RELX (whose organic growth is only
1pp higher). Informa trades on 14.9x 2019E P/E.
IICatalysts: FY-17 28th February
Related DB Research:
In the 3% club: raising TP to 880p (Collett)
Deutsche Bank Research: European Equity Focus — January 2018
34
Positive organic growth across all divisions (split by operating profit,
2016)
Knowledge & Networking (9%)
OG: FY17/18/19:
0.0%/1.5%/3.0%
Academic (45%)
Global Exhibitions (29%)
OG: FY17/18/19:
8.0%/6.0%/5.0%
Business Intelligence (17%)
OG: FY17/18/19: 2.0%/3.0%/3.0%
Organic revenue growth:
FY17/18/19: 0.7%/1.0%/1.5%
Informa trades on a discount to global information peers
EFTA01432927
> TMT
27 KPN — Keval Khiroya, BUY, close €2.9, €4.2 tgt, 45% upside
IIDutch wireless market solid. The Dutch market has shown increasing
signs of rationality over the past two years and KPN performs well within
this, with the company highlighting low mid-single digit underlying service
revenue growth in the most recent quarter.
IIWireless consolidation helpful. Most of the price competition has been
contained to the low-end, where Tele2 and T-Mobile NL have been active.
The two operators recently announced they would consolidate (announced
15-Dec) and this should further help trends at the low-end.
IICost cutting progress on track. KPN has guided to continued opex
reduction through to 2019 and a reduction in capital intensity, given a high
starting point (19% domestic capex/sales). This should further help
continued FCF growth (2017 — 20e EFCF CAGR of >15%).
IIB2B revenue trends are improving. This has been a major area of
concern, but Q3's -4.9% decline was better than the prior quarter (-5.9%)
and the 2016 decline of -7.3%. A potential return to stable revenues over
the medium term would be a key positive.
IIConsumer fixed remains solid. KPN's main fixed competitor, Ziggo,
remains rational following the integration with Vodafone. Both operators
have put through price rises in return for higher speeds. KPN delivered
3.2% consumer fixed revenue growth in the most recent quarter.
IIValuation remains attractive: KPN trades in-line with the sector on an
EFCF yield of 6.5%, but with low risk and premium EFCF growth. Dividend
yield is 5.4% vs peers 5.0%.
IICatalysts: Q4 results 31-Jan-18, progress of Tele2-TMNL deal.
Related DB Research: Tele2 and T-Mobile NL consolidation a positive (Khiroya)
Deutsche Bank Research: European Equity Focus — January 2018
40
45
50
55
60
65
70
75
Price/month for iPhone contracts, total value split over 24 months
AVG/m (RHS)
T2 5GB (4GB until Feb 17)
KPN 10GB (5GB until June 17)
KPN 20GB cony (10GB until June 17)
50
100
150
200
EFTA01432928
250
300
57 57 57 56 56 58 59 58 57 58 56 55 55 55 56 57 63 63
0
128GB from Sept-16, iPhone 6S 64GB until Sept-16
KPN EFCF (pre associate dividends), EURm
100
200
300
400
500
600
700
800
900
0
2015
35
2016
2017
2018
855
683
552
727
EFTA01432929
> TMT
28 Sophos — Alex Tout, BUY, close 600p, 790p tgt, 32% upside
IIA significant player in IT security market with differentiation from its
balanced portfolio across Endpoint and Network security
IIIncreasing confidence in management forecasts to FY20 due to traction
with Intercept X and Central and high renewal rates (139% in 1H18). This
supports double-digit billings growth to FY22E.
IIHighly supportive end market demands as customer senior management
increase focus on cyber security (particularly after the WannaCry and
NotPetya attacks)
— Sophos has the right product offering to benefit with its significant focus
on Endpoint
IIContinued margin improvement due to lower new customer billings mix
and hence lower sales and marketing cost as a % of billings, as well as
further scale on G&A spend.
IIWe believe recent weakness is driven by: 1) director selling; 2) Apax
placing
c10% of market cap, causing short term oversupply; 3) the tech selloff
driving selling among shorter-term holders
IIValuation attractive at 21x CY18E EV/uFCF (adjusted for SBC) given its
20% uFCF CAGR (FY19-22E).
— This compares to peers Palo Alto Networks (39x), Fortinet (19x) and
Check Point Software (18x), all of whom are more geared to the slowing
Network security market and have lower FCF growth.
IICatalysts: launch of fully AI based next gen Endpoint product Intercept X
v2
in January, 3Q18 results 08-Feb
Related DB Research:
1H18 Review. TP Raised to 790p (Tout)
Deutsche Bank Research: European Equity Focus — January 2018
We forecast substantial billings growth (USDm)
1000
1200
1400
774
200
400
600
800
0
FY15
10%
15%
20%
EFTA01432930
25%
30%
35%
Cash EBITDA and adjusted operating profit margins improving
Cash EBITDA margin
FY16
FY17
FY18
FY19
FY20
FY21
FY22
632
476
535
1,366
1,220
1,070
923
Adj. op. margin
0%
5%
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
36
EFTA01432931
> TMT
29 Vodafone — Robert Grindle, BUY, close 235p, 300p tgt, 27% upside
IIVodafone organic EBITDA growth has reached 9.3% yoy, but it has got
little credit for this because of the lack of topline growth - organic
service
revenue has been flat for two years.
IIHowever, our analysis shows that stripping out the effects of regulation
and
handset sales shows that underlying MSR has been improving, growing
at 2%, compared the headline of -0.7%.
IIPoor handset sales should drag less in 2018 and could accelerate; roaming
regulations will annualise out from calendar Q3. Therefore, both headwinds
d
hould abate in 2018 and hence we expect re-rating from improving topline.
We believe investment risk is overstated. As 5G increases efficiency,
lowering the cost of unit capacity, no material delta to current capital
expenditure is needed.
IIOn fibre, Vodafone can choose where it deploys, pressuring incumbents
into better wholesale deals.
IIWe see a deal with Liberty Global for Virgin Media as possible. Greater
regulatory clarity after a few tumultuous years would enable Vodafone to
sensibly value Virgin Media, making such a deal possible. This would bring
substantial synergies. It could also potentially expand the CityFibre
partnership.
IIThe stock is cheap at 6.0x 19E EV/EBITDA (vs. the sector at 6.5x) and a
dividend yield of 6% (vs. the sector at 4.5%).
IICatalysts: improving organic growth and M&A
Related DB Research:
Telcos Outlook 2018: Time to call the sector up (Grindle)
Deutsche Bank Research: European Equity Focus — January 2018
Organic EBITDA growth has accelerated to 9.3%
10%
-10%
-5%
0%
5%
H1 15
H2 15
Ex regulation + mobile, Vodafone is growing MSR at 2%
-5%
-4%
-3%
-2%
EFTA01432932
-1%
0%
1%
2%
3%
Q4 15
MSR
MSR ex regulation
MSR ex regulation/handsets
H1 16
H2 16
H1 17
H2 17
H1 18
Group OSR
Group org. EBITDA
Q2 16
Q4 16
37
Q2 17
Q4 17
Q2 18
EFTA01432933
Business Services, Leisure and Transport
Deutsche Bank Research: European Equity Focus — January 2018
38
EFTA01432934
> BLT
30 Deutsche Lufthansa — Anand Date, BUY, close €30.7, €36.2 tgt, 18% upside
IIThe Air Berlin acquisition is an excellent deal. >50% of Air Berlin flown
capacity on routes where Lufthansa + Air Berlin would have combined 80100%
market share, creating capacity and revenue management
opportunities.
— The combined group would have a number of strong positions at
severely and slightly constrained airports. Our August 2017 note
("Finding a sweet slot") highlighted the benefits of such positions, in
terms of network flexibility, better pricing power and tangible slot value.
IIAirline M&A has historically been highly accretive, generally yielding
synergies of 3-7% of combined revenues (3/4 revenue, 1/4 cost).
IILufthansa is not inheriting legacy costs, only purchasing assets at
market rates. It has guided that the deal should reduce unit costs.
IIWe see a ROCE of 25-35% on a three year view based on a €1.5bn
investment in the deal.
IIThe market is not reflecting this in forecasts. We forecast incremental
EBIT of €470m by 2019, leaving us 22% ahead of consensus.
IIAntitrust risk is limited: 1) Lufthansa is providing much of Air Berlin
bridge
financing; 2) EC did not block the Lufthansa-Swiss Air deal despite similar
local market dominance
IIShares should trade up on earnings growth and consensus revisions.
Currently trades on 6.5x lyr fwd P/E. With 5% and 18% adjusted EBIT
growth in 18E/19E, we see consensus upgrades as likely as the deal is
priced in.
Related DB Research:
Lufthansa: AB Fab. Upgrade to BUY (Date)
Transportation Outlook 2018: Going Places (Chu)
Deutsche Bank Research: European Equity Focus — January 2018
Combined AB + LHA has over half its capacity on routes with >80% share
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
5,000,000
0
Total Seats
Airline M&A has historically yielded material synergies
Date
Sep 2010
Aug 2010
EFTA01432935
May 2010
Nov 2009
Apr 2008
Apr 2005
Acquirer / Candidate
Southwest / AirTran
LAN / TAMa
UAL / Continentala
British Airways / Iberiaa
Delta / Northwesta
America West / US Airways
Total Synergies
US$400 million
US$400 millionb
US$1.2 billion
US$600 millionc
US$2.0 billion
US$680 million
% of Revenue
3%
4%
4%
3%
6%
7%
NB: Unless notes, all of the above synergy totals reflect an annual run rate
and were expected to be achieved by year three
following transaction close. (a) Transaction structured as a merger of
equals, (b) In early 2012, LAN and TAM revised their synergy
forecast to $600 - $700 million beginning four years after completion of the
transaction and representing 4.5% - 5.0% of LTM
combined revenue, (c) At the time of the announcement, BA and Iberia
identified €400 million of annual synergies (after five years)
which we converted to US$ at the time of the announcement. Source: Deutsche
Bank, Company Data
39
80-100%
(AB+LHA)
mkt share
60-80%
(AB+LHA)
mkt share
40-60%
(AB+LHA)
mkt share
20-40%
(AB+LHA)
mkt share
0-20%
(AB+LHA)
mkt share
EFTA01432936
29,589,352
6,445,393
16,646,936
4,027,540
1,490,576
978,907
EFTA01432937
> BLT
31 Royal Mail — Andy Chu, SELL, close 454p, 359p tgt, 21% downside
IIIt will be tougher to restructure in the coming twelve months.
Modernisation and cost cutting are essential, but this will be difficult with
weak GDP growth, Brexit risk, high wage pressures and union negotiations.
IIStill in the early phases of transformation. Postal and parcel network
businesses are very complex, making restructuring very challenging.
— Royal Mail lags behind Deutsche Post DHL by twenty years in terms of
re-positioning the business to grow EBIT.
IIRoyal Mail's medium- to long-term strategy is not entirely clear. There is
no
clarity on the geographic/business mix on a 5-10 year view:
— While M&A has been focused in GLS in Europe, there have also been
bolt-on acquisitions in the US where we see few large-scale synergies.
IIFY Mar 18/19 profits could fall YoY. Mid-single digit volume decline in
addressed mail likely to offset strong growth in GLS and modest UK parcel
growth.
IIShareholders are not near the top of the stakeholder list. Restructuring,
employee wages and pensions and M&A are all greater priorities than
shareholder return.
IIDividend yield unattractive vs. peers. The 5.6% dividend yield is above
UK market but below Austrian Post and PostNL at 6.3%, both of which have
been restructuring for far longer.
IICatalysts: further newsflow on union negotiations, trading update 18
January 2018
Related DB Research:
Royal Mail: Moving to SELL — Harder to restructure (Chu)
Transportation Outlook 2018: Going Places (Chu)
Deutsche Bank Research: European Equity Focus — January 2018
On-going transformation costs (FY P&L £'m) remain stubbornly high
100
150
200
250
300
50
0
2011
RMG dividend yield (CY18) looks less impressive vs. peers
10%
0%
1%
2%
3%
EFTA01432938
4%
5%
6%
7%
8%
9%
Royal Mail
Austrian Post
40
PostNL*
CTT*
2012
2013
2014
2015
2016
2017
At £137m, 19% of EBIT
pre transformation costs
EFTA01432939
> BLT
32 SGS — Tom Sykes, BUY, close CHF2579, CHF2620 tgt, 2% upside
IISGS 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.
IISGS beat the market in 2007-11, suggesting relative upside in the event of
a potential downturn.
IIWe 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%)
IIStructural growth opportunities from Consumer and Food + Agri
businesses.
IIRock-solid balance sheet means M&A upside potential. Net
Debt/EBITDA is only 0.4x.
IIMargin 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%.
IISGS is not cheap at 24.6x 18E P/E, but we do not see a relative de-rating
until well into a cyclical cut in earnings.
IICatalysts: 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)
Deutsche Bank Research: European Equity Focus — January 2018
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Room for considerable M&A, with a rock-solid balance sheet
Net debt/EBITDA
0.1
SGS is a long term outperformer of the market
SGS share price relative in USD
1 0
Expon. (SGS share price relative in USD)
Acquisition spend as % of EBITDA
EFTA01432940
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
41
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1/4/87
1/10/88
1/4/90
1/10/91
1/4/93
1/10/94
1/4/96
1/10/97
1/4/99
1/10/00
1/4/02
1/10/03
1/4/05
1/10/06
1/4/08
2017E
2018E
2019E
2020E
1/10/09
1/4/11
1/10/12
1/4/14
1/10/15
EFTA01432941
1/4/17
EFTA01432942
> BLT
33
Vinci — Guillermo Fernandez-Gao, BUY, close €86.7, €94.1 tgt, 9% upside
IIVinci is a large company (market cap > €50bn) with substantial absolute
cash generation potential at €4.5bn FCF ex growth capex, implying a
9.3% yield (well above Ferrovial's at 4.5%).
— Growth capex derives from stimulus programmes and construction of
new assets (which is M&A-like in nature).
II8% EBIT CAGR to 2019E driven mostly by French construction market
recovery boosting the late-cycle Contracting segment (c30% of value,
growing at a 12% CAGR to 2019).
— Infrastructure should be an important driver, spurred by meaningful
contracts in railways (such as the Grand Paris Metro network).
IIEarnings visibility in Autoroutes division (50% of Group valuation) due
to resilient and predictable cash flows. We expect a 4.1% EBIT CAGR to
2019E — substantial for such mature assets
IIA takeover of ADP would be accretive from day one. Even if we assume
no synergies at all and a 30% takeover premium, EPS would increase by
11% in 2018E. This potential deal has seen escalating newsflow.
— This would also help reduce Vinci's overexposure to the French
economy. Domestic EBITDA would fall from 76% to 63% of the total
(assuming ADP traffic mix, Int'l 84% of its total).
IIVinci trades on 16.5x P/E. Our target implies an adjusted FCF yield of
8.5%.
IICatalysts: FY 2017 Results on 07-Feb. We are 2% above consensus at
EBIT level.
Related DB Research:
Vinci: How Vinci would look with ADP in it (Fernandez-Gao)
Transportation Outlook 2018: Going Places (Chu)
Deutsche Bank Research: European Equity Focus — January 2018
CF from
operations
Cost of
Debt
Taxes Working
Capital
Var.
The Contracting segment is growing at a 12% EBIT CAGR to 2019E
1,000
1,200
1,400
1,600
1,800
200
400
EFTA01432943
600
800
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
Impressive FCF generation (2018E, EUR bn) — a 9.3% yield ex growth capex
6.8
- 0.5
- 1.4
- 0.7
-1.6
- 1.4
Operating
Capex
Operating
FCF
Growth
Capex
(M&A)
Dividends Net debt
reduction
42
-1.3
0.1
4.3
EBIT (EURm, LHS)
EBIT margin (RHS)
0%
1%
2%
3%
4%
5%
6%
EFTA01432944
Risks
IIABB — ABBN.S: Key downside risks include continued M&A at high
multiples, accelerated Chinese competition in T&D in overseas markets and
prolonged macro weakness.
IIArcelorMittal - MT.AS: Key risks are related to macro, steel prices, raw
material costs, project development and FX rates. Should the improving
leading indicators not translate into a recovery in economic performance as
expected by DB, this provides a risk to demand for steel. Deviating
commodity prices and/or a steel price shock provide further risks to margins
assumptions. Also, the rising protectionism could cause disruptive changes
to steel markets, depending on the outcome. Lastly, ArcelorMittal has a
large growth appetite, and a stronger-than-expected ramp up of the capex
budget, ability to deliver on projects or M&A provide further risks.
IIAroundtown Properties — AT1.DE: 1/ Corporate governance; the change
of the domicile from Cyprus to Luxembourg could serve as a catalyst; we
also see key man risk. 2/ Capex backlog. The company is pursuing a "light"
capex model despite the value add character of their business model. 3/
Dilutive equity issues to fund external growth 4/ Non-accretive acquisitions
diluting shareholder returns
IIAXA - AXAF.PA: Like most European life assurers, the shares are sensitive
to investment markets in both directions with an above average exposure in
AXA's case to sovereign spreads. Sentiment, earnings and economic
solvency are negatively impacted by lower US and European bond yields
and vice versa. Other downside risks include execution risk around M&A
strategy; regulatory risk surrounding GSII (Globally Systematically Important
Insurers) capital requirements; and failure to deliver on its five-year
targets.
IIAstraZeneca - AZN.L: Risks include lower sales from the growth platforms
given pressure on respiratory/diabetes, failure of key pipeline drugs and
failure
to deliver expected margin improvements from new launches.
IIB&M - BMEB.L: Downside risks relate to B&M's ability to open profitable new
stores, eg rising rents and success in the relatively untested Southern
England
Other risks include a response from grocers to a loss of price-leadership,
which
could impact B&M's margins, and negative leverage from slowing LFLs. CD&R
owns 11% of shares and may reduce its stake in the future.
IIBAE Systems Plc - BAES.L: A key downside risk would be if the UK
government halted arms sales to Saudi Arabia. A second key risk would be a
change in the UK government, as this might see a change in direction when it
comes to the current equipment plan. The direction of defence budgets
globally
offers both upside and downside risks. FX (USD/GBP) fluctuations.
EFTA01432945
II Banco Santander - SAN.MC: Key downside risks include: 1) a weaker capital
build-up than expected; 2) macroeconomic deterioration in the bank's core
markets, particularly Brazil, the UK or Spain; 3) a potentially stricter
regulatory
stance. 4) Adverse movement in interest rates; 5) Adverse exchange rates
movements in the bank's core markets.
IIBritish American Tobacco - BATS.L: Investing in tobacco carries
sectorspecific
risks regulation, duty increases, volume declines in high-margin
markets, etc). In addition to these general sector downside risks, BAT is
potentially exposed to adverse currency movements, unexpected adverse US
and Canadian litigation developments and possible overpayment for an
acquisition.
Deutsche Bank Research: European Equity Focus — January 2018
43
EFTA01432946
Risks
IIBovis Homes - BVS.L: Downside risks include the lesser availability and
affordability of mortgages, which is a determinant of housing demand.
Economic factors such as the higher unemployment rate and consumer
confidence also have a demand influence. Political factors such as lower
government funding and policy on planning have an influence on demand
and supply. Company-specific risks include the later timing and lower
profitability of new land including some large strategic land sites, lesser
control of material and labour costs, and the slower timing and lower profits
from the sale of parcels of land on larger sites
IICarrefour - CARR.PA: Key upside risks include: 1) sustainable market
share gains in France, 2) strong economic rebound in Brazil, due to crisis
resolution and 3) faster-than-expected ramp-up of converted DIA stores in
France
IICredit Suisse Group - CSGN.S: Key downside risks include challenging
capital market conditions, widening credit spreads, CHF strength, higher
wind-down losses and litigation charges.
IIContinental AG - CONG.DE: Key risks include a worsening volume
environment, especially in Europe given Continental's regional exposure,
and higher operational gearing to the downside due to a higher fixed cost
base and revenue per unit (DBe); as well as a weaker tire demand and
pricing and higher raw material headwind. For our estimates, we work with
the following assumptions: for the tire market (DBe: —25-30% gearing on
volume, biggest impact from pricing, mix around 1/3 to the bottom line). In
our analysis, the gearing to the downside in automotive exceeds the usual
15-20% gearing to the upside (DBe).
IIDeutsche Lufthansa AG - LHAG.DE: Aside from general sector,
macroeconomic and political issues, we see the following potential downside
risks
for Lufthansa: (i) the EU Commission attempting to block the Air Berlin
deal, (ii)
an inability to realize synergies quickly, or at all, and (iii) increased
entry into
German domestic from more aggressive airline competitors.
IIDSM NV - DSMN.AS: There are several downside risks. For the GDP-sensitive
industrially focused businesses, such as Materials, macro weakness could
lead to
lower forecasts and potentially valuation. For Nutrition, increased
competition
would lead to pressure on prices and volumes and negatively affect our
forecasts
and valuation For the group, higher energy or raw materials costs would also
potentially impact our forecasts and valuation. A sustained weakening in the
US$
against the Euro and/or strengthening of the CHF could also impact earnings
and
EFTA01432947
potentially valuation. Last but not least, M&A not happening or value
destructive
M&A in a context on high asset prices is another risk.
IIEutelsat Communications - ETL.PA: Upside risks: unexpected growth in
consumer broadband, pricing growth on video hotspots, accelerating TV channel
launches and accelerating EM pay-TV subscriber growth, strong uptake of 3D
and Ultra HD, unexpectedly strong demand from military and governmental
organisations, lower-than-expected CAPEX.
IIFresenius - FREG.DE: General downside risks relate to healthcare reform and
austerity with negative consequences for Fresenius. Company specific downside
risks relate to rising cost inflation not adequately covered by
reimbursement (e.g.
for dialysis in the US), M&A integration (e.g. Qironsalud, Care Coordination
deals)
and/or overpaying for potential future acquisitions, more-than-expected
easing of
drug shortages in the US and/or production issues at Kabi, rising competition
and/or less-than-expected new products, lack of cost savings, and FX.
Deutsche Bank Research: European Equity Focus — January 2018
44
EFTA01432948
Risks
IIGlencore - GLEN.L: Variance in commodity prices or operating currencies
from expectations are key risks to our earnings and valuation forecasts. On
the downside, weaker commodity prices would have a significant negative
sentiment impact and provide a deterrent to a re-rating. Glencore's key
growth assets are in less politically stable regions than most - such as the
Democratic Republic of Congo (DRC) and Equatorial Guinea - which
introduces a higher degree of sovereign risk. Risks for zinc include
increasing marginal production.
IIInfineon Technologies - IFXGn.DE: Key downside risks include: FX (every
lc change in EUR /$ impacts revenues by —0.5% and earnings by —1%);
Cyclicality and inventory de-stocking; Large dependence on Automotive;
Potentially value destructive M&A
IIInforma PLC - INF.L: Downside risks include potential earnings dilution
from the sale or closure of non-core businesses. The business may require
additional investment on top of the announced plan. Informa intends to
expand via acquisition in the events industry, where there is competition for
assets and where growth is cyclical. The Academic division has high
exposure to print books, including textbooks, which could suffer from
structural declines.
IIKingspan - KSP.I: Slower global growth, especially in large markets for
Kingspan such as the UK; Slower innovation or penetration growth; Euro
strength causing negative translation effect; Poor cost inflation
passthrough;
Inability to complete targeted M&A in the Light & Air division.
IIKPN - KPN.AS: Key downside risks include an (i) aggressive push from
Tele2 as the new network operator in the market; (ii) continued weakness in
Business due to the economy and IP migration and (ii) restructuring costs
which could weigh on the FCF generation of KPN.
Deutsche Bank Research: European Equity Focus — January 2018
IILinde - LING.DE: Risks include weaker global GDP, lower retention of the
cost
cutting/efficiencies from Praxair merger, FX, Praxair merger falling apart
and
aggressive competition from peers for new on-site contracts.
IIPrudential - PRU.L: The group's balance sheet is negatively exposed to
higher
US and UK corporate bond spreads, lower US and UK bond yields and weaker
US equity markets. Earnings growth could be further impacted by any
strengthening in Sterling given that 86% of earnings are non-GBP, or a weaker
than expected outlook for Asian economies. Other downside risks include
worse than anticipated political or regulatory changes either to solvency
requirements or market practices in its principal territories. For the
former, we
note especially developing GSII capital rules, guarantee risks in its US
EFTA01432949
life back
book and proposed NAIC changes to the US capital regime. On the latter, we
highlight the possibility of further regulatory restrictions on mainland
China sales
into HK or a failure by the new US administration to modify the previously
planned DOL changes.
IIRoyal Mail - RMG.L: Upside risks include faster execution of the
transformation plan, better pricing in UK parcels, higher parcel volumes than
forecast, no industrial action and a successful sale of its surplus
properties
IIRenault SA - RENA.PA: Downside risks include: i) failure of the new product
campaign in Europe, which could result in market share loss and in pricing
pressure; ii) a tougher European market environment, likely leading to
further
pricing and volume erosion where, usually on the downside, OP leverage could
be as high as -50%; and iii) worse-than-expected emerging market
performance.
45
EFTA01432950
Risks
IIRoyal Dutch Shell Plc - RDSa.L: Risks to the downside are now
dominated by Shell's ability to reduce balance sheet debt and reposition the
business, not least at a time when the company will be targeting material
($30bn) divestments. Divestments aside, project start ups are key -
including Gorgon, Prelude and Kashagan.
IIRWE - RWEG.DE: Key downside risks include a further drop in the value of
RWE's stake in innogy, lower power prices, a carbon tax, lignite closures
and higher estimates of the cost of financing long term nuclear, pension and
other liabilities.
IISGS - SGSN.S: Downside risk stems from lower potential structural growth
and less cross selling benefit than we model and less benefit from
maximizing the potential of the company's small scale M&A. Downside risk
also comes from slower China growth and the knock on effect on valuation
and commodities and less margin gain than we forecast.
IIShire PLC - SHP.L: Risks include potential impact of new hemophilia
therapies, lower growth of the HAE and ADHD franchises and risks of
oversupply in the plasma markets.
IISophos - SOPH.L: Key risks for Sophos, in our view, include: Sophos may
face more competition in IT Security for midmarket companies than we
expect; IT Security spending may be negatively impacted by a worsening
macro outlook; and customer migration to Cloud may impact Sophos more
negatively than we expect.
IIVinci - SGEF.PA. Downside risks: worsening of the French/European
economic situation, particularly its more cyclical component, contracting.
Worse
performance in construction projects leading to lower than expected margins.
Volatility in the risk-free rate affecting the valuation (higher interest
rates having
a negative impact particularly in the valuation of infrastructure assets).
Unpredictable outcome of potential inorganic growth in particular in the
airports
sector. Unpredictable events like accidents or terror attacks affecting
traffic at
airports and toll roads.
IIVodafone Group Plc - VOD.L: Risks to our target price being achieved
include: 1) Competition from new entrant mobile operators (eg Italy) and/or
convergence price discounting by integrated fixed and mobile operators; 2)
any
deterioration in either employment trends or wage growth would reduce
consumer disposable income available for spending on Vodafone services; and
3) currency weakness in either UK or EM (Egypt, Turkey, India, South Africa).
Deutsche Bank Research: European Equity Focus — January 2018
46
EFTA01432951
DB forecasts
GDP growth (%)
Global
US
Eurozone
Germany
France
Italy
Spain
Japan
UK
China
India
EM Asia
EM CEEMEA
EM LatAm
EM
DM
2016
3.2
1.5
1.8
1.9
1.1
0.9
3.3
0.9
1.9
6.7
7.9
6.2
1.6
-1.2
4.3
1.6
2017
3.7
2.3
2.3
2.3
1.8
1.6
3.1
1.8
1.6
6.8
6.3
6.1
2.6
1.1
4.8
EFTA01432952
2.2
2018F
3.8
2.6
2.3
2.3
2.0
1.4
2.9
1.2
1.0
6.3
7.5
6.0
2.9
2.3
4.9
2.2
2019F
3.7
2.2
1.7
1.8
1.6
1.0
2.3
0.8
1.4
6.3
7.8
6.0
2.9
2.8
5.0
1.9
CPI inflation, YoY* (%)
US
Eurozone
Japan
UK
China
Central Bank policy rate (%)
US
Eurozone
Japan
UK
China
Key market metrics
US 10Y yield (%)
EUR 10Y yield (%)
EUR/USD
EFTA01432953
USD/JPY
S&P 500
Stoxx 600
Oil WTI (USD/bbl)
Oil Brent (USD/bbl)
Current prices as of 02-Jan-2018
2016
1.3
0.2
-0.1
0.6
2.0
2017
2.1
1.5
0.3
2.6
1.7
1.375
0.00
-0.10
0.50
1.50
0.42
1.204
112
2,696
388
60.4
66.6
2.50
0.50
1.17
116
2018F
2.1
1.4
0.4
2.5
2.7
2.375
0.00
-0.10
0.50
1.50
2.95
0.90
1.20
120
2019F
2.2
EFTA01432954
1.5
0.8
2.3
2.4
Current Q4-17F Q4-18F Q4-19F
1.375
0.00
-0.10
0.50
1.50
3.125
0.50
-0.10
0.75
1.50
Current Q4-17F Q4-18F Q4-19F
2.46
2.96
0.90
1.20
110
2,600
375
51.0
56.0
2,850
395
52.0
55.0
53.0
56.0
Deutsche Bank Research: European Equity Focus — January 2018
47
EFTA01432955
Companies Mentioned Table
Company name
Ticker
ABB
Aeroports de Paris
Air Berlin PLC
ArcelorMittal
Aroundtown Properties
AstraZeneca
AXA
B&M
BAE Systems Plc
British American Tobacco
Bovis Homes
Carrefour
Check Point Software
Credit Suisse Group
Continental AG
Deutsche Lufthansa AG
Deutsche Post DHL
Deutsche Telekom
DSM NV
ABBN.S
ADP.PA
AB1.DE
MT.AS
AT1.DE
AZN.L
AXAF.PA
BMEB.L
BAES.L
BATS.L
BVS.L
CARR.PA
CHKP.OQ
CSGN.S
CONG.DE
LHAG.DE
DPWGn.DE
DTEGn.DE
DSMN.AS
Company name
Eutelsat Communications
ExxonMobil
Fortinet Inc
Fresenius
Geberit
Glencore
Informa PLC
Infineon Technologies
Innogy
EFTA01432956
Kingspan
KPN
Nissan Motor
Liberty Global
Linde
Oesterreichische Post AG
Palo Alto Networks
PostNL NV
Praxair
Prudential
Ticker
ETL.PA
X0M.N
FTNT.OQ
FREG.DE
GEBN.S
GLEN.L
INF.L
IFXGn.DE
IGY.DE
KSP.I
KPN.AS
7201.T
LBTYA.OQ
LING.DE
POST.VI
PANW.N
PTNL.AS
PX.N
PRU.L
Company name
RELX NV
Renault SA
Roche
Royal Dutch Shell Plc
Royal Mail
RWE
SES
SGS
Shire PLC
Sophos
Swatch Group
Tele2
Tesco PLC
Valeo SA
Vinci
Vodafone Group Plc
Wal-Mart
Wolters Kluwer NV
Ticker
RELN.AS
EFTA01432957
RENA.PA
ROG.S
RDSa.L
RMG.L
RWEG.DE
SESFd.PA
SGSN.S
SHP.L
SOPH.L
UHR.S
TEL2b.ST
TSCO.L
VLOF.PA
SGEF.PA
VOD.L
WMT.N
WLSNc.AS
Deutsche Bank Research: European Equity Focus — January 2018
48
EFTA01432958
Appendix 1
Important Disclosures
*Other information available upon request
Prices are current as of the end of the previous trading session unless
otherwise indicated and are sourced from local exchanges via Reuters,
Bloomberg and other vendors . Other
information is sourced from Deutsche Bank, subject companies, and other
sources. For disclosures pertaining to recommendations or estimates made on
securities other than the
primary subject of this research, please see the most recently published
company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within
this report, important conflict disclosures can also be found at https://-
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"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to
review this information before investing.
Analyst Certification
The views expressed in this report accurately reflect the personal views of
the undersigned lead analyst about the subject issuers and the securities of
those issuers. In addition, the undersigned
lead analyst has not and will not receive any compensation for providing a
specific recommendation or view in this report. Mark Braley
Deutsche Bank Research: European Equity Focus — January 2018
49
EFTA01432959
Equity Rating Key
Equity Rating Dispersion and Banking
Relationships
Buy: Based on a current 12-month view of total shareholder return
(TSR = percentage change in share price from current price to
projected target price plus projected dividend yield), we recommend
that investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return,
we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12 months out and,
based on this time horizon, do not recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and target prices
always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or more
over a 12-month period
Hold: Expected total return (including dividends) between -10%
and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% or
worse over a 12-month period
100
150
200
250
300
350
400
50
0
Buy
Hold
58 %
37 %
48 %
37 %
5 %34 %
Sell
Companies Covered Cos. w/ Banking Relationship
European Universe
Deutsche Bank Research: European Equity Focus — January 2018
50
EFTA01432960
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EFTA01432961
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EFTA01432962
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EFTA01432963
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51
EFTA01432964
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