business & employment svcs experian & aggreko to buy ope · for this company. kean marden *...

Mkt. Cap Price Cons. Current EPS Estimates Previous Est.Company Name Ticker (MM) Rating Price Target Next FY 2013 2014 2015 2014 2015 Adecco ADEN VX CHF13,923.0 HOLD CHF73.55 CHF73.50 €3.80 €3.37 €3.64 €4.38 €3.64 €4.38Aggreko plc AGK LN £4,179.1 BUY▲ 1,577.00p 1,800.00p▲ 79.80p 93.80p 80.10p 86.60p 80.10p 86.60pAPR Energy plc APR LN £620.9 BUY 794.00p 1,250.00p ¢112.40 ¢59.00 ¢101.80 ¢116.20 ¢101.80 ¢116.20Bunzl BNZL LN £5,559.1 HOLD▲ 1,681.00p 1,600.00p▲ 82.30p 81.40p 83.00p 88.50p 81.80p 85.50pBureau Veritas BVI FP €2,404.6 BUY▲ €22.00 €25.50▲ €0.97 €0.89 €1.01 €1.14 €1.02 €1.11Eurofins Scientific ERF FP €2,860.0 BUY €200.00 €250.00 €6.83 €6.11 €7.71 €9.00 €7.71 €9.00Experian plc EXPN LN £11,415.7 BUY▲ 1,136.00p 1,340.00p▲ ¢90.40 ¢84.60 ¢90.20 ¢102.70 ¢90.00 ¢102.00

Hays HAS LN+ £2,094.7 HOLD▼ 150.70p 165.00p▲ 6.00p 5.06p 6.06p 7.40p 6.06p 7.40pIntertek Group ITRK LN £4,655.4 BUY▲ 2,906.00p 3,650.00p▲ 148.10p 138.60p 146.40p 166.10p 143.00p 152.90pMichael Page MPI LN £1,428.2 HOLD▼ 467.80p 500.00p▼ 17.70p 14.90p 17.80p 24.10p 18.80p 24.60pRandstad RAND NA €19,976.1 HOLD▼ €41.91 €46.50▼ €2.72 €2.08 €2.64 €3.23 €2.69 €3.26SGS SGSN VX CHF17,121.0 BUY▲ CHF2,195.00CHF2,450.00▲CHF90.80 CHF84.63 CHF91.89 CHF101.19 CHF91.89 CHF98.76Sthree STHR LN £496.3 HOLD▼ 405.50p 450.00p 16.30p 8.20p 15.70p 20.10p 15.70p 20.10p

Rating | Target | Estimate Change

Business Services | Business & Employment Svcs 1 May 2014

Business & Employment SvcsHit the Switch. Cut Recruiters to Hold; TIC,Experian & Aggreko to Buy

EQU

ITY R

ESEARC

H EU

ROPE

+Jefferies Hoare Govett, a division of JefferiesInternational Limited, acts as a corporate brokerfor this company.

Kean Marden *Equity Analyst

+44 (0) 20 7029 8038 [email protected] Kirkness *

Equity Analyst+44 (0) 20 7029 8201 [email protected]

* Jefferies International Limited

Key Takeaway

After a prolonged period of outperformance many European recruiters tradeat relative highs and upside to our price targets has narrowed. Conversely,some high quality structural growth stocks have suffered. In our view, this islikely to reverse as investors reassess the attractive ROIC and FCF characteristicsof Experian, the Testers and Aggreko. We upgrade these stocks to Buy anddowngrade the Recruiters to Hold.

Closing out our long Recruiters call. Much has gone well recently and it is becomingincreasingly difficult to identify an obvious area where investor’s expectations could bepositively surprised. The consensus analyst is now bullish (not normally an encouraging signfor a sector that rewards the contrarian investor) and many companies trade close to relativehighs. With stocks closing in on our peak EPS derived price targets we downgrade to Hold.

Upgrading Experian from Hold to Buy as triple headwinds abate. Experian datasuggests that Brazilian defaults are no longer deteriorating, headwinds from the proposedDATA Act are unlikely to be material and disappointment over M&A value creation hasbeen priced in. We upgrade FY15E EPS by 1.5% to sit 4% ahead of consensus and believeExperian’s attractive ROIC and cash conversion attributes will become more highly valuedby investors.

Double upgrade to Intertek and Bureau Veritas; Raising SGS from Hold toBuy. It has been almost two years since we initiated coverage with cautious estimatesand contrarian recommendations. FY14E EPS estimates have declined by c15% and theconsensus analyst has flipped from Buy to Hold. In our view, trading momentum willaccelerate from H2 and we upgrade FY15E EPS by 1-9% to sit 1-5% ahead of consensus.Eurofins is a unique asset and remains our top pick in the testing space. Of the majors Intertekis our highest conviction Buy, we are 3% ahead of consensus in FY15 and have 25% upsideto our PT.

Raising Aggreko from Hold to Buy. APR remains a Buy. In our view, momentum isclose to inflection and revenue growth will turn positive in Q4. Our unchanged EPS forecastsare broadly in line with consensus but a more bullish scenario suggests 9% upside to FY15FEPS. We increase our PT to 1800p and upgrade to Buy.

We upgrade Bunzl to Hold. After digging deeper into US and UK coffee and conveniencetrends, we believe there is a useful structural revenue driver for c.30% of group sales.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 132 to 136 of this report.

Contents EXECUTIVE SUMMARY ................................................................................................................ 3

Switching from cyclicals into undervalued growth ....................................................................... 3 Closing out our long Recruiters call .............................................................................................. 3 Upgrading Experian from Hold to Buy .......................................................................................... 3 Double upgrade to Intertek and Bureau Veritas; Raising SGS from Hold to Buy .......................... 3 Raising Aggreko from Hold to Buy ................................................................................................ 4 Upgrading Bunzl from Underperform to Hold .............................................................................. 4

TESTING AND INSPECTION ........................................................................................................... 6 Turning positive after two year bear call ...................................................................................... 7 Upgrading BV, Intertek and SGS to Buy ...................................................................................... 13 Intertek (Buy, PT 3650p) ............................................................................................................. 15 Bureau Veritas (Buy, PT €25.5) ................................................................................................... 16 SGS (Buy, PT CHF2450) ............................................................................................................... 17 Eurofins (Buy, €250) ................................................................................................................... 18 Commodities right sized ............................................................................................................. 19 Industrial - Not a ‘Minerals’ re-run ............................................................................................. 23 Consumer divisions – more resilient ........................................................................................... 29 The China Opportunity ............................................................................................................... 31 Marine – Organic to Double Digit ............................................................................................... 34

RECRUITERS .............................................................................................................................. 51 Revisiting the Peak Earnings Framework .................................................................................... 52 Investor concerns after a prolonged rally ................................................................................... 53 Adecco (Hold, PT CHF73.5) ......................................................................................................... 58 Hays (Hold, PT 165p)................................................................................................................... 62

How far could UK EBITA recover? .......................................................................................... 63 Randstad (Hold, PT €46.5) .......................................................................................................... 67 Michael Page (Hold, PT 500p) ..................................................................................................... 73

Flat Underlying SG&A in FY14E .............................................................................................. 74 Sthree (Hold, PT 450p) ................................................................................................................ 79

EXPERIAN (BUY, PT 1340P) ........................................................................................................ 84 The Brazilian Outlook is Stabilising ............................................................................................. 85 US Legislative Risks have Low Impact ......................................................................................... 88

DATA Act = Headwind for Marketing Services ....................................................................... 89 Upgrading from Hold to Buy ....................................................................................................... 90

ASSET RENTAL ........................................................................................................................... 95 Aggreko – Inflection Point .......................................................................................................... 96

MW on rent reaching an inflection ........................................................................................ 97 The Local business is motoring .............................................................................................. 98 Other concerns are subsiding................................................................................................. 98 Upgrading to Buy, new PT of 1800p .................................................................................... 100

APR – A story of retention ........................................................................................................ 103 BUNZL – UPGRADE TO HOLD ................................................................................................... 106

A Powerful Re-rating ................................................................................................................. 107 North America – Focus on Grocery ........................................................................................... 108 EU and UK to Stage a Recovery................................................................................................. 109

UK – Coffee and Convenience .............................................................................................. 110 Developing Future Markets ...................................................................................................... 112

LONG VIEWS………………………………………………………………………………………………………………………….. …118

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1 May 2014

page 2 of 136 , Equity Analyst, +44 (0) 20 7029 8038, [email protected] Marden

Please see important disclosure information on pages 132 - 136 of this report.

Executive Summary

Switching from cyclicals into undervalued growth After a prolonged period of positive economic surprises and share price outperformance,

many European recruiters trade at all-time relative highs and upside to our price targets

has narrowed. Conversely, several high quality structural growth stocks have suffered

over the past 18 months, partly due to company specific factors but also in many

instances due to their late cycle characteristics. As the charts on p5 illustrate, the relative

PE multiple of these stocks has flipped from ten-year highs to the bottom half of the

range.

In our view, the compression of valuation multiples across the Support Services sector is

likely to reverse as investors reassess the attractive ROIC and FCF conversion characteristics

of Experian, the Testers, Aggreko and Bunzl. This is not merely a top-down allocation call

– our analysis of key drivers for these companies indicates improving trading momentum

and favourable risk/reward.

Closing out our long Recruiters call While we remain positive on the medium-term earnings outlook we are conscious that

recruiter shares anticipate trading momentum as far as 1-2 years into the future. An awful

lot has gone well over the last 12 months and it is becoming increasingly difficult to

identify an obvious area where investor’s expectations could be positively surprised. In

addition, we fear the market is too relaxed about Adecco and Randstad’s ability to retain

the CICE subsidy which was introduced to lower French labour costs rather than to

increase recruiter margins.

From a share price perspective, broker ratings have become increasingly more positive

over the past six months (which is not normally an encouraging sign for a sector that has

rewarded the contrarian investor) and many companies now trade close to all-time

relative highs. The discount to our peak EPS derived price targets has narrowed to such an

extent that there is insufficient upside to maintain Buy ratings.

Upgrading Experian from Hold to Buy In our view, three headwinds have abated over the past few months. Firstly, Serasa’s data

suggests that the YOY decline in Brazilian consumer defaults improved to -1.8% in March

from a 10%-11% peak in August-November 2013. Secondly, headwinds from the

proposed Data Broker Accountability and Transparency Act are unlikely to be material and

its main proposals are in-line with our January 2014 note “Senate Committee Review; Q3

Preview”. Lastly, investor disappointment over M&A value creation has been priced in.

We upgrade our FY15E EPS estimate by 1.5% to reflect improved growth momentum and

recent currency movements (particularly the Brazilian Reais which has appreciated by

10% over the past two months) and now sit 3%-4% ahead of FY15E and FY16E consensus.

With earnings momentum now recovering we believe Experian’s attractive ROIC and cash

conversion attributes are likely to be more highly valued by investors.

Double upgrade to Intertek and Bureau Veritas; Raising SGS from Hold to Buy It has been almost two years since Australian peer ALS flagged weakness in the minerals

testing segment and we initiated coverage of the European TIC sector with below

consensus EPS estimates and cautious, contrarian recommendations. Throughout this

period FY14E EPS estimates have declined by c.15% and the consensus analyst has flipped

from Buy to Hold.

While trading momentum will remain tough in 1H14 we believe revenue growth will

accelerate in 2H supported by evidence that commodities capex is stabilising,

encouraging recent updates from Team Inc and Mistras in the US (which have been very

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1 May 2014



bullish for testing and inspection in core oil and gas markets), a positive readacross to

Consumer testing from an upswing in global trade and easier comparables. A steady

European recovery, unrelenting structural drivers and the scope for a step up in M&A give

us confidence in the medium-term outlook.

With the exception of Eurofins, we upgrade FY15E EPS by 1%-9%, placing us 1%-5%

ahead of consensus. As growth inflects and medium-term consensus estimates look too

conservative we believe the shares can re-rate to previous peak PE multiples. We upgrade

Intertek and Bureau Veritas from Underperform to Buy and SGS from Hold to Buy.

Raising Aggreko from Hold to Buy In our view, Aggreko’s trading momentum is close to the point of inflection. Contract

conversion is the best in two years and a lower off-hire rate would prove a useful tailwind

for improving utilisation and margins. The diesel glut should be subsiding as competitors

reduce capacity and Aggreko convert their sets into HFO or transfer them to the local

market.

In our base case scenario, growth in MW on rent turns positive in 3Q14 and revenue

growth turns positive in 4Q14. In addition, the Local business, accounting for 53% of

FY14F EBITA has had a very strong start to the year.

Our EPS forecasts are unchanged and we are broadly in-line with consensus. We increase

our price target to 1800p and upgrade our rating to Buy.

Upgrading Bunzl from Underperform to Hold We did not appreciate the self-funding compounding story in Bunzl and we now

recognise the cash flow, dividend and M&A appeal. In this note, we dig a little deeper

into trends in US and UK coffee and convenience that could prove a useful revenue driver,

beyond a GDP recovery, for c.30% of group revenues. On 19x FY15F EPS, however, we

believe the shares look fairly valued.

Table 1: Rating and EPS Estimate Changes

Rating Price Target FY14 EPS FY15 EPS

Old New Old New Old New Old New

Adecco Hold Hold CHF73.5 CHF73.5 €3.64 €3.64 €4.38 €4.38

Aggreko Hold Buy 1500p 1800p 80.1p 80.1p 86.6p 86.6p

APR Buy Buy 1250p 1250p 101.8c 101.8c 116.2c 116.2c

Bunzl Underperform Hold 1230p 1600p 81.8p 83.0p 85.5p 88.5p

Bureau Veritas Underperform Buy €18.0 €25.5 €1.02 €1.01 €1.11 €1.14

Eurofins Buy Buy €250.0 €250.0 €7.71 €7.71 €9.00 €9.00

Experian Hold Buy 1090p 1340p 90.1c 90.2c 101.2c 102.7c

Hays Buy Hold 159p 165p 6.1p 6.1p 7.4p 7.4p

Intertek Underperform Buy 2700p 3650p 143.0p 146.4p 152.9p 166.1p

Michael Page Buy Hold 580p 500p 18.8p 17.8p 24.6p 24.1p

Randstad Buy Hold €52.5 €46.5 €2.69 €2.64 €3.26 €3.23

SGS Hold Buy CHF1950 CHF2450 CHF91.9 CHF91.9 CHF98.8 CHF101.2

Sthree Buy Hold 450p 450p 15.7p 15.7p 20.1p 20.1p

Source: Jefferies

Business Services


1 May 2014



Chart 1: Aggreko – PE rel to Stoxx600

Source: Bloomberg

Chart 2: Experian – PE rel to Stoxx600

Source: Bloomberg

Chart 3: Intertek – PE rel to Stoxx600

Source: Bloomberg

Chart 4: SGS – PE rel to Stoxx600

Source: Bloomberg

Chart 5: Bureau Veritas – PE rel to Stoxx600

Source: Bloomberg

0.5

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Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Apr 14

Aggreko

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Experian

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Intertek

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SGS

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Bureau Veritas

Business Services


1 May 2014



Testing and Inspection

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1 May 2014



Turning positive after two year bear call It has been almost two years since we first saw weakness in the minerals testing segment

from Australia peer ALS. While the main testers took a little longer to see a slowdown,

2013 was a difficult year with BV, Intertek and SGS underperforming the Stoxx 600 by

c.15%. Throughout this time we have downgraded our FY14F EPS numbers by 14%-17%,

driven predominantly by changes to assumptions in commodities with some impact from

lowering assumptions in industrial markets.

Chart 6: FY14F consensus EPS estimates (re-based to 100)

Source: Bloomberg

Chart 7: LTM change in consensus FY14F EPS

Source: Bloomberg

Currently we anticipate that 1H14 will still be tough but are more hopeful into 2H14 as

we think fears of slowing, especially in energy activities of the industrial businesses look

overplayed. The businesses also begin to lap easier comps with the growth rate

troughing in 4Q13.

Confident we have seen the worst

Post the GFC in 2008/09 we saw growth hit lows of -1%-2% across the group but then

bounced back to 8%-10% within 12 months (BV aside where a couple of long duration

cyclical divisions held them back). This time it is clearly not the same but we anticipate by

2015 organic growth will once again be high single digit and margins will reach previous

highs last seen in 2010. A steady European recovery, improving world trade, unrelenting

structural drivers and the scope for a step up in M&A give us confidence in the outlook.

Key divisions should remain resilient

In addition, we have revisited some of the areas last assessed in our industry deep dive in

September 2012, focusing on divisions we believe move the dial and those indicators

where we have previously discovered a reasonable degree of correlation with the organic

growth rates of the testing firms:

Commodities - We anticipate that the second derivative of capex turns positive

in 2014, with more positive comments from peer ALS around sample intakes

and staffers seeing a broad based stabilisation in their Australia businesses. In our

view, stabilisation as opposed to growth is the outlook but at least the TIC

divisions are now right sized for this kind of environment. In oil and gas markets

the outlook for growth on a global basis is robust, albeit we expect Europe to

underperform.

Industrial - Overall we do not expect this division to see a re-run of a 'minerals'

style slowdown. We do see capex remaining positive, albeit with growth

slowing meaningfully from c.20% in recent years to low single digit. Despite

this, rig and well data has improved in recent weeks and updates in 2014 from

peers, Team and Mistras in the US have been very bullish for testing and

inspection in core oil and gas markets.

70

75

80

85

90

95

100

105

110

Apr

2013

May

2013

Jun

2013

Jul

2013

Aug

2013

Sep

2013

Oct

2013

Nov

2013

Dec

2013

Jan

2014

Feb

2014

Mar

2014

Apr

2014

ITRK BVI SGS -20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

BVI ITRK SGS

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1 May 2014



Consumer – Resilient through the cycle but we see support from an upswing in

global trade, upgraded WTO forecasts and development of the Chinese

opportunity. Perhaps more importantly we see an acceleration in product

development with a pick-up in patent application worldwide.

Upgrading BV, Intertek and SGS to Buy

We are increasing our confidence in the outlook and upgrading our FY15F EPS by 1%-9%,

placing us 1%-5% ahead of consensus. We believe that as growth inflects and forecasts

for years FY15 and beyond look too conservative, that the shares can re-attain peak

multiples. As a result we increase our ratings as follows:

Intertek – Buy, from Underperform, with 25% upside

Bureau Veritas – Buy, from Underperform, with 16% upside

SGS – Buy, from Hold, with Hold, with 14% upside

Eurofins - Buy, PT €250

A unique asset in the TIC space, focused in fast growing pure testing markets. Higher

trend organic growth, margin expansion and M&A should prove near term guidance to

be conservative. 22x FY15F EPS is not cheap, but for the growth it is still better value than

peers. Buy.

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1 May 2014



Eat, Pray, Love

Potentially an early call We recognise that 1Q and probably 2Q are going to be tough, the industry as a whole

appears to be expecting a pick-up in the second half but even that doesn’t look secure.

Here we do not commit to the recovery until 2015. We think that the late cyclical nature

of many of the divisions will drive solid growth and looking back through history suggests

that even our new ahead of consensus forecasts could be conservative.

A decent bounce back is possible If we look back to the last time that organic growth troughed out for these stocks then the

recovery in the next 12 months was impressive:

Chart 8: Organic growth progression – 1Q09-4Q11

Source: Jefferies, company data

Chart 9: Average quarterly prospective PE (x)

Source: Jefferies, Factset

* SGS report only interims and prelims so quarterly so we crudely assume flat trajectory

through the half

The above organic growth chart demonstrates that these companies do exhibit cyclical

qualities. In the global recession of 2008/2009, organic declines remained in the low

single digits for Bureau Veritas and SGS and Intertek just managed to remain in growth.

We note here that within 12-18 months organic growth had recovered to the high single

digit/double digit ranges, aside from BV which was hampered by its long duration Marine

and European exposed construction and inspection/certification activities.

The recovery in the prospective PE multiple occurred from 4Q08/1Q09, approximately 12

months before we see organic revenue growth trough out.

How is it different this time? Generally we anticipate that 1H14 will see low levels of organic growth, in the region of

1%-3% with 1Q in the lower end of that range and 2Q a little better. A pick up is

expected towards the mid-single digit range but the companies seem less confident in this

and we imagine that industry divisions are the main area of uncertainty and the swing

factor in achieving a rebound or not.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

BVI ITRK SGS*

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12

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22

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

BVI ITRK SGS

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1 May 2014



Chart 10: Organic growth progression - 1Q11-4Q14F

Source: Jefferies estimates, company data

Chart 11: Average quarterly prospective PE (x)

Source: Jefferies, FactSet

Clearly this time there are some key differences that will stop them returning to double

digit by the end of the year:

No double digit growth from commodities and industry divisions

A slower emerging market backdrop, which as SGS shows below, has in areas

such as Asia Pacific held up better:

Chart 12: SGS - Organic Growth by Region (%)

Source: Company Data

Overall, however, we anticipate a decent recovery by FY15 with the testers once again

achieving high single digit organic growth rates with potential for upside risk depending

on the pace of a European recovery, emerging markets and a re-engagement of growth in

energy markets.

As a result we anticipate that PE’s will look to expand to recovery type multiples up to 12

months in advance of achieving the more robust mid-high single digit levels of organic

growth.

Have the testers been overearning? Change in mix has clearly been a headwind in recent years for Bureau Veritas and Intertek,

as some divisions such as consumer goods and commodities have seen their contribution

to group revenues move backwards over the last three years. Indeed translating the shape

of the business in 2010 onto 2013 suggests mix has had the following impact on margin:

0%

2%

4%

6%

8%

10%

12%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14F 2Q14F 3Q14F 4Q14F

BVI ITRK SGS*

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16

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19

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23

24

25

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14F 2Q14F 3Q14F 4Q14F

BVI ITRK SGS

-6.0%

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0.0%

2.0%

4.0%

6.0%

8.0%

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12.0%

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16.0%

2009 2010 2011 2012 2013

EMEA Americas AsiaPacific

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1 May 2014



1) BV: -70bps; Intertek: -110bps, and; SGS: +10bps. This suggests that the underlying

improvement in margin between 2010 and 2013 has been +70bps at Bureau Veritas,

+20bps and -110bps at SGS.

The margin profile shows a clear spike up in 2010 which coincided with a peak in the

minerals supercycle, strong emerging markets and a business mix more skewed into

higher margin areas:

Chart 13: Group EBITA margins - FY04-16F


Unfortunately for the testing companies, they set strategic plans, including margin

expansion targets of 100-150bps around 2010. Since then some powerful cycles have

ended and mix has moved against them. However, we feel the current margin levels are

sensible and that the businesses should be able to drive expansion from here.

M&A We previously have noted that acquisition spend as a percentage of market cap, suggests

that M&A trends directionally with the cycle.

Chart 14: Bureau Veritas Organic and

Acquired Growth


Chart 15: Intertek Organic and

Acquired Growth


Chart 16: SGS Organic and Acquired

Growth


The charts above demonstrate that organic and acquired revenue growth rates do indeed

correlate quite closely. As opposed to some firms that look to replace organic growth

with acquired growth we get the impression that TIC companies find transactions more

palatable when there is more certainty. Our forecasts assume that organic growth picks

back up towards high single digit and in this scenario, although we only formally forecast

announced acquisitions, it would not be unreasonable to assume we see a step up in

M&A also.

12%

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FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F

BVI ITRK SGS

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BV - Organic BV - Acquired

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SGS - Organic SGS - Acquired

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1 May 2014



Trade Volumes Improving On 14 April, WTO economists updated their growth assumptions for world trade, 2014 is

forecast at 4.7% and 2015 at a slightly faster rate of 5.3%. Although the 2014 forecast is

more than double the 2.1% increase of last year, it remains below the 20-year average of

5.3%.

Chart 17: Growth in volume of world merchandise exports and GDP, 2005-15

Source: WTO

Previously we found limited correlation between the consumer divisions and trade

volumes, with innovation, R&D, regulation etc remaining important. That said, as activity

picks up the testing firms do benefit, as a result we anticipate an improvement in areas of

trade and production testing and inspection, across a number of divisions. The return in

2015 to trade growth of 5.3%, the 20 year average, supports our thesis that we begin to

see growth pick up in 2014 with 2015 a full recovery year.

Long-term structural growth drivers intact The themes of globalisation, increasing regulation and outsourcing drive a testing market

that tends to grow over the medium term at 5%-7% per annum:

Globalisation: Longer supply chains and global trade have necessitated a

mechanism of verification of the trade flows. Regression analysis of GDP and

volumes of world merchandise traded suggests a very high correlation.

Outsourcing: We estimate as much as two-thirds of the market for testing

services in excess of €100bn remains in-house. And as regulations become more

stringent and testing more complex, there is likely to be motivation for

companies and governments to outsource more, albeit a gradual process.

Regulation: Longer supply chains and greater global affluence drive a trend

towards greater regulation and stricter quality and safety standards, both

statutory and voluntary.

Industry consolidation: There is a highly active M&A market across the TIC

space, with deals occurring across the listed, unlisted and PE-backed entities.

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

Exports GDP

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1 May 2014



Upgrading BV, Intertek and SGS to Buy Downgrading the space is becoming a little more consensual, with the number of Buy

recommendations falling for SGS and markedly for Intertek.

Chart 18: % of Buy Recommendations

Source: Bloomberg

Despite seeing double digit downgrades over the last 12-18 months from a point when

the shares were trading at peak multiples, the shares have proved very resilient, de-rating

only slightly.

Chart 19: Prospective PE Multiples (x)

Source: Factset

Our analysis suggests that the market may now be too cautious on the medium term

outlook and though the next quarter is likely to be difficult we forecast an improvement

from 3Q14 with FY15 a full recovery from an organic growth and margin perspective.

In our view in this recovery situation the stocks can recover to peak multiples as we enter

a period of acceleration from growth troughs and as the year progresses we may well see

the need for upgrades to consensus 2015 earnings.

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1 May 2014



Chart 20: 10 Years of Prospective PEs (x) Current, Peak, Trough

Source: Factset

We apply the following PE multiples which drives a double upgrade from Underperform

to Buy for Intertek and Bureau Veritas and a single upgrade to Buy for SGS. We see 19%

upside at Bureau Veritas, 27% at Intertek and 17% at SGS.

Table 2: Recommendation Changes

Entity Rating Previous

Rating

Target FY15F

Multiple

Price Target Previous

Price Target

Bureau Veritas Buy Underperform 22 € 25.50 € 18.00

Intertek Buy Underperform 22 3,650p 2,700p

SGS Buy Hold 24 CHF 2,450 CHF 1,950

Source: Jefferies

It is also worth noting that IPO activity is picking up in the sector and there is the potential

that this reduces the scarcity premium.

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1 May 2014



Intertek (Buy, PT 3650p) Intertek previously screened as having the most appealing mix of activities in

terms of a skew to testing and high US and AsiaPac exposure. We believe the

large energy focussed industry division will remain more resilient than some

fear. In our view FY14 is the inflection year and we upgrade FY15F EPS by 9%

placing us 3% ahead of consensus. Upgrade to Buy.

We like the business mix at Intertek

We would estimate that Intertek has the highest proportion of revenues in North America

and Asia Pacific, two areas that we anticipate will remain strong. Based on activities and

an analysis of employee costs the skew towards more testing over inspection and

certification suggests potentially the greatest scope for margin expansion.

Intertek has the highest exposure to energy infrastructure

We estimate that energy infrastructure testing represents 23% of group revenues,

comfortably higher than BV on 14% and SGS on 8%. We suspect this is why the shares

have relatively underperformed their peers of late but we are more confident in the

resilience of this division. Elsewhere, Intertek has the smallest minerals business, at c.5% of

group revenues, which we believe is now is right sized allowing margins to inflect. The

remainder of the group is largely consumer facing, representing c.50% of EBITA. Here we

think development and trade data is supportive of on-going high trend growth.

1Q IMS on 16 May unlikely to be a catalyst

Intertek will publish their 1Q IMS on 16 May which covers trading in the first four months

of the year. Formal communication has been that organic growth in 1H will be in the 1%-

3% range but we anticipate that 1Q group organic revenue growth will be 1.5% with

Industry, Commodities and Chemical & Pharm likely to be in the 0-1% range and

Consumer and Commercial & Electrical 5% and 7% respectively.

Upgrading FY15F EPS 9% placing us 3% ahead of consensus

Aside from a 10bps increase in group EBITA margin, we leave underlying trading

assumptions in FY14 broadly unchanged. In FY15 we lift organic revenue growth

assumptions across the board but mostly in Industry and Commodities with margins also

raised in these areas and in consumer. The net result is a 2% increase in the organic

growth rate to 7% with margins raised 60bps to 16.6%. The EPS upgrade, assisted by tax,

is 2% in FY14 and 9% in FY15, placing us 3% ahead of consensus.

Valuation – Double Upgrade to Buy

Intertek witnessed the largest drop in Buy recommendations over the last year and is

trading at the biggest discount to peak, on 19x prospective EPS. In our view, FY14 is the

year of inflection and consensus expectations for FY15 could well be too conservative. We

apply 22x to FY15F EPS as we see positive earnings momentum, driving a 3,650p PT and a

double upgrade to Buy, from Underperform. Downside risk from energy slowdown.

Table 3: Summary Financials and Valuations (at 2,922p)

FY12 FY13 FY14F FY15F FY16F

Sales 2054.3 2184.4 2265.6 2424.9 2610.1

Adjusted PBT 308.4 314.9 335.6 382.1 419.3

FD Adjusted EPS 131.2 138.6 146.4 166.1 181.0

Dividend 41.0 46.0 50.6 55.7 61.2

EV/EBITDA (x) 14.7 16.3 13.9 12.1 10.9

PE (x) 20.0 23.2 20.0 17.6 16.1

Dividend Yield (%) 1.6% 1.4% 1.7% 1.9% 2.1%

FCF Yield (%) 2.8% 2.4% 4.2% 4.9% 5.4%


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1 May 2014



Bureau Veritas (Buy, PT €25.5) Previously we had been nervous of the business and geographic mix at

Bureau Veritas, now we sense that the Marine business and some of the more

cyclical European activities should see a decent rebound. The 1Q IMS showed

2.7% organic growth and good progression from 4Q13 across a number of

divisions. We upgrade FY15F EPS 2% moving us 5% ahead of consensus and

increase our price target to €25.5 and recommendation to Buy

Perhaps the most cyclical of the TIC names – now this is a positive

Post the last trough in organic growth rates around 4Q09/1Q10, BV only managed to

bounce back to mid-single digits, versus Intertek and SGS who achieved around double

digits. The reason being the long duration Marine business and European exposed

construction and certain inspection/certification activities. Now we see three reasons to

expect better growth: 1) Marine should move to double digit organic growth; 2) Europe

(35% of revenues) is showing signs of recovery, and 3) BV has the highest EM exposure at

52% and, minerals aside, we expect growth here to remain robust.

1Q IMS showed group organic growth of 2.7%

BV’s 1Q IMS on 29 April was reassuring with organic revenue growth of 2.7% (JEFe: 1.7%,

cons. 2.6%, 4Q13 1.6%) suggesting that 4Q13 was the trough. This was better than we

expected largely due to Marine, where new orders bounced back and in-service activities

took share and Commodities where growth in oil and gas was sufficient to offset minerals

weakness. Encouragingly comments were positive with regards to oil and gas, both from

a product and infrastructure perspective and we had further signs that minerals declines

are reaching a trough.

Upgrading FY15F EBITA by 2%, 5% ahead of consensus

Our assumptions for FY14 are broadly unchanged, looking for 4.6% organic growth

which will be second half biased, with a 1H/2H split of 3.2%/6.0%. Our margin

assumptions are increased to 17.0% but due to a slight increase in tax we reduce EPS by

2%. In FY15 we then upgrade our group organic growth number to 7.4% from 5.7% and

increase the margin 20bps to 17.4%. This results in a 3% increase to EBITA, moderated to

2% on EPS due to the higher tax. We are 4% ahead of consensus in FY14 and 5% ahead in

FY15 and FY16.

Valuation – Double Upgrade to Buy

Having previously been our least favoured stock we now are attracted to some of the

more cyclical divisions, especially Marine. As growth inflects in FY14 and the chance of

upgrades into FY15 we think it is appropriate that the shares re-rate towards the higher

end of the range. As a result we apply a 22x multiple to FY15F EPS, in-line with Intertek,

which drives a €25.5 price target and a Buy rating, from Underperform. Downside risks

from a European slow down, energy or marine weakness.

Table 4: Summary Financial and Valuation Data (at €21.9)


Sales 3902.3 3933.1 4149.2 4471.9 4816.5

Adjusted PBT 569.9 592.9 633.6 712.0 786.9

FD Adjusted EPS 0.90 0.89 1.01 1.14 1.26

Dividend 0.46 0.48 0.55 0.61 0.67

EV/EBITDA (x) 14.2 15.5 14.6 13.3 12.1

PE (x) 19.9 25.1 21.7 19.3 17.5

Dividend Yield (%) 2.6% 2.1% 2.5% 2.8% 3.0%

FCF Yield (%) 4.6% 3.9% 3.8% 4.1% 4.5%


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1 May 2014



SGS (Buy, PT CHF2450) SGS has historically demonstrated the highest growth and margins of the

three testing companies, while diversified by region and activity, minerals

and energy exposure is high but growth should be inflecting. The highest

European exposure of the three will be useful with a recovery and a very

conservative balance sheet suggests the greatest upside from M&A. We

upgrade FY15F EPS by 3% and move from Hold to Buy with a CHF 2,450 price

target.

Three positives for growth and margins

Aside from detailed divisional analysis, there are three appealing tailwinds for SGS: 1)

They have the largest European exposure of the three testers, at 38% of group revenues,

as this area recovers this will be a helpful; 2) Of all the testers SGS has the largest delta

between its trough employee costs as a percentage of revenues and the proportion now,

and; 3) SGS runs with the most conservative balance sheet with net debt to EBITDA of

0.2x in FY14F, this means they have the greatest capacity for M&A.

The most diverse tester – a rebound to come

Aside from the consumer division at 26% of EBITA, no division is more than 16% of EBITA,

this helps to make the business more resilient. Energy related activities, both from

product and infrastructure, are the largest exposure, accounting for perhaps as much as

45% of revenues and here we expect growth to inflect in FY14. Within minerals, data

points suggest a troughing this year and we do not think the slowdown in oil and gas will

be as bad as many fear.

Next update is interims in July

SGS report only twice a year and we anticipate that the group will be able to report close

to 5% organic growth in 1H with margins up 20bps YOY. 1Q statements elsewhere are

unlikely to be a catalyst as for us, we believe FY14 is the inflection year with higher levels

of growth and positive earnings momentum resuming in FY15.

We upgrade FY15F EPS 3%, 1% ahead of consensus

By flexing up organic growth assumptions in commodities and industrial areas we move

FY15 group organic growth up 1.9% to 7.4%. Our margin assumption of 17.5%,

increased 10bps, could prove conservative. Overall we upgrade FY15F EPS by 3% placing

us 1% ahead of consensus.

Valuation – Upgrade from Hold to Buy

SGS has historically traded at a c.2x PE premium to Bureau Veritas and Intertek which we

believe is justified given their diversification and more appealing dividend yield. As with

BV and Intertek, 2014 should be the year of inflection with 2015 potentially in need of

upgrades. We apply a 24x PE multiple to FY15F EPS, driving a CHF2,450 price target and

a Buy rating, from Hold. Downside risk from a meaningful slowdown in commodities.

Table 5: Summary Financials and Valuation (at CHF 2,144)


Sales 5,569 5,830 5,978 6,419 6,887

Adjusted PBT 890 939 1,022 1,126 1,224

FD Adjusted EPS 80.6 84.6 91.9 101.2 109.9

Dividend 58 65 70 70 70

EV/EBITDA (x) 13.5 14.6 12.9 12.0 11.2

PE (x) 22.9 25.6 23.3 21.2 19.5

Dividend Yield (%) 3.1% 3.0% 3.3% 3.3% 3.3%

Cash Flow Yield (%) 3.0% 3.7% 3.7% 4.4% 4.7%


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1 May 2014



Eurofins (Buy, €250) Eurofins is a unique asset in the TIC space, focused in fast growing pure

testing markets. Higher trend organic growth, margin expansion and M&A

should prove near term guidance to be conservative. 22x FY15F EPS is not

cheap, but for the growth it is still better value than peers. Buy.

Focussed in appealing markets

Generally, the wider the range of activities and geographies, the more appealing the TIC

asset, however, Eurofins’ focus on pure testing activities in fast growing markets are a key

strength. The underlying growth rates within food and pharma are generally perceived to

be amongst the faster in the TIC world, driven by regulation and outsourcing.

Environmental testing has been lagging in recent years but we anticipate a pick up from

FY14 onwards.

M&A can be a meaningful driver of growth

With a €1.2bn revenue base, €100-120m of revenues can comfortably be added per

annum. With greenfield sites taking 3 years on average to break-even, when targeting

new geographies or looking to add new IP, M&A makes sense. Over the last three years

acquisitions have added 14% on average to group revenue growth.

Margin expansion from two areas

100% testing, as opposed to inspection and certification, should allow for higher margins

for two reasons: 1) With testing activities we anticipate it is harder for clients to see the

value and so understand the price they should be paying, and; 2) Driving high volumes

through labs, assisted by IT and automation should allow high levels of utilisation. In

addition it is worth noting that the EBITDA margin in mature businesses is 260bps higher

than the group adjusted margin, suggesting there are underlying improvements to come

and these can go some way with the best performing labs at 30-50%. Finally, there is also

a turnaround story to play out as underperforming acquisitions reach breakeven.

Near term guidance feels conservative

The company have guided FY14 revenues of €1.4bn and adjusted EBITDA of €250m

(17.9%). We currently have forecast €1.4bn of revenues with adjusted EBITDA of €257

(18.5%). This gives us a steadier trajectory towards the unchanged longer term guidance

for €2bn of revenues and adjusted EBITDA margins of 20% by 2017.

Valuation

Our price target of €250 implies 28x FY15F EPS. This feels justified because: 1) The major

testing firms trade on 20-22x FY15 EPS with a CY13-16F EPS CAGR of 6%-8% versus 21%

for Eurofins; 2) This is a uniquely placed asset focused purely on testing in high growth

markets; 3) At €250 the shares would trade on 17x FY17 EPS and; 4) The shares have a 10-

year prospective PE range of 15-40x. Downside risks from poor acquisition integration.

Table 6: Summary Financials and Valuation(at €199.25)


Sales 1044.0 1225.5 1386.8 1490.5 1609.4

Adjusted PBT 111.6 138.7 161.3 186.1 218.8

FD Adjusted EPS 5.0 6.1 7.7 9.0 10.7

Dividend 1.0 1.2 1.5 1.8 2.1

EV/EBITDA (x) 11.4 16.3 14.8 12.5 10.7

PE (x) 19.0 27.2 25.8 22.1 18.6

Dividend Yield (%) 1.0% 0.7% 0.7% 0.9% 1.1%

Cash Flow Yield (%) 3.8% 2.6% 3.4% 4.6% 5.7%


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1 May 2014



Commodities right sized After a very difficult period of trading from 3Q12, while not calling an upturn, we do

sense that minerals could be troughing out. We anticipate that the oil and gas businesses

should remain resilient, albeit more mixed by geography.

Chart 21: Commodities - Revenues by activity as a % of group (FY13)


More importantly from an earnings perspective, given the amount of restructuring, we

believe the TIC players now understand the magnitude and the duration of the downturn.

As a result the minerals businesses are ‘right-sized’ for the current environment and we

expect that margins should improve from here.

Majors Capex – Second derivative turns positive In previous notes we have found that there tends to be higher correlation with capex and

exploration data and the organic growth of the commodities divisions. The chart below

shows actual and forecast levels of capex spend for the major mining companies – Anglo

American, Antofagasta, BHP Billiton, First Quantum, Glencore, Kazakhmys, Rio Tinto and

Vedanta.

Chart 22: Majors Capex Spend and YOY Change % (RHS)


Forecasts for 2014-2015 comprise only projects which have received board approval, as a

result 2013 looks to be where growth inflects with broadly flat capex in 2014. There may

not be another leg down in 2015 as more projects receive approval.

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1 May 2014



Peer commentary supports a trough ALS, an Australian listed testing and inspection company with 60% of EBITAS exposed to

minerals was a useful steer into the downturn, when they reported their minerals sample

intake moving sequentially flat from August 2012. The most recent update from ALS on

27 February was a profit warning citing:

1) Continuing tight market conditions in the minerals and coal sectors;

2) Very abnormal weather conditions in North America due to the influence of the polar

vortex which led to 16 days of lost laboratory operations in January and February;

3) A shift in North American Oil & Gas drilling activity from exploration to production

drilling.

Prior to this, detailed commentary was more positive

Post the interim results we had a detailed call with the company in early December where

they suggested a nervous near term outlook but sample intake had moved sequentially

flat with the magnitude of declines in line with previous downturns.

Sample flows in the geochemistry division (exploration) have declined by around 1/3rd

YOY and these declines had been reasonably consistent. Mineral sample inflows were

fairly flat on a weekly basis for the last 4 months (Aug-Nov) but the company was keen to

point out the off season is Jan-Mar and they anticipate that this time will be challenging.

This uncertain outlook is why the company did not give any full year guidance with their

interims.

History suggests a trough is close

In each of the downturns over the last 40 years, ALS believe that the average minerals

cycle peak to peak is 7 years (occasionally as long as 10), with the market contracting

35%-45%. Looking at the MEG (Metal Economics Group) data ALS expect that exploration

spends have declined c.40% which gives them some confidence that they are reaching

the bottom.

Broad based stabilisation in Australia In our universe, Hays has the largest Australian business and for a few months we have

highlighted tentative signs that, after two years of decline, the Australian labour market is

bottoming out. In our view, with the 3Q IMS there were clear signs of stabilisation across

a broad range of states and specialisms:

Perm fees were stronger than expected in March

Hays increased its sales consultant headcount by 3% during the quarter

The YOY decline in net fees in Australia/New Zealand moderated to -10% (Q2 -

15%)

Data from SEEK, an online Australian job board also suggests that we are seeing an

improvement, with YOY growth just positive for the last two months:

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1 May 2014



Chart 23: SEEK New Job Ads - Australia - Seasonally Adjusted

Source: SEEK

Oil and gas should remain robust Generally, as with many other divisions, capex is a better steer of organic growth but

given trade and production type activities, volume related data will also be relevant.

Chart 24: US Crude Oil Production (quadrillion Btu)

Source: US EIA

By region we would anticipate that Europe is in decline as refining capacity reduces while

Asia Pacific is buoyant as activity ramps up. The US is interesting as the longer term

fundamental trends are appealing as they look to ramp up domestic production and

perhaps eventually move from an energy import to export nation. Challenges at the

moment will involve adjusting pipelines and refineries to serve different geographical

areas and a different product. This could drive more work for the testers from extra capex

and investment but it could also create a headwind as the testers need to alter and

relocate their testing services and develop new facilities, equipment and tests.

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1 May 2014



Chart 25: US Refinery Vacuum Distillation Downstream Charge Capacity

Source: US EIA

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1 May 2014



Industrial - Not a ‘Minerals’ re-run In our view the industrial segments, and in particular the energy infrastructure testing and

inspection activities, are a fundamental point of debate. Views range from TIC firms being

at the start of another minerals cycle to a more moderate global slowing, with some areas

still very strong.

Chart 26: Industry as a % of group revenue


Chart 27: Industry as a % of group EBITA


On the balance of evidence out there we anticipate a moderate slowing but not a re-run

of issues we saw in the minerals segment. Activities here are very broad and occur across

the entire globe so making comparisons and picking out exact themes is not easy.

Peer Updates are Bullish Since the start of 2014 comments from two peers that we watched closely, Team inc and

Mistras Group have been much more positive. The latest update showed that despite

weather and company contract specific issues, the underlying confidence in markets has

not changed, particularly in the core North American oil and gas inspection markets.

Team Inc – 7 April 2014

US Industrial testing and inspection peer, Team Inc, reported 3Q earnings post the close.

On March 20 they revised down FY14 guidance by 7% at the mid-point due to the

adverse and prolonged winter in the US. They also effectively pre-announced their 3Q

and as a result the formal 3Q results were inline. The FY14 guidance was also unchanged.

In terms of outlook, they expect a good pick up into 4Q and they talk about ‚a bullish

perspective‛ with ‚a lot of activity‛

Mistras Group – 8 April

On the 3Q results call, the CEO stated that services to the oil and gas industries saw

revenues up 20% YOY and that he was extremely bullish‛ in the contract outlook for FY15

(yr. end May). The organic revenue growth for 3Q was 7%, with weather impacting it be

2%, but they feel they are well placed to achieve organic growth of 7%-12%.

Capex – A slowing of growth This is perhaps a key area of concern, in 2009 a reduction in the oil price saw a

curtailment in investment from oil and gas companies but this rebounded very strongly

and within 18 months was back at double digit.

We do suspect that the rate of growth in capex is likely to pull back due to:

Liquidity concerns and slowing cash flows

Rising capex costs +45% in 2 years

Closing of international and focus on domestic activities

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1 May 2014



The concerns here are twofold. Firstly we could see wholesale trimming of capex

impacting the volume of work; secondly we could see the whole supplier base experience

a meaningful pushback on pricing. Capex costs have been increasing 45% and indeed we

are seeing wage price inflation with Team inc talking about 8%-10% wage inflation in the

Gulf for their inspectors, albeit not in other skill disciplines or regions for the moment. We

are also hearing that oil companies are consolidating their supply base which will be a

headwind to revenues and may increase price competition which would be negative for

margins.

Many oil companies are reining back their international operations and focusing on the

US market, given the bias of testing companies to the US markets this could be helpful.

We estimate that International Oil companies represent the biggest customer group for

the testers but the mix is shifting towards National Oil companies. This is unhelpful

because national oil companies provide less guidance about the outlook and capex plans.

In addition we could see upside from the changes in US energy policy. Currently refining

capability is largely focussed around crude as opposed to sweeter shale blends of oil,

secondly operations of oil and gas are predominantly focussed on import as opposed to

export. As a reminder, it is illegal to export crude from the US but refined products can be

exported. This could be a useful positive driver of capex.

Chart 28: Integrated Oils - Capex Trends

Source: Jefferies

The chart above shows capex spend for the top 15 (c.60% market cap) integrated oil

companies and shows two interesting trends; 1) That the rate of growth in capex is

declining to low single digits from 20%+, we forecast it to remain positive but this does

represent a meaningful slowdown. Importantly we have been seeing a slowing since

2011 and the second derivative, YOY growth, is actually turning positive in 2014. 2) That

gross capex has increased by c.45% between 2010 and 2013 while production has

remained broadly consistent. This implies a combination of cost inflation and increased

cost per barrel extracted.

The chart below reiterates the rising cost theme by highlighting the cost of adding a new

barrel to proven reserves, clearly this is both a mix of drilling in more difficult and so

expensive areas and also due to increasing costs.

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1 May 2014



Chart 29: The cost of adding a new bbl of oil to their proven reserves

(US$/bbl)

Source: Jefferies

The exploration angle is likely to continue unabated as the need to find future oil fields

grows. In addition, we sense that having let smaller E&P firms be more nimble and quick

to explore, the integrated companies are now willing to throw a little more investment

behind their own programmes.

Chart 30: Integrated Oils - Exploration Spend

Source: Jefferies estimates

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Global Rig Data looking better

Oil rig counts in North America moves into positive territory 4/5 weeks ago. While gas rig

growth rates remain negative, the rate of YOY declines have slowed in recent weeks:

Chart 31: North American Rotary Rig Count 2007-2014

Source: Baker Hughes

Chart 32: North American Rotary Rig Count 2012-2014


In Canada YOY growth rates have been positive for the last 5 weeks and currently the

growth is double digit, in the Gulf of Mexico we have seen strong growth for almost the

last three years and although 2014 to date is a moderation on previous growth rates on

average the YOY increases are mid-single digit:

Chart 33: Gulf of Mexico Oil & Gas Rig Counts


Chart 34: Canada Oil & Gas Rig Counts


Operating Budgets seeing near term pressure Although this area should be resilient the experience appears to have been that unless

testing and inspection activities are required by laws or industry regulation that these

activities can be delayed. Intertek for example saw a slowing in their higher margin

consulting and training contracts.

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1 May 2014



A European Recovery We believe that Bureau Veritas is the most cyclical of the testers and while this made us

nervous in our deep dive on the testing space in September 2012, we believe it has the

potential to offer upside here. Firstly we anticipate that divisions such as Marine and

Construction could be a useful contributor to organic growth from FY15 and with 35% of

revenues in Europe, a rebound here would be helpful also.

Chart 35: BVI Revenues by Geography


Chart 36: ITRK Revenues by Geography


Chart 37: SGS Revenues by Geography


All three companies offer a balanced mix of emerging and developed markets growth but

Intertek offers the highest exposure to North America (25%), largely through their

industrial (energy) and commodities (oil cargo inspection) activities.

Construction Inflecting Data around activity levels in construction is most relevant for the Construction Services

division at Bureau Veritas but also will influence growth rates of the Industrial divisions for

all three players. Elsewhere there is likely to be an impact on In-service Verification and

Certification at BV and Environmental Services at SGS. The data for the US is encouraging,

with YOY growth inflecting in 2013 and turning positive from 2014:

Chart 38: YOY change in public Non-resi construction

Source: Jefferies, census.gov

Chart 39: YOY change in public Non-resi construction

Source: Jefferies, census.gov

In Europe the recovery is less buoyant but forecasts imply that 2014 will just creep into

positive YOY growth.

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-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E2015E2016E2017E2018E

Non-Residential Buildings Public Non-Residential Infrastructure

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Non-Residential Buildings Public Non-Residential Infrastructure

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1 May 2014



Chart 40: YOY change in construction put in place (EC-15)

Source: Jefferies, Euroconstruct

Clearly within the mix some countries will perform better than others, but in 2014 only 5

countries of the EC-15 are expected to be negative; France, Italy, Portugal, Spain and the

UK. France and Spain are important countries for Bureau Veritas and SGS respectively.

Chart 41: YOY change in non-residential construction


Chart 42: YOY change in civil engineering


-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Non-Residential Civil Engineering

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

France Spain

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

France Spain

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1 May 2014



Consumer divisions – more resilient Through the cycle, the consumer divisions have remained the most resilient in terms of

organic growth with stable high margins. Bureau Veritas and SGS report all their

consumer activities under one division while Intertek break out consumer goods and

commercial and electrical. At just over 50% of group EBITA, consumer testing is most

significant for Intertek:

Chart 43: Consumer - % of group revenue (FY13)


Chart 44: Consumer - % of group EBITA (FY13)


An Upswing in Global Trade In our deep dive into the sector in September 2012, we did not discover any correlation

with world merchandise volumes or export volumes but in general, as activity levels pick

up, TIC firms will benefit. In addition we suspect that improving demand and trade could

be a lead indicator for future innovation and product development which is important for

the testers, albeit harder to measure.

The latest (April 8, 2014) IMF forecasts global growth to run at 3.6% in 2014 and 3.9% in

2015 helped by a pick-up in advanced economies - a major impulse from the US. The

forecasts were cut 0.1% for each year since they were published in January. The World

Bank raised its global forecasts in January to 3.2% this year and 3.4% in 2015. Recent data

points also attest to a pick-up in global trade.

Chart 45: OECD Total Composite Leading Indicator – YOY (%)

Source: Jefferies, OECD, Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

BVI Intertek SGS

Consumer Commercial & Electrical

0%

10%

20%

30%

40%

50%

60%

BVI Intertek SGS

Consumer Commercial & Electrical

-6

-4

-2

0

2

4

6

8

03 04 05 06 07 08 09 10 11 12 13

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1 May 2014



Growth of China’s foreign trade container throughput picked up to 6.4% from 2% yoy in

Feb, as NY effect phased out. The improving growth was led by better demand from US

and Europe, which continues into early April. More recently, the US ISM indicates

manufacturing to return to expansion for US industry with the backlog of orders growing

while import intentions also rose.

Chart 46: World GDP % YOY vs World Merchandise Trade Volume YOY (%)

Source: Jefferies

Acceleration in product development As stated above we tended to find better correlation with innovation, R&D etc than with

trade and as a result the chart below is encouraging, showing a strong rebound in patent

applications worldwide.

Chart 47: YOY growth in patent applications worldwide

Source: WIPO

The top 10 countries (including USA, Japan, China and Germany) saw 5.1% growth in no

of applications in 2013. The top contributors to growth in patent applications worldwide

show the increasing importance of China:

(20.0)

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

03 04 05 06 07 08 09 10 11 12 13

World GDP % y-y (LHS) World merchandise trade volume % y-y (sa, RHS)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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1 May 2014



Chart 48: Contributors to growth in patents 2005-07

Source: WIPO

Chart 49: Contributors to growth in patents 2010-12

Source: WIPO

With the top 3 technologies being:

Electrical machinery (+10.9% YOY)

Computer Technology (+18.0%)

Digital Communications (+11.3%)

The shift towards come electronic goods does potentially present some margin mix

headwinds, generally as a result of locations in more developed regions combined with

higher technician and lab costs, the margins are lower.

The China Opportunity All of the large testing firms have made a big play of the China opportunity, with a

reasonable amount of management time and energy focussed there. It is hard to quantify

the size of the opportunity, although BV put it at €300-€500m of annual revenues.

Essentially this would suggest that the local Chinese consumer market could be the size of

Europe. Given the large consumer business, relative to group, we believe Intertek could

be best placed to see the impact.

Intertek – China development

At the moment revenues in China account for c.13% of group revenues, however, only

15%-20% of this domestic which translates to c.2.5% of group revenues and we estimate

is split broadly as follows:

Chart 50: Intertek - Current local Chinese revenue split


China

44%

US

40%

Europe

8%

Korea

7%

Other

1%

China

73%

US

15%

Korea

5%

Brazil

2%

Others

5%

Consumer Goods

25%

Commercial &

Electrical

12%

Industry &

Commodities

63%

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1 May 2014



We anticipate that there are many reasons to be excited by the China opportunity and

below we reference a Jefferies note; ‚China 2025: A Clear Path to Prosperity‛ by Christie Ju

from 1 January 2013. The focus here is one of the 7 megatrends – consumerization.

Rising middle class

According to Euromonitor, by 2020 China's middle class (defined as households with

annual income between RMB60k and RMB500k) will expand to 700 million, accounting

for almost c.50% of the total population vs. the current 23%. Over the 2007-2012 period,

China’s households with an annual disposable income of over US$10,000 more than

doubled, while India’s grew by 50.1%.

Chart 51: 5 Year CAGR

Source: CEIC

Social welfare reform

China has put huge efforts into overhauling its massive social security and healthcare

system. According to the National Bureau of Statistics, fiscal investment in these areas

reached RMB318.5bn in 2010, up 27.9% from 2008. This has and will continue to boost

consumers’ confidence. Public housing schemes broaden the consumer pool and should

bring imminent demand for retail shopping.

Urbanization

We believe that China is still at the early stage of urbanization, which provides ample

opportunity for the next tide of consumption growth. Jefferies house view is that total

urban population will increase from 691mn people in 2011 to 914m people in 2025, at a

CAGR of 2%. McKinsey expects China to have 221 cities with more than one million

residents, with 23 cities having more than five million people. Migration could drive

almost 70% of urban population growth from 2005 to 2025.

Food and beverages

Spending on basic needs in China will continue to decline as a proportion of per capita

consumption, and its growth rate is set to slow further. Our sensitivity analysis based on

Engel’s Law suggests that in the absence of hyperinflation, per capita food consumption

should grow at 5%-6% in base case; 3%-5% at least and 6%-8% at most during 2010-

2025. The growth rate of good consumption could range from 8% to 11% for 2010-2015.

0%

5%

10%

15%

20%

25%

30%

1995-2000 2000-2005 2005-2011

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1 May 2014



Chart 52: Breakdown of Urban Consumption (1995)

Source: CEIC, NBS

Chart 53: Breakdown of Urban Consumption (2011)

Source: CEIC, NBS

Retail

Modernization in retail intensifies competition in 1st tier cities but the transformation of the

retail format still lags behind that in developed countries and has ample room to develop

in rural areas. A global comparison suggests that the fast expansion of operating floor

area (OFA) in China, at double digit growth for the period of 2005-2010, is likely to slow

down to 9%-10% in the next one decade. It is noticeable that leading department store

operators have even grown their OFA at >20% p.a. in the last 2-3 years. We believe the

current market competition and catch-up gap do not allow such an aggressive expansion

to last for long. Should pricing be taken into consideration, we expect low- to mid-teens

growth for the sector.

A word of caution History is littered with failed forays into China by foreign companies. A McKinsey article

“Past lessons for China’s new joint ventures” points to some of these issues but perhaps

most relevant for the testers are issues around IP:

“Multinational companies still struggle to protect their intellectual property in China, and

joint ventures are particularly vulnerable. Protection in most developed markets occurs

primarily through legally binding agreements enforced in courts of law. But the concept of

intellectual-property protection is still new in China, and recourse to the legal system can be

lengthy and inadequate.”

The opening up of China could be a slower process than expected; in addition the margin

dynamics may not be as attractive, at least to start off with.

Food

50%

Clothing

14%

Household Facilities

7%

Medicine

3%

Transport and

Communication

5%

Recreation,

Education and

Cultural

10%

Residential

8%

Other

3%

Food

36%

Clothing

11%Household Facilities

7%

Medicine

7%

Transport and

Communication

14%

Recreation,

Education and

Cultural

12%

Residential

9%

Other

4%

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1 May 2014



Marine – Organic to Double Digit Bureau Veritas is unique amongst the three large testing firms due to its Marine Business.

The division is essentially a ship classification society, which deals with conformity

assessment of ships and marine equipment; both new vessels (43%) and in service vessels

(57%). Given contract format, around half of revenues are therefore recurring.

Classification targets two areas: first the structural soundness and second the reliability of

the propulsion and steering systems.

The group operates in two main areas and two further areas:

1) New construction: examination of the plans, inspection of the manufacturer’s

equipment and supervision of construction and trials. The contracts are usually

one to two years in length and account for 43% of revenues. The trend in

organic revenue growth tends to track new orders, albeit with some time lag.

Indeed, there is a statistical correlation on a one-year lagged basis between

growth in the total fleet order book and organic revenue growth. This is positive

because New Orders has recently almost doubled. Indeed if recent trends hold

up our assumption of 10% organic revenue growth in FY15 and FY16 look

conservative:

Chart 54: YOY growth in new orders (millions of gross register tonnage)


2) In-service activity: This is on-going certification and involves annual and

intermediary visits, with the most important being the special or fifth-year visit to

renew the classification certificate. Contracts are longer here, generally five

years, with a high renewal rate such that ships in service tended to be classed by

the same company for all their useful lives. In addition, the same society that

was involved in construction will generally be retained for in-service. This

division, including the smaller areas below, accounts for 57% of revenues. BV

has 16% market share (3rd) in terms of number of ships and 9% share based on

tonnage (5th).

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

New Orders Marine Organic growth (RHS)

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1 May 2014



Chart 55: YOY growth in fleet classed by Gross registered Tonnage and

number


3) Conformity certification services: This in respect to areas such as health and

safety as well as application of technical standards, such as safety and pollution.

4) Advice and assistance: This is mainly training and technical assistance in areas

such as appraisals, engineering and risk analysis.

Limited Operational Gearing Generally we consider the testing firms to have limited operational gearing. By way of a

broad estimate we assume that of the 100-150bps margin expansion outlined in strategic

plans, half comes from self-help and driving higher margin activities in divisions and half

comes from operational gearing.

SGS has biggest delta to troughs of employee costs as a % of revenues

Total employee costs as proportion of revenues has not changed in a material way over

the last nine years. Overall SGS currently has the biggest delta to its trough employee

costs versus group revenue:

Chart 56: Employee Costs as a % of Group Revenue


0%

2%

4%

6%

8%

10%

12%

14%

2007 2008 2009 2010 2011 2012 2013

GRT Number

40%

42%

44%

46%

48%

50%

52%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

BV Intertek SGS

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1 May 2014



In our view, Intertek has lower employee costs as a percentage of group revenues

because it has a higher proportion of testing versus inspection and certification. Generally

across the group the proportions are not materially different from nine years ago, this is

despite an average of 8% organic growth across the three firms, across the nine years.

BV and SGS have operated with the normal trading pattern of falling proportions of

staffing costs with revenue growth which broadly troughed in 2009 and have climbed up

since. Intertek has followed a slightly different pattern, experiencing relatively increasing

proportions of headcount costs in 2005 through 2008 which we attribute to the shift in

mix as they ramped up in inspection and, to a lesser degree, certification activities.

Interestingly from the point we are at now we could see a drop in headcount costs as a

proportion of revenues of 1% for BV, 2% for Intertek and 3% for SGS to troughs.

Intertek has the largest delta to peak EBITA per employee

In the chart below we have assessed EBITA contribution per employee, translated into EUR

at the average rate for each year:

Chart 57: Contribution to EBITA per employee (€)


Here, as we might expect, this has generally improved as margins have expanded.

Currently, Intertek has the biggest delta to peak EBITA per employee.

For BV, as margins have expanded almost 200bps over the period, we are only 4% of

EBITA per employee from peaks and 4% per employee above the 2005 position. We

believe this suggests that there could be further to go as some of the recent

underperforming areas, such as Marine, certain Certification activities, Commodities and

Europe pick up.

For Intertek, the average EBITA per employee is 10% below peaks but 21% above 2005.

Interestingly though margins are only 70bps higher over the period which suggests costs

elsewhere have increased markedly, this would tie in with the change in their business

from high margin activities to more capital intensive areas. We believe that Intertek does

have scope to increase the EBITA contribution per employee from here.

Finally, with SGS, EBITA per employee correlates well with the EBITA margin profile,

having improved 21% from nine years ago but only 4% below 2010 peaks.

6

7

8

9

10

11

12

13

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

BV Intertek SGS

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1 May 2014



Intertek - Upgrading FY15F EPS 9%

Table 7: Key Forecast Changes

FY14F FY15F

Old New Var Old New Var

Industry & Assurance 771 771 0.0% 810 833 2.9%

Organic growth 3.0% 3.0% 0.0% 5.0% 8.0% 3.0%

EBITA 88.7 88.7 0.0% 93.9 104.1 10.8%

Margin 11.5% 11.5% 0.0% 11.6% 12.5% 0.9%

Commodities 581 578 -0.5% 604 612 1.4%

Organic growth 3.0% 2.5% -0.5% 4.0% 6.0% 2.0%

EBITA 70.8 72.2 1.9% 75.5 82.7 9.5%

Margin 12.2% 12.5% 0.3% 12.5% 13.5% 1.0%

Consumer Goods 396 397 0.5% 423 429 1.4%

Organic growth 6.5% 7.0% 0.5% 7.0% 8.0% 1.0%

EBITA 129.1 130.8 1.2% 138.2 141.6 2.5%

Margin 32.7% 32.9% 0.2% 32.7% 33.0% 0.3%

Commercial & Electrical 349 349 0.0% 368 369 0.5%

Organic growth 5.0% 5.0% 0.0% 5.5% 6.0% 0.5%

EBITA 51.6 51.6 0.0% 55.2 55.4 0.5%

Margin 14.8% 14.8% 0.0% 15.0% 15.0% 0.0%

Chemicals & Pharmaceuticals 171 171 0.0% 178 181 1.9%

Organic growth 2.0% 2.0% 0.0% 4.0% 6.0% 2.0%

EBITA 17.1 17.1 0.0% 18.7 19.0 1.9%

Margin 10.0% 10.0% 0.0% 10.5% 10.5% 0.0%

Total 2267 2266 0.0% 2382 2425 1.8%

Organic growth 3.8% 3.8% 0.0% 5.1% 7.0% 1.9%

EBITA 357.3 360.3 0.8% 381.4 402.8 5.6%

Margin 15.8% 15.9% 0.1% 16.0% 16.6% 0.6%

EBITDA 402.2 405.2 0.7% 436.9 458.3 4.9%

Margin 17.7% 17.9% 0.1% 18.3% 18.9% 0.6%

Net Interest 24.7 24.7 0.0% 22.7 20.7 -8.8%

Adj PBT 332.6 335.6 0.9% 358.7 382.1 6.5%

Tax 79.8 77.2 -3.3% 86.1 87.9 2.1%

Tax Rate 24.0% 23.0% -1.0% 24.0% 23.0% -1.0%

Fully Dil. Adj. EPS 143.0 146.4 2.4% 152.9 166.1 8.6%


We are 3% Ahead of Consensus

Table 8: JEFe fully diluted EPS vs consensus

FY14 FY15 FY16

Hi 153 169 183

Low 141 153 164

Consensus 147 162 177

JEFe 146 166 181

Variance -0.5% 2.7% 2.5%

Source: Jefferies estimates, FactSet

Business Services


1 May 2014



Intertek - Summary Financial Data

Chart 58: Revenue by Division

Source: Company Data (FY13)

Chart 59: EBITA by division


Chart 60: EBITA margin by division


Income Statement

Table 9: Income Statement - FY10-16F

FY10 FY11 FY12 FY13 FY14F FY15F FY16F

Industry & Assurance 191 469 666 709 771 833 908

Organic growth 7.4% 7.0% 10.4% 4.2% 3.0% 8.0% 9.0%

EBITA 16.6 50.9 77.4 82.2 88.7 104.1 113.5

Margin 8.7% 10.9% 11.6% 11.6% 11.5% 12.5% 12.5%

Commodities 473 530 572 587 578 612 655

Organic growth 8.0% 11.9% 8.6% 2.1% 2.5% 6.0% 7.0%

EBITA 54.5 67.0 77.2 70.0 72.2 82.7 89.8

Margin 11.5% 12.6% 13.5% 11.9% 12.5% 13.5% 13.7%

Consumer Goods 304 316 343 381 397 429 464

Organic growth 5.2% 4.8% 7.3% 8.5% 7.0% 8.0% 8.0%

EBITA 106.2 106.3 112.8 124.5 130.8 141.6 153.9

Margin 34.9% 33.7% 32.8% 32.7% 32.9% 33.0% 33.2%

Commercial & Electrical 269 291 318 338 349 369 392

Organic growth 7.8% 9.1% 8.7% 4.8% 5.0% 6.0% 6.0%

EBITA 38.4 44.1 50.6 49.3 51.6 55.4 58.7

Margin 14.3% 15.2% 15.9% 14.6% 14.8% 15.0% 15.0%

Chemicals & Pharmaceuticals 137 144 155 169 171 181 192

Organic growth 6.3% 4.0% 9.0% 2.0% 2.0% 6.0% 6.0%

EBITA 11.8 12.8 17.1 16.6 17.1 19.0 22.1

Margin 8.6% 8.9% 11.0% 9.8% 10.0% 10.5% 11.5%

Total 1374 1749 2054 2184 2266 2425 2610

Organic growth 7.7% 8.3% 8.6% 4.3% 3.8% 7.0% 7.6%

EBITA 227.5 281.1 335.1 342.6 360.3 402.8 438.0

Margin 16.6% 16.1% 16.3% 15.7% 15.9% 16.6% 16.8%

EBITDA 256.6 290.4 343.6 374.9 405.2 458.3 504.8

Margin 18.7% 16.6% 16.7% 17.2% 17.9% 18.9% 19.3%

Net Interest 15.6 21.0 26.7 27.7 24.7 20.7 18.7

Adj PBT 211.9 260.1 308.4 314.9 335.6 382.1 419.3

Tax 56.6 73.3 80.3 72.4 77.2 87.9 96.4

Tax Rate 26.7% 28.2% 26.0% 23.0% 23.0% 23.0% 23.0%

Fully Dil. Adj. EPS 89.4 107.2 131.2 138.6 146.4 166.1 181.0


Industry &

Assurance

32%

Commodities

27%

Consumer Goods

17%

Commercial &

Electrical

16%

Chemicals &

Pharmaceuticals

8%

Industry &

Assurance

24%

Commodities

21%Consumer Goods

36%

Commercial &

Electrical

14%

Chemicals &

Pharmaceuticals

5%

0%

5%

10%

15%

20%

25%

30%

35%

Industry &

Assurance

Commodities Consumer Goods Commercial &

Electrical

Chemicals &

Pharmaceuticals

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1 May 2014



Cash Flow Statement

Table 10: Cash Flow Statement - FY10-16F

FY10 FY11 FY12 FY13 FY14F FY15F FY16F

Net profit 139.0 151.1 188.2 217.0 238.0 273.3 302.0

Depreciation 51.1 56.4 59.8 65.7 67.4 78.0 88.7

Amortization of software 4.2 3.8 3.8 5.2 5.2 5.2 5.2

Amortization of intangible assets arising

on acquisitions

12.9 25.3 32.5 22.5 22.5 22.6 21.9

Share option expense 7.4 9.5 10.4 10.9 0.0 0.0 0.0

Net financing costs 16.6 21.0 26.7 28.2 24.7 20.7 18.7

Income tax expense 50.9 61.9 68.4 64.8 77.2 87.9 96.4

Cash flow 282.3 329.1 389.9 414.9 435.0 487.7 532.9

Change in Working Capital -10.9 -40.4 -57.3 -36.3 -9.7 -12.0 -13.9

Cash flow from operations 271.4 288.7 332.6 378.6 425.3 475.7 519.0

Interest Paid -15.4 -22.3 -26.5 -28.5 -24.0 -24.0 -24.0

Income taxes Paid -61.7 -53.4 -72.6 -80.9 -77.2 -87.9 -96.4

Net Cash flow from operations 194.3 213.0 233.5 269.2 324.1 363.8 398.6

Capex -65.9 -80.6 -115.0 -144.8 -124.6 -133.4 -143.6

Free cash flow 128.4 132.4 118.5 124.4 199.5 230.4 255.0

Investments/Perimeter chg. -51.2 -464.1 -40.2 -111.2 -40.0 0.0 0.0

Other 1.7 3.6 4.0 6.2 6.2 6.2 6.2

Net Cash flow from investments -115.4 -541.1 -151.2 -249.8 -158.4 -127.2 -137.4

Dividends -49.1 -57.6 -70.5 -83.8 -81.4 -92.7 -101.3

Increase in Indebtedness 44.4 357.3 -16.2 35.3 0.0 0.0 0.0

Change in Equity 2.3 -7.4 -5.9 -16.3 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Cash flow from financing -2.4 292.3 -92.6 -64.8 -81.4 -92.7 -101.3

Net Cash Flow 76.5 -35.8 -10.3 -50.1 84.2 143.9 159.9

Net debt 169.7 580.7 550.7 618.2 534.0 390.0 230.1

Net debt to EBITDA 0.7 2.0 1.6 1.6 1.3 0.9 0.5


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1 May 2014



BV - Upgrading FY15F EPS by 2%


FY14 FY15

Old New Variance Old New Variance

Revenue

Marine 294.2 309.5 5.2% 308.9 340.4 10.2%

Organic growth 3.0% 8.2% 5.2% 5.0% 10.0% 5.0%

Industry 960.5 962.4 0.2% 1027.8 1049.0 2.1%

Organic growth 6.3% 6.0% -0.3% 7.0% 9.0% 2.0%

In-Service Inspection & Verification 589.6 580.6 -1.5% 613.2 621.3 1.3%

Organic growth 4.5% 5.1% 0.6% 4.0% 6.0% 2.0%

Construction 448.5 449.5 0.2% 461.9 476.5 3.1%

Organic growth 5.0% 3.7% -1.3% 3.0% 6.0% 3.0%

Certification 326.6 328.3 0.5% 339.7 348.0 2.4%

Organic growth 1.5% 1.0% -0.5% 4.0% 6.0% 2.0%

Commodities 687.8 693.9 0.9% 729.0 742.5 1.8%

Organic growth 0.0% 2.9% 2.9% 6.0% 6.0% 0.0%

Consumer Products 587.4 564.7 -3.9% 634.4 618.3 -2.5%

Organic growth 9.3% 7.8% -1.5% 8.0% 9.0% 1.0%

Gov Services & International Trade 263.0 260.3 -1.1% 278.8 275.9 -1.1%

Organic growth -1.3% -0.3% 1.0% 6.0% 6.0% 0.0%

Group 4157.6 4149.2 -0.2% 4393.7 4471.9 1.8%

Organic growth 4.1% 4.6% 0.6% 5.7% 7.4% 1.7%

EBITA

Marine 78.6 84.2 7.2% 82.8 95.3 15.1%

Margin 26.7% 27.2% 0.5% 26.8% 28.0% 1.2%

Industry 147.9 148.2 0.2% 160.3 163.6 2.1%

Margin 15.4% 15.4% 0.0% 15.6% 15.6% 0.0%

In-Service Inspection & Verification 82.5 81.3 -1.5% 86.5 87.6 1.3%

Margin 14.0% 14.0% 0.0% 14.1% 14.1% 0.0%

Construction 67.3 67.4 0.2% 71.6 72.4 1.1%

Margin 15.0% 15.0% 0.0% 15.5% 15.2% -0.3%

Certification 56.5 56.5 -0.1% 61.1 60.6 -1.0%

Margin 17.3% 17.2% -0.1% 18.0% 17.4% -0.6%

Commodities 79.1 79.8 0.9% 87.5 92.8 6.1%

Margin 11.5% 11.5% 0.0% 12.0% 12.5% 0.5%

Consumer Products 141.0 135.5 -3.9% 152.3 151.5 -0.5%

Margin 24.0% 24.0% 0.0% 24.0% 24.5% 0.5%

Gov Services & International Trade 51.3 50.7 -1.1% 55.8 55.2 -1.1%

Margin 19.5% 19.5% 0.0% 20.0% 20.0% 0.0%

Group 704.2 703.6 -0.1% 757.8 779.0 2.8%

Margin 16.9% 17.0% 0.0% 17.2% 17.4% 0.2%

EPS Adj 1.03 1.01 -1.5% 1.12 1.14 1.6%


5% ahead of FY15 Consensus

Table 12: Fully adjusted diluted EPS vs Consensus

FY14 FY15 FY16

Hi 1.03 1.15 1.24

Low 0.90 1.03 1.07

Average 0.97 1.08 1.19

JEFe 1.01 1.14 1.26

Variance 4.2% 5.1% 5.3%


Business Services


1 May 2014



BV- Summary Financial Data

Chart 61: Revenues by division




Chart 63: EBITA margins by division


Divisional Data

Table 13: Divisional Data – FY11-16F

FY11 FY12 FY13F FY14F FY15F FY16F

Marine 318.7 317.0 294.2 309.5 340.4 374.5

Growth 1.7% -0.5% -7.2% 5.2% 10.0% 10.0%

Organic Growth 2.4% -4.0% -4.6% 8.2% 10.0% 10.0%

EBITA 93.9 84.7 78.2 84.2 95.3 106.7

EBITA Margin 29.5% 26.7% 26.6% 27.2% 28.0% 28.5%

Industry Services 664.0 874.8 939.4 962.4 1049.0 1143.4

growth 9.2% 31.7% 7.3% 2.5% 9.0% 9.0%

organic growth 17.1% 16.1% 8.3% 6.0% 9.0% 9.0%

EBITA 82.0 126.5 143.3 148.2 163.6 180.7

EBITA Margin 12.3% 14.5% 15.3% 15.4% 15.6% 15.8%

In-Service Verification 462.5 480.5 477.4 580.6 621.3 652.3

growth 7.3% 3.9% -0.3% 21.6% 7.0% 5.0%

organic growth 2.8% 1.9% 2.7% 5.1% 6.0% 5.0%

EBITA 48.4 52.5 66.2 81.3 87.6 93.3

EBITA Margin 10.5% 10.9% 13.9% 14.0% 14.1% 14.3%

Construction 442.7 447.6 439.7 449.5 476.5 509.8

growth 3.5% 1.1% -1.8% 2.2% 6.0% 7.0%

organic growth -2.2% -5.0% 5.2% 3.7% 6.0% 7.0%

EBITA 45.2 46.9 64.5 67.4 72.4 78.5

EBITA Margin 10.2% 10.5% 14.7% 15.0% 15.2% 15.4%

Certification 322.1 344.1 335.0 328.3 348.0 365.4

growth 0.2% 6.8% -2.9% -2.0% 6.0% 5.0%

organic growth 0.1% 4.5% 1.3% 1.0% 6.0% 5.0%

EBITA 66.5 61.5 57.4 56.5 60.6 64.3

EBITA Margin 20.6% 17.9% 17.1% 17.2% 17.4% 17.6%

Commodities 554.9 713.6 664.5 693.9 742.5 801.9

growth 108.1% 28.6% -6.9% 4.4% 7.0% 8.0%

organic growth 10.1% 13.5% -1.7% 2.9% 6.0% 8.0%

EBITA 69.1 99.0 72.2 79.8 92.8 104.2

EBITA Margin 12.5% 13.9% 10.9% 11.5% 12.5% 13.0%

Consumer Products 379.3 442.9 505.3 564.7 618.3 674.0

Growth -0.8% 16.8% 14.1% 11.8% 9.5% 9.0%

Organic Growth 1.5% 8.3% 9.7% 7.8% 9.0% 9.0%

EBITA 97.1 108.6 121.8 135.5 151.5 165.1

EBITA Margin 25.6% 24.5% 24.1% 24.0% 24.5% 24.5%

Marine

7%

Industry Services

24%

In-Service

Verification

12%Construction

11%

Certification

9%

Commodities

17%

Consumer Products

13%

Government

Services

7%

Marine

12%

Industry Services

22%

In-Service

Verification

10%Construction

10%

Certification

9%

Commodities

11%

Consumer Products

18%

Government

Services

8%

0%

5%

10%

15%

20%

25%

30%

Business Services


1 May 2014





Government Services 214.4 281.8 277.6 260.3 275.9 295.2

Growth 20.0% 31.4% -1.5% -6.3% 6.0% 7.0%

Organic Growth 13.5% 28.2% 2.7% -0.3% 6.0% 7.0%

EBITA 42.1 59.5 53.3 50.7 55.2 59.0

EBITA Margin 19.6% 21.1% 19.2% 19.5% 20.0% 20.0%

Group Revenue 3358.6 3902.3 3933.1 4149.2 4471.9 4816.5

Reported growth 14.6% 16.2% 0.8% 5.5% 7.8% 7.7%

Organic growth 6.2% 7.8% 3.5% 4.6% 7.4% 7.7%

EBITA 544.3 639.2 656.9 703.6 779.0 851.9

EBITA Margin 16.2% 16.4% 16.7% 17.0% 17.4% 17.7%


Income Statement

Table 14: Income Statement – FY11-16F

FY 11 FY 12 FY 13 FY 14E FY15E FY16E

Total Revenue 3358.6 3902.3 3933.1 4149.2 4471.9 4816.5

Purchases 995.5 1136.3 1120.5 1182.1 1274.0 1372.2

Personnel Costs 1709.4 1966.9 2017.1 2048.7 2200.7 2365.4

Tax 71.1 69.3 53.8 56.8 61.2 65.9

Other 64.0 120.9 67.3 67.3 67.3 67.3

EBITDA 593.2 660.9 739.0 794.4 868.7 945.7

EBITDA margin % 17.7% 16.9% 18.8% 19.1% 19.4% 19.6%

Depreciation 112.9 142.6 149.4 158.0 157.0 161.1

EBIT 480.3 518.3 589.6 636.3 711.7 784.6

EBIT margin % 14.3% 13.3% 15.0% 15.3% 15.9% 16.3%

Adjusted EBIT 544.3 639.2 656.9 703.6 779.0 851.9

Adjusted EBIT margin % 16.2% 16.4% 16.7% 17.0% 17.4% 17.7%

Financial result -58.4 -69.3 -64.0 -70.0 -67.0 -65.0

Associates 0.3 0.0 0.0 0.0 0.0 0.0

Amortization 0.0 0.0 0.0 0.0 0.0 0.0

Pre tax 422.2 449.0 525.6 566.3 644.7 719.6

486.2 569.9 592.9 633.6 712.0 786.9

Taxes 116.9 141.8 169.1 186.9 212.8 237.5

Tax rate 27.7% 31.6% 32.2% 33.0% 33.0% 33.0%

Profit 305.3 307.2 356.5 379.5 432.0 482.1

Minority 7.7 9.6 11.4 12.1 13.8 15.4

Net income 297.6 297.6 345.1 367.3 418.1 466.7

Earnings Per Share - basic 0.68 0.68 0.79 0.84 0.95 1.06

Earnings Per Share - diluted 0.67 0.66 0.77 0.82 0.94 1.05

Earnings Per Share - adj diluted 0.78 0.90 0.89 1.01 1.14 1.26


Business Services


1 May 2014



Cash Flow Statement

Table 15: Cash Flow Statement – FY11-16F

FY 11 FY 12 FY 13 FY 14E FY15E FY16E

Net Income 422.2 449.0 525.6 566.3 644.7 719.6

Depreciation & Amortization 129.1 167.9 149.4 158.0 157.0 161.1

Changes in Provisions -4.9 31.1 25.8 0.0 0.0 0.0

Adjustments -104.8 -118.9 -97.3 -186.9 -212.8 -237.5

Cash flow 441.6 529.1 603.5 537.5 588.9 643.3

Working Capital -39.2 -24.6 -75.6 -16.7 -27.3 -29.2

Cash flow from operations 402.4 504.5 527.9 520.7 561.6 614.1

Capex -115.8 -140.5 -147.3 -155.4 -167.5 -180.4

Free cash flow 286.6 364.0 380.6 365.4 394.1 433.7

Investments/Perimeter chg. -70.2 -246.6 -165.6 -450.0 0.0 0.0

Other 0.5 9.7 8.0 0.0 0.0 0.0

Cash flow from investments -185.5 -377.4 -304.9 -605.4 -167.5 -180.4

Increase in Indebtedness -89.2 80.6 42.4 42.4 42.4 42.4

Change in Equity 28.5 -52.9 -101.6 0.0 0.0 0.0

Dividends -131.2 -147.1 -216.8 -267.6 -304.6 -340.0

Cash flow from financing -191.9 -119.4 -276.0 -225.2 -262.2 -297.6

Exchange Effect 4.5 -3.8 -24.1 -5.0 0.0 0.0

Net Cash Flow 29.5 3.9 -77.1 -314.8 131.9 136.1

Net debt 1021.5 1170.8 1326.3 1641.1 1509.2 1415.5

Net debt to EBITDA 1.7 1.8 1.8 2.1 1.7 1.5


Business Services


1 May 2014



SGS - Upgrading FY15F EPS 3%


FY14F FY15F

Old New Var Old New Var

Total Revenue 5978 5978 0.0% 6306 6419 1.8%

% Change 2.6% 2.6% 0.0% 5.5% 7.4% 1.9%

LFL % 4.9% 4.9% 0.0% 5.5% 7.4% 1.9%

Perimeter Effect % 0.5% 0.5% 0.0% 0.0% 0.0% 0.0%

Currency effect % -2.8% -2.8% 0.0% 0.0% 0.0% 0.0%

Total Operating Profit 1018 1018 0.0% 1095 1122 2.5%

% Margin 17.0% 17.0% 0.0% 17.4% 17.5% 0.1%

by Division

Agricultural Services 400 400 0.0% 424 428 0.9%

% LFL Growth 7.0% 7.0% 0.0% 6.0% 7.0% 1.0%

% Perimeter 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

% Currency -2.0% -2.0% 0.0% 0.0% 0.0% 0.0%

% Reported 5.0% 5.0% 0.0% 6.0% 7.0% 1.0%

Operating Profit 69 69 0.0% 74 75 0.9%

% Margin 17.3% 17.3% 0.0% 17.5% 17.5% 0.0%

Minerals Services 744 744 0.0% 766 796 3.9%

% LFL Growth -2.5% -2.5% 0.0% 3.0% 7.0% 4.0%

% Perimeter 0.4% 0.4% 0.0% 0.0% 0.0% 0.0%

% Currency -4.0% -4.0% 0.0% 0.0% 0.0% 0.0%

% Reported -6.1% -6.1% 0.0% 3.0% 7.0% 4.0%


% Margin 16.1% 16.1% 0.0% 16.6% 16.6% 0.0%

Oil, Gas & Chemical Services 1197 1197 0.0% 1269 1293 1.9%

% LFL Growth 7.0% 7.0% 0.0% 6.0% 8.0% 2.0%

% Perimeter 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

% Currency -2.0% -2.0% 0.0% 0.0% 0.0% 0.0%

% Reported 5.0% 5.0% 0.0% 6.0% 8.0% 2.0%


% Margin 13.8% 13.8% 0.0% 14.2% 14.5% 0.3%

Life Sciences Services 223 223 0.0% 235 237 1.0%

% LFL Growth 9.0% 9.0% 0.0% 5.0% 6.0% 1.0%

% Perimeter 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

% Currency 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

% Reported 9.0% 9.0% 0.0% 5.0% 6.0% 1.0%


% Margin 14.0% 14.0% 0.0% 15.0% 15.0% 0.0%

Consumer Testing Services 1103 1103 0.0% 1191 1203 0.9%

% LFL Growth 9.0% 9.0% 0.0% 8.0% 9.0% 1.0%

% Perimeter 0.4% 0.4% 0.0% 0.0% 0.0% 0.0%

% Currency -3.5% -3.5% 0.0% 0.0% 0.0% 0.0%

% Reported 5.9% 5.9% 0.0% 8.0% 9.0% 1.0%


% Margin 24.6% 24.6% 0.0% 24.5% 24.8% 0.3%

Systems & Services Certification 408 408 0.0% 433 433 0.0%

% LFL Growth 3.5% 3.5% 0.0% 6.0% 6.0% 0.0%

% Perimeter 1.1% 1.1% 0.0% 0.0% 0.0% 0.0%

% Currency -3.0% -3.0% 0.0% 0.0% 0.0% 0.0%

% Reported 1.6% 1.6% 0.0% 6.0% 6.0% 0.0%


% Margin 18.5% 18.5% 0.0% 19.0% 19.0% 0.0%

Business Services


1 May 2014




FY14F FY15F

Industrial Services 969 969 0.0% 1008 1037 2.9%

% LFL Growth 2.0% 2.0% 0.0% 4.0% 7.0% 3.0%

% Perimeter 1.4% 1.4% 0.0% 0.0% 0.0% 0.0%

% Currency -2.5% -2.5% 0.0% 0.0% 0.0% 0.0%

% Reported 0.9% 0.9% 0.0% 4.0% 7.0% 3.0%


% Margin 11.4% 11.4% 0.0% 11.8% 12.0% 0.2%

Environmental Services 324 324 0.0% 334 343 2.9%

% LFL Growth 1.0% 1.0% 0.0% 3.0% 6.0% 3.0%

% Perimeter 0.7% 0.7% 0.0% 0.0% 0.0% 0.0%

% Currency -3.0% -3.0% 0.0% 0.0% 0.0% 0.0%

% Reported -1.3% -1.3% 0.0% 3.0% 6.0% 3.0%


% Margin 10.5% 10.5% 0.0% 10.7% 10.8% 0.1%

Automotive Services 327 327 0.0% 346 350 0.9%

% LFL Growth 9.0% 9.0% 0.0% 6.0% 7.0% 1.0%

% Perimeter 0.1% 0.1% 0.0% 0.0% 0.0% 0.0%

% Currency -2.0% -2.0% 0.0% 0.0% 0.0% 0.0%

% Reported 7.1% 7.1% 0.0% 6.0% 7.0% 1.0%


% Margin 21.8% 21.8% 0.0% 22.0% 22.0% 0.0%

Governments & Institutions Services 283 283 0.0% 300 300 0.0%

% LFL Growth 8.0% 8.0% 0.0% 6.0% 6.0% 0.0%

% Perimeter 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

% Currency -5.0% -5.0% 0.0% 0.0% 0.0% 0.0%

% Reported 3.0% 3.0% 0.0% 6.0% 6.0% 0.0%


% Margin 24.8% 24.8% 0.0% 24.5% 24.5% 0.0%

EPS 91.9 91.9 0.0% 98.8 101.2 2.5%


1% Ahead of FY15F Consensus

Table 17: JEFe fully diluted EPS versus consensus

FY14 FY15 FY16

Hi 93.8 103.5 116.0

Low 86.4 92.5 99.5

Average 90.8 100.3 109.7

JEFe 91.9 101.2 109.9

Variance 1.2% 0.9% 0.2%


Business Services


1 May 2014



SGS - Summary Financial Data

Chart 64: Revenues by division




Chart 66: EBITA margins by division


Divisional Data


FY11 FY12 FY13 FY14F FY15F FY16F

Total Revenue 4797 5569 5830 5978 6419 6887

% Change 0.8% 16.1% 4.7% 2.6% 7.4% 7.3%

LFL % 10.5% 10.2% 4.4% 4.9% 7.4% 7.3%

Total Operating Profit 815 931 977 1018 1122 1220

% Margin 17.0% 16.7% 16.8% 17.0% 17.5% 17.7%

Agricultural Services 327 370 381 400 428 454

% LFL Growth 5.7% 11.0% 3.8% 7.0% 7.0% 6.0%

% Reported -4.9% 13.0% 3.2% 5.0% 7.0% 6.0%

Operating Profit 51 61 65 69 75 79

% Margin 15.7% 16.5% 17.1% 17.3% 17.5% 17.5%

Minerals Services 678 868 792 744 796 851

% LFL Growth 23.5% 13.8% -7.8% -2.5% 7.0% 7.0%

% Reported 10.1% 28.1% -8.8% -6.1% 7.0% 7.0%


% Margin 19.4% 18.7% 15.6% 16.1% 16.6% 17.0%

Oil, Gas & Chemical Services 912 1046 1140 1197 1293 1397

% LFL Growth 7.7% 11.6% 9.4% 7.0% 8.0% 8.0%

% Reported -4.7% 14.7% 9.0% 5.0% 8.0% 8.0%


% Margin 13.5% 13.1% 13.5% 13.8% 14.5% 14.5%

Life Sciences Services 192 199 205 223 237 251

% LFL Growth 5.2% 0.9% 8.8% 9.0% 6.0% 6.0%

% Reported -0.8% 3.8% 2.9% 9.0% 6.0% 6.0%


% Margin 10.8% 8.5% 13.2% 14.0% 15.0% 15.0%

Consumer Testing Services 802 936 1042 1103 1203 1311

% LFL Growth 10.3% 10.8% 11.2% 9.0% 9.0% 9.0%

% Reported -2.4% 16.7% 11.3% 5.9% 9.0% 9.0%


% Margin 25.3% 24.8% 24.8% 24.6% 24.8% 25.0%

Systems & Services Certification 364 395 402 408 433 459

% LFL Growth 5.6% 6.2% 3.9% 3.5% 6.0% 6.0%

% Reported -5.7% 8.5% 1.7% 1.6% 6.0% 6.0%


% Margin 18.7% 18.3% 18.3% 18.5% 19.0% 19.5%

Agricultural Services

6%

Minerals Services

14%

Oil, Gas & Chemical

Services

20%

Life Sciences

Services

3%

Consumer Testing

Services

18%

Systems & Services

Certification

7%

Industrial Services

16%

Environmental

Services

6%

Automotive Services

5%

Governments &

Institutions Services

5%

Agricultural Services

7%

Minerals Services

13%

Oil, Gas & Chemical

Services

16%

Life Sciences

Services

3%Consumer Testing

Services

26%

Systems & Services

Certification

7%

Industrial Services

11%

Environmental

Services

3%

Automotive Services

7%

Governments &

Institutions Services

7%

0%

5%

10%

15%

20%

25%

30%

Business Services


1 May 2014





Industrial Services 747 899 960 969 1037 1109

% LFL Growth 10.9% 9.5% 2.1% 2.0% 7.0% 7.0%

% Reported 1.2% 20.3% 6.9% 0.9% 7.0% 7.0%


% Margin 10.7% 11.2% 11.2% 11.4% 12.0% 12.5%

Environmental Services 284 323 328 324 343 367

% LFL Growth 13.1% 6.6% 0.3% 1.0% 6.0% 7.0%

% Reported 1.9% 13.7% 1.6% -1.3% 6.0% 7.0%


% Margin 9.4% 10.6% 10.3% 10.5% 10.8% 11.0%

Automotive Services 270 277 305 327 350 371

% LFL Growth 7.1% 4.6% 10.4% 9.0% 7.0% 6.0%

% Reported 38.5% 2.7% 10.0% 7.1% 7.0% 6.0%


% Margin 21.9% 22.0% 21.6% 21.8% 22.0% 22.0%

Governments & Institutions Services 222 256 275 283 300 318

% LFL Growth 6.6% 17.3% 11.1% 8.0% 6.0% 6.0%

% Reported -3.0% 15.5% 7.3% 3.0% 6.0% 6.0%


% Margin 23.4% 21.0% 24.8% 24.8% 24.5% 24.5%


Income Statement



Sales 4797 5569 5830 5978 6419 6887

% change 0.8% 16.1% 4.7% 2.6% 7.4% 7.3%

Salaries and wages 2635 3071 3228 3252 3479 3733

Others 1147 1384 1392 1369 1465 1566

EBITDA 1015 1114 1210 1357 1474 1588

EBITDA margin % 21.2% 20.0% 20.7% 22.7% 23.0% 23.1%

Depreciation and amortization 225 280 298 319 332 349

Goodwill amortization 16 -17 -20 -20 -20 -20

Exceptionals -9 -80 -45 0 0 0

EBIT 790 834 912 1038 1142 1240

EBIT margin % 16.5% 15.0% 15.6% 17.4% 17.8% 18.0%

Financial result -26 -41 -38 -37 -36 -36

Pre tax 764 793 874 1002 1106 1204

Taxes 203 214 236 270 299 325

Tax rate 26.6% 27.0% 27.0% 27.0% 27.0% 27.0%

Profit 561 579 638 731 807 879

Minority 27 34 38 43 47 52

Net income group share 534 545 600 688 760 827

Net income pre exceptionals 557 617 652 708 780 847

Diluted EPS - adjusted 73.2 80.6 84.6 91.9 101.2 109.9


Business Services


1 May 2014



Cash Flow Statement



Net profit 561 579 638 688 760 827

Depreciation 225 280 298 319 332 349

Amortization 0 0 0 0 0 0

Minority Interests 27 34 38 43 47 52

Adjustments -39 -22 3 0 0 0

Cash flow 774 871 977 1050 1139 1227

Working Capital -84 -73 -29 -83 -29 -31

Cash flow from operations 690 798 948 967 1110 1197

Capex -337 -376 -333 -359 -385 -413

Free cash flow 353 422 615 608 725 783

Investments/Perimeter chg. -112 -182 -108 -10 0 0

Other 6 1 16 0 0 0

Cash flow from investments -443 -557 -425 -369 -385 -413

Dividends -510 -521 -471 -570 -654 -722

Net flows -157 -99 144 39 72 61

Increase in Indebtedness 695 18 -47 0 0 0

Change in Equity -50 0 0 0 0 0

Other -2 37 2 0 0 0

Cash flow from financing 133 -466 -516 -570 -654 -722

Exchange Effect 16 -5 -13 0 0 0

Net Cash Flow 396 -230 -6 29 72 61


Business Services


1 May 2014



Eurofins - Summary Financial Data

Chart 67: Revenues by geography


Chart 68: Revenues by activity


Chart 69: Organic revenue growth


Income Statement



Sales 828.9 1044.0 1225.5 1386.8 1490.5 1609.4

Exceptional Costs 12.4 15.3 30.2 15.0 5.0 0.0

Adjusted EBITDA 151.6 176.5 219.3 256.6 283.2 313.8

Adjusted EBITDA margin % 18.3% 16.9% 17.9% 18.5% 19.0% 19.5%

Depreciation and amortization 42.1 45.4 57.4 73.0 77.2 80.7

Exceptional Depreciation 3.8 9.5 9.5 4.0 0.0 0.0

Goodwill 4.2 0.0 0.0 0.0 0.0 0.0

Other (efficiency program/options) 2.5 5.2 10.0 10.0 10.0 10.0

Adj EBIT 86.5 131.1 161.9 183.6 206.0 233.2

Adj EBIT margin 10.4% 12.6% 13.2% 13.2% 13.8% 14.5%

Financial result -16.4 -19.7 -23.5 -22.6 -20.2 -14.7

Associates 0.3 0.2 0.3 0.3 0.3 0.3

Other 0.0 0.0 0.0 0.0 0.0 0.0

Adjusted PBT 70.5 111.6 138.7 161.3 186.1 218.8

Adj Taxes 16.7 19.8 22.0 27.4 31.6 37.2

Adj Tax rate 23.7% 17.7% 15.9% 17.0% 17.0% 17.0%

Reported Tax 13.8 17.8 17.2 26.5 34.2 41.8

Reported Tax rate 19.6% 21.8% 19.3% 20.0% 20.0% 20.0%

Minority 1.3 0.4 -0.1 -0.1 -0.1 -0.1

Adj Profit 56.6 91.4 116.7 133.8 154.5 181.6

Profit 56.7 65.9 71.9 105.8 136.9 167.0

Hybrid Interest - post tax 13.7 12.1 19.3 10.5 10.5 10.5

Net income group share 56.7 65.9 71.9 105.8 136.9 167.0

Net income pre exceptionals 75.4 91.4 116.7 133.8 154.5 181.6

Adj EPS Diluted - post Hybrid 4.06 5.02 6.11 7.71 9.00 10.70

Dividend 0.80 1.00 1.20 1.45 1.75 2.10


Benelux

9%U.K.

5%

France

18%

Germany

17%

North America

23%

Scandinavia

13%

Other

15%

Food

40%

Pharma

40%

Environmental

20%

0%

2%

4%

6%

8%

10%

12%

14%

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14E FY 15E FY16E

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Cash Flow Statement



Operating Income 70.5 81.7 89.1 154.6 191.0 223.2

Depreciation 48.2 54.8 66.9 69.0 79.0 89.0

Change in Provisions -5.1 -1.0 -0.5 0.0 0.0 0.0

Disposal of fixed assets 0.0 0.0 0.0 0.0 0.0 0.0

Adjustments 18.8 22.5 30.6 20.0 20.0 20.0

Cash flow 132.3 158.1 186.0 243.6 290.0 332.2

Working Capital -6.9 -11.0 13.8 -3.1 -2.5 -2.9

Cash flow from operations 125.4 147.0 199.8 240.5 287.5 329.3

Interest Paid -12.4 -18.4 -20.2 -22.6 -20.2 -14.7

Taxes Paid -15.1 -12.9 -30.5 -27.4 -31.6 -37.2

Cash from operating activities 98.0 115.8 149.1 190.4 235.7 277.4

Capex -43.8 -58.4 -79.2 -83.2 -89.4 -96.6

Free cash flow 54.3 57.4 69.9 107.2 146.3 180.9

Investment in Intangibles -10.1 -13.3 -20.3 -17.6 -19.0 -20.5

Investments/Perimeter chg. -152.4 -79.3 -87.4 -20.0 0.0 0.0

Other 2.2 5.2 -3.2 1.0 1.0 1.0

Cash flow from investments -204.2 -145.7 -190.1 -119.9 -107.4 -116.0

Increase in Indebtedness 146.2 -21.0 241.6 0.0 0.0 0.0

Change in Equity 49.4 24.4 -1.1 0.0 0.0 0.0

Dividends -3.6 -12.1 -15.5 -19.0 -23.0 -28.0

Hybrid Interest -9.1 -12.1 -9.7 -10.5 -10.5 -10.5

Other 0.1 0.0 0.0 0.0 0.0 0.0

Cash flow from financing 183.0 -20.8 215.3 -29.5 -33.5 -38.5

Exchange Effect 0.6 -0.8 -3.2 0.0 0.0 0.0

Net Cash Flow 77.4 -51.5 171.1 41.1 94.8 122.9


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Recruiters

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1 May 2014



Revisiting the Peak Earnings Framework In previous notes we outlined the methodology we have used to determine peak 2016

EPS for the European recruiters. These estimates are broadly unchanged and consequently

we do not intend to outline them in detail in this document.

Similarly, our peak earnings valuation framework is unaltered. In our mind, what multiple

staffing agencies should trade on at peak and what multiple they do trade on elicit

different answers. In theory, cyclical investments should derate as profitability peaks.

However, while some contraction in the PE multiple is evident during the later stages of

the economic cycle, it never reaches the considerably lower levels that investors and

analysts cite with the benefit of hindsight. Regrettably, few of us ever spot an imminent

recession.

Our framework assumes that the market has learned some lessons from the past and we

apply lower PE multiples at peak than those observed in July 2007. We then discount

back peak fair value at 10% over three years. However, our formal price targets do not

rigidly adhere to this framework as, while it is easy for analysts to plug figures into a

spreadsheet, countries like France have barely turned the corner and face considerable

structural headwinds to recovery.

Table 23: Peak Derived Fair Values – An Overview

Currency Unit Peak EPS July 2007 PE

(x)

Next Peak

PE (x)

2017 Peak

Fair Value

2013 Fair

Value

Current

Share Price

Upside

Adecco €/CHF 5.3 16.9 15.5 103 77 72.3 7%

Randstad € 4.2 16.9 15.5 65 49 42.0 17%

Hays p 14.4 15.6 14.5 209 165 153.0 7%

Michael Page p 48.0 19.2 17.0 816 613 463.0 33%

Sthree p 42.0 19.0 17.0 714 536 412.0 29%


Peak to peak profit growth

In our view, recruiter share prices can exceed historical highs relative to the market if there

has been a permanent improvement in their profitability. All companies below delivered

strong EPS growth between the 2000 and 2007 peaks, and we anticipate further

improvement at the peak of the next cycle.

Chart 70: EPS – Current versus three peaks (€/$)


Chart 71: EPS – Current versus three peaks (p)


0

10

20

30

40

50

60

Hays Michael Page Sthree

2000 2007 2013 Peak

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Investor concerns after a prolonged rally Our discussions with investors dwell on a number of factors ranging from whether the

CICE subsidy in France should be ascribed a PE multiple of one, to whether there is any

upside to consensus EPS.

Has the sector become a crowded long?

While consensus is not as euphorically bullish as it was in late 2006, in aggregate, brokers

have become increasingly more positive over the past six months, which is not normally

an encouraging sign for a sector that has rewarded the contrarian investor.

With 18 buy ratings, six holds and no sellers, analysts are more optimistic about

the Hays share price outlook than for at least 15 years

Analysts are more bullish on Adecco than Randstad

The consensus recommendation on Michael Page shares moved from Sell to Buy

in the middle of 2013 and has strengthened in conviction since despite

lacklustre quarterly results

Chart 72: % Buys minus % Sells

Source: Bloomberg

CICE may be a temporary boost to French profitability

Crédit d'impôt pour la compétitivité et l'emploi (CICE) was introduced at the start of

2013, is intended to enhance the competitiveness of French businesses and may not be

used to boost dividends or executive pay. The profit uplift from this payroll subsidy is

substantial as recruiters are passing through far less than half to customers and we

suspect are incurring modest training costs.

We have two concerns regarding the permanency of its positive impact on margins:

Legislation only proposes the CICE credit until December 2015. We fear the

subsidy could lapse if the labour market recovers and, if retained, it would likely

be in response to anaemic employment growth.

Customers (especially large accounts) are likely to demand pass-through during

annual price negotiations. After all, the subsidy was introduced with the

intention of lowering French labour costs (boosting investment, research,

innovation, training, employment and the exploration of new markets) rather

than enhancing recruiter margins.

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

31

/01

/20

00

30

/03

/20

01

29

/03

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29

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31

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14

Adecco Randstad Hays Michael Page Sthree

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The chart below uses Adecco France as a template as Randstad’s historical comparisons

are distorted by the acquisition of Vedior in December 2007. We have adjusted historic

data for changes in 35-hour week provisions and the accounting treatment of payroll tax

subsidies.

Assuming that all restructuring benefits and CICE subsidies are retained would propel the

EBITA margin to approximately 7% which is difficult to justify in a historical context.

Chart 73: Adecco France EBITA Margin


Chart 74: CICE benefit as percentage of group PBT


If the Jacobs family has sold their Adecco stake, shouldn’t I do so as well?

On the day of the Q4 results, Jacobs Holding AG announced that 30.2m of its 34.9m

shareholding in Adecco would be placed with investors by Goldman Sachs. This equated

to 16% of the company’s issued capital. The shares were offered in a CHF71-73 range and

were placed at CHF71.5, a 9% discount to the prevailing CHF78.6 closing price.

The Jacobs Group comprises Swiss investment company Jacobs Holding AG and the

Jacobs family. Andreas Jacobs, eldest son of Klaus Jacobs (who constructed Adecco with

Philippe Floriel-Destezet when they merged their Adia and Ecco recruitment agencies in

1996) is Executive Chairman of Jacobs Holding and vice-Chairman of Adecco.

Fewer positive economic data surprises

Recruiter shares discount cyclical inflection points early and anticipate trading momentum

as far as 12 months into the future.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4E

FY1

5E

FY1

6E

Adjusted If CICE fully retained

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1 May 2014



Consequently, share price outperformance over the last year has been driven more by

2014 and 2015 economic recovery expectations than quarterly trading performance.

Recruiters started telling us at the start of 2013 that Europe was bottoming out and

highlighted an increasing body of evidence throughout the summer that pointed to

recovery, even in peripheral economies. While this was eventually reflected in economic

data, it took six months to become evident.

More recently, the sector has highlighted the following positive developments:

A strong revival in perm placement volumes in the UK and US

Emerging evidence of wage rate inflation in some pockets of the labour market

Recovery in the Australian labour market after two years of deterioration

No slowdown in momentum in Emerging Markets

An awful lot has gone well over the last 12 months and, with the possible exception of

France, it is difficult to identify an obvious area where investor’s expectations could be

positively surprised.

As the charts below indicate, economic data is ceasing exceed economists’ expectations to

the same degree that was evident in the second half of 2013.

Chart 75: Citi Economic Surprise Index - Eurozone

Source: Bloomberg

Chart 76: Citi Economic Surprise Index - US

Source: Bloomberg

Recruiter shares are back to all-time relative highs

Adecco (adjusting for movements in the €:CHF exchange rate) and Randstad shares have

now recovered back to historical peaks relative to the Stoxx 600 index. Their previous

excursion to these levels in 2010 was ultimately undermined by the European sovereign

debt crisis.

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1 May 2014



Chart 77: Adecco – Relative to Stoxx 600 Index

Source: Bloomberg

Chart 78: Randstad – Relative to Stoxx 600 Index

Source: Bloomberg

Among the London-quoted recruiters, Hays is now closest to it historical peak relative to

the FTSE Allshare. Michael Page and Sthree have both lagged as recent trading updates

have failed to catalyse earnings upgrades.

Chart 79: Hays – Relative to FTSE Allshare Index

Source: Bloomberg

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12 Jan13 Jan14

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1 May 2014



Chart 80: Michael Page – Relative to FTSE Allshare Index

Source: Bloomberg

Chart 81: Sthree – Relative to FTSE Allshare Index

Source: Bloomberg

What if recruiters can’t resist the temptation to reinvest?

Consensus profit estimates assume high drop-through to profits from incremental

revenue (termed the ‚recovery ratio by Randstad’s management‛). However, recruiters

often tactically attempt to covertly expand when labour markets start to improve in an

effort to take market share from competitors.

If old habits are difficult to resist, the resultant wave of headcount investment could

depress operational gearing.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12 Jan13 Jan14

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1 May 2014



Adecco (Hold, PT CHF73.5) In our view, Adecco’s current share price already discounts attainment of

management’s 5.5%+ EBITA margin and our €5.3 peak EPS estimate in 2017.

With the shares back to relative highs and profits boosted by a French payroll

subsidy, we struggle with valuation at this point. Perhaps the Jacobs family,

who divested the bulk of their shareholding in March, held a similar view.

A French subsidy contributes 10% of group pre-tax profit. The profit uplift from

the CICE payroll subsidy is substantial as recruiters are passing through far less than half

to customers and we suspect are incurring modest training costs. We have two concerns

regarding permanency: 1) legislation only proposes the CICE credit until December 2015.

We fear the subsidy could lapse if the labour market recovers and, if retained, it would

likely be in response to anaemic employment growth; 2) customers (especially large

accounts) are likely to demand pass-through during annual price negotiations.

After all, the subsidy was introduced with the intention of lowering French labour costs

(boosting investment, research, innovation, training, employment and the exploration of

new markets) rather than enhancing recruiter margins. Assuming that all restructuring

benefits and CICE subsidies are retained would propel the EBITA margin to approximately

7% which is difficult to justify in a historical context.

A long-standing major shareholder has just sold at CHF71.5. On the day of the

Q4 results, Jacobs Holding AG announced that 30.2m of its 34.9m shareholding in Adecco

would be placed with investors. This equated to 16% of the company’s issued capital. The

shares were offered in a CHF71-73 range and were placed at CHF71.5, a 9% discount to

the prevailing CHF78.6 closing price. The Jacobs Group comprises Swiss investment

company Jacobs Holding AG and the Jacobs family. Andreas Jacobs, eldest son of Klaus

Jacobs (who constructed Adecco with Philippe Floriel-Destezet when they merged their

Adia and Ecco recruitment agencies in 1996) is Executive Chairman of Jacobs Holding and

vice-Chairman of Adecco.

Swiss investors pay no tax on the dividend. In our view, the CHF2.0 dividend, which

equates to a c.3% yield and is free from Swiss withholding tax as distribution has been

made out of the reserve from capital contributions, is likely to be a key attraction for Swiss

nationals. The shares traded ex-dividend on 24 April with payment five days later.

Reiterate Hold rating. Our CHF73.5 price target is set at a 5% discount to our peak EPS

derived fair value (discounted back at 10% pa) as structural challenges to the economy

and labour market create an uncertain recovery trajectory in France.

Risks include the shape of the economic recovery and changes to labour market

legislation.

Table 24: Adecco – Summary Financials and Valuation (at CHF72.3)

Year to Dec (€m) 2010 2011 2012 2013 2014E 2015E 2015E

Net Fees 3329 3566 3674 3560 3756 4083 4426

Adjusted PBT 658 747 718 773 900 1073 1240

FD Adjusted EPS (€) 2.36 2.94 2.50 3.37 3.64 4.38 5.00

Dividend (CHF) 1.10 1.80 1.80 2.00 2.10 2.30 2.50

EV/EBITDA (x) 10.0 9.8 9.1 10.1 10.6 9.2 8.0

PE (x) 17.3 13.8 14.7 13.9 16.3 13.5 11.9

Dividend Yield (%) 2.0% 3.6% 4.1% 3.5% 2.9% 3.2% 3.5%

FCF Yield (%) 5.6% 2.3% 3.0% 2.6% 4.0% 4.5% 5.2%


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1 May 2014



Table 25: Adecco – Profit and Loss Account, FY09-FY16E

Year to December (€m) FY 09 FY 10 FY 11 FY 12 FY 13 FY 14E FY 15E FY 16E

Turnover 14,797 18,656 20,545 20,536 19,503 20,472 22,191 24,055

COS -12,166 -15,327 -16,979 -16,862 -15,943 -16,716 -18,108 -19,628

Gross Profit 2,631 3,329 3,566 3,674 3,560 3,756 4,083 4,426

Gross Margin (%) 17.8% 17.8% 17.4% 17.9% 18.3% 18.3% 18.4% 18.4%

SG&A -2229 -2607 -2752 -2881 -2706 -2794 -2955 -3141

EBITA 402 722 814 793 854 962 1,128 1,285

EBITA Margin (%) 2.72% 3.87% 3.96% 3.86% 4.38% 4.70% 5.08% 5.34%

Net Interest Payable -55 -63 -71 -76 -79 -64 -60 -50

Other Income/(expenses) -1 -1 4 1 -2 2 5 5

Adjusted PBT 346 658 747 718 773 900 1,073 1,240

Exceptionals -295 0 -10 -82 -33 0 0 0

Intangible Amortisation -42 -55 -51 -52 -42 -34 -30 -30

Reported PBT 9 603 686 584 698 866 1,043 1,210

Taxation Payable -1 -179 -166 -206 -140 -242 -292 -351

Adjusted Tax Rate (%) 29.5% 29.1% 24.7% 34.5% 21.7% 28.0% 28.0% 29.0%

Minorities 0 -1 -1 -1 -1 -1 -1 -1

Prefs/convertible 0 0 0 0 0 0 0 0

Net Income 8 423 519 377 557 623 750 858

Average No. Shares (m) 177.6 192.1 190.7 188.4 180.5 177.7 175.8 175.8

Fully Diluted Av No. Shares (m) 177.6 195.6 190.8 188.3 180.8 178.0 176.1 176.1

Reported EPS (€) 0.05 2.20 2.72 2.00 3.09 3.51 4.26 4.88

Adjusted EPS (€) 1.37 2.40 2.95 2.50 3.38 3.64 4.39 5.00

Fully Diluted Adj EPS (€) 1.37 2.36 2.94 2.50 3.37 3.64 4.38 5.00

DPS (CHF) 0.75 1.10 1.80 1.80 2.00 2.10 2.30 2.50


Chart 82: Adecco – Gross Fees and EBITA per Employee (€)


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1 May 2014



Table 26: Adecco – Divisional Revenue Summary, FY09-FY16E


France 4,806 5,494 6,066 5,203 4,735 4,943 5,338 5,765

North America 2,316 3,488 3,442 3,800 3,726 3,827 4,120 4,449

UK & Ireland 947 1,630 1,707 1,936 1,907 2,124 2,245 2,379

Japan 1,343 1,295 1,406 1,550 1,118 1,057 1,119 1,186

Italy 683 842 1,032 934 960 1,046 1,108 1,175

Iberia 676 728 734 657 662 729 780 835

Benelux 801 889 961 922 929 1,002 1,073 1,148

Nordics 596 731 795 840 815 856 924 998

Switzerland 342 392 474 437 411 437 472 509

Germany/Austria 1,033 1,231 1,544 1,591 1,620 1,781 1,995 2,234

Australia & New Zealand 288 431 510 531 423 319 344 372

Emerging Markets 963 1,256 1,638 1,825 1,878 2,019 2,321 2,670

Group Turnover 14,794 18,656 20,545 20,536 19,503 20,472 22,191 24,055

Year to December FY 09 FY 10 FY 11 FY 12 FY 13 FY 14E FY 15E FY 16E

France -28% 16% 10% -14% -9% 4% 8% 8%

North America -23% 14% 8% 3% 2% 7% 8% 8%

UK & Ireland -28% -4% 5% 6% 3% 10% 6% 6%

Japan -22% -12% 4% -10% -8% 1% 6% 6%

Italy -42% 24% 23% -10% 3% 9% 6% 6%

Iberia -34% 8% 1% -11% 2% 10% 7% 7%

Benelux -23% 8% 8% -4% 2% 8% 7% 7%

Nordics -33% 13% 5% 2% 0% 5% 8% 8%

Switzerland -30% 7% 7% -10% -3% 5% 8% 8%

Germany/Austria -37% 19% 25% 1% 3% 10% 12% 12%

Australia & New Zealand -24% 15% 9% -4% -13% -14% 8% 8%

Emerging Markets 2% 23% 18% 10% 9% 10% 15% 15%

Group Organic Revenue Growth -27% 12% 11% -5% -1% 7% 9% 8%


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1 May 2014



Table 27: Adecco – Divisional EBITA Summary, FY09-FY16E

Year to December FY 09 FY 10 FY 11 FY 12 FY 13 FY 14E FY 15E FY 16E

France 1.9% 3.6% 3.6% 3.1% 4.6% 5.1% 5.4% 5.7%

USA & Canada 5.1% 3.8% 4.4% 4.4% 4.7% 5.3% 5.6% 5.9%

UK & Ireland 0.3% 1.3% 2.0% 1.7% 2.1% 2.4% 2.9% 3.2%

Japan 7.1% 5.3% 5.7% 5.9% 5.9% 6.4% 6.7% 6.9%

Italy 3.8% 4.5% 5.8% 5.8% 6.0% 6.4% 6.6% 6.7%

Iberia 3.1% 3.7% 3.3% 3.3% 3.0% 3.4% 4.0% 4.4%

Benelux 2.0% 4.6% 4.6% 4.4% 4.2% 4.5% 4.8% 5.1%

Nordics 0.8% 5.2% 3.5% 3.6% 2.8% 3.1% 3.7% 4.4%

Switzerland 6.7% 10.2% 10.5% 9.6% 8.3% 8.7% 9.2% 9.6%

Germany 3.7% 6.7% 7.1% 6.2% 5.4% 6.2% 7.0% 7.7%

Australia & New Zealand 1.4% 2.8% 3.5% 3.2% 1.9% 2.0% 2.3% 2.8%

Emerging Markets 2.9% 2.9% 3.5% 3.5% 3.5% 3.7% 3.9% 4.0%

Group Contribution Margin 3.2% 4.3% 4.5% 4.4% 4.7% 5.2% 5.5% 5.8%

Corporate Expenses as % Sales -0.5% -0.4% -0.4% -0.5% -0.5% -0.5% -0.5% -0.5%

Underlying EBITA Margin 2.7% 3.9% 4.1% 4.0% 4.3% 4.7% 5.1% 5.3%


France 92 199 220 163 219 252 288 329

North America 118 134 152 169 174 203 232 263

UK & Ireland 3 22 34 33 40 51 65 76

Japan 95 69 80 91 66 68 75 82

Italy 26 38 60 54 58 67 73 79

Iberia 21 27 24 22 20 25 31 37

Benelux 16 41 44 41 39 45 51 59

Nordics 5 38 28 30 23 27 34 44

Switzerland 23 40 50 42 34 38 43 49

Germany/Austria 38 82 110 99 88 110 140 172

Australia & New Zealand 4 12 18 17 8 6 8 10

Emerging Markets 28 36 58 63 65 75 91 107

Total Contribution 469 796 926 909 923 1,060 1,231 1,395

Corporate Expenses -67 -74 -82 -97 -93 -97 -103 -110

Underlying EBITA 402 722 844 812 830 963 1,128 1,285

Above the line one-offs 0 -33 -30 -19 0 0 0 0

Group EBITA 402 689 814 793 830 963 1,128 1,285


Chart 83: Adecco – EBITA Margin (%), 1995-2015


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1 May 2014



Hays (Hold, PT 165p) An awful lot has gone well for Hays over the last 12 months, in no small

measure due to company specific factors, and investors now regularly ask us

whether a return to £100m UK EBITA is achievable. We have become more

optimistic, and raise our peak EPS estimate to 14.4p and our PT from 159p to

165p, but this leaves insufficient upside to remain a buyer. Hold.

Now firing on more cylinders. An awful lot has gone well for Hays over the last 12

months, in part due to improving economic growth but in no small measure due to

company specific factors, particularly in the UK. Perm growth is accelerating. So is an

increasingly broad based UK recovery. Australia has stabilised and German momentum

has improved.

Are there any further positive surprises? The UK perhaps? In that context, we

struggle to identify from where the next positive catalyst might emerge. The UK is an

obvious candidate. EBITA peaked at £141m in FY07 and dipped into loss in FY12 which

prompted many commentators to openly question whether Hays should exit its public

sector operations. Fast forward two years and many analysts view management’s £45-

75m medium-term EBITA guidance as too conservative. Some investors now ask us

whether £100m+ is achievable. In our view, it seems likely that some of this optimism

might already be factored into the share price.

There are two credible paths to £90-100m UK EBITA. We believe there are two

credible paths to a more optimistic £90-100m UK EBITA contribution via the £15k stretch

productivity target or a 30% headcount increase over the next three years. Under this

scenario our peak EPS estimate would increase to 15.6p and peak derived fair value to

178p. But at this early stage, our peak analysis assumes £75m (upgraded from £63m).

£200m surplus capital = higher dividend and M&A? In five years, Hays could have

a 4p basic dividend (assuming that cover drifts to the top of management’s 2.5-3.0x

target range) and £200m surplus capital. This could be used to finance bolt-on

transactions, reduce the modest pension deficit and several £20m (c.2%) special

dividends. In our view, Hays is likely to maintain its highly selective approach to M&A

(only four transactions between 2003 and 2006 with £48m total consideration), but a

platform acquisition to accelerate its expansion in North America might appeal.

Raising price target from 159p to 165p. Our price target is predicated on a 14.4p

peak EPS estimate which is calculated on a bottom up basis with UK EBITA of £75m, APAC

£102m and CEROW £115m. Hays outlined a pathway to ‚broadly doubling‛ EBITA at

their October 2013 Investor Day and our £292m peak estimate is in the upper quartile of

management’s £200-300m scenario range.

Risks include the shape of the economic recovery and reviving UK profitability.

Table 28: Hays – Summary Financials and Valuation (at 153p)

Year to June (£m) FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Fees 557.7 672.0 734.0 719.0 727.2 784.4 874.7

Adjusted PBT 71.1 106.6 122.4 118.5 132.7 158.7 194.7

FD Adjusted EPS (p) 3.2 5.1 5.4 5.1 6.1 7.4 9.3

Dividend (p) 5.80 5.80 2.50 2.50 2.60 2.80 3.10

EV/EBITDA (x) 16.2 12.6 8.3 8.8 13.8 11.7 9.7

PE (x) 32.1 21.9 14.4 16.3 25.3 20.8 16.5

Dividend Yield (%) 5.6% 5.2% 3.2% 3.0% 1.7% 1.8% 2.0%

FCF Yield (%) 1.4% 1.8% 7.9% 6.1% 3.7% 4.0% 4.6%


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1 May 2014



How far could UK EBITA recover? With stable trading momentum in Australia and steadier growth in Germany, many

investors view the UK as the main potential swing factor for medium term profitability. As

the chart below illustrates, EBITA peaked at £141m in FY07 and dipped into loss in FY12.

At the Investor Day last autumn, Hays guided to a £45-75m medium-term EBITA range –

considerably below the FY07 peak as the levels of activity experienced in the public sector,

construction and banking/finance are unlikely to be revisited during this upswing. At the

time this seemed plausible given management’s focus on raising productivity from

approximately £9k net fees per four-week period per consultant to £11-12k.

Chart 84: Hays UK – Headcount, Net Fees (£m) and EBITA (£m), FY03-Peak


Since then, two things have changed:

The stretch productivity target has been raised to £15k. In our view, this figure is

likely to be unattainable as even Hays Australia during its most successful trading

period achieved c£14k in Australia (using a five-year average exchange rate of

£:AUD2) but it is a useful motivational tool for operational management.

Recovery became sufficiently entrenched in January 2014 for tactical headcount

investment to occur, particularly outside the South East where Hays has strong

heritage and smaller competitors have suffered during the recession. UK

headcount peaked at c.3350 in December 2007 and troughed at 1850 in

December 2012. The group intends to add 5%-10% in 2H14E and presumably

will continue to expand in FY15E and FY16E.

Our peak EPS analysis currently assumes a recovery in UK EBITA to £63m. However, as the

table below summarises, we believe there are two credible paths to a more optimistic

£90-100m range via the £15k stretch productivity target or a 30% headcount increase

over the next three years.

Table 29: Hays UK Scenario Analysis

Year to June (£m) FY11 FY12 FY13 FY14E £11k

Productivity

£12k

Productivity

£15k

Productivity

ReInvestment

Scenario

No. Sales Consultants 2150 2062 1912 2037 2050 2050 2050 2605

Net Fee Per 4 Week Period (£) 8,648 8,403 8,933 9,241 11,000 12,000 15,000 13,000

Net Fee Uplift 55 82 162 138

EBITA Uplift 41 57 97 83

Net Fees 277 304 384 360

EBITA 47 63 103 88

Conversion Rate 17% 21% 27% 25%


-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

-100

0

100

200

300

400

500

FY0

3

FY0

4

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5

FY0

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FY0

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FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4E

FY1

5E

FY1

6E

Peak

Net Fees (LHS) EBITA (LHS)

Net Fees Per Consultant (RHS) EBITA Per Consultant (RHS)

Business Services


1 May 2014



Chart 85: Hays – UK Net Fees per Consultant and Headcount, FY05-FY15E


Table 30: Hays – Profit and Loss Account, FY09-FY16E

Year to June (£m) FY 09 FY 10 FY 11 FY 12 FY 13 FY 14E FY 15E FY 16E

Turnover 2447.7 2691.1 3256.0 3654.6 3696.9 3578.0 3882.6 4426.7

Cost of Sales -1776.9 -2133.4 -2584.0 -2920.6 -2977.9 -2850.8 -3098.2 -3552.0

Gross Profit/Net Fees 670.8 557.7 672.0 734.0 719.0 727.2 784.4 874.7

Gross Margin (%) 27.4% 20.7% 20.6% 20.1% 19.4% 20.3% 20.2% 19.8%

SG&A -512.8 -477.2 -558.0 -605.9 -593.5 -586.6 -619.7 -676.5

EBITA 158.0 80.5 114.1 128.1 125.5 140.7 164.7 198.2

Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Finance Charge (7.0) (9.4) (7.5) (5.7) (7.0) (8.0) (6.0) (3.5)

Adjusted PBT 151.0 71.1 106.6 122.4 118.5 132.7 158.7 194.7

Intangible Amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Exceptionals 0.0 (41.4) 4.1 0.0 0.0 0.0 0.0 0.0

Reported PBT 151.0 29.7 110.7 122.4 118.5 132.7 158.7 194.7

Taxation (45.2) (23.1) (32.4) (46.9) (46.8) (46.4) (53.2) (62.3)


Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Earnings from Continuing Ops 105.8 6.6 78.3 75.5 71.7 86.3 105.5 132.4

Discontinued Operations 0.0 2.7 1.8 11.0 0.0 0.0 0.0 0.0

Period End No. Shares (m) 1368.0 1372.0 1376.0 1390.0 1398.9 1406.1 1406.1 1406.1

Weighted Av No. Shares (m) 1370.5 1371.1 1376.0 1381.4 1393.8 1404.2 1406.1 1406.1

Fully Diluted No. Shares (m) 1371.6 1386.1 1400.3 1404.8 1417.2 1424.2 1426.1 1426.1

Adjusted EPS (p) 7.72 3.25 5.19 5.47 5.14 6.14 7.51 9.42

Fully Diluted Adj EPS (p) 7.71 3.21 5.10 5.37 5.06 6.06 7.40 9.28

Reported EPS (p) 7.72 0.48 5.69 5.47 5.14 6.14 7.51 9.42

DPS (p) 5.80 5.80 5.80 2.50 2.50 2.60 2.80 3.10


0

500

1000

1500

2000

2500

3000

3500

6,000

7,000

8,000

9,000

10,000

11,000

12,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Net Fees per 4 Week Period (£), LHS Average Headcount, RHS

Business Services


1 May 2014



Table 31: Hays – Divisional Summary, FY09-FY16E


UK/Ireland 330.7 243.9 241.7 225.3 222.0 244.8 269.2 296.2

Asia Pacific 149.1 146.3 210.0 242.2 211.8 173.7 179.6 199.3

CEROW 191.0 167.5 220.4 266.5 285.2 308.8 335.6 379.2

Total Net Fees 670.8 557.7 672.0 734.0 719.0 727.2 784.4 874.7

UK/Ireland 63.5 11.4 3.6 -6.5 5.6 27.2 39.8 53.3

Asia Pacific 61.4 52.0 78.1 90.9 67.2 48.4 51.4 59.0

CEROW 33.1 17.1 32.4 43.7 52.7 65.2 73.5 85.9

Total EBITA 158.0 80.5 114.0 128.1 125.5 140.7 164.7 198.2

Conversion Rate 23.6% 14.4% 17.0% 17.5% 17.5% 19.3% 21.0% 22.7%


Table 32: Hays – Cash Flow Statement, FY09-FY16E


EBITA 158.0 80.5 114.1 128.1 125.5 140.7 164.7 198.2

Depreciation 11.6 14.6 20.3 23.2 23.6 25.0 27.0 28.0

(Increase)/Decrease in Stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(Increase)/Decrease in Debtors 99.0 (50.6) (93.5) (26.7) (25.1) (1.8) (48.3) (86.3)

Increase/(Decrease) in Creditors (9.0) 29.2 46.3 29.9 4.6 (25.0) 22.6 50.1

Working Capital 90.0 (21.4) (47.2) 3.2 (20.5) (26.8) (25.7) (36.2)

Change in Provisions 0.1 (4.2) (2.4) (5.4) (2.4) 0.0 0.0 0.0

Cash Exceptionals 0.0 (4.1) (15.4) (7.0) (0.7) 0.0 0.0 0.0

Other 1.2 8.6 12.5 13.1 10.2 5.0 0.0 0.0

Cash Flow from Operations 260.9 74.0 81.9 155.2 135.7 143.9 166.0 190.0

Net Interest (2.7) (3.3) (8.5) (6.2) (8.3) (5.5) (4.5) (2.0)

Dividends (79.3) (79.5) (79.7) (65.8) (34.8) (35.0) (37.4) (40.6)

Tax Payable (56.5) (22.1) (26.6) (44.2) (45.2) (46.4) (53.2) (62.3)

Servicing of Finance and Tax (138.5) (104.9) (114.8) (116.2) (88.3) (87.0) (95.1) (104.9)

Gross Capex (37.0) (29.8) (18.6) (18.8) (10.7) (12.0) (20.0) (25.0)

Fixed Asset Disposals 0.0 1.1 0.5 0.1 0.2 0.0 0.0 0.0

Net Capex (37.0) (28.7) (18.1) (18.7) (10.5) (12.0) (20.0) (25.0)

Disposals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Acquisitions (5.4) (17.9) (3.2) (1.0) (0.8) (0.3) 0.0 0.0

Investing Activities (42.4) (46.6) (21.3) (19.7) (11.3) (12.3) (20.0) (25.0)

Share Issues 3.3 (0.4) 0.0 1.4 0.0 0.0 0.0 0.0

Share Option Proceeds 0.0 0.2 1.2 0.0 1.6 0.3 0.0 0.0

Additional Pension Contribution (2.7) (1.2) (12.0) (12.4) (12.8) (13.0) (13.0) (13.0)

Currency Translation 1.2 1.0 7.4 (6.4) 2.8 (4.0) 0.0 0.0

Financing Activities 1.8 (0.4) (3.4) (17.4) (8.4) (16.7) (13.0) (13.0)

(Incr)/Decr in Net Debt 81.8 (77.9) (57.6) 1.9 27.7 27.9 37.9 47.0


Business Services


1 May 2014



Table 33: Hays – Balance Sheet, FY09-FY16E


Tangible Fixed Assets 29.1 23.8 23.4 24.2 22.3 17.3 18.3 23.3

Intangible Assets 213.5 247.7 246.4 232.7 221.7 214.0 206.0 198.0

Investment in Own Shares 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Fixed Assets 242.6 271.5 269.8 256.9 244.0 231.3 224.3 221.3

Inventory 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Trade Debtors 230.1 263.0 345.6 351.4 368.7 369.7 398.7 450.5

Other Debtors 122.3 144.2 178.6 187.2 197.2 198.0 217.3 251.8

Deferred Tax Assets 42.9 29.0 29.2 28.3 34.2 34.2 34.2 34.2

Retirement Benefit Surplus 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash & Cash Equivalents 55.0 74.7 55.1 38.7 40.0 40.0 40.0 40.0

Current Assets 450.3 510.9 608.5 605.6 640.1 641.9 690.2 776.6

Trade Creditors -61.8 -78.9 -106.0 -116.9 -120.4 -117.9 -120.1 -125.1

Other Creditors -267.0 -307.6 -331.7 -342.4 -346.5 -324.0 -344.4 -389.5

Short Term Gross Debt 0.0 -151.9 -4.9 -1.6 -0.2 -0.2 -0.2 -0.2

Long Term Gross Debt -54.3 0.0 -185.0 -170.0 -145.0 -117.1 -79.2 -32.1

Deferred Tax Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Retirement Benefit Obligations -109.2 -67.1 -11.9 -15.4 -33.0 -20.0 -7.0 6.0

Provisions -46.2 -44.6 -42.4 -25.6 -22.6 -22.6 -22.6 -22.6

Total Creditors -538.5 -650.1 -681.9 -671.9 -667.7 -601.8 -573.5 -563.5

Net Assets 154.4 132.3 196.4 190.6 216.4 271.4 341.1 434.3

Share Capital 14.7 14.7 14.7 14.7 14.7 14.7 14.7 14.7

Share Premium Account 369.6 369.6 369.6 369.6 369.6 369.9 369.9 369.9

Retained Earnings -282.6 -313.0 -275.6 -270.5 -244.3 -189.6 -119.9 -26.7

Other 52.7 61.0 87.7 76.8 76.4 76.4 76.4 76.4

Shareholders' funds 154.4 132.3 196.4 190.6 216.4 271.4 341.1 434.3

Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Assets 154.4 132.3 196.4 190.6 216.4 271.4 341.1 434.3


Chart 86: Hays – Conversion Rate, FY90-Peak


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY

90

FY

91

FY

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FY

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Business Services


1 May 2014



Randstad (Hold, PT €46.5) In our view, Randstad’s current share price already discounts attainment of

management’s 5-6% EBITA margin target and our €4.2 peak EPS estimate in

2017. With the shares back to relative highs and profits boosted by a French

payroll subsidy, we downgrade from Buy to Hold and lower our price target

from €52.5 to €46.5.

Strong Q1 EBITA was partly flattered by one-offs. Q1 EBITA was 7% ahead of

consensus but the impressive 94% incremental conversion ratio was flattered by two

factors. Firstly, SG&A benefited from €3.0m positive one-offs in the US, Italy and Spain

largely related to the release of historic provisions. Secondly, the comparable was soft as

Randstad retained only 50% of the French CICE subsidy in Q113 before realising that

peers had been more aggressive and revising its accounting policy in Q2.

We remain unconvinced about long term retention of the French CICE

subsidy. We don’t wish to dwell on the CICE credit but it is making a material

contribution to group EBITA and changes in how Randstad accounted for it in 2013 create

substantial distortions to FY14E comparables. For example, some analysts seemed

disappointed on the results call that Q2 incremental conversion ratio guidance was 70%

but a slowdown was always likely as Randstad revised its CICE accrual policy in Q213 and

booked a material credit. More importantly, any peak EPS framework needs to take a view

on whether legislation for the credit expires or customers demand pass-through during

annual price negotiations. In our view, the share price assumes too benign a scenario as

the subsidy was introduced with the intention of lowering French labour costs rather than

permanently enhancing recruiter margins.

Trimming EPS estimates by 1-2%. Our downgrades accommodate slighter softer

FY14E revenue progression as Randstad’s outlook comments echoed those made three

months ago (the group isn’t currently experiencing an acceleration in growth but remains

confident that the gradual recovery continues) and a higher share count as a greater than

expected proportion of shareholders opted for stock over cash this year.

Lowering our price target from €52.5 to €46.5. Our €46.5 price target is set at a

5% discount to our peak EPS derived fair value (discounted back at 10% pa) as structural

challenges to the economy and labour market create an uncertain recovery trajectory in

France. Our peak EPS estimate declines from €4.6 to €4.2 due to more conservative

assumptions regarding peak Dutch margins, higher central costs and a higher share

count.

Risks include the shape of the economic recovery and changes to labour market

legislation.

Table 34: Randstad – Summary Financials and Valuation (at €42.0)

Year to Dec (€m) FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Fees 2669.3 2957.1 3102.0 3011.6 3181.7 3463.3 3767.3

Adjusted PBT 479.2 576.7 538.3 544.0 684.3 834.0 991.3

FD Adjusted EPS (€) 1.96 2.32 2.11 2.08 2.64 3.23 3.81

DPS (€) 1.18 1.25 1.25 0.95 1.10 1.35 1.55

EV/EBITDA (x) 11.4 9.0 8.2 11.7 10.3 8.4 7.0

PE (x) 17.8 13.3 12.1 18.1 15.9 13.0 11.0

Dividend Yield (%) 3.4% 4.1% 4.9% 2.5% 2.6% 3.2% 3.7%

FCF Yield (%) 4.8% 7.7% 10.3% 6.0% 6.1% 7.2% 8.8%


Business Services


1 May 2014



Table 35: Summary Estimate Revisions

Year to December (€m) FY14E Old FY14E New FY15E Old FY15E New

Turnover 17,517 17,394 18,858 18,822

COS -14,319 -14,213 -15,388 -15,359

Gross Profit 3,199 3,182 3,470 3,463

Gross Margin (%) 18.3% 18.3% 18.4% 18.4%

SG&A -2,489.6 -2,472.6 -2,634.3 -2,614.9

EBITA 708.9 709.2 835.6 848.4

EBITA Margin (%) 4.0% 4.1% 4.4% 4.5%

Net Interest -12.0 -12.6 -2.0 -2.0

Preference Dividend -12.8 -12.4 -12.8 -12.4

Net Finance Charge -24.8 -25.0 -14.8 -14.4

Adjusted PBT 684.1 684.3 820.8 834.0

Intangible Amortisation -184.0 -144.0 -184.0 -144.0

Exceptionals 0.0 -4.9 0.0 0.0

Reported PBT 500.1 535.4 636.8 690.0

Taxation Payable -146.6 -162.4 -182.8 -198.7

Adjusted Tax Rate (%) 29.0% 29.8% 29.0% 29.0%

Minorities 0.0 0.0 0.0 0.0

Net Income 353.5 373.0 454.0 491.4

Average No. Shares (m) 177.3 178.4 177.3 181.6

Fully Diluted Av No. Shares (m) 179.3 180.2 179.0 183.4

Reported EPS (€) 1.99 2.09 2.56 2.71

Adjusted EPS (€) 2.72 2.67 3.29 3.26

Fully Diluted Adjusted EPS (€) 2.69 2.64 3.26 3.23

DPS (€) 1.10 1.10 1.35 1.35


Chart 87: Randstad – EBITA Margin (%), 1990-2015E


Business Services


1 May 2014



Table 36: Randstad – Profit and Loss Account, FY09-FY16E

Year to December (€m) FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Turnover 12,400 14,179 16,225 17,087 16,568 17,394 18,822 20,364

COS -9,979 -11,510 -13,268 -13,985 -13,557 -14,213 -15,359 -16,596

Gross Profit 2,421 2,669 2,957 3,102 3,012 3,182 3,463 3,767

Gross Margin (%) 19.5% 18.8% 18.2% 18.2% 18.2% 18.3% 18.4% 18.5%

SG&A -2,105.6 -2,159.7 -2,356.5 -2,539.1 -2,432.8 -2,472.6 -2,614.9 -2,768.6

EBITA 315.7 509.6 600.6 562.9 578.8 709.2 848.4 998.7

EBITA Margin (%) 2.5% 3.6% 3.7% 3.3% 3.5% 4.1% 4.5% 4.9%

Associate -0.5 0.6 -0.2 0.1 0.3 0.1 0.0 0.0

Net Interest -48.9 -23.8 -16.5 -17.9 -23.0 -12.6 -2.0 5.0

Preference Dividend -7.2 -7.2 -7.2 -6.8 -12.1 -12.4 -12.4 -12.4

Net Finance Charge -56.1 -31.0 -23.7 -24.7 -35.1 -25.0 -14.4 -7.4

Adjusted PBT 259.1 479.2 576.7 538.3 544.0 684.3 834.0 991.3

Intangible Amortisation -158.6 -172.4 -178.4 -196.2 -163.4 -144.0 -144.0 -144.0

Intangible Impairment 0.0 0.0 -125.0 -139.8 0.0 0.0 0.0 0.0

Exceptionals -63.3 4.0 -47.5 -99.3 -49.1 -4.9 0.0 0.0

Reported PBT 37.2 310.8 225.8 103.0 331.5 535.4 690.0 847.3

Taxation Payable 23.2 -29.5 -54.0 -73.1 -112.9 -162.4 -198.7 -244.3


Minorities 0.7 -0.5 -0.2 0.0 0.0 0.0 0.0 0.0

Net Income 61.1 280.8 171.6 29.9 218.6 373.0 491.4 603.0

Average No. Shares (m) 169.6 169.9 170.8 171.9 175.5 178.4 181.6 183.1

Fully Diluted Av. Shares (m) 171.1 171.4 172.3 173.1 177.2 180.2 183.4 184.9

Reported EPS (€) 0.36 1.65 1.00 0.17 1.25 2.09 2.71 3.29

Adjusted EPS (€) 1.22 1.98 2.34 2.13 2.10 2.67 3.26 3.84

Fully Dil Adj EPS (€) 1.21 1.96 2.32 2.11 2.08 2.64 3.23 3.81

DPS 0.00 1.18 1.25 1.25 0.95 1.10 1.35 1.55


Chart 88: Randstad – Gross Fees and EBITA per Employee (€)


Business Services


1 May 2014



Table 37: Randstad – Divisional Overview, FY09-FY16E

Year to December (€m) FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Netherlands 2,963 2,827 2,940 2,825 2,739 2,769 2,962 3,170

France 2,692 3,067 3,378 3,099 2,836 2,889 3,120 3,370

Germany 1,321 1,729 1,960 1,843 1,876 2,071 2,279 2,461

Belgium/Lux 1,191 1,328 1,413 1,318 1,239 1,298 1,376 1,458

United Kingdom 753 802 789 799 770 827 890 953

Iberia 796 861 873 782 897 1,057 1,131 1,222

Other Europe 604 761 930 898 1,091 1,349 1,497 1,647

North America 1,450 1,848 2,514 3,947 3,687 3,686 3,974 4,332

ROW 630 956 1,430 1,578 1,435 1,448 1,592 1,752

Total Turnover 12,400 14,179 16,225 17,087 16,568 17,394 18,822 20,364

Netherlands 201.1 188.7 180.7 154.6 159.2 170.5 200.0 231.4

France 11.8 88.4 104.3 83.2 105.1 139.7 162.3 188.7

Germany 55.2 106.5 130.5 93.2 81.1 108.5 134.4 157.5

Belgium/Lux 52.5 61.6 65.4 54.2 44.5 62.1 69.5 77.3

United Kingdom 5.7 5.4 3.2 5.0 6.5 13.7 16.0 19.1

Iberia 14.2 18.0 22.1 15.8 25.7 37.4 44.1 51.3

Other Europe 0.7 19.2 27.7 28.1 30.1 45.2 56.2 68.4

North America 22.3 62.0 102.2 170.8 166.9 172.6 204.7 242.6

ROW -4.2 8.8 9.5 5.9 10.1 11.5 14.3 17.5

Corporate -43.6 -45.0 -45.0 -47.9 -50.4 -52.1 -53.0 -55.0

Total EBITA 315.7 513.6 600.6 562.9 578.8 709.2 848.4 998.7


Business Services


1 May 2014



Table 38: Randstad – Cash Flow Statement, FY10-FY16E

Year to December (€m) FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Operating Profit 509.6 600.6 562.9 578.8 709.2 848.4 998.7

Depreciation 85.3 80.5 84.1 68.2 72.0 75.0 80.0

(Increase)/Decrease in Inventory 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(Increase)/Decrease in Debtors -409.0 -67.9 197.9 -64.1 -159.4 -269.2 -290.5

Increase/(Decrease) in Creditors 314.9 59.2 -113.7 141.7 66.0 162.0 195.4

Change in Working Capital -94.1 -8.7 84.2 77.6 -93.4 -107.1 -95.1

Share Based Payments 9.3 15.1 24.1 27.1 29.0 30.0 30.0

Employee Benefit Obligations -2.1 -1.0 -2.9 -50.5 -3.0 -3.0 -3.0

Provisions -44.0 -7.4 19.9 Above 0.0 0.0 0.0

Other 8.1 -41.3 -86.7 -114.5 -4.9 0.0 0.0

Cash Flow from Operations 472.1 637.8 685.6 586.7 708.9 843.3 1010.6

Net Interest -17.3 -22.8 -22.9 -19.0 -12.6 -2.0 5.0

Equity Dividends 0.0 -201.6 -215.1 -83.8 -57.3 -67.4 -84.0

Preference Dividend -7.2 -7.2 -7.1 -6.8 -12.4 -12.4 -12.4

Minority Dividend/Rec'd from Assocs 0.6 -0.3 0.0 -0.1 0.1 0.0 0.0

Tax Paid -102.9 -118.3 -140.0 -246.0 -162.4 -198.7 -244.3

Servicing of Finance and Tax -126.8 -350.2 -385.1 -355.7 -244.5 -280.4 -335.7

Gross Capex -60.7 -85.5 -63.5 -61.5 -65.0 -75.0 -80.0

Asset Disposals 5.1 6.3 2.5 17.0 3.0 3.0 3.0

Purchase of Fixed Assets -55.6 -79.2 -61.0 -44.5 -62.0 -72.0 -77.0

Purchase of Own Shares 0.0 0.0 0.0 -9.4 0.0 0.0 0.0

Acquisitions -143.4 -565.8 -44.1 -19.2 0.0 0.0 0.0

Disposals 16.1 9.2 13.4 8.4 0.0 0.0 0.0

Net Acquisitions/Disposals -127.3 -556.6 -30.7 -10.8 0.0 0.0 0.0

Investing Activities -182.9 -635.8 -91.7 -64.7 -62.0 -72.0 -77.0

Equity Issuance 4.9 17.0 0.9 7.1 0.0 0.0 0.0

Exercise of Options 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Acquired Net Cash/(Debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Exchange Rates -47.0 -67.0 -2.2 -7.8 0.0 0.0 0.0

Other -4.9 -5.1 -0.6 169.1 0.0 0.0 0.0

Financing Activities -47.0 -55.1 -1.9 168.4 0.0 0.0 0.0

(Incr)/Decr in Net Debt 115.4 -403.3 206.9 334.7 402.3 490.9 597.9


Business Services


1 May 2014



Table 39: Randstad – Balance Sheet, FY10-FY16E

Year to December (€m) FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Tangible Assets 155.6 179.4 155.3 131.4 121.4 118.4 115.4

Goodwill 2,401.0 2,551.6 2,407.1 2,310.4 2,310.4 2,310.4 2,310.4

Other Intangibles 761.1 735.8 535.4 354.2 210.2 66.2 -77.8

Investment in Associates 1.1 0.9 1.0 1.3 1.3 1.3 1.3

Fixed Assets 3,318.8 3,467.7 3,098.8 2,797.3 2,643.3 2,496.3 2,349.3

Inventory 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Trade Debtors 2,384.1 2,714.8 2,509.5 2,555.1 2,690.6 2,919.4 3,166.3

Other Debtors 455.9 448.9 412.9 442.0 465.9 506.3 549.9

Deferred Tax Assets 520.4 724.4 504.7 521.9 521.9 521.9 521.9

Cash & Cash Equivalents 285.3 338.6 191.5 136.1 136.1 136.1 136.1

Financial Investments 74.4 80.1 79.7 155.4 155.4 155.4 155.4

Current Assets 3,720.1 4,306.8 3,698.3 3,810.5 3,969.9 4,239.1 4,529.6

Trade Creditors -128.3 -185.0 -207.5 -231.7 -235.0 -243.1 -257.9

Other Creditors -2,170.1 -2,345.8 -2,306.0 -2,295.6 -2,469.5 -2,754.2 -3,198.0

Gross Debt -1,184.6 -1,641.2 -1,287.2 -897.1 -494.8 -3.9 694.0

Employee Benefit

Obligations

-21.5 -24.4 -24.1 -81.1 -78.1 -75.1 -72.1

Deferred Tax Liabilities -444.4 -442.7 -44.3 -36.6 -36.6 -36.6 -36.6

Provisions -134.0 -160.2 -180.2 -136.5 -136.5 -136.5 -136.5

Other Liabilities -103.6 -76.2 -22.8 -21.4 -21.4 -21.4 -21.4

Total Creditors -4,186.5 -4,875.5 -4,072.1 -3,700.0 -3,471.8 -3,270.8 -3,028.4

Total Equity 2,852.4 2,899.0 2,725.0 2,907.8 3,141.4 3,464.6 3,850.5

Minority Interest -1.6 -0.6 -0.1 0.0 0.0 0.0 0.0

Shareholders' Funds 2,850.8 2,898.4 2,724.9 2,907.8 3,141.4 3,464.6 3,850.5

Issued Share Capital 19.5 19.6 19.7 25.3 25.3 25.3 25.3

Share Premium Account 2,031.3 2,067.2 2,096.4 2,258.7 2,258.7 2,258.7 2,258.7

Reserves 800.0 811.6 608.8 623.8 857.4 1,180.6 1,566.5

Shareholders' Funds 2,850.8 2,898.4 2,724.9 2,907.8 3,141.4 3,464.6 3,850.5


Business Services


1 May 2014



Michael Page (Hold, PT 500p) We maintained a positive recommendation on the shares throughout 2013

and into 2014 in the belief that an earnings upgrade cycle would resume. In

fact the reverse has occurred and a recent acceleration in investment drives a

further 5% downgrade to our FY14E EPS estimate. We downgrade from Buy

to Hold and lower our price target to 500p.

Yet to hit its stride. We maintained a positive recommendation on Michael Page

throughout 2013 and into 2014 in the belief that an earnings upgrade cycle would

resume. In fact, the reverse has occurred and the recent £4m accelerated investment in

headcount and infrastructure created further headwinds to FY14E profit growth. Investors

have postulated several theories for the lack of traction including whether the departure of

Charles-Henri Dumon and his team in 2012 removed an entrepreneurial layer from the

group or if the systems upgrade has created disruption.

Downgrading FY14E EPS by 5%. While we have no doubt that the group will expand

rapidly over the next 2-3 years, the traditionally biggest month of the year (March) has

now passed and 2014 consensus assumes a further acceleration in revenue momentum

during Q2-Q4. Bullish analyst’s EBITA estimates have declined from around £90m to the

mid-£80s currently but are still elevated relative to what we suspect is Michael Page’s

internal budget (low £80s).

We think Michael Page has faced multiple headwinds. Hays has become a far

more effective competitor in the UK under Nigel Heap; the macro-economic environment

in Brazil has been difficult (and the presidential election in November is likely to create the

usual hiatus in corporate decision making and hiring); and French labour market

momentum has been lacklustre. The group also suffers from a sustained period of

beating analyst’s expectations in the mid 2000s and 2009/2010 which encourages many

of us to project top-of-the-range estimates.

Restarting the share buyback. Modest interest payable in FY13 suggests that the

balance sheet is broadly neutral rather than flush with the £85m net cash reported at year

end. Nevertheless, cash balances should build from here and we believe the group is likely

to re-engage its share buyback programme in the near future. In the past, Michael Page

has tended to purchase shares pro-cyclically – buying when the price is high and pausing

when economic uncertainty clouds the outlook and depresses the share price. Perhaps an

alternative strategy might be promoted by the new Finance Director?

Lowering our price target from 580p to 500p. Our fair value methodology

assumes 48p peak EPS and a 17x target PE multiple but discounts back to today at 10%

per annum. This suggests 610p fair value but given the group’s current profit trajectory

we have applied a 20% discount. We downgrade from Buy to Hold.

Risks include the shape of the economic recovery and executing an aggressive

internationalisation strategy.

Table 40: Michael Page – Summary Financials and Valuation (at 463p)

Year to Dec (£m) FY10 FY11 FY12 FY13 FY14E FY15E FY15E

Net Fees 442.2 553.8 526.9 513.9 542.4 616.5 711.9

Adjusted PBT 72.2 86.1 64.8 67.1 85.2 114.5 159.3

FD Adjusted EPS (p) 14.7 18.2 13.5 14.9 17.8 24.1 34.1

Dividend (p) 9.00 10.00 10.00 10.50 11.50 12.65 13.90

EV/EBITDA (x) 16.1 14.6 15.3 15.8 13.3 10.3 7.7

PE (x) 28.9 25.3 28.8 28.8 26.0 19.2 13.6

Dividend Yield (%) 2.1% 2.2% 2.6% 2.4% 2.5% 2.7% 3.0%

FCF Yield (%) 3.1% 2.6% 3.8% 3.0% 4.4% 5.5% 7.4%


Business Services


1 May 2014



Flat Underlying SG&A in FY14E In our view, several factors are likely to influence profit momentum over the next 12-18

months over and above net fee growth.

Non-recurrence of £0.3m costs related to the departure of the FD

A £0.3m reduction in above the line French profit share costs

£10m incremental cost savings from 2013 initiatives, partially offset by a £3m

increase in intangible amortisation

A £14m increase in wage costs after a 3% increase was implemented at the start

of the year

£4m adverse currency translation if current exchange rates are maintained

Savings from 2013 initiatives relate to the costs and benefits associated with the group’s

review of processes and functions in its operational support areas, and amortisation of the

systems upgrade. Examples of the former include centralisation of training, learning and

development in EMEA and Americas.

Table 41: Profit & Loss Impact of 2013 Efficiency Initiatives

Year to December (£m) H113 H213 FY13 FY14E

Benefit 5.0 9.0 14.0 20.0

Above the Line Cost -3.0 -1.0 -4.0 0.0

Net Reorganisation Impact 2.0 8.0 10.0 20.0

Amortisation of IT Systems 0.0 -5.4 -5.4 -8.7

Total 2.0 2.6 4.6 11.3


As the chart below illustrates, the fee earners/support staff ratio drifted back to the 2009

recessionary low in 2012 but rebounded back to peak efficiency in 2013.

Chart 89: Fee Earners/Support Staff, December 1999 to date


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Business Services


1 May 2014



Table 42: Summary Estimate Revisions

Year to December (£m) 2014E Old 2014E New 2015E Old 2015E New

United Kingdom 133.8 136.5 147.2 152.9

EMEA 217.6 218.1 241.5 242.1

Asia Pacific - Australia 32.1 32.5 34.7 35.3

Asia Pacific - Other 69.5 76.5 83.4 91.7

Americas 81.8 78.9 96.6 94.6

Net Fees 534.8 542.4 603.3 616.5

United Kingdom 23.0 22.5 27.5 29.3

EMEA 39.5 34.3 50.0 43.0

Asia Pacific - Australia 5.1 3.7 6.5 5.3

Asia Pacific - Other 14.2 16.9 19.0 22.4

Americas 7.7 7.5 13.1 13.9

Total EBITA 89.4 84.9 116.1 113.7

Conversion Rate (%) 16.7% 15.7% 19.2% 18.4%

Associates 0.0 0.0 0.0 0.0

Net interest cost 0.3 0.3 0.8 0.8

Adjusted PBT 89.7 85.2 116.9 114.5

Taxation Payable -30.9 -29.4 -39.7 -38.9


Minorities 0.0 0.0 0.0 0.0

Earnings 58.8 55.8 77.2 75.6

Period End No. Shares (m) 310.0 310.0 310.0 310.0

Weighted Average No. Shares (m) 310.0 310.0 310.0 310.0

Fully Diluted No. Shares (m) 313.0 313.0 313.0 313.0

Adjusted EPS (p) 19.0 18.0 24.9 24.4

Fully Diluted Adj EPS (p) 18.8 17.8 24.6 24.1

Published EPS (p) 19.0 18.0 24.9 24.4

DPS (p) 11.50 11.50 12.65 12.65


Chart 90: Michael Page – Conversion Rate, FY92-Peak


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1 May 2014



Table 43: Michael Page – Profit and Loss Account, FY08-FY16E

Year to December (£m) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Turnover 972.8 716.7 832.3 1019.1 989.9 1005.5 1050.4 1181.8 1364.8

Cost of Sales -420.1 -365.0 -390.1 -465.3 -463.0 -491.6 -508.0 -565.3 -652.8

Net Fees/Gross Profit 552.7 351.7 442.2 553.8 526.9 513.9 542.4 616.5 711.9

Gross Margin (%) 56.8% 49.1% 53.1% 54.3% 53.2% 51.1% 51.6% 52.2% 52.2%

Administrative Expenses -412.2 -331.5 -370.7 -467.7 -461.7 -445.7 -457.5 -502.8 -553.6

EBITA 140.5 20.2 71.5 86.0 65.1 68.2 84.9 113.7 158.3

Conversion Rate (%) 25.4% 5.7% 16.2% 15.5% 12.4% 13.3% 15.7% 18.4% 22.2%

Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest -0.4 0.9 0.7 0.1 -0.3 -1.1 0.3 0.8 1.0

Adjusted PBT 140.1 21.1 72.2 86.1 64.8 67.1 85.2 114.5 159.3

Goodwill Amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Exceptional Items 0.0 0.0 28.5 0.0 -7.8 -3.0 0.0 0.0 0.0

Reported PBT 140.1 21.1 100.7 86.1 57.0 64.1 85.2 114.5 159.3

Taxation Payable -42.7 -8.6 -33.2 -29.3 -20.8 -21.5 -29.4 -38.9 -52.6

Adjusted Tax Rate (%) 30.5% 41.0% 34.9% 34.0% 36.0% 30.9% 34.5% 34.0% 33.0%

Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Earnings 97.3 12.4 67.5 56.9 36.2 42.6 55.8 75.6 106.7

Weighted Av No. Shares (m) 321.5 321.6 311.8 304.5 305.3 307.9 310.0 310.0 310.0

Av Fully Dil No. Shares (m) 325.7 329.1 319.5 312.4 308.5 310.4 313.0 313.0 313.0

Adjusted EPS (p) 30.3 3.9 15.1 18.7 13.6 15.1 18.0 24.4 34.4

Fully Diluted Adj EPS (p) 29.9 3.8 14.7 18.2 13.5 14.9 17.8 24.1 34.1

Published EPS (p) 30.3 3.9 21.6 18.7 11.9 13.8 18.0 24.4 34.4

DPS (p) 8.00 8.00 9.00 10.00 10.00 10.50 11.50 12.65 13.90


Chart 91: Headcount, Net Fees (£m) and EBITA (£m), FY03-Peak


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Business Services


1 May 2014



Table 44: Michael Page – Divisional Net Fees and EBITA, FY08-FY16E


United Kingdom 176.7 110.8 124.9 130.0 121.4 124.1 136.5 152.9 171.2

EMEA 258.8 163.7 188.7 239.6 218.4 207.8 218.1 242.1 278.4

Asia Pacific - Australia 40.5 23.9 37.6 50.2 51.7 39.7 32.5 35.3 38.8

Asia Pacific - Other 26.3 18.3 34.6 53.2 63.2 66.1 76.5 91.7 110.0

Americas 50.5 35.0 56.4 80.9 72.2 76.2 78.9 94.6 113.6

Total Net Fee Income 552.7 351.7 442.2 553.8 526.9 513.9 542.4 616.5 711.9

United Kingdom 46.6 11.3 19.6 18.3 15.8 18.4 22.5 29.3 37.9

EMEA 66.3 1.1 22.3 31.7 22.1 25.9 34.3 43.0 60.9

Asia Pacific - Australia 12.8 4.3 9.8 11.5 14.2 6.7 3.7 5.3 7.4

Asia Pacific - Other 9.6 3.8 12.6 14.7 14.8 12.5 16.9 22.4 29.6

Americas 5.3 -0.2 7.3 9.9 -1.7 4.6 7.5 13.9 22.6

Total EBITA 140.5 20.2 71.5 86.0 65.1 68.2 84.9 113.7 158.3


Table 45: Michael Page – Cash Flow Statement, FY08-FY16E


Operating Profit 140.5 20.2 71.5 86.0 65.1 68.2 84.9 113.7 158.3

Depreciation 10.3 11.3 10.6 11.7 15.1 17.5 23.0 23.0 23.0

(Increase)/Decrease in Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(Increase)/Decrease in Debtors 25.0 61.9 -32.1 -32.7 7.5 -8.5 -13.8 -31.3 -42.4

Increase/(Decrease) in Creditors 2.2 12.5 -19.5 25.6 -5.1 -1.8 1.7 14.0 20.7

Change in Working Capital 27.1 74.4 -51.7 -7.1 2.4 -10.3 -12.1 -17.3 -21.7

Increase in Provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other 7.3 8.9 38.7 12.7 4.1 3.2 13.3 14.5 14.5

Cash Flow from Operations 185.2 114.8 69.1 103.3 86.6 78.5 109.1 133.9 174.1

Net Interest -0.9 0.9 0.7 0.1 -0.3 -0.9 0.3 0.8 1.0

Equity Dividends -27.3 -25.9 -24.9 -28.5 -30.6 -30.8 -33.5 -36.7 -40.3

Preference Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Tax Paid -53.4 -28.2 -12.4 -37.1 -24.4 -24.4 -29.4 -38.9 -52.6

Servicing of Finance and Tax -81.6 -53.2 -36.6 -65.5 -55.3 -56.2 -62.6 -74.9 -91.9

Gross Capex -27.4 -13.4 -16.1 -29.6 -16.9 -13.3 -16.0 -16.0 -16.0

Asset Disposals 1.0 2.1 1.4 0.2 0.4 0.6 0.0 0.0 0.0

Net Capex -26.4 -11.3 -14.8 -29.4 -16.5 -12.7 -16.0 -16.0 -16.0

Purchase of Own Shares/Other -16.8 -1.9 -76.8 -30.3 -18.0 0.0 0.0 0.0 0.0

Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Disposals (net of costs) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Acquisitions/Disposals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Investing Activities -43.3 -13.2 -91.6 -59.7 -34.4 -12.7 -16.0 -16.0 -16.0

Share Issues 2.2 2.7 4.0 1.6 7.8 14.4 0.0 0.0 0.0

Issue Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Acquired Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Currency Translation 21.4 -8.2 -1.6 -2.1 -1.5 0.0 0.0 0.0 0.0

Financing Activities 23.7 -5.5 2.5 -0.5 6.3 14.4 0.0 0.0 0.0

(Incr)/Decr in Net Debt 84.0 42.9 -56.7 -22.4 3.2 24.0 30.6 43.0 66.2


Business Services


1 May 2014



Table 46: Michael Page – Balance Sheet, FY08-FY16E


Intangible Assets 13.9 20.1 27.6 39.7 44.1 42.1 34.1 26.1 18.1

Leasehold Improvements 16.1 16.1 12.0 15.1 15.1 15.1 15.1 15.1 15.1

Other Tangible Assets 23.0 15.3 16.5 18.1 13.8 10.1 11.1 12.1 13.1

Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Fixed Assets 53.0 51.5 56.1 73.0 73.0 67.3 60.3 53.3 46.3

Stock & Work in Progress 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Trade Debtors 168.4 100.2 134.7 157.0 146.7 150.3 164.1 195.4 237.8

Other Debtors 42.8 49.4 37.5 46.1 46.1 46.1 46.1 46.1 46.1

Deferred Tax Assets 6.5 10.2 12.4 8.4 9.2 10.4 10.4 10.4 10.4

Cash and Liquid Investments 157.0 137.2 80.5 64.4 70.8 87.1 117.6 160.7 226.9

Current Assets 374.6 297.0 265.2 275.8 272.7 293.9 338.2 412.5 521.1

Trade Creditors -9.8 -7.3 -9.1 -8.7 -11.3 -11.0 -12.7 -26.7 -47.4

Other Creditors -143.5 -143.8 -134.4 -153.0 -142.8 -139.1 -139.1 -139.1 -139.1

Gross Debt -62.7 0.0 0.0 -6.2 -9.4 -1.7 -1.7 -1.7 -1.7

Deferred Tax Liabilities -0.9 -0.3 -0.4 -0.2 -0.9 -0.9 -0.9 -0.9 -0.9

Provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Creditors -216.9 -151.5 -143.9 -168.2 -164.4 -152.7 -154.4 -168.4 -189.1

Total Equity 210.7 197.0 177.4 180.6 181.4 208.5 244.1 297.4 378.4

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Shareholders’ Funds 210.7 197.0 177.4 180.6 181.4 208.5 244.1 297.4 378.4

Share Capital 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2

Capital Reserve/EBT 74.0 66.4 14.8 22.8 24.2 43.1 43.1 43.1 43.1

Profit and Loss 133.4 127.4 159.4 154.7 154.0 162.2 197.8 251.2 332.1



Business Services


1 May 2014



Sthree (Hold, PT 450p) While Sthree has made a strong start to FY14E and self-inflicted headwinds

are lifting, profit generation is heavily skewed to the peak autumn trading

months and we doubt full year guidance will be raised until management

gain more visibility over this period. The shares have outperformed the FTSE

Allshare by 15% year to date and have narrowed the discount to our price

target. We downgrade from Buy to Hold.

A strong start to FY14E. After a disappointing Q4 which we felt was distorted by a very

conservative 53rd trading week adjustment, Sthree made a much stronger start to 2014

than expected driven by better momentum in temp and perm placements. Group net fee

growth accelerated from -5% in Q4 to +9% in Q1 which was well ahead of our +2%

estimate and consensus.

Signs that self-inflicted headwinds are ending. These include a strategic decision

to emphasise the lifetime profitability of Contract which depressed group revenue growth

in H113; underinvestment in Perm consultants while Contract was being promoted which

left the group unable to fully capitalise on the recent revival in Perm demand; raised tax

guidance after previously capitalised losses in respect of Australia and Belgium had been

de-recognised; and revised guidance from Sthree’s auditors regarding the accounting

treatment for ‚tracker shares‛ (equity holdings in subsidiary companies issued to senior

operational management as an incentive to grow their unit, and earn out into Sthree plc

equity according to a fixed formula) which raised the fully diluted share count.

But EPS upgrades are unlikely until the autumn. Current trading comments from

Sthree over the past few quarters have been measured in tone but two recent

developments make us feel more optimistic. Firstly, consultant headcount increased by

6% during the first quarter which accelerates YOY growth to 18%. Secondly, the perm

deal pipeline (effectively a snapshot of the volume order book) was up 7% YOY at the end

of February. However, Sthree’s profit generation is heavily skewed to the peak autumn

trading months and consequently we doubt management will raise full year profit

guidance until they gain more visibility over this period.

Downgrade from Buy to Hold. The shares have outperformed the FTSE Allshare index

by 15% year to date and now have insufficient upside to our price target to maintain a

Buy rating. Our 450p price target is set at a 25% discount to our peak EPS derived fair

value given greater uncertainties over Sthree’s long-term profitability following recent

strategic changes. At the current price, the shares yield 3.4% on a dividend that we

believe will be 1.2x covered by earnings this year.

Risks include the shape of the economic cycle and managing an aggressive overseas

expansion strategy.

Table 47: Sthree – Summary Financials and Valuation (at 412p)

Year to Nov (£m) FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Fees 166.4 195.5 205.3 199.8 218.7 251.6 282.4

Adjusted PBT 21.6 30.3 25.3 21.0 30.2 38.0 45.4

FD Adjusted EPS (p) 11.5 15.5 12.6 8.2 15.7 20.1 24.0

Dividend (p) 12.0 25.0 14.0 14.0 14.0 14.0 14.0

EV/EBITDA (x) 13.1 11.4 12.0 14.8 15.1 12.2 10.4

PE (x) 26.3 21.6 23.1 35.5 26.2 20.5 17.2

Dividend Yield (%) 4.0% 7.5% 4.8% 4.8% 3.4% 3.4% 3.4%

FCF Yield (%) 5.5% 5.2% 3.4% -0.2% 2.0% 3.0% 4.2%


Business Services


1 May 2014



Table 48: Sthree – Profit and Loss Account, FY08-FY16E

Year to Nov (£m) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Turnover 631.5 519.4 474.5 542.5 577.5 634.3 718.8 821.7 918.2

Cost of Sales (412.6) (348.2) (308.1) (346.9) (372.2) (434.5) (500.0) (570.1) (635.7)

Net Fees 218.9 171.2 166.4 195.5 205.3 199.8 218.7 251.6 282.4

Gross Margin (%) 34.7% 33.0% 35.1% 36.0% 35.6% 31.5% 30.4% 30.6% 30.8%

SG&A (162.1) (153.2) (145.2) (165.6) (180.2) (178.6) (188.6) (213.9) (237.4)

EBITA 56.8 18.0 21.2 30.0 25.1 21.2 30.2 37.8 45.0

Conversion Rate (%) 25.9% 10.5% 12.8% 15.3% 12.2% 10.6% 13.8% 15.0% 15.9%

Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net interest cost (0.8) (0.0) 0.4 0.3 0.2 (0.2) 0.0 0.2 0.4

Adjusted PBT 56.0 18.0 21.6 30.3 25.3 21.0 30.2 38.0 45.4

Goodwill Amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Exceptional Items (2.0) (9.1) 0.0 0.0 0.0 (5.5) 0.0 0.0 0.0

Reported PBT 54.1 8.9 21.6 30.3 25.3 15.5 30.2 38.0 45.4

Taxation Payable (16.2) (3.0) (7.4) (10.0) (8.4) (8.1) (9.4) (11.4) (13.6)

Adjusted Tax Rate (%) 30.0% 30.8% 34.0% 33.1% 33.4% 47.4% 31.0% 30.0% 30.0%

Minorities (2.0) (1.2) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0

Earnings 35.9 4.8 14.2 20.3 16.8 7.4 20.8 26.6 31.8

Weighted Av Shares (m) 124.7 118.7 119.9 120.6 119.5 121.1 122.4 122.4 122.4

Av Fully Dil Shares (m) 127.7 122.5 123.8 131.0 133.8 135.1 132.4 132.4 132.4

Adjusted EPS (p) 29.9 9.5 11.9 16.8 14.1 9.1 17.0 21.7 26.0

Fully Dil Adj EPS (p) 29.2 9.2 11.5 15.5 12.6 8.2 15.7 20.1 24.0

Published EPS (p) 28.8 4.0 11.9 16.8 14.1 6.1 17.0 21.7 26.0

DPS (p) 12.00 12.00 12.00 25.00 14.00 14.00 14.00 14.00 14.00


Chart 92: Sthree – Net fees, EBITA and Headcount, FY00-FY16E


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1 May 2014



Table 49: Sthree – Cash Flow Statement, FY08-FY16E

Year to November (£m) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Operating Profit 56.8 18.0 21.2 30.0 25.1 21.2 30.2 37.8 45.0

Depreciation 5.9 6.1 6.3 7.7 6.8 5.8 6.0 6.2 6.4

(Increase)/Decrease in Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(Increase)/Decrease in Debtors 16.5 51.0 (3.7) (12.0) (5.3) (10.9) (11.4) (13.9) (13.0)

Increase/(Decrease) in Creditors 6.7 (7.7) 9.7 8.4 4.0 (7.9) 3.3 4.0 3.8

Change in Working Capital 23.2 43.2 6.1 (3.6) (1.3) (18.8) (8.1) (9.8) (9.2)

Increase in Provisions 0.3 2.0 (3.6) (0.2) 0.5 4.5 0.0 0.0 0.0

Other 0.8 (5.7) 1.8 2.5 1.8 (3.2) 0.0 2.3 2.7

Cash Flow from Operations 87.0 63.7 31.8 36.4 33.0 9.5 28.1 36.5 44.9

Net Interest (0.8) (0.0) 0.4 0.3 0.2 (0.2) 0.0 0.2 0.4

Equity Dividends (12.0) (14.4) (14.4) (14.5) (30.0) (16.9) (17.0) (17.1) (17.1)

Preference Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Minority Dividend/Associate (0.1) (0.1) (1.0) (0.8) (0.5) (0.3) (0.6) (0.7) (0.7)

Tax Paid (11.4) (18.3) (6.0) (8.0) (9.5) (4.5) (9.4) (11.4) (13.6)

Servicing of Finance & Tax (24.3) (32.8) (20.9) (22.9) (39.8) (21.9) (26.9) (29.0) (31.1)

Gross Capex (6.2) (4.9) (5.8) (5.8) (10.5) (5.6) (8.0) (9.0) (9.0)

Asset Disposals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Capex (6.2) (4.9) (5.8) (5.8) (10.5) (5.6) (8.0) (9.0) (9.0)

Purchase of Own Shares/Other (31.3) 0.0 0.0 (7.6) (6.9) (1.6) 0.0 0.0 0.0

Acquisitions (1.1) (1.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Disposals (net of costs) 0.0 0.0 0.0 0.0 0.0 6.0 0.0 0.0 0.0

Net Acquisitions/Disposals (1.1) (1.3) 0.0 0.0 0.0 6.0 0.0 0.0 0.0

Investing Activities (38.5) (6.2) (5.8) (13.4) (17.4) (1.2) (8.0) (9.0) (9.0)

Share Issues 0.0 0.0 0.5 0.1 0.9 0.7 0.6 0.7 0.7

Issue costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Acquired debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Currency Translation (3.0) (0.8) 1.1 0.1 (3.7) (6.6) 0.0 0.0 0.0

Financing Activities (3.0) (0.8) 1.6 0.3 (2.8) (6.0) 0.6 0.7 0.7

(Incr)/Decr in Net Debt 21.1 23.9 6.7 0.4 (27.1) (19.6) (6.2) (0.9) 5.5


Business Services


1 May 2014



Table 50: Sthree – Balance Sheet, FY08-FY16E

Year to Nov (£m) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Intangible Assets 12.3 10.9 10.2 8.5 14.3 12.0 12.0 12.0 12.0

Tangible Assets 6.6 5.4 5.4 5.3 5.9 4.0 5.0 7.8 10.4

Investment in JVs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Fixed Assets 18.8 16.3 15.6 13.8 20.1 16.0 17.0 19.8 22.4

Stock & Work in Progress 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Trade Debtors 101.9 58.3 63.1 70.5 73.4 85.6 97.0 110.9 123.9

Other Debtors 38.0 38.2 34.8 40.6 41.3 41.3 41.3 41.3 41.3

Deferred Tax Assets 3.1 5.5 8.7 6.4 4.9 3.5 3.5 3.5 3.5

Cash & Liquid Investments 24.6 48.5 55.2 55.6 28.3 13.7 7.5 6.6 12.1

Current Assets 167.7 150.5 161.8 173.1 147.8 144.0 149.2 162.2 180.8

Trade Creditors (30.3) (22.6) (30.0) (33.3) (32.8) (24.9) (28.2) (32.3) (36.1)

Other Creditors (61.8) (53.5) (60.0) (64.6) (66.4) (66.4) (65.4) (67.7) (53.2)

Gross Debt 0.0 0.0 0.0 0.0 0.0 (5.0) (5.0) (5.0) (5.0)

Deferred Tax Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Provisions (3.9) (6.0) (5.6) (6.6) (6.9) (12.1) (12.1) (12.1) (12.1)

Total Creditors (95.9) (82.0) (95.5) (104.4) (106.0) (108.4) (110.7) (117.1) (106.4)

Total Equity 90.6 84.8 81.9 82.5 61.9 51.6 55.5 64.9 96.7

Minority Interest (4.1) (4.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0


Share Capital 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

Share Premium/Capital

Reserve

6.3 6.4 2.6 (5.2) (4.8) (0.5) (0.5) (0.5) (0.5)

Retained Earnings 78.9 72.6 78.1 86.4 65.5 50.9 54.7 64.2 96.0



Business Services


1 May 2014



Experian

Business Services


1 May 2014



Experian (Buy, PT 1340p) In our view, three headwinds have abated over the past few months – the

outlook is stabilising in Brazil; headwinds from the proposed DATA Act are

not material; and investor disappointment over M&A value creation has been

priced in. With earnings momentum now recovering we believe Experian’s

attractive ROIC and cash conversion attributes are likely to be more highly

valued by investors. We upgrade from Hold to Buy.

Headwinds from the proposed DATA Act are not material. The main proposals

contained with the Data Broker Accountability and Transparency (DATA) Act are in-line

with our January 2014 note “Senate Committee Review; Q3 Preview”. The Act, which is still

at an early stage of the legislative process and may not pass into law, allows consumers to

opt out of having their information collected and sold by data brokers for marketing

purposes and individuals would gain compulsory access and correction rights. This could

impede revenue growth in Experian’s Marketing Services division (as a narrower data set

might impede the efficacy of its analysis) and raise regulatory/compliance costs but we

calculate would create revenue headwinds for a mere 2-6% of group EBITA

The outlook is stabilising in Brazil. In our view, there two signs that the second

derivative may no longer be negative for Experian’s LATAM division. Firstly, the rate of

YOY decline in defaults peaked at 10%-11% in August-November 2013 but has

progressively improved since with March only -1.8%. Secondly, GDP data is no longer

deteriorating and, judging from Bloomberg consensus, economists believe the trough

may be close at hand.

M&A disappointment has been priced in. Our view that the 41st Parameter and

Passport acquisitions have a questionable path to value creation remains unchanged.

However, the issue has been heavily debated over the past six months and should now be

priced in. Ultimately, we doubt we will ever be in a position to accurately assess the

transactions as Experian won’t disclose their profit contribution after integration.

Upgrading FY15E EPS by 1.5%. We have upgraded our FY15E EPS estimate by 1.5%

to reflect improved growth momentum in the second half of the year and recent currency

movements (particularly the Brazilian Reais which has appreciated by 10% over the past

two months. We are 3% and 4% ahead of FY15E and FY16E consensus respectively.

Moving from Hold to Buy. With potential earnings headwinds now receding we

believe Experian’s attractive ROIC and cash conversion attributes are likely to be more

highly valued by investors. As momentum improves the shares could return to the top of

the 7-21x prospective PE range experienced over the past decade. We increase our price

target from 1090p to 1340p. At this level, the shares would trade on a 20x CY15E PE and a

5.5% FCF yield (5% on a fully taxed basis).

Risks include economic growth, regulatory change, acquisition integration and exchange

rate movements.

Table 51: Experian – Summary Financials and Valuation (at 1122p)

Year to Mar ($m) FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Turnover 3880 3885 4487 4730 4891 5426 5863

Adjusted PBT 854 920 1128 1195 1228 1395 1550

FD Adjusted EPS (c) 62.8 65.5 77.5 84.6 90.2 102.7 114.1

Dividend (c) 23.0 28.0 32.0 34.8 37.2 42.0 46.2

EV/EBITDA (x) 9.5 10.8 10.6 11.7 12.1 11.2 10.2

PE (x) 13.7 16.5 16.7 19.0 19.8 18.1 16.3

Dividend Yield (%) 2.7% 2.6% 2.5% 2.2% 2.1% 2.2% 2.5%

FCF Yield (%) 8.3% 7.0% 6.6% 5.7% 6.3% 6.5% 6.9%


Business Services


1 May 2014



The Brazilian Outlook is Stabilising The chart below summarises real GDP growth and loan growth in Brazil since 2001.

Optically there appears to be a reasonable relationship between the two data series

although this is not borne out by regression analysis with a R-squared of only 0.2x

(admittedly this improves to around 0.6x if the more acute swings in late 2008 and 2009

are excluded).

Using nominal GDP instead does not improve the statistical fit.

Chart 93: Brazilian Real GDP Growth versus Total Loan Growth

Source: Bloomberg

The revelation that there is a relationship between economic growth and the credit cycle

is hardly a startling one. As the chart below illustrates, there is a similarly intellectually

logical but statistical uninspiring relationship between organic revenue growth in

Experian’s LATAM Credit Services unit and Brazilian loan growth.

Chart 94: Experian LATAM Revenue Growth versus Brazilian Loan Growth

Source: Bloomberg, Company Data

Given the strength of these relationships, it’s clear that regression analysis is unlikely to

provide a reliable path to predicting revenue growth. However, they can still be a useful

indicator of momentum and inflection points.

To assist our understanding, we monitor two monthly Experian data series:

Consumer defaults. While the central bank's delinquency gauge is considered

Brazil's benchmark, Serasa's indicator is broader because it monitors payments

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Business Services


1 May 2014



of bank, non-bank and utility debts as well as bounced checks. Delinquency

rates are being closely monitored as policymakers have hiked interest rates to

choke off inflation.

Consumer demand for credit, constructed from a representative sample of

about 11.5 million social security numbers within the Serasa database.

Chart 95: Experian LATAM Credit Services Revenue Growth versus Brazilian

Delinquencies and Credit Demand

Source: Company Data; Note: Timescale above uses Experian’s March year end

In our view, there two signs that the second derivative may no longer be negative for

Experian’s LATAM division:

The trend in delinquencies is no longer deteriorating. Sequentially,

defaults increased in Q114 but the data is not seasonally adjusted and several

financial commitments (including property taxes and school fees) traditionally

fall for payment at the start of the calendar year. On a year-on-year basis, the

rate of decline peaked at 10%-11% in August-November 2013 but has

progressively improved since with March only -1.8%.

Chart 96: Brazilian Consumer Default Rate


GDP growth estimates may have bottomed. The charts overleaf indicate

that although consensus GDP estimates are still drifting lower, economists

believe the trough may be close at hand. In our view, 2014 is a difficult year to

predict given the Football World Cup and November Presidential elections.

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Business Services


1 May 2014



Chart 97: Consensus Brazilian Real GDP Estimates

Source: Bloomberg

Chart 98: Consensus Expects Rising GDP Growth after 2014

Source: Bloomberg

Chart 99: With a Trough in Q214

Source: Bloomberg

Serasa’s own economic growth indictor (which uses data that are correlated with

subcomponents of the formal quarterly GDP figure to construct a monthly series)

improved sharply in February. The figures are seasonally adjusted so the robust sequential

growth rate in February was also notable although it may have been flattered by the

timing of Mardi Gras celebrations this year.

Chart 100: Serasa Monthly Real GDP Growth Indicator


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Business Services


1 May 2014



US Legislative Risks have Low Impact In our 7th January 2014 research note “Senate Committee Review; Q3 Preview” we assessed

the implications of a December 2013 US Senate Committee on Commerce, Science and

Transportation oversight review of the data broker industry. The document dwelled on

three key topics that were debated during a two hour committee sitting:

Do data broker’s products identify the financially vulnerable and potentially

support discrimination?

Can data brokers fully control who has access to data?

Lack of regulation, the Consumers’ right to know and to opt out

The second bullet touched on a sensitive development at a business acquired by Experian

in 2012 which has been more widely reported as court proceedings have progressed.

The Court Ventures Saga First a quick overview:

A website called superget.info marketed its ability to source Social Security

numbers, birth dates, driver licence records and financial information on millions

of Americans (apparently known as ‚fullz‛ amongst the criminal fraternity). In

some instances, criminals used this information for identity theft purposes.

superget.info was operated by Hieu Minh Ngo, an individual based in Vietnam

but who was making monthly wire payments to Court Ventures from Singapore

The database used to provide this service came from a company called US

InfoSearch but was obtained via Court Ventures as part of an information

sharing agreement between the two entities. Experian’s involvement arises

because they acquired Court Ventures in March 2012.

In 2013, the US Secret Service contacted Experian and revealed that data

sourced from superget.info was being used for fraudulent purposes.

According to Experian, it did not have full access to client data when conducting

due diligence on Court Ventures.

Hieu Minh Ngo pleaded guilty in federal court in March and will be sentenced in

June.

Experian released a formal statement on the matter in 2013:

“Experian acquired Court Ventures in March 2012 because of its national public records

database. After the acquisition, the US Secret Service notified Experian that Court Ventures

had been and was continuing to resell data from US Info Search to a third party possibly

engaged in illegal activity. Following notice by the US Secret Service, Experian discontinued

reselling US Info Search data and worked closely and in full cooperation with law

enforcement to bring Vietnamese national Hieu Minh Ngo, the alleged perpetrator, to justice.

Experian’s credit files were not accessed. Because of the ongoing federal investigation, we are

not free to say anything further at this time.”

State investigations are unlikely to create meaningful headwinds

Experian has filed suit against the former owners of Court Ventures for permitting the sale

of US Info Search’s data to Ngo, and intends to hold those individuals fully responsible for

their conduct in permitting the sale of data to an identity thief unbeknownst to Experian.

Massachusetts and Connecticut and other undisclosed US states have opened

investigations into whether Experian and other parties followed laws requiring companies

to properly secure consumer data and comply with breach disclosure rules.

Business Services


1 May 2014



In our view, the transgression was an isolated incident in a recently acquired subsidiary

rather than an indication of more deep-seated issue with controls. Consequently, we

doubt these investigations will create a meaningful headwind.

DATA Act = Headwind for Marketing Services While we are relaxed regarding the financial implications of the Hieu Minh Ngo affair, we

remain concerned by the potential for the industry to suffer headwinds under the

proposed Data Broker Accountability and Transparency (DATA) Act of 2014 (s.2025).

The key elements of the Bill are:

Data brokers would be prohibited from collecting or soliciting consumer

information in deceptive ways

Consumers would be able to opt out of having their information collected and

sold by data brokers for marketing purposes

Consumers would be allowed to access and correct their information

The legislation would empower the Federal Trade Commission to enforce the

law and to impose civil penalties on data brokers that violate consumers’ privacy

and trust. Any data broker who violates the Act could be fined by up to $16,000

per violation. Individual states could also levy a fine of similar magnitude

Under the Act, the FTC would require data brokers establish measures to audit

internal or external access to data and create a centralised website intended for

consumer benefit that lists all businesses subject to the Act

But would only impact 2%-6% of group EBITA

In our January 2014 note, we suggested the three possible outcomes listed below. The

DATA Act, which is still at an early stage of the legislative process and may not pass into

law, proposes all three.

Compulsory access and correction rights for consumers. Data brokers’ voluntary

policies regarding consumer access and correction rights vary widely from

virtually no rights to the more flexible approach recently adopted by Acxiom

through its www.aboutthedata.com website.

Give the FTC more teeth? The Federal Trade Commission’s regulatory hand is

strongest where the Fair Credit Reporting Act applies but it freely admits is less

potent elsewhere. Its remit could be extended to cover Marketing Services

activities and its range of sanctions expanded.

Introduce an opt-out for consumers. In 2012, the Federal Trade Commission

advocated to establishment of a central information site which would allow

consumers to observe what data has been collected on them. Individuals would

then be allowed to opt-out of some data categories (of which there are up to

1500) if they desired greater privacy.

Individually none are likely to lead to material earnings downgrades but they could

impede revenue growth in Experian’s Marketing Services division (as a narrower data set

might impede the efficacy of its analysis) and raise regulatory/compliance costs.

As we outline below, this would create revenue headwinds for a mere 2%-6% of group

EBITA as meaningful oversight is already in place for credit reports under the Fair Credit

Reporting Act. In our view, additional costs are unlikely to be material.

US Marketing Services only contributes 9% of group turnover of which only one-

third concerns the use of external data for the purposes of targeted marketing.

As this tends to be a lower than average margin activity, the percentage of

group EBITA directly impacted may only be c.2%.

Business Services


1 May 2014



Elsewhere, some elements of Credit Services (healthcare and insurance) do not

fall under the remit of the Fair Credit Reporting Act and potentially could also be

impacted. Following the Passport acquisition, US healthcare will contribute 4%

of group turnover. US insurance revenues are modest.

Chart 101: FY14E revenue by discipline


Upgrading from Hold to Buy With potential headwinds to FY15E and FY16E earnings now receding we believe

Experian’s attractive ROIC and cash conversion attributes are likely to be more highly

valued by investors. As momentum improves the shares could return to the top of the 7-

21x prospective PE range experienced over the past decade.

We increase our price target from 1090p to 1340p. At this level, the shares would trade

on a 20x CY15E PE and a 5.5% FCF yield (5.0% on a fully taxed basis). As the chart below

illustrates, global peers trade on a 14-19x CY15E PE but consensus projects 7%-9%

compound EPS growth versus 10% for Experian.

Chart 102: CY15E PE Multiple (x)

Source: Bloomberg

45%

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Credit Services Consumer Services Marketing Services Decision Analytics

13.516.2 16.8

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Business Services


1 May 2014



Upgrading FY15E EPS by 1.5% We have upgraded our FY15E EPS estimate by 1.5% to reflect improved growth

momentum in the second half of the year and recent currency movements (particularly

the Brazilian Reais which has depreciated by 10% over the past two months.

We are 3% and 4% ahead of FY15E and FY16E consensus respectively.

Table 52: Experian – Summary Estimate Revisions

Year to March ($m) FY14E Old FY14E New FY15E Old FY15E New

Turnover 4,888 4,891 5,355 5,426

EBITA 1,307 1,308 1,453 1,475

EBITA Margin (%) 26.77% 26.77% 27.14% 27.18%

Net Interest Cost -82 -82 -82 -82

Pension: Expected Return/Interest 2 2 2 2

Preference Dividend 0 0 0 0

Net Finance Charge -80 -80 -80 -80

Adjusted PBT 1,227 1,228 1,373 1,395

Intangible Amortisation -120 -120 -120 -120

Fair Value Adjustments 0 0 0 0

Exceptional Items -57 -57 0 0

Reported PBT 1,050 1,051 1,253 1,275

Taxation Payable -287 -287 -341 -347


Minorities -2 -2 -2 -2

Earnings from Continuing Ops 761 762 911 926

Discontinued Operations 1 1 0 0

Weighted Average No. Shares (m) 980 980 977 977

Av Fully Diluted No. Shares (m) 992 992 989 989

Adjusted EPS (c) 91.2 91.3 102.4 104.0

Fully Diluted Adj EPS (c) 90.1 90.2 101.2 102.7

Published EPS (c) 77.6 77.7 93.2 94.8

DPS (c) 37.20 37.20 42.00 42.00


Table 53: JEF estimates versus Consensus

Year to March (c) FY14E FY15E FY16E

Consensus - High 93.0 106.0 121.0

Consensus - Low 88.0 96.0 103.0

Consensus - Average 90.5 99.8 109.6

JEF 90.2 102.7 114.1

JEF vs Consensus 0% 3% 4%

Source: Jefferies estimates, Bloomberg

Business Services


1 May 2014



Table 54: Experian – Profit & Loss Account, FY07-FY16E

Year to Mar ($m) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Turnover 3,481 3,789 3,873 3,880 3,885 4,487 4,730 4,891 5,426 5,863

EBITA 825 908 939 935 991 1,175 1,253 1,308 1,475 1,620

EBITA Margin (%) 21.54% 22.45% 23.13% 24.06% 25.61% 26.23% 26.97% 26.77% 27.18% 27.64%

Associate 0 0 0 0 0 0 0 0 0 0

Net Interest Cost -127 -148 -113 -80 -77 -58 -66 -82 -82 -72

Net Pension 16 23 17 -1 6 11 8 2 2 2

Preference Dividend 0 0 0 0 0 0 0 0 0 0

Net Finance Charge -111 -125 -96 -81 -71 -47 -58 -80 -80 -70

Adjusted PBT 714 783 843 854 920 1,128 1,195 1,228 1,395 1,550

Intangible Amortisation -76 -121 -132 -140 -99 -122 -123 -120 -120 -120

Fair Value Adjustments -35 -29 19 -18 -142 -318 -561 0 0 0

Exceptional Items -209 -112 -150 -96 -23 1 -71 -57 0 0

Reported PBT 394 521 580 600 656 689 440 1,051 1,275 1,430

Taxation Payable -68 -91 -86 9 -118 35 -152 -287 -347 -389

Adjusted Tax Rate (%) 22.3% 23.1% 22.1% 19.0% 21.5% 24.3% 25.3% 27.0% 27.0% 27.0%

Minorities -1 -15 -20 -36 -42 -63 -39 -2 -2 -3

Earnings from Cont Ops 325 415 474 573 496 661 249 762 926 1039

Discontinued Operations 137 22 12 27 85 -6 118 1 0 0

Weighted Av. Shares (m) 927 1,009 1,013 1,015 1,002 989 988 980 977 977

Av Fully Dil Shares (m) 937 1,022 1,025 1,030 1,024 1,006 1,009 992 989 989

Adjusted EPS (c) 59.7 57.6 62.3 63.7 66.9 78.9 86.4 91.3 104.0 115.5

Fully Dil Adj EPS (c) 59.1 56.8 61.6 62.8 65.5 77.5 84.6 90.2 102.7 114.1

Published EPS (c) 35.0 41.1 46.8 56.4 49.4 66.8 25.2 77.7 94.8 106.3

DPS (c) 17.00 18.50 20.00 23.00 28.00 32.00 34.75 37.20 42.00 46.20


Table 55: Experian – Organic Revenue Growth by Division

Year to March Q113 Q213 Q313 Q413 Q114 Q214 Q314E Q414E

Credit Services 9% 7% 11% 9% 9% 5% 4% 9%

Decision Analytics 18% 18% 12% 4% 10% -2% 24% 8%

Marketing Services 3% 3% 4% 10% 3% 1% 4% 5%

Consumer Services 7% 7% 4% 6% 3% 3% 4% 5%

North America 8% 6% 7% 7% 6% 4% 5% 6%

Credit Services 16% 12% 8% 12% 9% 5% 4% 4%

Decision Analytics 32% 50% 47% 27% 81% 23% 39% 29%

Marketing Services 67% 57% 29% -29% -7% -15% -7% 9%

Latin America 18% 16% 11% 11% 10% 4% 5% 6%

Credit Services 0% 2% 3% 3% 3% 3% 3% 4%

Decision Analytics -4% 0% 0% 4% 2% 0% 3% 3%

Marketing Services -2% -4% -1% -1% -1% 1% -1% 1%

Consumer Services 30% 22% 26% 26% 30% 26% 23% 19%

UK & Ireland 4% 2% 6% 8% 7% 7% 7% 6%

Credit Services 2% 0% -1% 7% 0% 2% 2% 3%

Decision Analytics -8% -4% -1% -3% 1% 13% 16% 14%

Marketing Services 12% 14% 3% -5% 6% 2% -3% 5%

EMEA/Asia Pacific 4% 6% 1% 1% 3% 5% 3% 3%

TOTAL 9% 7% 7% 9% 7% 5% 5% 6%


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Table 56: Experian – Divisional Revenue Overview, FY07-FY16E

Year to March ($m) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Credit Services 804 807 730 693 716 791 873 942 1,044 1,128

Decision Analytics 77 82 119 116 113 129 146 216 353 416

Marketing Services 353 380 358 329 367 395 417 437 465 498

Consumer Services 751 791 852 922 709 777 822 853 911 965

Discontinued 4 0 24 8 0 0 0 0 0 0

North America 1,989 2,060 2,083 2,068 1,905 2,092 2,258 2,448 2,773 3,007

Credit Services 0 305 437 538 687 874 874 818 848 907



Discontinued 0 0 0 0 0 0 0 0 0 0

Latin America 5 323 462 559 722 961 1,001 945 991 1,076

Credit Services 266 293 265 234 225 240 248 258 278 286



Consumer Services 33 68 84 109 113 152 193 242 297 342

Discontinued 64 59 59 62 11 1 0 0 0 0

UK & Ireland 907 1,023 902 792 742 825 873 938 1,046 1,113

Credit Services 433 495 172 190 184 194 171 173 186 195



Discontinued 17 12 0 7 15 30 77 6 0 0

EMEA/Asia Pacific 591 722 426 461 516 609 598 560 616 667

TOTAL 3,492 4,128 3,873 3,880 3,885 4,487 4,730 4,891 5,426 5,863


Table 57: Experian – Divisional EBITA Overview, FY07-FY16E

Year to March ($m) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

North America 512 554 575 572 556 658 718 793 901 977

Latin America -4 75 118 166 235 320 346 335 347 382

UK & Ireland 212 226 211 204 214 227 246 277 311 332

EMEA/Asia Pacific 73 50 49 52 52 38 26 -17 0 17

Discontinued 79 60 43 3 0 6 -2 0 0 0

Central Costs -47 -57 -57 -62 -66 -74 -81 -81 -84 -87

EBITA 825 908 939 935 991 1,175 1,253 1,308 1,475 1,620


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Table 58: Experian – Cash Flow Statement, FY07-FY16E

Year to March ($m) 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Operating Profit 825 908 939 935 991 1175 1253 1308 1475 1620

Depreciation 227 285 288 277 286 312 342 345 350 360

(Increase)/Decrease in Stock -1 0 -2 1 -10 3 3 0 -1 -1

(Increase)/Decrease in Debtors -72 -51 24 -38 -33 -38 -68 -33 -111 -91

Increase/(Decrease) in Creditors 82 79 -11 18 47 57 39 7 131 102

Change in Working Capital 9 28 11 -19 4 22 -26 -27 19 10

Share Incentive Plans 91 66 52 61 64 65 78 80 80 80

Cash Pension in Excess of P&L -4 -5 -4 -3 0 -2 -3 -3 -3 -3

Disposal Loss/(Gain) 10 3 17 25 26 -4 14 0 0 0

Discontinued Activities 0 0 0 0 57 2 64 90 0 0

Other -216 -151 -201 -119 -60 -29 -56 -57 0 0

Cash Flow from Operations 942 1134 1102 1157 1368 1541 1666 1736 1921 2068

Net Interest -106 -131 -128 -68 -92 -57 -68 -82 -82 -72

Equity Dividends -401 -182 -189 -206 -251 -290 -322 -244 -372 -419

Preference Dividends 0 0 0 0 0 0 0 0 0 0

Minority/Associate Dividend 39 25 4 -42 -55 -70 -53 1 1 1

Tax Paid -121 -79 -39 -26 -85 -107 -162 -103 -151 -203

Servicing of Finance and Tax -589 -367 -352 -342 -483 -524 -605 -428 -604 -692

Gross Capex -275 -321 -305 -314 -369 -453 -460 -440 -500 -520

Asset Disposals 0 0 0 30 7 3 1 1 0 0

Net Capex -275 -321 -305 -284 -362 -450 -459 -439 -500 -520

Purchase of Own Shares/Other -75 -6 0 -178 -411 -239 -254 -304 0 0

Acquisitions -42 -1729 -208 -48 -296 -758 -1553 -1245 0 0

Disposals (net of costs) 258 6 191 107 12 0 -3 25 0 0

Net Acquisitions/Disposals 216 -1723 -17 59 -284 -758 -1556 -1220 0 0

Investing Activities -134 -2050 -322 -403 -1057 -1447 -2269 -1963 -500 -520

Share Issues 1525 7 7 4 7 11 9 11 0 0

Share Option Proceeds 59 34 9 60 50 54 61 0 70 75

Acquired Debt 0 0 0 0 0 0 0 0 0 0

Currency Translation 166 17 -37 35 0 9 2 20 0 0

Other 60 -66 182 -28 241 39 16 -67 0 0

Financing Activities 1810 -8 161 71 298 113 88 -36 70 75

(Incr)/Decr in Net Debt 2029 -1291 589 483 126 -317 -1120 -691 886 930


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1 May 2014



Asset Rental

Business Services


1 May 2014



Aggreko – Inflection Point We anticipate that Aggreko could now be at the point of inflection, in our

base case assumption growth in MW on rent turns positive in 3Q14 and

revenue growth turns positive in 4Q14 and we think the shares will respond

positively to this. The Local business, accounting for 53% of FY14F EBITA has

had a very strong start to the year. Forecasts unchanged but our upside

scenario suggests 9% accretion to FY15F EPS. We increase our Price Target to

1,800p and upgrade our rating to Buy.

Aggreko could be at the point of inflection

In our base case we have assumed that an additional 100MW are won in 2Q14 in addition

to the 197MW already announced. We then assume 200MW in 3Q and 250MW in 4Q

taking total FY14 order intake to 956MW. This then provides the basis for our new base

case which suggests that growth in MW on rent turns positive in 3Q14 with revenue

growth positive in 4Q14. Average MW on rent growth through 2014 was -4% in FY13 and

we anticipate -2% in FY14.

The Local Business is motoring

We anticipate that the local business will account for 53% of group EBIT in FY14 and as a

result we should pay more attention to it. Geographically it is a slightly mixed bag but we

think that this division could drive an upside surprise through 2014. In terms of current

trends we are most encouraged by The Americas (49% of revenues), with strong growth

being supported by oil and gas markets (45% of Americas).

1Q IMS – A good start to the year

If we analyse the YOY change in MW on rent then the second derivative of growth actually

turned positive in 2H12 but the 1Q IMS shows that in 1H14, we should move into positive

territory for the first time in 2 years. In addition the local business was off to a great start

with underlying revenue growth of 11%

Elsewhere concerns are abating

With contract conversion looking better than ever versus the past two years and a lower

off-hire rate we have a useful tailwind for improving utilisation and rates. The diesel glut

should be subsiding as competitors reduce capacity and Aggreko convert their sets into

HFO or transfer them to the local market. Our forecasts are unchanged and we are

broadly in line with consensus.

Valuation

Given increased confidence over the prospects of the business and to account that much

of this invested capital is at unusually low utilisation rates, we increase the REP ratio to

1.4x which drives an increase in the targeted EV/Invested Capital ratio to 3x. This drives an

increased price target of 1800p, from 1500p and a Buy rating, from Hold. At our price

target the shares would trade on 21x FY15F EPS. Downside risks from lost contracts.

Table 59: Aggreko – Summary Financials and Valuation (at 1,569p)


Sales 1583.2 1573.0 1557.4 1624.6 1716.6

Adjusted PBT 365.0 337.5 292.8 316.6 345.8

FD Adjusted EPS 102.1 93.8 80.1 86.6 94.5

Dividend 23.9 26.3 29.0 32.0 35.0

EV/EBITDA (x) 10.0 7.6 7.9 7.4 6.8

PE (x) 21.2 17.9 19.6 18.1 16.6

Dividend Yield (%) 1.1% 1.6% 1.8% 2.0% 2.2%

FCF Yield (%) -1.0% 6.6% 4.4% 3.5% 4.3%


Business Services


1 May 2014



MW on rent reaching an inflection If we analyse the YOY change in MW on rent then the second derivative of growth actually

turned positive in 2H12 and 2Q14 YTD we should move into positive territory for the first

time in 2 years.

Chart 103: Order intake YOY


* 2Q14 is YTD vs 2Q13 YTD

Order intake YOY is up 150MW YTD and we think this sets Aggreko up for the best 1H/FY

in two years

Chart 104: Quarterly Order Intake


* 2Q14-4Q14 is an estimate

In the above analysis we have assumed that an additional 100MW are won in 2Q14 in

addition to the 197MW already announced. We then assume 200MW in 3Q and 250MW

in 4Q taking total FY14 order intake to 956MW.

This then provides the basis for our new base case which suggests that growth in MW on

rent turns positive in 3Q14 with revenue growth positive in 4Q14. Average MW on rent

growth through 2014 was -4% in FY13 and we anticipate -2% in FY14.

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14*

1Q

1Q

1Q

1Q

1Q

2Q2Q

2Q

2Q

2Q

3Q

3Q

3Q 3Q

3Q

4Q 4Q

4Q4Q

4Q

0

50

100

150

200

250

300

350

400

450

500

2010 2011 2012 2013 2014F*

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1 May 2014



Chart 105: YOY growth in MW on rent and revenues (%)


The Local business is motoring We anticipate that the local business will account for 53% of group EBIT in FY14 and as a

result we should pay attention. It is a slightly mixed bag but we think that this division

could drive an upside surprise through 2014. In terms of current trends:

The Americas (49% of local revenues) is performing well, with strong growth

being supported by oil and gas markets, with 45% of revenues generated in oil

and gas and petrochemical and refining. Americas is the largest local segment,

accounting for 49% of group local revenues.

EMEA (37%) is recovering well and growth is reasonable with some support

coming through in pricing.

AsiaPacific (14%) remains difficult and competitive. In particular Australia and

mining clients are difficult and as a result utilisation has fallen and pricing is

under pressure.

Other concerns are subsiding When we downgraded Aggreko to Hold in October 2013, we were concerned that the

market back drop was slow and these difficulties were being exacerbated by specific

issues around fleet bias and increased competition from APR Energy. Now we are more

positive for the following reasons:

The off hire rate could be lower YOY

In FY13 the off-hire rate, as a percentage of opening MW on hire was 40%. We know that

1Q experienced a lower off hire rate in FY14 versus FY13 and we suspect that this could

continue through the year. This would lower the on-hire rate required just to stand still,

help utilisation and therefore be a tailwind to underlying growth and margins. We expect

Japan and Military revenues of £40m in FY14 and c£10m in FY15 from £75m in FY13.

Utilisation should improve

We believe there is a triple tailwind that should benefit utilisation: 1) A lower level of off-

hires, as stated above; 2) Conversion of diesel sets to HFO, and; 3) A transfer of fleet from

Power Projects to the Local business.

Contract conversion may be coming back

We feared that Aggreko had lost the initiative and were not able to convert some of the

larger contracts out there but recent evidence suggests that this is not the case.

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

F

3Q

14

F

4Q

14

F

Growth in MW on rent PP Underlying Revenue Growth

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1 May 2014



FX headwinds abating

Although FX is not our call to make, it appears to have stabilised in recent months. This is

encouraging as with previous fluctuations, after a while countries get used to the higher

cost of energy and start to see activity resume.

Worst of the diesel glut could be over

In our view, the worst of the diesel glut could be over as players start to take capacity out

and it begins to get absorbed by new contracts. Aggreko themselves are only using capex

in power projects to convert diesel sets either to the new HFO product or to the new more

efficient G3+ units. We know that APR diesel utilisation is at c80% and they are not adding

anymore which suggests they will not be competing in a material way in the diesel space.

Chart 106: Power Projects Fleet – FY13


Chart 107: Power Projects Fleet – FY16F


Management change should not throw up any unknown issues

We understand that a review of internal and external candidates is currently underway.

This would suggest to us that Angus may have thrown his hat in the ring to remain in the

CEO role longer term. We believe the market would welcome this as he brings continuity

and strong knowledge of the business. An external CEO would bring about a fresh pair of

eyes but as Aggreko has historically been conservatively managed from a financial

reporting perspective so we do not believe any changes to management would result in a

rebasing of profitability expectations.

Turbines unlikely – ROIC and margin profile maintained

New management would not have any legacy concerns in fully exploring the turbine

option, especially now that Pratt and Whitney are available for partnering. That said we

understand that Aggreko have carried out three separate and independent reviews into

turbines and all have concluded that they are not the way to go. The reports anticipate

that the turbine part of the market is perhaps 15%-20% of the total temporary power

market meaning that there is more than enough space for Aggreko and APR to play

together, nicely.

‘Free expansion’ before capex needs ramping up

Capex is not currently a leading indicator. With utilisation down at 70% there is plenty of

scope for contract wins to be absorbed by existing capacity as opposed to requiring new

plant. Capex guidance for 1H was unchanged at £130m but full year guidance is £215m,

implying only £85m in 2H. We will watch this closely as utilisation tracks up to the mid

70s, per management guidance this may well be the time to turn the tap back on.

Balance sheet remains sensible.

Post the payment of the special £200m return in June, net debt to EBITDA is forecast to be

0.9x but in a low capex environment this will continue to reduce.

Diesel

71%

Gas

24%

HFO

5%

Diesel

51%

Gas

23%

HFO

26%

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1 May 2014



Upgrading to Buy, new PT of 1800p We value Aggreko based on the returns (ROIC) that it generates over WACC and what

investors have historically been willing to pay for that on the basis of their invested capital

base.

Historically the REP ratio based on the above has been 1.2x and applying this to the

current ROIC-WACC spread of 2.1x has driven the targeted EV/Invested Capital multiple.

Chart 108: ROIC/WACC


Here, given increased confidence over the prospects of the business, improving returns

and to account that much of this invested capital is at unusually low utilisation rates, we

increase the REP ratio to 1.4x which drives an increase in the targeted EV/Invested Capital

ratio to 3x. This drives an increased price target of 1800p, from 1500p and a Buy rating,

from Hold. This is a reasonable anti-consensual call right now; over the last 12 months

recommendations have moved from 60% Buys to 20%.

Chart 109: EV/Invested Capital


Although our formal valuation is based on a REP ratio, it is worth flagging here that for

reference many investors will talk about the company in PE terms. When we take account

of the special dividend/capital return payable in June then the stock is trading on sub

1,500p which equates to 16.5x PE.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13F FY14F FY15F

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13F FY14F FY15F

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1 May 2014



Summary Financial Data


Source: Jefferies estimates (FY14F)

Chart 111: Power projects revenues


Chart 112: Local Business by division


Income Statement


FY10 FY11 FY12 FY13F FY14F FY15F FY16F

Total Local revenues 695.4 734.1 905.0 904.0 917.8 969.4 1036.1

IPP ex fuel 460.3 554.0 638.2 627.0 597.6 613.2 638.5

IPP inc fuel 534.5 662.0 678.2 669.0 639.6 655.2 680.5

Group Revenue 1229.9 1396.1 1583.2 1573.0 1557.4 1624.6 1716.6

Growth 13.5% 13.4% -0.6% -1.0% 4.3% 5.7%

Group ex fuel 1155.7 1288.1 1543.2 1532.9 1517.3 1584.5 1676.5

Total Local EBIT 144.5 124.2 174.5 158.0 165.2 179.3 196.9

Margin 20.8% 16.9% 19.3% 17.5% 18.0% 18.5% 19.0%

IPP ex fuel 168.1 214.8 211.5 196.0 147.6 153.3 160.9

Margin 36.5% 38.8% 33.1% 31.3% 24.7% 25.0% 25.2%

IPP (inc fuel) EBIT 170.0 217.1 210.7 194.0 147.6 153.3 160.9

Margin 31.8% 32.8% 31.1% 29.0% 23.1% 23.4% 23.6%

Group EBIT 314.5 341.3 385.2 352.0 312.8 332.6 357.8

Margin 25.6% 24.4% 24.3% 22.4% 20.1% 20.5% 20.8%

Net Interest -10.1 -18.7 -24.7 -25.5 -27.0 -23.0 -19.0

Exceptional items 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Aggreko Group PBT 307.1 327.2 365.0 337.5 292.8 316.6 345.8

EPS (pre exceptionals &

amortisation) (p)

80.1 87.1 102.4 93.8 80.1 86.6 94.5

Fully Diluted EPS

(Adjusted) (p)

79.0 86.8 102.1 93.8 80.1 86.6 94.5

Dividend (p) 18.9 20.8 23.9 26.3 29.0 32.0 35.0


Local

53%

Power Projects

47% Utilities

61%

Other

16%

Mining

16%

Oil & Gas

7%

Other

4%

Utilities

29%

Military

6%

Manufacturing

7%

Petrochem/refining

14%

Oil/gas

18%

Mining

4%

Services

5%

Contracting

4%

Construction

4%

Events

5%

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1 May 2014



Cash Flow Statement

Table 61: Cash Flow Statement

FY10 FY11 FY12 FY13F FY14F FY15F FY16F

Group Operating Profit 317.2 345.9 391.7 358.0 312.8 332.6 357.8

Depreciation 158.4 184.5 240.9 278.0 280.3 292.4 309.0

EBITDA 475.6 530.4 632.6 636.0 593.1 625.1 666.7

Working capital -23.7 -37.9 -162.9 -25.0 -25.7 -33.0 -23.9

Profit(-)/loss(+) on disposal of fixed assets -2.7 -4.6 -4.5 -6.0 0.0 0.0 0.0

Share based payments 18.7 19.8 13.5 -2.0 -2.0 -2.0 -2.0

Other 0.0 1.1 0.0 0.0 0.0 0.0 0.0

Operating cash flow 467.9 508.8 478.7 603.0 565.4 590.0 640.9

Net interest -10.1 -16.4 -23.2 -26.0 -27.0 -23.0 -19.0

Tax paid -68.4 -89.1 -83.0 -68.0 -68.8 -73.2 -78.7

Dividends and income received 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Gross cash flow 389.4 403.3 372.5 509.0 469.6 493.9 543.1

Capex -268.8 -418.2 -439.6 -228.0 -296.4 -355.7 -373.5

Capex/depreciation ratio 1.7 2.3 1.8 0.8 1.1 1.2 1.2

Sale of fixed assets 7.8 12.6 12.6 14.0 10.0 10.0 10.0

Free cash flow (post capex) 128.4 -2.3 -54.5 295.0 183.2 148.2 179.7

Dividends -39.7 -199.8 -59.8 -66.0 -69.7 -76.9 -84.8

Acquisitions -15.4 -14.2 -126.6 0.0 0.0 0.0 0.0

Disposals 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Equity issues 1.7 1.6 2.7 1.0 -200.0 0.0 0.0

Other (included share treasury purchases) -27.2 -10.1 -11.1 -1.0 -12.0 -12.0 -12.0

B/S Currency adjustment -4.5 -7.5 20.8 1.0 0.0 0.0 0.0

Movement in net debt 43.3 -232.3 -228.5 230.0 -98.5 59.3 82.9

Opening net cash/debt -175.5 -132.2 -364.5 -593.0 -363.0 -461.5 -402.2

Closing net cash/debt -132.2 -364.5 -593.0 -363.0 -461.5 -402.2 -319.3

Net debt/EBITDA 0.3 0.7 0.9 0.6 0.8 0.6 0.5


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1 May 2014



APR – A story of retention Getting comfortable with leverage and contract concentration suggests the

shares are good value. While Libya is material, in our view, there is plenty of

support for further contract renewal and legitimate reasons for slow

payment. We forecast net debt to EBITDA will reduce to 2.1x in 1H14, below

the 2.5x covenant. Buy.

Carving out a different market to Aggreko

Upgrading our rating on Aggreko to Buy is not predicated on the company achieving

growth at the expense of APR. As time goes on we see a greater divergence in the two

businesses. We estimate APR’s fleet could be c.60% turbines by FY15 which appeal to

certain power customer who understand the technology, prefer higher power density or

require lower emissions. APR are also likely to appeal for larger contracts perhaps reflected

in their average contract size being around twice that of Aggreko’s.

Libya – We view renewal as likely

We estimate Libya accounts for 30%-40% of FY14 EBITA, slightly less than some may fear.

We attended a seminar on Libya at the International Institute for Strategic Studies and

takeaways around crumbling infrastructure, a lack of consensual decision making and

security left to manage itself supports a thesis that temporary power is likely to be needed

on an on-going basis, that costs of operating there will be higher and that getting paid

can be a lengthy process. This need for power is supported by the recent 140MW win

there for Aggreko.

Continues to be a story of retention

Unlike Aggreko, the story at APR and achievement of FY14F EPS is really predicated on

retention of contracts. There is no requirement for APR to win new contracts. The current

contract retention of 90% is encouraging as is the fact that renewals are done at the same

pricing suggesting there should not be an erosion in the margin.

Net leverage should fall to c.2x by 1H14

The key negative that has weighed on the shares of late is cash conversion and leverage.

$100m of cash has been received in respect of the Libya contract, c.$60m since year end,

meaning the debtor is now current. This has allowed net debt to reduce to c.$500m (2.1x

net debt to EBITDA) from $556m (3.1x) at year end. This makes our forecast net debt to

EBITDA of 2.1x in 1H14, when the covenant drops to 2.5x, look achievable.

Valuation

We value APR at a discount to Aggreko based on higher contract concentration, less

prudent accounting and their equipment cost disadvantage. This equates to a 1.8x EV/

Invested Capital, which delivers a 1250p price target, at which the shares trade on 20x

FY14F EPS, and Buy recommendation. Downside risks from bad debts and lost contracts.

Table 62: Summary Financial and Valuation (at 777p)


Sales 265.7 308.3 522.5 561.4 606.8

Adjusted PBT 63.3 56.0 121.5 138.7 151.8

FD Adjusted EPS 68.1 59.0 101.8 116.2 127.1

Dividend 15.5 16.5 16.0 16.0 16.0

EV/EBITDA (x) 12.2 9.7 5.5 4.9 4.4

PE (x) 30.4 23.7 12.7 11.1 10.2

Dividend Yield (%) 0.7% 1.2% 1.2% 1.2% 1.2%

Cash Flow Yield (%) -14.2% -24.2% 6.0% 5.9% 4.0%


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Year to Dec (US$m) FY11 FY12 FY13 FY14F FY15F FY16F

APR Group Revenue ($m) 212.8 265.7 308.3 522.5 561.4 606.8

Growth % 68.7% 24.9% 16.0% 69.5% 7.4% 8.1%

Cost of Sales (incl dep & mobilisation) -123.7 -165.0 -197.3 -334.4 -359.3 -388.3

% of sales 58.1% 62.1% 64.0% 64.0% 64.0% 64.0%

Gross Profit 89.1 100.7 111.0 188.1 202.1 218.5

Gross margin (%) 41.9% 37.9% 36.0% 36.0% 36.0% 36.0%

EBITDA 109.2 157.0 176.8 313.3 341.5 371.5

Margin % 51.3% 59.1% 57.3% 60.0% 60.8% 61.2%

Depreciation & mobilisation -48.8 -86.3 -99.0 -160.8 -179.8 -196.8

Sales & General Admin expenses -28.8 -33.5 -33.2 -37.6 -40.4 -43.7

APR Group Operating Profit 60.3 67.2 77.8 150.5 161.7 174.8

Operating margin % 28.3% 25.3% 25.2% 28.8% 28.8% 28.8%

Net finance cost -3.3 -3.9 -21.8 -29.0 -23.0 -23.0

PBT (Adjusted) 57.0 63.3 56.0 121.5 138.7 151.8

Growth % 90.9% 11.2% -11.6% 116.9% 14.2% 9.4%

Tax payable -15.5 -10.1 -7.7 -24.3 -27.7 -30.4

Tax Rate (%) 27.3% 15.9% 13.8% 20.0% 20.0% 20.0%

Profit after tax 41.4 53.2 48.3 97.2 110.9 121.4

Adj EPS (c) 52.9 68.1 59.0 101.8 116.2 127.1

DPS (c) 15.5 15.5 16.5 16.0 16.0 16.0

Weighted avg no. shares (m) 78.2 78.2 81.0 94.5 94.5 94.5



Year to December ($m) FY11 FY12 FY13F FY14F FY15F FY16F

Operating Profit 60.3 67.2 57.9 150.5 161.7 174.8

Depreciation 48.8 86.3 99.0 160.8 179.8 196.8

Share based payments 1.4 3.4 4.4 3.0 3.0 3.0

Profit on asset disposal 0.0 -0.4 2.4 0.0 0.0 0.0

Bad debt provision movement 1.9 -1.5 0.0 5.2 5.6 6.1

Working capital

(Increase) decrease in debtors -18.8 -10.9 -100.3 -65.2 -18.5 -21.6

Increase (decrease) in creditors 8.4 -0.8 48.9 57.9 10.5 12.3

Movement in decommission provisions -0.8 -9.4 -10.7 -2.0 -4.0 -4.0

Net Movement in working capital -11.3 -21.0 -62.1 -9.2 -12.0 -13.3

Other cash flow movements -30.8 -7.0 -17.3 0.0 0.0 0.0

Operating cash inflow 70.4 127.0 84.3 310.3 338.1 367.3

Net interest (expense) -3.4 -2.9 -15.3 -26.1 -23.0 -23.0

Tax paid -17.5 -6.8 -11.2 -21.9 -24.3 -27.7

Other finance (income)/expense 0.0 0.0 0.0 0.0 0.0 0.0

Net operating cash flow 49.5 117.3 57.8 262.3 290.8 316.6

Cash flows from investing activities:

Net capex -349.8 -347.1 -355.6 -187.5 -225.0 -270.0

Increase(decrease) in deposits 0.0 0.0 17.9 0.1 6.9 2.8

Free cash flow -300.3 -229.8 -279.9 74.9 72.7 49.4

Equity dividends 0.0 -16.4 -12.9 -12.0 -12.0 -12.0

Shares issued 400.0 0.0 5.1 0.0 0.0 0.0

Debt issue costs -1.0 -0.8 -11.3 0.0 0.0 0.0

Other items -8.7 0.0 0.0 0.0 0.0 0.0

Net debt movement 90.0 -247.0 -372.1 62.9 60.7 37.4

Opening net cash(debt) -26.9 63.1 -184.0 -556.1 -493.2 -432.5

Closing net (debt) cash 63.1 -184.0 -556.1 -493.2 -432.5 -395.1


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Bunzl

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1 May 2014



Bunzl – Upgrade to Hold We did not appreciate the self-funding compounding story in Bunzl. We now

recognise the cash flow, dividend and M&A appeal as well as dig a little

deeper into trends in US and UK coffee and convenience that could prove a

useful revenue driver, beyond a GDP recovery, for c.30% of group revenues.

On 19x FY15F EPS, however, this looks reflected. Hold

We did not appreciate the power of the Bunzl model

We did not sufficiently appreciate the self-funding compounding story within Bunzl: 1)

The elevated acquisition spend necessitated by the high multiple was delivered,

acquisitions added 10.3% to growth in FY13; 2) Material headwinds from pricing have not

emerged; 3) The Aussie and Brazil exposure has not been a drag. In the last three years

organic growth has averaged 5% and acquired growth 22% in RoW.

At your convenience - North America

We estimate North American grocery accounts for 22% of group revenues. In 2013, the

top 10 fast growing convenience chains added 884 stores between them which

represented growth on average of 18%. We believe that a greater number of smaller

stores necessarily increases the available market for Bunzl due to: 1) The logistics of

organising a larger network, and; 2) With more urban locations, there are likely to be

smaller storage facilities, increasing the scope and frequency of Bunzl’s services.

Coffee and Convenience – The UK & Ireland

As with North America, the 2013-2020 growth CAGR in convenience outlets across the

UK’s top 7 multiples should prove to be a useful tailwind to growth. In addition we

forecast a 6% 2013-2018 CAGR in the number of branded coffee shops and a 10% CAGR

in coffee shop sales over the same time frame. Grocery and food service account for 36%

of UK revenues. We upgrade FY15F EPS by 4%, placing us 2% ahead of consensus.

Emerging markets opening up

Beyond South America, as infrastructure matures, Asia will become a market where the

Bunzl model starts to work. Bunzl first started exploring South America in 2006, two years

before their first acquisition in 2008. We understand that Bunzl have just begun a similar

exercise in Asia, and while there is no certainty, a similar pattern would suggest a whole

new region within our forecast horizon. In addition, Bunzl has broad based appeal, with

twenty years of uninterrupted dividend growth totalling a CAGR of 10.5% combined with

a ten year average operating cash flow conversion of close to 100%.

Valuation - Upgrade to Hold

Further multiple expansion here looks tough in the absence of meaningful upgrades from

a much improved underlying growth rate or elevated M&A conversion. We think the 20x

peak multiple is too much of a stretch at this stage and so we apply an 18x PE multiple to

2015F EPS which drives a 1600p price target and a Hold recommendation.

Table 65: Bunzl – Summary Financials and Valuation (at 1,652p)


Sales 5359.2 6097.7 6185.3 6463.0 6769.3

Adjusted PBT 318.4 372.2 382.1 409.8 433.7

FD Adjusted EPS 70.2 81.4 83.0 88.5 93.1

Dividend 28.2 32.4 33.2 35.4 37.2

EV/EBITDA (x) 11.1 11.7 13.9 12.8 11.9

PE (x) 14.6 16.0 19.9 18.7 17.7

Dividend Yield (%) 2.8% 2.5% 2.0% 2.1% 2.3%

FCF Yield (%) 7.0% 7.1% 5.3% 5.4% 5.7%


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A Powerful Re-rating Over the last two years earnings momentum has been relatively muted despite high levels

of M&A and as a result the re-rating has been fundamental in the share price growth:

Chart 113: Consensus FY14 EPS Estimates

Source: Bloomberg

Chart 114: Prospective PE (x)

Source: Factset

We think the company has done a good job of convincing the market that not only does it

consistently deliver results that are generally in line or better than expectation but also

that there is future organic and acquired growth and margins can improve steadily.

Underappreciated, by us We did not sufficiently appreciate the self-funding compounding story within Bunzl. This

meant that our two year negative view on the stock has been wrong, mainly for the

following reasons:

1) M&A has been a powerful driver of organic growth in future years and a margin

benefit. Acquisitions added 10.3% to reported growth in FY13.

2) The headwinds we anticipated from pricing have not emerged in a meaningful

way.

Chart 115: Input pricing

Source: Factset

3) Despite the key RoW geographies being Australia and Brazil, whose economics

have slowed materially in recent times, the RoW segment has continued to

experience strong growth. In the last three years organic growth has averaged

5% and acquired growth 22%.

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Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014

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1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Pulp Resin (RHS)

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North America – Focus on Grocery North America is a significant region for Bunzl, accounting for 55% of revenue, but with

6.3% margin, 48% of group EBITA. Across the group North America has the largest

segment in grocery:

Chart 116: North America - Revenue by sector

Source: Company Data - March 2012 Investor Day

We anticipate that grocery could now be a slightly lower proportion as other areas have

grown faster via acquisition, although even at c.£1.4bn ($2.2bn) of revenues, it is a

meaningful proportion. The Redistribution segment is essentially food service (coffee

shops, restaurants, hotels) whereby, although Bunzl have a direct relationship, they

service them through food distributors.

North America – Convenient Growth Bunzl have a significant position in the grocery segment in the US, indeed of their top 20

customers we estimate around 15 of those would be US grocers and as a reminder the

top 40 customers represent 30% of group revenues. Our consumer goods team recently

published a note, looking in some detail at some interesting changes in the landscape of

US food retailing. We believe that a greater number of smaller stores necessarily increases

the available market for Bunzl due to: 1) The logistics of organising a larger network, and;

2) With more urban locations, there are likely to be smaller storage facilities, increasing

the scope and frequency of Bunzl’s services:

Chart 117: 2013 growth in outlets, top 10

Source: CS News

Grocery, 40%

Redistribution, 28%

Food Processor,

13%

Convenience Stores,

6%

Non-food Retail, 6%

Other, 6%

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The above chart shows in 2013, that the top 10 fast growing chains added 884 stores

between them which represented growth on average of 18%. Convenience store news

has an upbeat outlook as they anticipate a recovery in GDP and employment more

generally as well as a recovery from individual product lines.

EU and UK to Stage a Recovery While c.75% of group revenues derived from resilient sectors such as food service,

grocery, cleaning & hygiene and healthcare, the company’s organic revenue growth

oscillates with less volatility than GDP.

Chart 118: UK & Ireland – Revenue by Sector

Source: Company Data – March 2012 Investor Day

Chart 119: Continental Europe – Revenue by Sector

Source: Company Data – March 2012 Investor Day

Specifically, 72% of revenues in the UK & Ireland and 70% in Continental Europe would

be considered resilient. Despite this, the divisions do observe cyclicality as seen below:

Chart 120: Organic revenue growth (%)


We anticipate that as GDP picks up that the organic growth should return to 3%-4% and

perhaps beyond. Here we consider whether there could be underlying trends in the

market that support levels of growth for Bunzl that are above ‘market’ growth rates as the

infrastructure and space requirements necessitate a more sophisticated method of

distribution, procurement and management of non-consumable products.

Food service, 24%

Healthcare, 19%

Cleaning & Hygiene,

17%

Non-food retail,

12%

Grocery, 12%

Safety, 11%

Other, 5%

Cleaning & Hygiene,

31%

Food service, 20%Safety, 17%

Grocery, 12%

Non-food retail, 9%

Healthcare, 7%

Other, 4%

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-6

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-2

0

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2008A 2009A 2010A 2011A 2012 2013 2014F 2015F 2016F

Continental Europe UK & Ireland

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1 May 2014



UK – Coffee and Convenience In the UK we want to focus on Food Service and Grocery, representing c.36% of revenues.

Grocery predominantly deals with the major super markets (Waitrose, Morrison,

Sainburys) while food service deals with coffee shops (Costa Coffee and Café Nero),

hotels, restaurants etc. Products supplied are essentially anything, non-consumable,

required to run one of these businesses, from till tape, to packaging, to bags, to cleaning

and hygiene supplies.

Grocery Convenience Drive As with North America, we think that the drive towards convenience is helpful with a

greater number of smaller stores in urban areas, requiring more logistics management.

Below we summarise the roll out plans for convenience for the major supermarkets, who

have made no secret of their desire to redeploy capital here:

Chart 121: Convenience Store Growth CAGR 2013-2020


According to IGD, the total number of convenience stores in the UK was 49,207 in 2013

(12mths to April 2013), marginally up +0.1% from 2012. Whilst overall store growth in

the convenience segment is low, there is a robust drive from the Retail multiples to

increase the number of stores, which is being offset by a low-single digit decline in

unaffiliated independents (who would be less likely to use Bunzl) and petrol forecourts.

Sales value from the segment increased 4.9% yoy to £35.6bn over the same time period.

IGD estimates the convenience segment will grow 30% to £46.2bn in value terms by

2018 (a 7% CAGR).

In 2011, Morrisons CEO, Dalton Philips, commented that “there are 48,000 convenience

stores.. the multiples only have 4-5%. It’s consolidating at a rate”. In our own analysis, we

have expanded the definition beyond the pure Retail multiples to include each of the top-

7 UK Retailers’ – we estimate that this group currently owns c.11% of the total

convenience market – c. 5,500 outlets. We have analysed each company’s convenience

strategy in turn to conclude that the top 7 retailers look set to grow their store count at a

15% CAGR to 2020 (to c.11,000), consolidating to 22% of the total convenience market.

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40%

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1 May 2014



Chart 122: Projected Consolidation of Convenience Stores

Source: Jefferies estimates, IGD

Coffee Shop Expansion Aside from the supermarkets driving growth in the UK convenience food sector, another

useful driver for Bunzl could be the rapid growth of the coffee shop. In this section we

have performed some detailed analysis of the UK coffee shop market – a market which is

growing robustly at a 6% CAGR in store number and 10% CAGR by retail sales value. With

regard to Bunzl, we estimate that two of their larger customers, Caffe Nero and Costa,

have c.40% share of the UK’s branded market.

Chart 123: UK Coffee Shop Growth

Source: Jefferies estimates, Allegra Strategies

The total number of UK coffee shops are growing 6% pa and 10% pa by retail sales. The

total UK coffee shop market is estimated at 16,501 outlets according to Allegra Strategies

(Project Café 2013 UK report), with sales +6.4% yoy to £6.2bn and +15% since 2011. The

branded coffee chain segment within that accounts for 5,531 stores ( 34%) and revenue

of £2.6bn (42%), with independents and non-specialists (pubs, fast food restaurants,

supermarkets etc) accounting for £3.6bn.

90% 90% 89% 88% 86% 85% 83% 81% 79% 78%

10% 10% 11% 12% 14% 15% 17% 19% 21% 22%

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60%

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2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

Top 7 Retailers (Tesco, Co-Op, Sainburys, Morrisons, M&S, Waitrose, Asda)

Other Convenience Stores

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2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Independents Non-Specialists (Pubs, restaurants)

Branded Total

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1 May 2014



Chart 124: UK Coffee Shop Retail Sales and YOY Growth (RHS)

Source: Jefferies estimates, Allegra Strategies

We would highlight that the most readily addressable market for Bunzl is the branded

coffee shop chains, which allows them to tap into multiple stores with homogenous

products. Branded chain coffee shops are expected to increase from 5,531 stores in 2013

(33.5% of the market) to 7,380 by 2018 (36% of the market) – a 33% increase in total at a

6% CAGR. Independents are more likely to self-fulfil by using other suppliers such as cash

and carry.

Developing Future Markets The RoW segment has been fundamental to maintaining reasonable growth while

European and American growth slowed. The focus has been on this area in terms of M&A

and we expect this can continue to deliver strong growth in future.

Chart 125: Number of countries


There is clearly more to go for in the RoW segment where the main geographies are

essentially Australia & New Zealand (60% of RoW revenues) and South America (40%), of

which the main areas are Brazil, Chile and Mexico. Historically when Bunzl enters a new

country the growth, organic and M&A, is in excess of 20%. We can see that the bias of

acquisitions has shifted towards the RoW segment:

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Independents and non-specialists (£m) Branded Coffee Shop Sales (£m)

Growth Independents and non-specialists Growth Branded Coffee Shop Sales

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1 May 2014



Chart 126: Annualised Acquisition Revenues by Division


Asia within the Next Three Years….. Beyond South America we also anticipate that in the medium term, as infrastructure

matures, Asia will become a market whereby the Bunzl model starts to work. Bunzl first

started exploring South America in 2006 and did not make their first acquisition until

2008. We understand that Bunzl have just hired someone to begin a similar exercise in

Asia, clearly there is no certainty, but were a similar pattern repeated and a whole new

region could open up within our forecast horizon.

We believe that China is still at the early stage of urbanization, which provides ample

opportunity for the next tide of consumption growth. Jefferies house view is that total

urban population will increase from 691mn people in 2011 to 914m people in 2025, at a

CAGR of 2%. McKinsey expects China to have 221 cities with more than one million

residents, with 23 cities having more than five million people. Migration could drive

almost 70% of urban population growth from 2005 to 2025.

Fundamental Appeal Bunzl generates steady cash generative profitability, indeed in the five years 2008-13 it has

generated just shy of £1,200m of FCF (c.50% of market cap in 2009), spending £375m

(31%) of this on dividends and £813m (69%) on acquisitions.

Chart 127: 20 Years of Dividend Growth

Source: Factset

Chart 128: High Cash Conversion


* operating cash flow and profit pre amortisation and acquisition related costs

Twenty years of uninterrupted dividend growth totalling a CAGR of 10.5% combined with

a ten year average operating cash flow conversion of close to 100% are compelling.

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North America CE UK RoW

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Cash conversion 10 yr average

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1 May 2014



At the same time Bunzl are pursuing acquisitions in certain territories in higher margin

business such as safety or those that expand their own brand product range which tends

to be higher margin than the branded products.

One limitation of the above analysis in terms of the customer base is that Bunzl have a

huge number of customers, while the accounts state that no customer accounts for more

than 10% of group revenue we imagine that few are more than even 5%. As a result any

changes in the landscape are unlikely to move the dial in a materially noticeable way but

will provide a useful tailwind to organic growth.

Margins – Travelling Back Margins are depressed by deflation in input pricing, lower organic growth, investments

and acquisitions. Specifically from 2005 we saw margins hurt by acquisitions and the UK

and Ireland vending business, which was sold in 2011.

Chart 129: Group Operating Margin


We see a number of tailwinds to margin progression from here: 1) The margins in

acquired businesses will, generally, be improving; 2) Price increases are being put

through; 3) There will be some positive gearing impacts where capacity can absorb the

extra work; 4) On-going rationalisation of costs such as warehousing, and 5) Higher

margin geographies, such as RoW, becoming a bigger part of the pie.

We understand that there is some capacity in the business, although this will vary by

location and is hard to quantify. The main bottleneck will be in warehousing, as this

requires a step increase in cost and time to implement, whereas vehicle and headcount

costs are less of an issue.

Valuation – Upgrade to Hold Unfortunately it is hard to see why the multiple can expand further from here in the

absence of meaningful upgrades or a much improved growth rate. We think the 20x peak

multiple is too much of a stretch at this stage and so we apply an 18x PE multiple to

2015F EPS which drives a 1550p price target and a Hold recommendation.

6.0%

6.1%

6.2%

6.3%

6.4%

6.5%

6.6%

6.7%

6.8%

6.9%

7.0%

7.1%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

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1 May 2014



Upgrading FY15F EPS by 4% We make adjustments for the 6 acquisitions made year to date, contributing c.£70m on

our estimates. We also slightly increase organic assumptions in the UK and Ireland as GDP

data continues to improve. Finally, we increase margins in all territories aside from RoW as

acquisitions develop and we see some benefit from a better top line. The net result is

upgrades to EPS of 2% and 4% in FY14 and FY15 respectively:


FY14F FY15F

£m Old New % chg Old New % chg

Sales

North America 3,349 3,366 0.5% 3,490 3,507 0.5%

UK & Ireland 1,045 1,045 0.0% 1,076 1,081 0.5%

Continental Europe 1,182 1,205 1.9% 1,229 1,259 2.4%

Rest of the World 543 570 4.8% 576 615 6.8%

Group Revenue 6,119 6,185 1.1% 6,371 6,463 1.4%

Organic revenue growth (%)

North America 3.5 3.5 0.0 4.2 4.2 0.0

UK & Ireland 1.5 1.5 0.0 3.0 3.5 0.5

Continental Europe 3.0 3.0 0.0 4.0 4.0 0.0

Rest of the World 5.0 5.0 0.0 6.0 6.0 0.0

Organic Group Revenue Growth 3.2 3.2 0.0 4.1 4.2 0.1

Acquisitions 3.0 4.1 1.1 0.0 0.3 0.3

Currency -5.8 -5.8 0.0 0.0 0.0 0.0

Reported Group Revenue 0.3 1.4 1.1 4.1 4.5 0.4

Operating Profit

North America 210.3 211.4 0.5% 219.1 224.5 2.4%

UK & Ireland 73.4 73.4 0.0% 75.6 76.8 1.5%

Continental Europe 99.6 101.5 1.9% 103.6 107.0 3.4%

Rest of the World 52.9 55.4 4.8% 56.1 59.9 6.8%

Trading Profit 436.2 441.8 1.3% 454.4 468.2 3.0%

Central Costs - 19.7 - 19.7 0.0% - 20.4 - 20.4 0.0%

Group Operating Profit 416.5 422.1 1.3% 434.0 447.8 3.2%

Operating margins

North America 6.3% 6.3% 0.0% 6.3% 6.4% 0.1%

UK & Ireland 7.0% 7.0% 0.0% 7.0% 7.1% 0.1%

Continental Europe 8.4% 8.4% 0.0% 8.4% 8.5% 0.1%

Rest of the World 9.7% 9.7% 0.0% 9.7% 9.7% 0.0%

Trading Margins 7.1% 7.1% 0.0% 7.1% 7.2% 0.1%

Group Margins 6.8% 6.8% 0.0% 6.8% 6.9% 0.1%

Adj PBT 376.5 382.1 1.5% 396.0 409.8 3.5%

Adj EPS (p) 81.8 83.0 1.5% 85.5 88.5 3.5%

DPS (p) 32.7 33.2 1.5% 34.2 35.4 3.5%

Period-end net funds - 688.5 - 752.1 9.2% - 514.9 - 574.4 11.6%


We are 2%-3% ahead of consensus

Table 67: JEFe versus consensus, EPS adj (p)

FY14 FY15 FY16

Average 82.0 86.5 90.5

Hi 83.7 89.9 95.6

Low 80.3 82.5 85.5

JEFe 83.0 88.5 93.1

Variance 1.2% 2.3% 2.8%


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1 May 2014



Summary Financial Data

Chart 130: Revenue by Division


Chart 131: EBITA by Division


Chart 132: Margin by Division


Income Statement


FY10A FY11A FY12A FY13F FY14F FY15F FY16F

North America 2621 2728 2906 3402 3366 3507 3665

UK & Ireland 1007 997 992 1019 1045 1081 1130

Continental Europe 936 1067 1079 1152 1205 1259 1316

Rest of the World 265 318 382 526 570 615 658

Group revenue 4830 5110 5359 6098 6185 6463 6769

Organic revenue growth (%)

North America 5.0 6.2 3.0 2.8 3.5 4.2 4.5

UK & Ireland 0.5 3.0 1.0 1.5 3.0 4.0 4.5

Continental Europe -5.0 -1.0 2.0 -0.5 1.5 3.5 4.5

Rest of the World 4.0 4.0 8.0 3.5 5.0 6.0 7.0

Group revenue 0.8 4.0 2.6 2.0 3.2 4.2 4.7

Adjusted operating profit

North America 160.2 169.2 184.6 213.6 211.4 224.5 234.6

UK & Ireland 59.5 60.2 65.2 71.6 73.4 76.8 80.2

Continental Europe 79.9 95.6 87.5 97.0 101.5 107.0 111.9

Rest of the World 23.8 28.4 33.2 51.2 55.4 59.9 64.1

Trading profit 323.4 353.4 370.5 433.4 441.8 468.2 490.7

Central costs -16.7 -17.7 -18.1 -19.0 -19.7 -20.4 -21.1

Group operating profit 306.7 335.7 352.4 414.4 422.1 447.8 469.7

Adjusted operating margins (%)

North America 6.1 6.2 6.4 6.3 6.3 6.4 6.4

UK & Ireland 5.9 6.0 6.6 7.0 7.0 7.1 7.1

Continental Europe 8.5 9.0 8.1 8.4 8.4 8.5 8.5

Rest of the World 9.0 8.9 8.7 9.7 9.7 9.7 9.7

Trading margin 6.7 6.9 6.9 7.1 7.1 7.2 7.2

Group margin 6.4 6.6 6.6 6.8 6.8 6.9 6.9

Intangible amortisation -51.0 -56.4 -58.6 -82.3 -88.0 -88.0 -88.0

Net finance charge -30.5 -29.6 -34.0 -42.2 -40.0 -38.0 -36.0

Adjusted PBT 276.2 306.1 318.4 372.2 382.1 409.8 433.7

Growth (%) 7.1 10.8 4.0 16.9 2.7 7.3 5.8

Adjusted income tax -80.1 -84.2 -88.2 -103.8 -106.6 -114.3 -120.9

Adjusted tax rate (%) 29.0 27.5 27.7 27.9 27.9 27.9 27.9

Adjusted post-tax profit 196.1 221.9 230.2 268.4 275.5 295.5 312.7

Diluted Continuing adjusted EPS (p) 60.2 68.1 70.2 81.4 83.0 88.5 93.1


North America

55%

Continental Europe

19%

UK & Ireland

17%

RoW

9%

North America

48%

Continental Europe

23%

UK & Ireland

17%

RoW

12%

6.3%

8.4%

7.0%

9.7%

0%

2%

4%

6%

8%

10%

12%

North America Continental Europe UK & Ireland RoW

Business Services


1 May 2014



Cash Flow Statement


FY10A FY11A FY12A FY13F FY14F FY15F FY16F

Adjusted operating profit 306.7 335.7 352.4 414.4 422.1 447.8 469.7

Depreciation 25.5 25.4 23.0 25.9 26.3 27.5 28.8

Non-acquisition related amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBITDA 332.2 361.1 375.4 440.3 448.4 475.3 498.4

Working capital movement -12.7 31.4 -22.4 16.8 -7.9 -19.4 -21.4

Share based payments 4.7 5.3 5.7 6.2 6.5 6.5 6.5

Provisions and pensions -19.1 -10.4 -14.2 -15.1 -10.0 -10.0 -10.0

Other 2.5 2.7 4.6 -1.8 0.0 0.0 0.0

Operating cash flow 307.6 390.1 349.1 446.4 437.0 452.3 473.5

Net interest -31.2 -30.6 -30.6 -39.0 -40.0 -38.0 -36.0

Tax paid -79.7 -63.4 -63.6 -80.3 -84.3 -92.2 -99.1

Gross cash flow 196.7 296.1 254.9 327.1 312.7 322.1 338.4

Purchase of PP&E -23.4 -22.6 -23.0 -26.5 -25.7 -26.8 -28.1

Sale of PP&E 1.3 1.7 2.8 1.2 0.0 0.0 0.0

Net capex -22.1 -20.9 -20.2 -25.3 -25.7 -26.8 -28.1

Free cash flow 174.6 275.2 234.7 301.8 287.0 295.3 310.3

Dividends -66.1 -68.9 -85.7 -91.8 -109.6 -117.6 -123.7

Free cash flow post dividends 108.5 206.3 149.0 210.0 177.4 177.7 186.6

Acquisitions -110.6 -161.3 -254.7 -279.9 -80.0 0.0 0.0

Business disposals 0.0 30.6 0.0 0.0 0.0 0.0 0.0

Net proceeds/(purchase) employee shares 11.8 -12.6 -3.7 -43.3 0.0 0.0 0.0

Realised losses on foreign exchange

contracts

5.3 -0.2 -0.9 -9.7 0.0 0.0 0.0

Currency translation -15.0 1.1 25.1 11.5 0.0 0.0 0.0

Movement in net debt 0.0 63.9 -85.2 -111.4 97.4 177.7 186.6

Opening net cash/(debt) -716.8 -716.8 -652.9 -738.1 -849.5 -752.1 -574.4

Closing net cash/(debt) -716.8 -652.9 -738.1 -849.5 -752.1 -574.4 -387.8


Business Services


1 May 2014



Long Views

Business Services


1 May 2014



Long Term Financial Model Drivers

EPS CAGR 4.6%

FY15 Organic Revenue Growth 4.2%

FY14 Acquisition Contribution 4.1%

Operating Margin Expansion 0.1%

Other Considerations

Bunzl can be seen as an outsourcer as

much as a distributor. They essentially

take control of the procurement function

of nuisance items for their customers. In

some ways, they can, therefore be viewed

as an outsourcer. However, we view Bunzl

as a distributor and select a peer group as

such.

Prospective PE (x)

Source: FactSet

Bunzl allows customers to outsource the procurement of nuisance items, simplifying the

process and freeing up working capital. End markets are diverse but key areas are grocery,

redistribution, non-food retail and construction

Interims August 2014.

Announcement of acquisitions of scale,

especially in a new geography or product

area

Improvements in resin and pulp prices

A greater shift into own label which is

generally higher margin

Improving conditions in Continental

Europe and UK & Ireland

Catalysts

Target Investment Thesis

FY15 group revenue growth of 4.5% of

which 4.2% is organic and 0.3%.

Margins up 10 bps to 6.9%

No unannounced acquisitions baked into

projections

2015 EPS: 88.5p; Target Multiple: 18x;

Target Price 1,600p

Upside Scenario

Organic growth increased to 5.3%

5.0% from acquisitions

Margin flat up to 7.0%

2015 EPS: 95.2; Target Multiple: 20x;

Target Price: 1,900p

Downside Scenario

Organic revenue growth dropped to

1.8%.

Operating Margin reduced to 6.6% from

6.7% in the base case

No acquisitions.

2015 EPS: 83.7p; Target Multiple: 13x

Target Price: 1,250p

Long Term Analysis

Scenarios

Peer Group Prospective PEs (x)

Source: FactSet

Peer Group Prospective EV/EBITDA (x)

Source: FactSet

Recommendation / Price Target

Ticker Rec. PT

BNZL Hold 1600

BRAM Hold 460

DPLM Buy 750

ECM Hold 250

PFL Buy 250

Company Description

THE LO

NG

VIE

W

Peer Group

Bunzl

Hold: 1600p Price Target

Business Services


1 May 2014




LT Earnings CAGR 29%

Organic Revenue Growth 25%

Acquisition Contribution 6%



Three key drivers of global electricity

demand: 1) Population growth 2)

Economic growth and 3) Urbanisation. A

history of underinvestment in electricity

infrastructure globally has led to an

increasing gulf between electricity demand

and supply.

Prospective P/E (x)

Source: FactSet

APR Energy is the global number two rental provider of temporary power generation

equipment, typically fuelled by diesel or gas. At FY13, it had a rental fleet of 1.9GW

(continuous basis). The business was founded in 2002 as part of Alstom, demerged from

Alstom in 2004, rebranded as APR Energy in 2008 and listed on AIM in 2011. APR are

differentiated from Aggreko as they have moved away from diesel and gas engines towards

dual fuel turbines and try to focus on larger contracts.

APR Energy IMS 20 May 2014

Aggreko interims 5 August 2014

Contract news flow: APR Energy

announce any new individual contract

over 50 MW

Step up in capex

Catalysts


FY13-FY16 revenue growth CAGR of

25%. Utilisation at 74%.

No acquisitions assumed in

projections

No special dividend(s) or share

buybacks.

2015 EPS: US$116c, Target P/E

multiple: 18x; Target Price 1,250p.

Upside Scenario




projections


buybacks.


multiple: 20x; Target Price 1,450p

Downside Scenario




projections


buybacks.


multiple: 15x; Target Price 900p

Long Term Analysis

Scenarios

Prospective EV/EBITDA (x)

Source: FactSet

Prospective PE (x)

Source: FactSet


Ticker Rec. PT

APR LN Buy 1,250p

AGK LN Buy 1,800p

AHT LN Buy 1,050p

Company Description

THE LO

NG

VIE

W

Peer Group

APR Energy plc

Buy: 1,250p Price Target

Business Services


1 May 2014




LT Earnings CAGR 0.3%

Organic Revenue Growth -1%


Operating Margin Expansion -1.7%


Three key drivers of global electricity

demand: 1) Population growth 2)

Economic growth and 3) Urbanisation. A

history of underinvestment in electricity

infrastructure globally has led to an

increasing gulf between electricity demand

and supply. Oxford Economics estimate

that the shortfall in global electricity

generating capacity will increase from

current 130 GW in 2015 to 230 GW by

2015 (100GW pa increase).

Prospective PE (x)

Source: FactSet

Aggreko is the leading global rental provider of temporary power generation equipment,

typically fuelled by diesel or gas. At FY13, it had a rental fleet of 9.6GW (prime basis). The

business was founded in the Netherlands in 1962 and listed on the London Stock Exchange

in 1997. Unlike most of its equipment rental peers, Aggreko procurement and

manufacture its rental equipment in-house, with an estimated LFL capital cost of 20%-60%

less per MW than peers. Aggreko report under two divisions: International Power Projects

(IPP, c60% of operating profit), which principally trades with emerging market

government & utility customers. Local business (50% of FY14F operating profit). Since

2006, Aggreko has completed 5 acquisitions of smaller peers, bolstering its global market

leadership position.

APR Energy IMS 20 May 2014

Aggreko interims 5 August 2014

Individual contract announcements

(generally more than 100MW)

Step up in capex

Catalysts


FY13-FY16 rev growth of 3% CAGR,

956MW of wins in 2014. Rev growth of 5%

and EBITA margin 20.5%.

No additional acquisitions assumed in

projections (following 5 acquisitions in

FY06-FY13)

No special dividend(s) or share buybacks,

following 55p special dividend in FY11 and

75p in FY13.

2015 EPS: 84.7p, EBITDA £625m & PBT

£317m; Target PE multiple: 21.0x; Target

Price 1,800p.

Upside Scenario

Elevated win rate, 1100MW of wins in

2014. FY15 revenue growth +3% vs base

case. EBITA margin to 22%.



FY06-FY12) or special dividends.


£340m; Target PE multiple: 23x; Target

Price 2,050p.

Downside Scenario

Reduced win rate, 500MW of wins in

2014. FY15 Revenue growth -3% vs base

case. EBITA margin to 20.4%.



FY06-FY12) or special dividends.


£299m; Target PE multiple: 16.0x; Target

Price 1,300p.

Long Term Analysis

Scenarios

Prospective EV/EBITDA (x)

Source: FactSet

Prospective PE (x)

Source: FactSet


Ticker Rec. PT

AGK LN Buy 1,800p

APR LN Buy 1,250p

AHT LN Buy 1,050p

Company Description

THE LO

NG

VIE

W

Peer Group

Aggreko plc

Buy: 1,800 Price Target

Business Services


1 May 2014




LT Earnings CAGR 9%


Acquisition Contribution <1%



SGS is the grandaddy of the testing world,

with hands in all the pots. The company’s

successful execution on the 2014 plan and

the costs surrounding the plan will be the

swing factor vis-a-vis the comps over the

next 12 months.

Prospective PE (x)

Source: FactSet

SGS is the largest global inspection, testing, verification and certification player. Through

its international network of laboratories, the company inspects, samples and analyses raw

materials, food, crops and consumer goods, as well as certifying products and machinery

for compliance with local and international standards.

Intertek IMS 16 May 2014

SGS interims 17 July 2014

BV interims 27 August 2014

Eurofins 1Q IMS 6 May 2014

Testing legislation

Acquisitions

Catalysts


Organic growth of c7.5% in FY15-16

Margins of 17.0% in FY14 rising to 17.7%

in FY16.

No acquisitions baked into projections.

2015 EPS: CHF101; Target Multiple: 24x;

Target Price CHF2450

Upside Scenario

Organic growth increased 2% to 9%.

Operating Margin increases as this growth

drives operating leverage, margins

increased to 17.8%.

3% from acquisitions.

2015 EPS: CHF107; Target Multiple: 26x;

Target Price: CHF2800

Downside Scenario

Organic growth moderated to 4%.

Margins stay at FY14 17.0%.

No further acquisitions.

2015 EPS: CHF96; Target Multiple: 20x

Target Price: CHF1900

Long Term Analysis

Scenarios

Group PEs (x)

Source: FactSet

Group FY13-16F EPS CAGR (%)



Ticker Rec. PT

SGSN VX Buy CHF2450

BVI FP Buy €25.5

ERF FP Buy €250

ITRK LN Buy 3650p

Company Description

THE LO

NG

VIE

W

Peer Group

SGS

Buy: CHF2450 Price Target

Business Services


1 May 2014




LT Earnings CAGR 9%





Intertek has the fastest potential growth

potential and largest margin upside of the

larger testing players given its end-market

exposures and smaller size. Last year’s

Moody acquisition has proved very wise.

Prospective PE (x)

Source: FactSet

Intertek is the third largest quoted player in the technical inspection industry. The

company specializes in the inspection, analysis, audit and certification of products

(commodities, consumer good, etc.) and management systems (ISO standards, etc.) in

relation to regulatory or voluntary standards. Intertek employs over 20,000 people and has

operations in over 100 countries.



Bureau Veritas interims 27 August 2014


Acquisitions

Testing legislation

Catalysts


Organic growth of c4-5% in FY14-16F.

Margins of 15.9% in FY14F recover to

16.8% by FY16F.



Target Price 3650p

Upside Scenario

Organic growth edged up to 9% in FY15.


drives operating leverage, to 17.0%.

3% acquisition growth.


Target Price: 4150p

Downside Scenario

Organic growth at 4.0% in FY15, inline

with FY14F.

Margins drop to 16.0%.


2014 EPS: 154.5p; Target Multiple: 18x

Target Price: 2800p

Long Term Analysis

Scenarios

Peer Group - Prospective PE (x)

Source: FactSet

FY13-16F EPS CAGR (%)



Ticker Rec. PT

ITRK LN Buy 3650p

BVI FP Buy €25.5

ERF FP Buy €250

SGSN VX Buy CHF2450

Company Description

THE LO

NG

VIE

W

Peer Group

Intertek

Buy: 3650p Price Target

Business Services


1 May 2014






FY14 Acquisition Contribution 6.5%



Despite progress on restructuring and a

business not significantly different from

industry majors, Eurofins’ margin remains

below the industry standard. Getting that

margin to normalised levels is a key driver

of the story.

Prospective PE (x)

Source: FactSet

Eurofins Scientific operates over 150 laboratories in 30 countries which provide analytical

testing services to the pharmaceutical, food and environmental sectors. The company is

the global leader in food testing, the European leader in environmental testing and in the

top 10 globally in pharmaceutical development services.


Acquisitions

Legislation



Bureau Veritas 27 August 2014

Catalysts


Organic revenue growth of 7.0% in FY14,

increasing to 7.5% in FY15.

1.1% Adjusted EBITDA expansion to FY15,

from 17.9% in FY13 to 19.0%.


2015 EPS: €9.00; Target Multiple: 28x;

Target Price €250

Upside Scenario

Organic growth increased to 8% with total

growth of 15%

Adjusted EBITDA of 19.5% by FY15.


Target Price: €310

Downside Scenario

Organic revenue growth of 4% in FY14

with 2% from M&A.

Adjusted EBITDA margin of 17.9% in

FY14, in line with FY12.

2015 EPS: €7.98; Target Multiple: 24x

Target Price: €190

Long Term Analysis

Scenarios

Peer Group Prospective PEs (x)

Source: FactSet

FY13-16F EPS CAGR (%)



Ticker Rec. PT

ERF FP Buy €250

BVI FP Buy €25.5

ITRK LN Buy 3650p

SGSN VX Buy CHF2450

Company Description

THE LO

NG

VIE

W

Peer Group

Eurofins Scientific

Buy: €250 Price Target

Business Services


1 May 2014





Organic Revenue Growth 7.4%

Acquisition Contribution 5.4%



We consider Bureau Veritas to have more

cyclical market exposure as well as a

penchant for overpriced acquisitions vis-à-

vis the other testing firms.

Prospective PE (x)

Source: FactSet

Bureau Veritas is a leading international testing and certification group. The company

specializes in the inspection, analysis, audit, and certification of products, infrastructure

(buildings, industrial sites, equipment, ships, etc.) and management systems (ISO

standards) in relation to regulatory or voluntary standards.



Bureau Veritas interims 27 August 2014


A rebound in commodities

Testing legislation

Catalysts


Organic revenue growth of 4-8% in all

years.

Margin expansion from 16.7% in FY13 to

17.7% by FY16.



Target Price €25.50

Upside Scenario

8% FY15 organic revenue growth.


drives operating leverage, 17.7% in FY15.

2% from acquisitions.


Target Price: €28.50

Downside Scenario

Organic revenue at 5%.

Margins at 17.0%.


2015 EPS: €1.07; Target Multiple: 18x

Target Price: €19.50

Long Term Analysis

Scenarios

Peer Group - Prospective PE (x)

Source: FactSet

Peer Group – FY13-16F EPS CAGR (%)



Ticker Rec. PT

BVI FP Buy €25.50

ERF FP Buy €250

ITRK LN Buy 3650p

SGSN VX Buy CHF2450

Company Description

THE LO

NG

VIE

W

Peer Group

Bureau Veritas

Buy: €25.50 Price Target

Business Services


1 May 2014







Operating Margin Expansion 60bp


In October 2012, Experian agreed to

purchase 29.6% of Serasa, Brazil’s largest

Credit Bureau for US$1.5bn, taking its

ownership to 99.6%

Prospective PE Multiple (x)

Source: Bloomberg, Jefferies estimates

Experian is the global leader in credit information services. It maintains databases of credit

and consumer information, which it sells to clients in the financial services, retail,

automotive and telecom industries. It also helps consumers manage their credit

relationships and minimise the risk of identity theft. Experian has proprietary software

packages that assist in making lending decisions (eg scoring) or reducing fraud.

Geographically, in FY12, North America (47% of revenues) and the UK (18% of revenues)

were its largest markets. Globally, over 21% of Experian group revenues derive from Latin

America (Serasa in Brazil, Computec in Colombia) and 14% of group revenues come from

other European and Asian geographies. Experian is about twice the size of its closest

competitor, the US company Equifax (EFX US), and has a significantly greater exposure to

global economies, particularly emerging markets.

Prelim results 7th May 2014

Q1 IMS 11th July 2014

AGM 16th July 2014

Interim results 6th November 2014

Catalysts


Organic revenue growth of 6% in FY14E,

rising to 7% in FY15E and 8% in FY16E

partly as fast growth bolt-ons are included

after 12 months of ownership

No further acquisitions as Passport and

41st Parameter are integrated

£:$1.66 exchange rate

111c CY15E EPS; 20x target PE multiple;

1340p price target

Upside Scenario

Organic revenue growth reaccelerates to

9% in FY15E and FY16E

EBITA margins establish their 60-90bp

annual increase trajectory

Successful integration of Passport and 41st

Parameter acquisitions prompts further

bolt-ons

120c FY16E EPS; 20x target PE multiple;

1450p price target

Downside Scenario

Organic revenue growth remains stuck in

the mid-single digits in FY15E and FY16E

Operating margins stagnate given weaker

revenue momentum

Passport and 41st Parameter acquisitions

fall short of management guidance and

create limited shareholder value

108c FY16E EPS; 15x target PE multiple;

975p price target

Long Term Analysis

Scenarios

Peer Group CY14E PE (x) Three Year EPS CAGR

Source: Bloomberg


Ticker Rec. PT

EXPN LN Hold 1340p

EFX US NR N/A

DNB US NR N/A

ACXM US NR N/A

FICO US NR N/A

Company Description

THE LO

NG

VIE

W

Peer Group

Experian plc


Business Services


1 May 2014







Operating Margin Expansion +100bp


Adecco’s most appropriate peers are

Randstad and Manpower rather than

white collar recruitment specialists such as

Michael Page and Hays. Adecco and

Randstad are considerably more blue-

collar and temp exposed.

The PE multiple is impacted by currency as

Adecco reports in € but has a CHF

denominated share price

Prospective PE Multiple (x)

Source: Bloomberg

Adecco is the largest global staffing agency by gross fees. Its primary markets are France

(31% of sales) and the US (19%), but it has a significant global footprint including strong

positions in Germany, Italy and emerging markets. Adecco is primarily a general staffing

company, with office (lower-level white collar) and industrial (blue collar) making up

about 80% of revenues. However, its professional staffing platform was bolstered by the

acquisitions of MPS and Spring in 2009. The vast majority of revenue is derived from

temporary staffing, with only a small proportion of permanent hiring (1% of gross fees)

and outplacement (2%). In 2009, Patrick de Maeseneire replaced Dieter Schieff as CEO and

unveiled a strategy to achieve a medium-term EBITA margin of "at least 5.5%".

Adecco Q1s 8th May 2014

Sthree Q2s 13th June 2014

Hays Q4s 10th July 2014

Sthree interims 14th July 2014

Michael Page Q2s 15th July 2014

Monthly temp recruitment statistics

from PRISME (French industry trade

body) and non-farm payrolls in the US

Catalysts


7% LFL revenue growth in FY14E and 9%

in FY15E

Robust SG&A control maintained in 2014

No acquisitions

Our price target is set at a 5% discount to

our peak EPS derived fair value (discounted

back at 10% pa) as structural challenges to

the economy and labour market create an

uncertain recovery trajectory in France

Upside Scenario

Rejuvenated economic growth allows

revenue to reach €25bn

EBITA margin reaches 5.5% versus

management’s 5.5%+ target

EPS reaches a €5.4 peak at the top of the

cycle

€5.3 2016 EPS and 15.5x target PE multiple

= CHF103 price target

Downside Scenario

Rerun of 2008 banking crisis in Europe

drives net fees down by c30%

EBITA margin troughs at 2.7%

Diminished working capital requirement

supports FCF and net debt/EBITDA peaks

comfortably within covenants

€2900m FY14E net fees combined with

1.7x target EV/net fee multiple = CHF25

price target

Long Term Analysis

Scenarios

CY14E PE Multiple (x)


High, current, low CY14 EV/net fees (x)



Ticker Rec. PT

ADEN VX Hold CHF73.5

HAS LN Hold 165p

MPI LN Hold 500p

RAND NA Hold €46.5

STHR LN Hold 450p

Company Description

THE LO

NG

VIE

W

Peer Group

Adecco

Hold: CHF73.5 Price Target

Business Services


1 May 2014







Conversion Rate Expansion +530bp


Sthree’s most appropriate peers are white

collar recruitment specialists such as Hays,

Michael Page and Robert Walters. Adecco

and Randstad are considerably more blue-


An 11p special dividend was announced

in August 2011 and paid in 2012.

Prospective PE (x)

Source: DataStream

Sthree was founded in 1986 by Bill Botriel and Simon Arber, neither of whom is now

involved with the company. It is a predominantly IT-focused specialist staffing agency with

a mostly SME client base. Its culture is deliberately aggressive and Darwinian, but also

equity driven, with staff and management owning about 20%. The group operates under a

number of brands, including Huxley and Computer Futures, which in some instances

overlap and compete with each other. The group's historical UK IT focus has been diluted

in recent years by a strategic push into new geographies (it currently operates in 18

countries) and disciplines, such that this now contributes around one-third of group net

fees. Sthree has a broadly even temp/perm split across the cycle. In H113, public sector

clients contributed 7% of group net fee income.






Forward looking macro-economic

indicators such as the monthly

PMI/ISM surveys

Catalysts


14% LFL net fee growth in FY14E, 15% in

FY15E and 12% in FY16E

No acquisitions


our peak EPS derived fair value given

greater uncertainties over Sthree’s long

term profitability following recent strategic

changes.

Upside Scenario


management to achieve its medium term

international headcount targets

Net fees reach c£325m and, assuming a

30% conversion rate is achieved once

again, EPS peaks at c42p

42p 2016 EPS and 17x target PE multiple =

715p fair value

Downside Scenario



Conversion rate troughs at c10%




£170m FY14E net fees combined with

1.0x target EV/net fee multiple = 150p fair

value

Long Term Analysis

Scenarios






Ticker Rec. PT

STHR LN Hold 450p

MPI LN Hold 500p

HAS LN Hold 165p



Company Description

THE LO

NG

VIE

W

Peer Group

Sthree


Business Services


1 May 2014







Operating Margin Expansion +140bp


Randstad’s most appropriate peers are

Adecco and Manpower rather than white

collar recruitment specialists such as

Michael Page and Hay. Randstad and

Adecco are considerably more blue-collar

and temp exposed.

Prospective PE (x)

Source: DataStream

Randstad is the second-largest staffing company in the world behind Adecco with a 7%

market share. The group primarily focusses on temporary recruitment in the blue collar

generalist labour market but also has white collar specialist staffing and Recruitment

Process Outsourcing offerings. Organic revenue growth has been augmented with several

sizeable acquisitions over the past five years including Vedior (the global number four in

2008), FujiStaff in Japan (2010) and SFN in North America (2011).






Monthly temp recruitment statistics

from PRISME (French industry trade

body) and non-farm payrolls in the US

Catalysts


5.4% LFL revenue growth in FY14E and

8.3% in FY15E

Robust SG&A control in 2014 driving a

recovery ratio in excess of management’s

50% target

No acquisitions


our peak EPS derived fair value (discounted

back at 10% pa) as structural challenges to

the economy and labour market create an

uncertain recovery trajectory in France

Upside Scenario


revenue to reach €22bn

EBITA margin reaches 5.5%, below the

previous 6.0% peak due to gross margin

pressure in The Netherlands

EPS reaches a €4.2 peak at the top of the

cycle

€4.2 2017 EPS and 15.5x target PE multiple

= €65 fair value

Downside Scenario



EBITA margin troughs at 2.7%




€2500m FY14E net fees combined with

1.0x target EV/net fee multiple = €10 fair

value

Long Term Analysis

Scenarios






Ticker Rec. PT


HAS LN Hold 165p

MPI LN Hold 500p


STHR LN Hold 450p

Company Description

THE LO

NG

VIE

W

Peer Group

Randstad

Hold: €46.5 Price Target

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1 May 2014









Michael Page’s most appropriate peers are

white collar recruitment specialists such as

Hays and Robert Walters. Adecco and

Randstad are considerably more blue-


Prospective PE (x)

Source: DataStream

Michael Page was founded in 1976 and has expanded organically over the years to

become one of the world’s largest specialist staffing agencies. The group has a very highly

regarded management team, powerful culture (which it protects by refusing to hire from

competitors) and a profit based remuneration model (many competitors are commission

based). Initially a UK accountancy specialist, Michael Page now has a multi-discipline

offering in 32 countries and its largest market is EMEA (c40% net fees), of which France

contributes 60%. Michael Page has a 25:75 temp/perm split and consequently is one of

the most perm exposed and operationally geared of the major staffing agencies. In

common with many of its peers, the group is broadening its discipline offering into new

areas, such as engineering, property & construction and procurement and supply chain.








PMI/ISM surveys

Catalysts


8% net fee growth in FY14E and 13%

in FY15E

A £12m sequential net benefit to

FY14E EBITA from lower above-the-

line redundancy costs, efficiency

savings and IT amortisation costs

Our price target is 20% below our

peak EPS derived fair value which

assumes 48p peak EPS and a 17x

target PE multiple but discounts back

to today at 10% per annum

Upside Scenario

Rejuvenated economic growth and

headcount investment allows net fees

to reach c£770m

Group conversion rate revives to 27%

peak, slightly below the previous 31%

peak

EPS reaches a 48p peak at top of the

cycle

48p 2016 EPS and 17x target PE =

815p price target

Downside Scenario

Rerun of 2008 banking crisis in

Europe drives net fees down by c45%

to £375m


Diminished working capital

requirement supports FCF and net

debt/EBITDA peaks comfortably

within covenants

£375m FY14E net fees combined

with 1.4x target EV/net fee multiple =

175p price target

Long Term Analysis

Scenarios






Ticker Rec. PT

MPI LN Hold 500p

HAS LN Hold 165p

STHR LN Hold 450p



Company Description

THE LO

NG

VIE

W

Peer Group

Michael Page


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1 May 2014









Hays’s most appropriate peers are white

collar recruitment specialists such as

Michael Page and Robert Walters. Adecco

and Randstad are considerably more blue-


Although dividend yield does not seem to

have supported the shares over the past 3-

4 years, it is worth noting that the

dividend was substantially rebased in

February 2012.

Prospective PE (x)

Source: DataSteam

Hays floated in 1989 and was originally a three-division conglomerate, but after the

retirement of Ronnie Frost, the two non-staffing operations were divested/demerged in

2003/04. Hays Personnel is a specialist recruitment agency that operates in 27 countries. At

the net fee level, the group has a broadly even temp/perm split, c15% exposure to the

public sector and a 20:80 ratio between large contracts/spot transactions. Although the UK

is a substantial territory, its contribution has diminished substantially in recent years due to

strategic expansion overseas, particularly into Europe and the Far East. Similarly, the range

of disciplines has broadened away from accounting & finance and construction into areas

such as healthcare and education. Bolt-on acquisitions are occasionally used to accelerate

penetration of a new country or discipline.





Michael Page Q2s 15 July 2014



PMI/ISM surveys

Catalysts


+4% LFL net fee growth in FY14E, +9% in

FY15E and +12% in FY16E

No acquisitions

Our price target is in line with our peak EPS

derived fair value which assumes 14.4p

peak EPS and a 14.5x target PE multiple

but discounts back to today at 10% per

annum

Upside Scenario


management to achieve its long term

international headcount targets

Conversion rates return to previous peak in

CEROW and Asia Pacific but not UK due to

public sector decline and the failure of the

private sector to fully recover lost revenue

EPS reaches 16p peak at top of the cycle

16p peak EPS and 14.5x target PE multiple

= 230p fair value

Downside Scenario







£550m FY14E net fees combined with

1.5x target EV/net fee multiple = 50p price

target

Long Term Analysis

Scenarios






Ticker Rec. PT

HAS LN Hold 165p

MPI LN Hold 500p

STHR LN Hold 450p



Company Description

THE LO

NG

VIE

W

Peer Group

Hays


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1 May 2014



Company DescriptionAdecco is the largest global staffing agency by gross fees. Its primary markets are France (31% of sales) and the US (19%), but it has a significantglobal footprint including strong positions in Germany, Italy and emerging markets. Adecco is primarily a general staffing company, withoffice (lower-level white collar) and industrial (blue collar) making up about 80% of revenues. However, its professional staffing platform wasbolstered by the acquisitions of MPS and Spring in 2009. The vast majority of revenue is derived from temporary staffing, with only a smallproportion of permanent hiring (1% of gross fees) and outplacement (2%). In 2009, Patrick de Maeseneire replaced Dieter Schieff as CEOand unveiled a strategy to achieve a medium-term EBITA margin of "at least 5.5%".

Aggreko rents temporary power generators and temperature control equipment globally.

APR rents temporary power generators globally.

Bunzl allows customers to outsource the procurement of nuisance items, simplifying the process and freeing up working capital. End marketsare diverse but key areas are grocery, redistribution, non-food retail and construction.

Bureau Veritas is a leading international testing and certification group. The company specializes in the inspection, analysis, audit, andcertification of products, infrastructure (buildings, industrial sites, equipment, ships, etc.) and management systems (ISO standards) inrelation to regulatory or voluntary standards.

Eurofins Scientific operates over 150 laboratories in 30 countries which provide analytical testing services to the pharmaceutical, food andenvironmental sectors. The company is the global leader in food testing, the European leader in environmental testing, and in the top 10globally in pharmaceutical development services.

Experian offers credit checking and marketing services. The group manages large databases that enable credit provision and monitoring andhelps minimize fraud and credit risk.

Hays floated in 1989 and was originally a three-division conglomerate, but after the retirement of Ronnie Frost, the two non-staffing operationswere divested/demerged in 2003/04. Hays Personnel is a specialist recruitment agency that operates in 27 countries. At the net fee level, thegroup has a broadly even temp/perm split, c15% exposure to the public sector and a 20:80 ratio between large contracts/spot transactions.Although the UK is a substantial territory, its contribution has diminished substantially in recent years due to strategic expansion overseas,particularly into Europe and the Far East. Similarly, the range of disciplines has broadened away from accounting & finance and constructioninto areas such as healthcare and education. Bolt-on acquisitions are occasionally used to accelerate penetration of a new country or discipline.

Intertek is the third-largest quoted player in the technical inspection industry. The company specializes in the inspection, analysis, audit,and certification of products (commodities, consumer hardlines/softlines, etc.) and management systems (ISO standards, etc.) in relation toregulatory or voluntary standards. Intertek employs over 20,000 people and has operations in over 100 countries.

Michael Page was founded in 1976 and has expanded organically over the years to become one of the world’s largest specialist staffingagencies. The group has a very highly regarded management team, powerful culture (which it protects by refusing to hire from competitors)and a profit based remuneration model (many competitors are commission based). Initially a UK accountancy specialist, Michael Page nowhas a multi-discipline offering in 32 countries and its largest market is EMEA (c40% net fees), of which France contributes 60%. Michael Pagehas a 20:80 temp/perm split and consequently is one of the most perm exposed and operationally geared of the major staffing agencies. Incommon with many of its peers, the group is broadening its discipline offering into new areas, such as engineering, property & constructionand procurement and supply chain.

Randstad is the second-largest staffing company in the world behind Adecco. The group primarily focusses on temporary recruitment inthe blue collar generalist labour market but also has white collar specialist staffing and Recruitment Process Outsourcing offerings. Organicrevenue growth has been augmented with several sizeable acquisitions over the past five years including Vedior (the global number four in2008), FujiStaff in Japan (2010) and SFN in North America (2011).

SGS is the largest global inspection, testing, verification and certification player. Through its international network of laboratories, thecompany inspects, samples and analyzes raw materials, food, crops and consumer goods, as well as certifying products and machinery forcompliance with local and international standards.

Sthree was founded in 1986 by Bill Botriel and Simon Arber, neither of whom is now involved with the company. It is a predominantly IT-focused specialist staffing agency with a mostly SME client base. Its culture is deliberately aggressive and Darwinian, but also equity driven,with staff and management owning about 20%. The group operates under a number of brands, including Huxley and Computer Futures,which in some instances overlap and compete with each other. The group's historical UK IT focus has been diluted in recent years by a strategicpush into new geographies (it currently operates in 17 countries) and disciplines, such that this now contributes around one-third of groupnet fees. Sthree has a broadly even temp/perm split across the cycle. In 2011, public sector clients contributed 6% of group net fee income.

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Analyst CertificationI, Kean Marden, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Will Kirkness, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Kean Marden is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Will Kirkness is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.Jefferies Group LLC makes a market in the securities or ADRs of Hays PLC

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Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

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Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion.Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pickfalls within an investment style such as growth or value.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and

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1 May 2014



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income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 904 49.48% 242 26.77%HOLD 775 42.42% 134 17.29%UNDERPERFORM 148 8.10% 5 3.38%

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1 May 2014



business & employment svcs experian & aggreko to buy ope · for this company. kean marden *...

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