europe top picks - credit suisse
TRANSCRIPT
Europe Top Picks Credit Suisse Top Investment Ideas April 13 2016
Top ideas across European Equity Research: Top Picks identifies top investment ideas within each industry.
This report features our analysts’ most preferred Outperform- and Underperform-rated
names, along with a snapshot of their investment thesis. In support of the analysts’ views, we provide easy access to the financial data behind every name.
Research Analysts
Brandon Vair
+44 20 7888 6381
Richard Kersley
+44 20 7888 0313
Credit Suisse European Equity Research
See inside for contributors’ names
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF
NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
Why Credit Suisse Research?
High impact research that spans across asset classes, sectors, and regions
April 2016 Slide 2
Why Credit Suisse Analytics?
Access to innovative tools, models, and capabilities at your fingertips
April 2016 Slide 3
Methodology Identifying Top Picks 5
Overview Summary Tables of All Top Outperform & Underperform Stock Picks 6
HOLT® Outperforms Through HOLT® Lens 9
Additions Summary Tables of Additions 10
Removals Summary Tables and Rationale of Removals 11
Stock Thesis Top Pick Details by Industry & Sector
Consumer 13
Energy 22
Financials 24
Healthcare 29
Industrials 31
Materials 39
Technology 46
Telecom 49
Utilities 50
Swiss SMID 52
EMEA (Financials, Materials, Energy, Telecoms) 54
EMEA South Africa 57
EMEA Turkey 59
Valuation Valuation Tables 60
Page Table of Contents
April 2016 Slide 4
Identifying Top Picks
Methodology
Top picks across all sectors. Each analyst team identifies its highest conviction Outperform- and Underperform-rated ideas relative to the coverage universe.
Highlighting only high conviction ideas. The number of analyst picks illustrated is governed by the size of the relevant coverage universe. Top Picks were limited to 20% of the coverage universe
on average.
Investment thesis. For each name, we include a short summary of our analyst’s thesis as a starting point for further analysis. Financial summaries for every company can be easily accessed
by clicking on the company name.
HOLT® Credit Suisse Equity Research Analyst forecasts are now incorporated into the HOLT® Lens platform, providing an objective overview on fundamental research.
Results
96 top ideas across 31 subsectors. The exercise resulted in 96 total top ideas with 52 most preferred Outperforms and 44 least preferred Underperforms.
Changes since our last Top Picks. Following our January publication, we add 15 new top picks (7 Outperforms, 8 Underperforms) and remove 15 top picks (9 from Outperforms,
6 from Underperforms).
These should not be viewed as portfolios. This is a current snapshot of our analysts’ top picks in their coverage universes. We plan to update and publish regularly.
April 2016 Slide 5
Top Picks: Europe
Source: Credit Suisse estimates
Industry Top Outperforms Top Underperforms
CONSUMER
Automobiles & Components Fiat Chrysler Automobile FCHA.MI Volkswagen VOWG_p.DE
General Retailing Kingfisher KGF.L Inditex ITX.MC
Luxury Goods LVMH.PA Burberry Group BRBY.L
Media UBM plc (UBM.L) UBM.L Wolters Kluwer WLSNc.AS
Zoopla Property (ZPLAZ.L) ZPLAZ.L
Travel & Leisure Carnival CCL.L Compass CPG.L
Whitbread WTB.L
Consumer Staples
Diageo DGE.L Danone DANO.PA
Imperial Tobacco IMB.L
L'Oreal OREP.PA
ENERGY
Oil & Gas Integrated Royal Dutch Shell plc RDSa.L BP BP.L
Statoil STL.OL
FINANCIALS
Banks
Danske Bank DANSKE.CO Banco Popular POP.MC
Intesa Sanpaolo ISP.MI DNB DNB.OL
Svenska Handelsbanken SHBa.ST
Insurance
AVIVA Plc AV.L Admiral ADML.L
Prudential PRU.L Swiss Re SRENH.VX
AXA AXAF.PA
Real Estate Grand City Properties GYC.DE Capital & Counties CAPCC.L
Specialty Finance London Stock Exchange LSE.L Ashmore ASHM.L
HEALTHCARE
Medical Technology Straumann STMN.S GN Store Nord GN.CO
Pharmaceuticals Novartis NOVN.VX AstraZeneca AZN.L
Roche ROG.VX
April 2016 Slide 6
Top Picks: Europe Industry Top Outperforms Top Underperforms
INDUSTRIALS
Aerospace & Defence Airbus Group AIR.PA Rolls-Royce RR.L
Business & Professional Services
Capita CPI.L Ashtead AHT.L
Securitas SECUb.ST Brenntag BNRGn.DE
SGS SA SGSN.S Michael Page MPI.L
Capital Goods
Assa Abloy ASSAb.ST Sandvik SAND.ST
Halma HLMA.L Wartsila WRT1V.HE
Prysmian PRY.MI
Transport International Airlines Group ICAG.L Deutsche Post DHL DPWGn.DE
MATERIALS
Building Materials & Construction Lafargeholcim LHN.VX Persimmon PSN.L
Travis Perkins TPK.L
Chemicals AkzoNobel AKZO.AS Air Liquide AIRP.PA
Arkema AKE.PA BASF BASFn.DE
Metals & Mining
Aperam APAM.AS SSAB SSABa.ST
Boliden BOL.ST Vallourec VLLP.PA
Thyssen Krupp AG TKAG.DE
Paper & Packaging Smurfit Kappa SKG.I Stora Enso STERV.HE
TECHNOLOGY
Software & Services SAP SAPG.F Sage Group SGE.L
Dassault Systemes DAST.PA
Technology Hardware & Semis Nokia NOKIA.HE Gemalto GTO.AS
Infineon Technologies AG IFXGn.DE STMicroelectronics NV STM.PA
TELECOM
Telecommunication Services BT Group BT.L Swisscom SCMN.VX
UTILITIES
Gas & Multi Utilities
Centrica CNA.L National Grid NG.L
Endesa ELE.MC Terna TRN.MI
Iberdrola IBE.MC Suez SEVI.PA
Verbund VERB.VI
Source: Credit Suisse estimates
April 2016 Slide 7
Top Picks: Europe Industry Top Outperforms Top Underperforms
SWISS SMID
Swiss SMID Autoneum AUTON.S DKSH Holdings DKSH.S
OC Oerlikon Corp AG OERL.S
EMEA
EMEA Banks Erste Bank ERST.VI PKO BP PKO.WA
EMEA Metals & Mining Alrosa ALRS.MM KGHM KGH.WA
EMEA Oil Surgutneftegas SNGSyq.L
SOUTH AFRICA
EMEA SA Naspers NPNJn.J Discovery Holdings Ltd DSYJ.J
Mr Price Group Limited MPCJ.J
TURKEY
EMEA Turkey Halkbank HALKB.IS Vakifbank VAKBN.IS
Source: Credit Suisse estimates
April 2016 Slide 8
Credit Suisse European Focus List
Aerospace & Defense Airbus Group AIR.PA
Telecom BT Group BT.L
Transports International Airlines Group ICAG.L
General Retailing Kingfisher KGF.L
Specialty Finance London Stock Exchange LSE.L
Telecom Equipment Nokia NOKIA.HE
Insurance Prudential PRU.L
Pharmaceuticals Roche ROG.VX
Top Picks: Outperforms Through HOLT®
Source: Credit Suisse HOLT® Lens
April 2016
Credit Suisse HOLT® Lens
The HOLT scorecard is equally composed of three factors: Quality, Momentum, and Valuation weighted equally. The scorecard calculates factors scores on a group relative basis, formed by a combination of Region, Sector, and Size, scored and ranked by percentile.
We indicate above where a company ranks above the 50th percentile in each of the categories:
Quality: A firm’s track record of earning returns on capital (CFROI) and managing growth
Momentum: Revisions to consensus EPS estimates translated into cash flow impact (CFROI) and medium-term share price momentum
Valuation: Based on the HOLT DCF framework and traditional valuation multiples
HOLT® Ranks in top 50% on these
metrics
HOLT® Ranks in top 50% on these
metrics Europe Top Outperforms April 2016 Europe Top Outperforms April 2016
Name Ticker Country
Op
era
tio
nal
Qu
ality
Mo
men
tum
Valu
ati
on
Name Ticker Country
Op
era
tio
nal
Qu
ality
Mo
men
tum
Valu
ati
on
Airbus Group AIR.PA NLD P L'Oreal OREP.PA FRA P
Alrosa ALRS.MM RUS P P P Lafargeholcim LHN.S CHE
AkzoNobel AKZO.AS NLD P P P London Stock Exchange LSE.L GBR P P
Aperam APAM.AS LUX P P LVMH LVMH.PA FRA P P
Arkema AKE.PA FRA P P Mr Price Group MPCJ.J ZAF P P
Assa Abloy ASSAb.ST SWE P Naspers NPNJn.J ZAF P
Autoneum AUTON.S CHE P P Nokia NOKIA.HE FIN P
AVIVA Plc AV.L GBR P P P Novartis NOVN.S CHE P
AXA AXAF.PA FRA P P P OC Oerlikon Corp AG OERL.S CHE P P
Boliden BOL.ST SWE P P Prudential PRU.L GBR P
BT Group BT.L GBR P Prysmian PRY.MI ITA P P
Capita CPI.L GBR P Roche ROG.S CHE P P
Carnival CCL.L GBR P P Royal Dutch Shell RDSa.L GBR P P
Centrica CNA.L GBR P P SAP SE SAPG.F DEU P P P
Danske Bank DANSKE.CO DNK P Securitas SECUb.ST SWE P
Dassault Systemes DAST.PA FRA SGS Surveillance SGSN.S CHE P
Diageo DGE.L GBR P P Smurfit Kappa SKG.I IRL P P
Endesa ELE.MC ESP P P Straumann STMN.S CHE P P
Erste Bank ERST.VI AUT P Thyssen Krupp AG TKAG.DE DEU P
Fiat Chrysler Automobile FCHA.MI ITA P Travis Perkins TPK.L GBR P P
Grand City Properties GYC.DE LUX P P P Halkbank HALKB.IS TUR P P
Halma HLMA.L GBR P P UBM plc UBM.L GBR P
Iberdrola IBE.MC ESP P P Whitbread WTB.L GBR P
Imperial Brands IMB.L GBR P P Zoopla Property Group ZPLAZ.L GBR P
Infineon Technologies AG IFXGn.DE DEU P
International Airlines Group ICAG.L GBR P P
Intesa Sanpaolo ISP.MI ITA P P
Kingfisher KGF.L GBR P P
Slide 9
Additions Since Last Publication Click here for previous edition, January 2016
Source: Credit Suisse estimates
NEW TOP OUTPERFORMS
Company Industry Sector Analyst
Airbus Group (AIR.PA) Industrials Aerospace & Defense Olivier Brochet
Alrosa (ALRS.MM) Materials EMEA Metals & Mining Semyon Mironov
AXA (AXAF.PA) Financials Insurance Richard Burden
Boliden (BOL.ST) Materials Mining Liam Fitzpatrick
Kingfisher (KGF.L) Consumer Discretionary General Retailing Simon Irwin
LVMH (LVMH.PA) Consumer Discretionary Luxury goods Guillaume Gauville
SGS Surveillance (SGSN.S) Industrials Business & Professional services Andrew Grobler
NEW TOP UNDERPERFORMS
Company Industry Sector Analyst
Admiral (ADML.L) Financials Insurance Richard Burden
Ashmore Group (ASHM.L) Financials Speciality Finance Thomas Mills
Ashtead Group (AHT.L) Industrials Business & Professional services Karl Green
Danone (DANO.PA ) Consumer Staples Consumer Staples Charlie Mills
Deutsche Post DHL (DPWGn.DE) Industrials Logistics Neil Glynn
Inditex (ITX.MC) Consumer Discretionary General Retailing Simon Irwin
PKO BP (PKO.WA) Financials EMEA Banks Hugo Swann
Rolls-Royce (RR.L) Industrials Aerospace & Defense Olivier Brochet
April 2016 Slide 10
Removals from Top Outperform Click here for previous edition, January 2016
Source: Credit Suisse estimates
REMOVED FROM TOP OUTPERFORM
Company Universe Rating Rationale
Dassault Aviation (AVMD.PA) Aerospace & Defense Outperform We have higher conviction eslewhere
EFG International (EFGN.S) Swiss SMID Restricted The stock is Restricted
Engie (ENGIE.PA) Utilities Neutral Downgraded to Neutral See Details
LUKOIL (LKOHyq.L) EMEA Oil Underperform Downgraded to Underperform See Details
PhosAgro (PHORq.L) EMEA Metals & Mining Neutral Downgraded to Neutral See Details
Regus (RGU.L) Business & Professional Svc Outperform We have higher conviction eslewhere
Swatch Group (UHR.S) Luxury goods Outperform We have higher conviction eslewhere
Zalando (ZALG.DE) General Retailing Outperform We have higher conviction eslewhere
Zurich Insurance Group (ZURN.S) Insurance Outperform We have higher conviction eslewhere
April 2016 Slide 11
REMOVED FROM TOP UNDERPERFORM
Company Universe Rating Rationale
Deutsche Boerse (DB1Gn.F) Speciality Finance Neutral Downgraded to Neutral See Details
Meggitt (MGGT.L) Aerospace & Defense Underperform We hold higher conviction elsewhere
Next (NXT.L) General Retailing Underperform We hold higher conviction elsewhere
Royal Mail (RMG.L) Logistics Underperform We hold higher conviction elsewhere
Scor (SCOR.PA) Insurance Underperform We hold higher conviction elsewhere
Tenaris (TENR.MI) Steels Neutral Downgraded to Neutral See Details
Removals from Top Underperform
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Volkswagen
(VOWG_P.DE)
Credit Suisse
HOLT® Lens
Price: € 106.4
Target: € 79
MC: € 57.8bn
Uncertainty over the potential costs for the emissions scandal means the range of potential costs is wide. VW indicated a €6.7bn provision
to cover costs but this is unlikely to be the final figure, in our view. We think downside risks are not fully priced and in addition see
substantial risks to the Financial Services division.
VW will be subject to significant costs for regulatory and potential criminal penalties, and with the performance impact of the engine fix as
yet unclear, also potentially significant remedial costs relating to fuel subsidies and residual value losses.
In terms of commercial impact, we have already seen market share losses in Q4 and the impact of lower volumes and negative pricing is
likely underestimated by the market.
The Financial Services division, which has previously been supported by capital contributions from the industrial business, could further suffer
due to higher refinancing costs, higher provisioning, and potential asset write-downs on lower residual values. The industrial business may in
turn struggle to support it in the future, given a likely weaker balance sheet.
Research Team
Alexander Haissl | [email protected] | +44 20 7888 8507
Fei Teng | [email protected] | +44 20 7883 9978
Giulio Pescatore | [email protected] | +44 20 7883 3963
Consumer
Autos & Components
TOP OUTPERFORMS
Company Pricing Investment Thesis
Fiat Chrysler
Automobile
(FCHA.MI)
Credit Suisse
HOLT® Lens
Price: € 6.51
Target: € 10
MC: € 9.8bn
We view FCA as better positioned than its peers in NAFTA, Europe and China (strong mix with Jeep ramp-up). Post the Ferrari separation,
the key upside comes from the NAFTA region, where we expect margins to improve due to higher volumes, better pricing and customer mix.
We see improved Chrysler performance as a key driver of earnings and cash flow (cash conversion >70%) in the coming years, with
potential for an upside surprise.
Profit margins in NAFTA are beginning to demonstrate the underlying earnings potential of this business, driven by continued improvement
in retail mix on top of continued market share gains. This in turn is being converted into equally impressive gains on price and product mix as
FCA attempts to close the gap on GM/Ford. We see 7.3% margin reached by 2018E.
Valuation attractive at 1.6x EV/EBITDA compared to US peers at 2.1x and European peers at 2.3x. In our view an equity re-rating will be
driven by earnings upgrades rather than multiple expansion (versus consensus expectations), as market expectations are overly negative with
regards to earnings progression in the coming years (CS >20% ahead of the street).
Source: Credit Suisse estimates, market data as of xx April 2016
April 2016 Slide 12
TOP OUTPERFORMS
Company Pricing Investment Thesis
Kingfisher
(KGF.L)
Credit Suisse
HOLT® Lens
Price: 3,77.2 p
Target: 425 p
MC: £ 8.6bn
Macro Improving: It's 14 years since the last peak in UK DIY demand. DIY is typically late cycle and there are growing signs that project
spend is recovering. This comes at a time when the two largest players are downsizing : B&Q by 12%, Homebase by over 20%. We
forecast 4% LFL at B&Q this year, with half retained sales from downsizing, and this is looking increasingly credible. The macro also looks
more promising in France. DIY demand for the past 4 years, and key indicators like housing starts and property prices are starting to
recover.
Self help is earlier and bigger: because the CMD was only in January and will take 5Y, there is a view that self-help will take ages to come
through. However the B&Q downsizing is almost half way done, and B&Q outlined a group of efficiency measures 18 months ago which
are contributing significant cost savings. GNFR and unified ranges start to deliver this year and while there is risk to the new IT platform
rollout, they have already done half the UK without any obvious problems and have shortened the group rollout by a year.
Although the benefits of the programme are back-end loaded, EBIT rose 40bp last year and we forecast that, excluding the £70m of
transition cost, it will increase 40bp this year and 60bp next year. There is widespread caution that this business can ever do a double digit
margin as we forecast in Year 5, however peak margins at B&Q were 10.7%, France 9.5% and Poland 14.5%. Moreover looking at peers
Bunnings does 11.5%, Lowes will be >10% this year and Home Depot has gone from 6.2% in 2006 to c14% this year.
This widespread skepticism is reflected in consensus and valuation: 46% of sell side ratings are sell, by far the highest in the sector, and if
it delivers our forecasts, the shares are very cheap: We forecast 15.5% EPS growth over the next 5 years, with a 3% yield this gives a
18.5% 5Y TSR, which is better than Inditex and Next have delivered over the past decade. Using our forecasts HOLT gives a warranted
price of 469p. Revaluation is not going to happen overnight but our new target price of 425p gives a return of 15.5% over the next year
and would put the shares on a 15x 12m FWD PER in a year’s time.
Kingfisher is a Global and European Focus List stock for Credit Suisse.
Research Team
Simon Irwin | [email protected] | +44 20 7888 0320
Pradeep Pratti | [email protected] | +44 207 888 5043
Consumer
General Retailing
April 2016 Slide 13
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Inditex
(ITX.MC)
Credit Suisse
HOLT® Lens
Price: € 28.53
Target: € 25
MC: € 88.9bn
We have been warning for some time that ITX is facing store maturity in a post EM world, and having missed or come in at the low end of
its guidance for the past 4 years, ITX is finally bringing down its M-T space growth to 6-8% pa. What we don’t believe is that it can offset
this with a consistent 6% LFL.
Recent strong LFL have been driven by aggressive price cutting at Zara in AW 15 and SS 16 (UK down mid 20's Y/Y and Europe down
mid teens). Some of these gains are being funded by the Euro or proximity sourcing base, and the introduction of RFID. Despite this GM
were -130bp in 2H, cost leverage is minimal and Inditex saw forecast downgrades in 3Q and 4Q. Price cutting is clearly not a sustainable
source of L-T growth.
The other area of misunderstanding is online, which is not as good or as big as many think. There is no next day delivery, collect at store
takes 2-5 days and looking at site reviews on Sitejabber and Trustpilot shows that service levels for the US and UK sites are surprisingly
poor. Moreover we estimate that part of the price investment is driven by the need to flatten its very wide global price architecture which is
unsustainable in a M/C world.
We continue to believe that ITX will struggle to deliver more than 10% pa sales growth and see little likelihood that EBIT margins will
expand materially given the lack of historic cost leverage, and this is even less likely in the future, with e-com and the higher cost of new
space. Our forecasts therefore remain c5% below consensus over the next 3 years. Moreover we are not as optimistic as the market on
cash generation. The unit cost of new space is continuing to rise sharply and €800m of the €1.3bn increase in net cash last year came
from a one-off increase in working capital.
The stock trades at 28x 12m FWD PER despite offering 10% pa earnings growth. But our €25 target price already assumes another 70%
sales growth for what is already the world's largest apparel retailer and no fade in cash generation from record levels.
Research Team
Simon Irwin | [email protected] | +44 20 7888 0320
Pradeep Pratti | [email protected] | +44 207 888 5043
Consumer
General Retailing (II)
April 2016 Slide 14
TOP OUTPERFORMS
Company Pricing Investment Thesis
LVMH
(LVMH.PA)
Credit Suisse
HOLT® Lens
Price: € 146.05
Target: € 168
MC: € 74.0bn
In the context of a luxury sector for which we see near-term headwinds, we believe LVMH presents three advantages that will drive better
organic growth and margin momentum than peers.
Advantage #1: The staples/retail portfolio. We estimate it contributed 61% of group sales and 42% of profit in 2015. Such exposure to
staples/retail is unique to LVMH in our coverage. We expect above group-average sales growth of these businesses will be driven by further
market share gains in beauty, strong LFL at Sephora and improving cognac trends in China.
Advantage #2: LV positioning. We think LV benefits from a more adequate price proposition than peers. Its offering in accessible handbags
is key to drive volumes growth while the recent launches in leather should help mix. The bears will view possible 'logo fatigue' as a structural
risk to the LV story but we think this is only a cyclical trend in most markets. There has been no price increases so far this year and the 2Q
comps are tough but we remain confident that LV can deliver low-single digit growth in 2016e and beyond.
Advantage #3: Margin resilience. A low-single digit growth at LV should be enough to keep margins flat while we see further margin
expansion for beauty, Sephora, cognac and the smaller fashion and accessories brands. Coupled with the reversal of hedging losses in
2016 and a 3% dividend yield, this should drive a low-teen TSR over the next three years.
Valuation undemanding. The stock trades at 12x 2016E EV/EBIT against 11x for the luxury sector. This does not look expensive for one of
the best TSRs in luxury on our modelling and stabilising ROIC momentum.
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Burberry
Group
(BRBY.L)
Credit Suisse
HOLT® Lens
Price: 1,297 p
Target: 1,050 p
MC: £ 5.8bn
Burberry is our key short in the sector given both fundamental company and sector specific issues. We remain concerned around the
sustainability of Burberry’s organic growth in what is turning out to be a challenging macro environment. Further price increases look
relatively tough and could lead to the pricing out of its core market and with traffic seemingly declining for all companies and regions volume
growth is unlikely to surprise positively. Given these prospects of declining growth we believe Burberry will be subject to operating deleverage
as it succumbs to its inflated cost base. Moreover, given its regional exposure and limited presence in Japan, a key growth area in 2016 in
our opinion, we believe Burberry will suffer more from declining sector growth relative to peers. We expect further earnings downgrades on
FY17E PBT numbers over the next few months as the market and sell side adjust their expectations.
Research Team
Guillaume Gauville | [email protected] | +44 207 888 0321
Catherine Tillson| [email protected] | +44 207 888 6052
Consumer
Luxury Goods
April 2016 Slide 15
TOP OUTPERFORMS
Company Pricing Investment Thesis
UBM (UBM.L)
Credit Suisse
HOLT® Lens
Price: 596 p
Target: 650 p
MC: £ 2.6bn
Our Outperform rating is premised on the following 5 key points:
(1) PRN sale cleans investment case – We believe that the sale of PRN announced on the 15th December 2015 ‘cleans’ the UBM equity
story. Prior to the sale Events already contributed 75% of the group profitability. We believe that few if any investors owned the stock for
that exposure. Post the PRN sale Events now contributes c.90%.
(2) Events structurally sound – Despite events businesses being comparatively cheap vs European Media stocks we continue to see the
space as an attractive subsector of Media. Events businesses tend to exhibit “GDP+” growth characteristics with good margins and
attractive cash dynamics. We believe the events space is set to benefit from structural change as the increasing focus on digital
communications means businesses seek more efficient ways to conduct face to face communications – leading events offer this.
(3) Catalysts imminent – Following the sale of PRN we believe that further catalyst are likely. The group has stated that it intends to pay a
special dividend of £245m. Beyond this we believe that the group has been conservative on its synergy guidance for Advanstar and we
expect an update on integration and potentially on synergies at the F/Y.
(4) Platform standardisation could provide margin upside – One major part of CEO Cobbold’s new strategy for the group was to invest £15m
of capex in “standardised technology & data”; this is effectively producing a standardised back end platform for the group’s events allowing
the group to obtain cost benefits both for the existing events business and to extract greater synergies from acquisitions. Mgmt have guided
to annual cost savings building from 2016 to £10m pa from both this investment and the group’s “rationalisation” of its OMS and Events
business. We believe this guidance could prove conservative flagging annual benefits to the existing portfolio of £12-30m pa and over £25m
of NPV from heightened synergies from future acquisitions;
(5) Valuation looks far from demanding – UBM trades on a hefty discount to the Euro Professional publishing space (c.16% on 2017 PE),
despite faster growth and growth being held back by event pruning.
Consumer
Media
Research Team
Joseph Barnet-Lamb | [email protected] | +44 20 7883 3535
Sophie Bell | [email protected] | +44 20 7883 1488
April 2016 Slide 16
TOP OUTPERFORMS
Company Pricing Investment Thesis
Zoopla
Property
(ZPLAZ.L)
Credit Suisse
HOLT® Lens
Price: 245.4 p
Target: 290 p
MC: £ 1.0bn
We reiterate our Outperform rating and 290p target price continuing to believe that ZPG competitor OTM should eventually fail and as and
when it does ZPG’s lost members will, over time, return to the site. We believe ZPG is ideally positioned to benefit from the print to digital
transition within the UK online property classified advertisings space with highly cost effective marketing solutions for agents. We see
uSwitch as both strategically and financially attractive bought on 8.1-9.6x FY15 EBITDA for CSe +14% 14-17 adj EBITDA CAGR. uSwitch
will allow ZPG to better monetize its consumer audience by integrating the provision of ancillary switching services into its consumer journey.
We would also flag the strong Home Services revenue trends seen at MoneySupermarket.com in recent prints as setting a good precedent
uSwitch.
Valuation looks undemanding with the group trading on 16.1x 2017E earnings a discount of 43% vs number one player Rightmove.
Consumer
Media (II)
Research Team
Joseph Barnet-Lamb | [email protected] | +44 20 7883 3535
Sophie Bell | [email protected] | +44 20 7883 1488
April 2016 Slide 17
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Wolters Kluwer
(WLSNC.AS)
Credit Suisse
HOLT® Lens
Price: € 35.17
Target: € 31.1
MC: € 10.6bn
Our Underperform rating is supported by the following:
(1) Poor comparable organic revenue growth track record − Over the last 10 years, Wolters Kluwer has achieved average organic revenue
growth of just +1%, against RELX’s +2.5%. We believe that this long term underperformance illustrates the lower quality nature of Wolters
Kluwer’s business versus Reed’s;
(2) Medium and geographic exposure unfavourable – Wolters Kluwer obtains under 10% of its revenue from outside North America and
Europe (vs Reed’s c.20%) and still derives over 20% of revenues from print (vs RELX’s <20%). Although we believe over time European
exposure could well be a positive for the group, we believe it is currently too early to play. Print revenue is and will continue to be exposure
we dislike;
(3) One of the most defensive publishers – Clearly stable yielding stocks have had a bull run on the back of sustained low interest rates. We
believe that this trade has gone fair enough. Around 3/4rs of Wolters Kluwer’s revenues are ‘recurring’. This is therefore not exposure we
favour currently as we continue to look towards more cyclical names.
Consumer
Media (III)
Research Team
Joseph Barnet-Lamb | [email protected] | +44 20 7883 3535
Sophie Bell | [email protected] | +44 20 7883 1488
April 2016 Slide 18
TOP OUTPERFORMS
Company Pricing Investment Thesis
Carnival
(CCL.L)
Credit Suisse
HOLT® Lens
Price: 3,711 p
Target: 4,173 p
MC: US$ 38.6bn
Carnival is one of our top picks in the sector and we estimate it could return the highest level of growth over the next two years, at a below
average valuation. Guidance on both yields and unit costs have been beaten in each of the last eleven quarters and we see forecast risk as
skewed to the upside for 2016E. Self-help on path to double digit returns (7.5% in 2015A) should allow scope for cost guidance to be
exceeded, while growth in China should ease capacity elsewhere. While we believe the cruise industry remains a consensus long among
investors, a number of tailwinds including low oil prices, a structural shift to limit close-in discounts, and growth in new markets could
continue to drive substantial earnings growth in 2016. To this point, encouraging industry commentary from management teams, including
positive booking trends and strong pricing survey data, could ultimately create an opportunity for operators to take price on the remainder of
bookings over the next year.
The main risk to our Outperform rating is a strong rebound in the oil price, leading to higher fuel costs, further strengthening of the USD
leading to translational FX headwinds, further weakness in China or ‘one-off’ ship-specific incidents.
Whitbread
(WTB.L)
Credit Suisse
HOLT® Lens
Price: 3,832 p
Target: 5,140 p
MC: £ 7.0bn
Whitbread is a high conviction pick for 2016. At its heart Whitbread is a roll-out story with a 2015-20E space CAGR of 7% for Premier Inn
and 8% for Costa. These long dated growth drivers underpin our positive stance yet as the impact of the National Living Wage and end to
the EPS upgrade cycle has impacted the stock. In fact the PE multiple has been 70% correlated with Premier Inn LFL growth suggesting
investors are overlooking the long term potential of the group. We expect the new CEO to tackle two key issues over the next 3-5 years –
(1) the implementation of a greater focus on efficiency (in part to mitigate the NLW) and (2) a greater emphasis on the International growth
credentials of both businesses. We are especially bullish about the long term prospects for Premier Inn entering the German market with its
first unit to open in 2016. The upshot of the medium term operating growth is a 5 year EPS CAGR of 10% which we consider to be a
robust compound growth rate for a stock trading at its lowest PE relative to the UK market for 5 years. In addition we note our 5,140p TP is
based on the average of our DCF and property backed SOTP, we estimate c70% of the market cap is underpinned by freehold property.
Research Team
Tim Ramskill | [email protected] | +44 20 7883 7361
Ed Birkin | [email protected] | +44 20 7888 7673
Julia Pennington | [email protected] | +44 20 7888 0157
Consumer
Travel & Leisure (I)
April 2016 Slide 19
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Compass
(CPG.L)
Credit Suisse
HOLT® Lens
Price: 1,264 p
Target: 1140 p
MC: £ 20.8bn
We downgraded Compass in November, reflecting low growth and a high valuation. Given weakness in markets YTD we see greater upside
across our wider coverage and hence we retain an Underperform and note relatively modest constant currency EPS growth of 6% and
recent cashflow downgrades. Our DCF derived Target Price of 1,140p implies 10% downside. Compass trades on a 2016E PE of 21.8x,
2017E 19.8x offering a FCF of just 3.4% in 2016E.
The main risk to our Underperform rating is better than expected organic growth, FX benefit from weaker GBP, and a shift in sentiment that
results in investors favouring more defensive stocks.
Research Team
Tim Ramskill | [email protected] | +44 20 7883 7361
Ed Birkin | [email protected] | +44 20 7888 7673
Julia Pennington | [email protected] | +44 20 7888 0157
Consumer
Travel & Leisure (II)
April 2016 Slide 20
Research Team
Charlie Mills | [email protected] | +44 20 7888 0325
Sanjeet Aujla | [email protected]| +44 20 7888 0353
Molly Eggleton| [email protected] | +44 20 7883 9952
Consumer
Consumer Staples
TOP OUTPERFORMS
Company Pricing Investment Thesis
Diageo
(DGE.L)
Credit Suisse
HOLT® Lens
Price: 1,897.5 p
Target: 2,100 p
MC: £ 47.8bn
Diageo’s business is dominated by premium scotch and beer, with mainstream local brands accounting for just 11% of net sales (volume market share c12%). In light of recent FX devaluations, management is investing more behind mainstream spirits, which account for c85%
of spirits volumes consumed in emerging markets - Diageo has a significant opportunity to reach new consumers at more affordable price
points, which is not necessarily margin dilutive – Kenya and Uganda have already demonstrated this. In India, the focus is on premiumising
the local Indian whiskey portfolio (currently c40% of volumes, and c10% of net revenue). There is also a big opportunity for Diageo's own
brands (higher margin), in particular, the locally bottled Scotch brands VAT 69 and Black & White, to benefit from USL's distribution reach.
We believe Diageo could look to raise its stake in USL, particularly ahead of any operating improvement. More broadly, Diageo also has
significant scope for improvements in Cash Flow, driven by working capital benefits, particularly given management’s increasing focus on
FCF generation (now highest weighting in the annual incentive plan).
Imperial
Tobacco
(IMB.L)
Credit Suisse
HOLT® Lens
Price: 3,822.5 p
Target: 3,900 p
MC: £ 36.6bn
Imperial’s free cash flow has substantially benefitted from last year’s US acquisition, enabling the company to enter one the largest profit pools globally. On our numbers, the company can grow its dividend by 10% p.a. for the next 9 years before it will no longer be covered by
free cash flow.
The trading environment in tobacco is improving in the developed world, and the EU in particular, at a time when emerging market
economies remain uncertain and currencies devalue, Imperial is earning over 80% of its cash flow in hard currencies (£, US$, € and Aus$) –
further sterling weakness will aid earnings and prolong the ‘dividend cover’ period. The pricing environment (crucial for the tobacco industry)
is also getting better with all the major companies highlighting this in their recent results.
Additionally, the company, through its cost optimisation programme, is targeting lower unit costs and overheads, as well as a tighter control
of working capital and capex. With significant savings still to be delivered, it should allow management to deliver their commitment to a 10%
p.a. sterling dividend increase as well as reduce debt.
Valuation – tobacco stocks look cheap relative to consumer staples, and none more so than Imperial Brands. With a dividend yield of 4% (vs
staples of 2.5%) and currently trading on 15.9x 2016E earnings versus the consumer staples sector on 22x, we believe the discount is
unmerited and regard Imperial amongst the best value in our sector.
April 2016 Slide 21
Research Team
Charlie Mills | [email protected] | +44 20 7888 0325
Sanjeet Aujla | [email protected]| +44 20 7888 0353
Molly Eggleton| [email protected] | +44 20 7883 9952
Consumer
Consumer Staples (II)
TOP OUTPERFORMS
Company Pricing Investment Thesis
L'Oreal
(OREP.PA)
Credit Suisse
HOLT® Lens
Price: € 153.95
Target: € 166
MC: € 86.7bn
We think the two key reasons OR’s premium to the sector has eroded are set to improve. First, L’Oréal overindexes to Western Europe (35% of sales vs 20% for the global mkt) which has been a drag on market growth since the financial crisis. However with disposable
income, consumer confidence and employment intentions all pointing to a better 2016, L’Oréal is a good play on the improving European
macro. Second, L’Oréal has been a share donor in US consumer products for a few years but the fixes for problem categories are now in
place to see a return to weighted market share growth (Garnier relaunch, lapping Schwarzkopf launch, less promo from PG). OR has good
momentum going into 2016 after sequentially accelerating in the US throughout 2015 and finishing the year strongly. The stock’s premium
to the sector NTM PE is near all-time lows and we think this is an attractive entry point for a quality name with higher than average returns,
an unlevered balance sheet and exposure to attractive categories which lend themselves to pricing through innovation.
April 2016 Slide 22
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Danone
(DANO.PA)
Credit Suisse
HOLT® Lens
Price: € 60.93
Target: € 56
MC: € 39.9bn
Our issue with Danone remains a lack of visibility around major moving parts within its portfolio, sustainable yogurt margins, the structure of
the China milk formula industry and MiZone's competitiveness. Low milk prices have allowed Danone to step-up marketing investment and
deliver a long awaited margin uptick, but what will happen when the milk price inevitably trends up again? In our view, a forward PE of 20.2x
does not adequately compensate for a wider bandwidth of earnings outturns than is the case elsewhere in the sector. On that basis we
retain our Underperform rating and price target.
TOP OUTPERFORMS
Company Pricing Investment Thesis
Royal Dutch
Shell plc
(RDSa.L)
Credit Suisse
HOLT® Lens
Price: 1,732 p
Target: 1,970 p
MC: US$
165.0bn
RDS's acquisition of BG, which completed in February 2016 makes strategic sense and re-positions the company down the cost curve. The
NewCo will be a much less capital-intensive version of its former self with greater scale and scope around key focus areas and will allow the
company to re-prioritise its investments and de-risk the dividend, in our view.
We view RDS's deep-water portfolio as industry leading with a vast resource base to support it, its LNG positioning superior to its peers, which should put it in a relatively better position to improve margin capture and market share, and its downstream business as highly
profitable.
Research Team
Thomas Adolff | [email protected] | +44 20 7888 9114
Justin Teo | [email protected] | +44 20 7888 9484
Energy
Oil & Gas Integrated
April 2016
TOP UNDERPERFORMS
Company Pricing Investment Thesis
BP
(BP.L)
Credit Suisse
HOLT® Lens
Price: 351.85 p
Target: 330 p
MC: US$ 93.4bn
BP has shrunk over the past five years to a size it sees as "optimal" – a simpler, more focused version of its former self. One of the notable
features of its portfolio is the concentration of the business, which enables greater visibility and, more importantly, enables focused
management. However, we remain concerned about the capital that BP has left to pay Macondo costs, while peers have been able to
invest.
Performance does not appear to be differentiated; if anything it comes at a weaker relative pace and we see undifferentiated investment
returns for the next wave of projects (pre-FID and recent FIDs). We see its portfolio depth and quality as disadvantageous and believe it
needs to high-grade both the base and future options through M&A.
Statoil
(STL.OL)
Credit Suisse
HOLT® Lens
Price: Nkr 127.9
Target: Nkr 90
MC: Nkr
407.8bn
In a low hydrocarbon price environment, Statoil's outsized exposure to the mature and high-cost Norwegian shelf and high leverage to spot
hydrocarbon markets without the benefits of a defensive downstream business put it at a distinct disadvantage to its peers. Its cash-cycle
imbalance remains our main concern; without significant cuts to its capex plan and an ambitious divestment programme, it may potentially
breach its gearing target in 2016. This lack of financial headroom puts its dividend policy at risk, in our view, in the absence of a rapid oil
price recovery.
Looking at the dividend yield, however, a lower yield to its peers tells us that the market is already ‘pricing-in’ the positive impact of cost-
cutting measures, leaving risk/reward skewed to the downside. We maintain our view that STL is over-distributing in the current environment and bears a high risk of a dividend cut if the macro environment does not improve. We estimate it is on course to breach the
self-imposed ND/CE target of 30% already in 2016.
Slide 23
TOP OUTPERFORMS
Company Pricing Investment Thesis
Danske Bank
(DANSKE.CO)
Credit Suisse
HOLT® Lens
Price: Dkr 175.5
Target: Dkr 221
MC: Dkr 177.0bn
Danske (OP, TP DKK 221.0) - attractive direct yield and restructuring option not priced in
1) A new DKK9bn buy-back program was announced for 2016E, which implies an attractive 9.9%/year all-in yield (with dividend yield at
4.9%).
2) At 1.2x TBV, 2016E, the market is not pricing in restructuring options, which could add up to 40bp to ROTE.
3) The NII bear case is already priced in and the Nationalbank in January lifted deposit rates by 10bp (25bp higher short-rates is 3-4% EPS
upgrade).
Intesa
Sanpaolo
(ISP.MI)
Credit Suisse
HOLT® Lens
Price: € 2.33
Target: € 3.3
MC: € 37.0bn
ISP remains one of our preferred options within the banking sector, expecting it to benefit from the weakness of smaller Italian players and
management’s focus on fee generation to offset some of the revenue pressures from the low(er) interest rate environment. Our numbers
stand below management guidance on fees (5%YoY growth vs. 10% for 2016) and imply RoTBV levels of 10-11% in 2016-17, vs. 5-8%
for other Italian peers and 8-10% for domestic Spanish.
Capital remains one of the main attractions for ISP, with our numbers suggesting limited risks to the c.€3bn and €4bn dividend
commitments for 2016 and 2017, with the bank's current position (FL CET 1) standing c.330bps above the regulatory requirements –
implying the bank could theoretically absorb additional losses of c.10% of the existing NPL book (i.e. increasing coverage from 51% to
61%) and still maintain a solvency position of 11.6%.
Research Team
Jan Wolter | [email protected] | +468 54 50 7921
Andrea Unzueta | [email protected] | +44 20 7888 2692
Financials
Banks (I)
April 2016 Slide 24
Research Team
Jan Wolter | [email protected] | +468 54 50 7921
Andrea Unzueta | [email protected] | +44 20 7888 2692
Financials
Banks (II)
TOP UNDERPERFORMS
Company Pricing Investment Thesis
DNB (DNB.OL)
Credit Suisse
HOLT® Lens
Price: Nkr 97.5
Target: Nkr 91
MC: Nkr 158.8bn
We believe DNB is not priced for:
(1) Capital hurdle could be (even) higher than 15.0%, turning DNB into a value trap. With the announced 150bp pillar 2A buffer, we think a
capital hurdle of above 16% is not unlikely. Going from Q4 CET1 of 14.4% to c16.0%, implies cNOK35bn more equity, (CSe 9.6% ROTE*
level, 2017E => don’t justify above 1.0x TBV valuation).
(2) Oil & Off-shore downturn start to materialise. CSe Oil & off-shore book is c.9% of exposure and Q4 Group LLPs at 37bp is far above
DNB's c26bp indication, 2016-18. NPL formation is still ahead of investors, DNB looks less well reserved given only 0.3% in reserves vs
cNOK170bn in Oil& Off-shore exposure and Norwegian slowdown impact other sectors (SME lending cNOK220bn, c14% of lending).
Banco Popular
(POP.MC)
Credit Suisse
HOLT® Lens
Price: € 2.18
Target: € 2.08
MC: € 4.8bn
Despite valuation (0.5x PTBV16E), Banco Popular remains our least preferred Spanish bank because of its comparatively lower RoTBVs
and solvency levels. We forecast RoTBV levels of 5-6% in 2016-17E to result from the outstanding revenue pressures (low rates,
unexciting volumes, removal of mortgage floors) and the bank’s structurally higher cost of risk – which is explained by its worse asset quality
position and higher exposure to property. On solvency, POP’s 10.9% FL CET ratio stands below that of other domestic peers (11.5-13%)
and we see risks related to the lower coverage levels on its €30bn property exposure (40% vs. peers at 50-57%), with our Expected Loss
analysis suggesting ac.€1.3bn provisioning shortfall by 2018E.
Svenska
Handelsbanke
n (SHBa.ST)
Credit Suisse
HOLT® Lens
Price: Skr 100.9
Target: Skr 94
MC: Skr 188.9bn
Although SHB is the best managed bank in the Nordic region, we see it is fully priced at 1.5x TBV 2016E:
(1) SHB could be ‘collateral damage’ in the regulatory regime shift: Swedish FSA's ambition to raise corporate RWs above 30%, implies
above 300bp negative CET1 impact and >100bp impact is expected from Basel IV. This puts dividends in risk, we are 16% below
consensus dividend estimates, 2016-17E).
(2) Costs already best in class with Group C/I ratio at c45% and Swedish C/I at c35%. We argue it could be difficult for SHB to off-set
weaker revenues with efficiency gains.
April 2016 Slide 25
Research Team
Richard Burden | [email protected] | +44 20 7888 0499
Thembeka Stemela | [email protected] | +44 20 7888 9228
Financials
Insurance (I)
TOP OUTPERFORMS
Company Pricing Investment Thesis
AVIVA Plc
(AV.L)
Credit Suisse
HOLT® Lens
Price: 432.2 p
Target: 620 p
MC: £ 17.5bn
We expect Aviva to release significant amounts of capital over the coming 12-18mths with this emerging form 1) £800m from the move of
FriendsLife to an internal model for Solvency II, 2) c£300m from the expected sale of the Credit du Nord JV back to SocGen as a result of
SocGen’s call on the business and 3) the potential sale of the group’s Spanish operations which has been suggested by several media
sources (we estimate a value of c£350-400m). Further we would not be surprised by management taking further measures to simplify the
group such as further selective withdrawls from smaller business units such as Italy.
With the groups’ solvency position towards the upper end of managements target range, we see the capital release from these sources as
largely available to management to redeploy through either organic or inorganic growth if suitable options are available or to return to
shareholders through additional capital return (most likely buybacks). Clear evidence that management will behave in a disciplined way in
terms of the usage of this capital should provide a catalyst for a re-rating of the shares and a closing of the discount to key peer groups in
particular the UK life names but also to the European composites. We estimate Aviva trades at c.10.4x P/E FY17E on a headline basis and
c8.2x using an operating EPS basis pointing to a c0.5-1x multiple point discount to the larger European composites and a c2-3 multiple
point discount to the larger UK life and P&C names.
AXA
(AXAF.PA)
Credit Suisse
HOLT® Lens
Price: € 20.18
Target: € 25.5
MC: € 46.8bn
Given AXA is trading on c8.3x 2017E P/E, with a prospective 2016E yield of c6% and an operating free cash flow yield of c11%, at the
upper end of peers, we continue to see it as one of the most attractive names in the sector. We expect the June 21st investor day to focus
on growth initiatives aimed at delivering in excess of 5% compound growth over the next 5 years with this likely to include a mixture of cost
reductions, product reorientation and initiatives aimed at increasing the level of cross sell and top line growth. Management has been at the
forefront of changing the business mix to adapt the life business to the current low yield environment and we expect this to increasingly pay
off as competitors move to similar business models. Overall, we see scope for valuation upside, given recovery in growth over the past year,
persistently solid solvency and reduced leverage (c20% at y/end 15).
Prudential
(PRU.L)
Credit Suisse
HOLT® Lens
Price: 1313 p
Target: 1761.81
p
MC: £ 33.8bn
Despite Asian macro uncertainty, long term prospects for growth in Asia remain supportive in our view. We view rising household incomes,
favourable demographic trends and low levels of insurance penetration to contribute to a sustained period of growth in Asia as wealth builds
and the middle class to whom the industry caters grows. In the US, greater clarity over the department of labour fiduciary rules suggests that
worst case fears for the development of the variable annuity product will not be met, with this pointing to continued solid net inflows into the
group’s US operations. Whilst the growth in Asia and the US will be dampened by stagnant UK earnings in life and asset management in
the near-term, we would still expect Prudential to deliver solid high single digit to low double digit growth rates over the foreseeable future
and do not see this growth as currently being priced into the shares. We estimate Prudential to trade at 10.3x PE based on 2017E, a level
we see as undemanding for a growth stock and only in-line with sector averages despite a relatively higher level of expected growth.
Prudential is a Global and European Focus List stock for Credit Suisse.
April 2016 Slide 26
Financials
Insurance (II)
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Admiral
(ADML.L)
Credit Suisse
HOLT® Lens
Price: 1930 p
Target: 1740 p
MC: £ 5.4bn
While Admiral continues to be characterised by a strong track record of operational delivery, near-term growth expectations do not support
the current c3-8 multiple points (on 2017e) valuation gap against non-life peers in our view. While we expect the group's solid 6.4%
dividend yield (of which 1pt per annum is exceptional) to limit downside, we view valuation as currently stretched, with current share prices
attributing value to the still loss making international operations. Whilst not attributing a negative value to these operations, we are unwilling to ascribe value to them given little visibility on when the international operations will begin to contribute to earnings, as management
continues to invest.
Swiss Re
(SRENH.VX)
Credit Suisse
HOLT® Lens
Price: SFr 88.4
Target: SFr 88
MC: US$ 34.4bn
Capital return prospects (Dividend + Buyback) have supported the shares over recent months as falls in yields have increased the
attractiveness of yield stocks. However, with industry fundamentals remaining on a downward trajectory, albeit at a potentially slower pace
than in the past year, earnings upgrades are likely to be largely dependent on lower P/E elements such as benign weather, prior-year
reserve development and realised bond gains. With ongoing support from a c5.5% yield and potential support from a CHF1.0bn buy-back
not coming before 4Q16, we see few near-term catalysts and view the attraction of the group's yield as largely priced-in. Therefore, as
lower expectations bake into valuations, we see scope for steady relative underperformance.
Research Team
Richard Burden | [email protected] | +44 20 7888 0499
Thembeka Stemela | [email protected] | +44 20 7888 9228
April 2016 Slide 27
Research Team
Ben Richford | [email protected] | +44 20 7888 8505
Marios Pastou | [email protected] | +44 20 7883 1274
Financials
Real Estate
TOP OUTPERFORMS
Company Pricing Investment Thesis
Grand City
Properties
(GYC.DE)
Credit Suisse
HOLT® Lens
Price: € 19.8
Target: € 21.85
MC: € 3.0bn
The German residential sector is enjoying a number of secular tailwinds that are stimulating demand, both at the tenant and investor level. A
surge in immigration is not only boosting the country's otherwise weak demographic profile, but is also likely to increase occupancy and
enhance rental growth prospects for the type of affordable housing owned by the listed landlords. Investors are attracted by an increasing
home ownership rate and an attractive gap between returns offered by real assets and an interest rate that is set Europe-wide and is arguably too low for Germany’s stronger-than-average economy. Grand City Properties has a proven high-returns business model that relies
on repositioning the depleted cash flow of under-managed residential properties in urban locations. Unlike peers, it has no legacy issues,
which has supported the creation of a cost efficient structure. Although it has delivered sector leading total returns to shareholders since its
2012 IPO and trades at the highest premium to NAV in our German resi coverage, Grand City's value creation prospects remain well above
peers, even as it matures.
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Capital &
Counties
(CAPCC.L)
Credit Suisse
HOLT® Lens
Price: 338.9 p
Target: 310 p
MC: £ 2.9bn
About 40% of Capital & Counties’ £3.7bn portfolio consists of the large-scale residential-led regeneration at Earl’s Court. As land, these
holdings are a geared play on London’s residential market and sensitive to end price assumptions. Prices of London’s new-build residential
sector are down an estimated 10% from last year’s peak due to an increase in supply and a decline in investor demand resulting from
changes in taxation and economic uncertainty. In its FY15 results CapCo reported a lack of sales and increased incentive schemes from its
latest marketing campaign which leaves investors unclear what the clearing price is, and by how much the value of Earl’s Court should be
written down by. Given the stock trades at about Spot NAV, we believe this is not adequately reflected in its share price given closest peer
Shaftesbury trades at only a 10% higher NAV premium. Shaftesbury owns properties in London’s West End similar to Covent Garden (55% of CapCo’s portfolio), but does not have the residential development exposure of Earl’s Court. We therefore rate Capital & Counties
underperform.
April 2016 Slide 28
Financials
Specialty Finance
Research Team
Martin Price | [email protected] | +44 20 7883 7516
Thomas Mills | [email protected] | +44 20 7888 8204
David Da Wei Wong | [email protected] | +44 20 7883 7515
TOP OUTPERFORMS
Company Pricing Investment Thesis
London Stock
Exchange
(LSE.L)
Credit Suisse
HOLT® Lens
Price: 2,793 p
Target: 3,350 p
MC: £ 9.7bn
London Stock Exchange is one of our most preferred names reflecting the following:
(1) The possibility of a superior counterbid for LSE emerging from a competitor such as ICE, which has declared that it is evaluating a
potential offer. Our US exchanges analysts estimate ICE can pay 3,200p per LSE share (75% debt/25% cash), break even in year 1 and
deliver 8-10% accretion by year 3. (2) In the event of the LSE-DB1 merger closing, we estimate the value of the cost synergies accruing to
LSE shareholders is 440p per LSE share which we do not believe is appropriately reflected in the current LSE share price. )3) On a
standalone basis LSE offers sector-leading 15% EPS CAGR over the period 2015A-2018E driven by mid-teens revenue growth in
businesses exposed to structural growth (e.g. indexes & OTC clearing) and margin expansion resulting from cost savings on our estimates.
We believe balance sheet deleverage resulting from asset sales (e.g. Russell Investment Management) alongside earnings growth also
provides scope for positive estimate revisions resulting from accretive debt funded bolt-on M&A.
Risks include: (i) no counterbid for LSE materialising and/or antitrust risks preventing proposed deals from closing; (ii) adverse regulatory
change, negatively impacting earnings and/or returns (e.g., clearing house regulatory capital creep/an EU FTT); (iii) a significant contraction
in capital markets activity reducing primary market activity and/or secondary market trading volumes.
London Stock Exchange is a Global and European Focus List stock for Credit Suisse.
April 2016 Slide 29
Financials
Specialty Finance (II)
Research Team
Martin Price | [email protected] | +44 20 7883 7516
Thomas Mills | [email protected] | +44 20 7888 8204
David Da Wei Wong | [email protected] | +44 20 7883 7515
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Ashmore
Group
(ASHM.L)
Credit Suisse
HOLT® Lens
Price: 289.3 p
Target: 250 p
MC: £ 2.0bn
Ashmore is one of our least preferred names reflecting the following:
1) It is overwhelmingly an emerging market debt asset manager, with ~85% of its AUM in various – external (22%), local currency (24%),
corporate debt (10%) and blended debt (27%) – EMD strategies. This leaves it very heavily exposed to an asset class that has seen
amongst the weakest investor sentiment over the last 12 months, with industry net redemptions as a percentage of opening AUM of 10% in
2015 (for ASHM CY15 net redemptions were 14%). Whilst we expect the rate of net outflows to slow, we do not expect them to reverse in
the current financial year (CSe FY16 net redemptions of 12.6%), putting further pressure on AUM and hence ASHM’s earnings. An
additional downside risk to our current flow estimates is the risk of sovereign wealth fund outflows, particularly from oil price-exposed
regions. SWF/government assets are ~20% of ASHM’s AUM and we believe it has seen materially lower net outflows from these sources
than certain peers.
2) While there has been some improvement in 1yr fund performance, we note that 3yr/5yr fund performance at Ashmore has yet to
convincingly turn-the-corner. Indeed, it is actually suffering from the strong outperformance periods of 2010 and 2012 dropping out of its
key 3yr (14% of funds outperforming benchmark and 5yr (64% of funds outperforming benchmark) performance numbers. We think a
pick-up here is a critical prerequisite to an improvement in flows, notwithstanding any improvement in market sentiment.
3) These factors, together with a slightly more stubborn than previously expected cost base, result in weak earnings momentum for the
stock, with CSe implying a 27%/1% decline in adj. EPS in 16E/17E. This is partly counterbalanced by a strong balance sheet and the
ability – although not, as yet, explicitly committed to – to pay an uncovered dividend (~7.5% DY). However, this all comes at a relatively
steep ~15.4x CSe CY16E EPS, falling to only ~14.8x in CSe CY17E.
April 2016 Slide 30
Healthcare
Medical Technology
Research Team
Christoph Gretler | [email protected] | +41 44 333 79 44
TOP OUTPERFORMS
Company Pricing Investment Thesis
Straumann
(STMN.S)
Credit Suisse
HOLT® Lens
Price: SFr 340
Target: SFr 370
MC: SFr 5.3bn
(1) We believe our high single digit sales growth projections are well based, and may have even potential upside, given STMN is investing
into (a) its value segment offering; (b) geographical reach expansion and (c) product range extension, where we think STMN has only
scratched the surface of the tapered implant potential (e.g. c20% of STMN implants were tapered in 2015 vs. 2/3 in the total market), with
management targeting c10% market share equivalent to estimated sales of cSFr200m or our total 2016-19E sales growth. (2) We also
think investors underestimate the margin leverage inherent in the STMN business model. In 2015, STMN grew clean EBIT margin 300bps
on 9% underlying sales growth. For 2016/17E, we project 100bps/140bps EBIT margin increase on c7%/c8% underlying growth. (3)
Finally, we think STMN has at least SFr850m in firepower to participate in M&A and industry consolidation, thereby providing shareholders
with attractive, not yet discounted, return opportunities.
TOP UNDERPERFORMS
Company Pricing Investment Thesis
GN Store Nord
(GN.CO)
Credit Suisse
HOLT® Lens
Price: Dkr 134.3
Target: Dkr 125
MC: Dkr 20.8bn
We continue to view GN as the stock that is most at risk of disappointments within our hearing device coverage. With competition catching
up on 2.4GHz connectivity, we think any product differentiation related advantage at GN is shrinking. Hence, we believe GN's 2016 target
to outgrow the hearing device market by 300bps might prove to be overly ambitious. Further, we think visibility and predictability in the
headset business, Netcom, remains low (as evidenced by the recent soft outlook given by US competitor Plantronics), which could add
incremental risk throughout 2016.
April 2016 Slide 31
Healthcare
Pharmaceuticals
Research Team European Pharma Team | [email protected] | +44 207 888 0304 Jo Walton | [email protected] | +44 20 7888 0304 Matthew Weston | [email protected] | +44 20 7888 3690 Rebekah Harper | [email protected] | +44 20 7888 2124 Dilraj Judge| [email protected] | +44 20 7883 0843
TOP OUTPERFORMS
Company Pricing Investment Thesis
Novartis
(NOVN.VX)
Credit Suisse
HOLT® Lens
Price: SFr 71.85
Target: SFr 100
MC: US$ 201.9bn
Novartis remains a top pick for us. Novartis is in a period of restructuring, building up its oncology business, exiting underperforming vaccines/animal health businesses, and delivering on the Pharma pipeline. Despite the recent weakness at Alcon, we continue to believe that mid-term underlying EPS growth at Novartis is underappreciated. Strong Pharma and Sandoz margins highlight the significant potential from mix changes in the midterm. We continue to believe that the Group earnings leverage from the roll-out of Entresto (LCZ for heart failure) and Cosentyx (psoriasis) is significantly greater than consensus assumes. We look to the Novartis Business Services project as a way to constrain operating costs during this time of transition. Management confidence in the future prospects is also strong given its commitment to sustain and grow the group dividend in SFR.
Roche
(ROG.VX)
Credit Suisse
HOLT® Lens
Price: SFr 242.5
Target: SFr 300
MC: SFr
170.4bn
We highlight Roche's strength in oncology both with existing drugs and innovative pipeline developments. In immuno-oncology we continue to believe that Roche will be able to take a significant share of the emerging market despite being likely only third to the market in the lung cancer space. We also highlight the potential for ocrelizumab in MS to drive >$3bn of peak sales given its unique efficacy in the rare form of the disease.
Roche has one of the largest R&D budgets in the industry, both in absolute and relative terms. The increase in general R&D productivity that has supported the rerating of US biotech over recent years should also benefit Roche in the future.
In addition to typical risks associated with drug approvals and patents, for Roche we have limited visibility on the ultimate size of the immuno-oncology market, and the level of drug differentiation. Roche derives c70% of NPV from complex biologics, and this exposes them to uncertain future levels of biosimilar erosion following the expiration of the patent.
Roche is a European & Global Focus List stock for Credit Suisse.
TOP UNDERPERFORMS
Company Pricing Investment Thesis
AstraZeneca
(AZN.L)
Credit Suisse
HOLT® Lens
Price: 4,065 p
Target: 4,000 p
MC: US$ 73.2bn
Our Underperform rating reflects the ongoing headwinds to the base business from generics and low levels of uniqueness, a more
challenging diabetes market and the AZN specific saxa/dapa delay. Together we think these issues more than offset the mid-term
attractions of the pipeline, where there are still substantial execution risks particularly given recent pipeline failures.
We viewed saxa/dapa as a key plank of the earnings bridge to AZN’s new pipeline. The company is now materially behind Lilly’s Glyxambi
(launch March’15) and relied on the saxa/dapa combo for differentiation in a high-competitive market. Delays for saxa/dapa, brodalumab
and recent heightened safety concerns on AZD 9291 highlight the risks on such pipeline reliance. We expect investors to favour stocks with
greater short term earnings visibility. Also see PharmaValues 2016 Strategic Conclusions from 20 Oct 2015.
April 2016 Slide 32
Industrials
Aerospace & Defence
Research Team
Olivier Brochet | [email protected] | +44 20 7888 8508
Ashlee Ramanathan | [email protected] | +44 20 7883 9934
TOP OUTPERFORMS
Company Pricing Investment Thesis
Airbus Group
(AIR.PA)
Credit Suisse
HOLT® Lens
Price: € 56.35
Target: € 80
MC: € 43.9bn
Airbus should generate EUR24bn of cumulative FCF over 2016-20E, vs EUR19bn for 2000-15. This should be driven by the increase in
A320 output, a reduced cash drain from A350 and A400M and the improvement in the USD hedge rate. We believe overbooking and the
Iranian order will help Airbus absorb deferrals that may arise due to cyclical weakness without a material impact on production. The large
bulk of this FCF should come in 2018 and beyond. It will likely be complemented before that by the disposal of Dassault Aviation and some
Defence & Space assets.
We use a sum of the parts to value Airbus, with different prospects and cycles in each of its three business lines. It also captures some
adjustments to assets & liabilities not well captured at the operating earnings level (stake in Dassault Aviation, launch aids, etc). We are
using a 2018 SOTP to better capture the significant FX benefits derived from the lower euro. We have included the EUR 1bn share
buyback in our numbers.
Airbus Group is a Global and European Focus List stock for Credit Suisse.
April 2016
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Rolls-Royce
(RR.L)
Credit Suisse
HOLT® Lens
Price: 664 p
Target: 540 p
MC: £ 12.2bn
The improved disclosure will allow investors to determine if and when an earnings recovery story will be ready to unfold. We adhere to the
idea that the strong increase in installed base will drive aftermarket growth in the future, but it appears too early still to determine how strong
this drive will be (with many moving parts still not stabilised). In the meanwhile, it highlights the short term pressure coming from various
areas of the group (bizjet and regional jet engines, widebody OE, Marine, Defence Aerospace). We believe that the current price levels are
anticipating too much of the possible improvement at the end of the decade, with an unbalanced risk / reward.
We value Rolls-Royce at 540p using a SOTP based on our 2018E EBIT forecasts. We adjust our numbers for capitalised costs. We use
samples of Aerospace, Defence, Marine, Energy and Mechanical cap goods stocks for each of the divisions. We use EV/EBIT for all but
Nuclear & Energy, where we used EV/sales. We include cost benefits from the current operational review launched by the group's new
management.
Slide 33
Research Team
Andrew Grobler | [email protected] | +44 20 7883 5943
Karl Green | [email protected] | +44 20 7888 2629
Daniel Hobden| [email protected] | +44 20 7883 3290
Industrials Business & Professional Services (I)
April 2016 Slide 34
TOP OUTPERFORMS
Company Pricing Investment Thesis
Capita
(CPI.L)
Credit Suisse
HOLT® Lens
Price: 1,034 p
Target: 1,350 p
MC: £ 6.9bn
We think that Capita’s public sector bid pipeline and framework opportunities (especially in Healthcare, not reflected in the pipeline) are set
to expand materially over the next 12 months. Given Capita’s high level of contract selectivity, we anticipate an elevated win rate (>1:2) of
transformational outsourcing partnerships. In combination with shorter-term (nevertheless sticky) task orders, software sales and
transactional activities this should, contrary to relatively sceptical market sentiment, drive an acceleration in organic growth in both 2016 and
into 2017. At the same time, RoCE looks set to inflect as incremental capital being deployed to support growth is set to proportionately
reduce as the company exits a challenging transition period in the Life & Pensions sector and management has introduced a greater degree
of competition for internal funds between organic and M&A activities (whereas the former was constrained by a relatively arbitrary
capex/sales cap which has recently been removed).
Risk: Competition continues to raise its game and Capita may have to accelerate contract churn to avoid attrition at the more commoditised
end of its service offering. Capita is currently benefiting from tailwinds in its transactional businesses which could fade faster than expected
in 2016, especially in public sector staffing markets.
Reward: The Business Services sector has generally rewarded companies that are delivering a sustained improvement in RoCE in terms of
relative share price performance, of which Capita’s new CFO is acutely aware. Recent divisional reorganisations should make investors more
comfortable about the sustainability of EBITA margins. On a 12-18 month view, we see scope for material outperformance vs. the wider
sector.
Securitas
(SECUB.ST)
Credit Suisse
HOLT® Lens
Price: Skr 137
Target: Skr 140
MC: Skr 47.7bn
Securitas is at the forefront of the transition in the security markets from static manned guarding towards technology-enabled solutions. Its
ability to offer a bundled solution containing static guards, mobile units and technology is unique within the industry and is allowing to gain
incremental market share across major markets.
Bundled services are at c10% margins (on average) compared to 5% for traditional manned guarding. We expect that tech solutions
(growing c30% in 2015E) will move from 22% of EBITA in 2015E to 45% by 2019E as the mix continues to shift towards this offering.
This will, on our estimates, drive rising margins (5.1% in 2015E to 5.9% in 2019E), improved ROIC (10.4% in 2014 to 14% in 2019E) and
low double digit EPS growth over the 5 years to 2019E.
We think the current price reflects the old, commoditised, manned guarding business but not the structural shift in the industry, which
Securitas is leading, towards higher return, longer contract duration, bundled services.
TOP OUTPERFORMS
Company Pricing Investment Thesis
SGS
Surveillance
(SGSN.S)
Credit Suisse
HOLT® Lens
Price: SFr 2,103
Target: SFr
2,200
MC: SFr 16.5bn
We think that organic growth in the testing markets has troughed out at 2-3% in 2016 with longer term structural drivers remaining intact,
albeit less forceful than was the case historically. While much attention has been focused on the resources exposure of the business we
estimate that the non-trading related resources exposure only represents 15% of group EBITA so while not irrelevant is not the key driver of
operational performance. In addition we think SGS has significant opportunity to improve margins and ROIC in coming years as corporate
focus (and management incentives) shift from growth towards profitable growth. Efficiency and cost reduction programs should see group
EBITA margins rise from 16.1% in 2015 to 18% by 2020E and we do not think this progression is reflected in current IBES consensus.
Our forecasts are currently c10% above consensus for 2017E
Risk: Macro pressure leads to lower volume growth and further pressure on pricing reducing organic growth and, from a margin perspective,
offsetting the benefits of the efficiency and cost controls
Reward: Margin accretion plus the on-going M&A strategy leads support earnings growth and drives earnings momentum for the business.
Research Team
Andrew Grobler | [email protected] | +44 20 7883 5943
Karl Green | [email protected] | +44 20 7888 2629
Daniel Hobden| [email protected] | +44 20 7883 3290
Industrials Business & Professional Services (II)
April 2016 Slide 35
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Ashtead
Group (AHT.L)
Credit Suisse
HOLT® Lens
Price: 842 p
Target: 770 p
MC: £ 4.2bn
Though we see Ashtead’s US subsidiary, Sunbelt, as a best-in-class operator, we believe that supply side risks are growing around due to
two key factors: (1) lower demand for used US construction equipment from emerging markets (pressuring second hand values and, in turn,
rental pricing); and (2) greater incentives for contractors to rent vs. own equipment due to enhanced tax breaks, clarity around the total cost
of ownership of Tier-4 emissions compliant equipment and still-supportive levels of credit availability. We see rental fleet flexibility as
relatively ‘round the edges’ in terms of the wider stock and flow of US construction equipment and believe that overcapacity will be as
pronounced (proportionately) into the next construction downturn as in previous cycles. On this basis, we see risks around rental yield and,
due to very high drop through at the EBITDA level, see margin risk to the downside (unlike the steady upwards creep implied by consensus).
Risks: Though demand barometers are currently weak, a pick up on the demand side could absorb near-term supply pressures and rental
yields (and thus margins) could be more resilient than we forecast. In which case, after the recent valuation multiple compression, the stock
could be susceptible to a positive re-rating. The stock’s relatively lowly-levered balance sheet (by reference to historical standards) also
presents upside risk in the event management chooses to return capital to shareholders.
Reward: If our EPS estimates prove to be correct, the stock could fall materially from here without any further de-rating. Deep value support
by reference to tangible assets at replacement cost is significantly lower still.
Research Team
Andrew Grobler | [email protected] | +44 20 7883 5943
Karl Green | [email protected] | +44 20 7888 2629
Daniel Hobden| [email protected] | +44 20 7883 3290
Industrials Business & Professional Services (III)
April 2016 Slide 36
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Brenntag
(BNRGN.DE)
Credit Suisse
HOLT® Lens
Price: € 51.18
Target: € 42
MC: € 7.9bn
Our analysis suggests that Brenntag has lost a significant proportion of its market share organically and that only part of the gap has been
plugged by lumpy M&A activity. Despite growing gross profit by almost 50% between 2008-14, adjusted ROIC is essentially flat, on our
numbers. This suggests that scale benefits are inherently limited and/or, given market share losses, that Brenntag is possibly over-earning
in what is still a fragmented market.
We think the consensus overestimates Brenntag's medium-term organic growth potential or, more likely, underestimates the pressure on
invested capital turns, assuming that further M&A plugs part of the gap. While many investors appear to view Brenntag's business model as
"superior" (as described in the 2010 IPO prospectus), we do not believe it has produced superior growth in returns or a meaningfully
enhanced market position.
Risks: A meaningful acceleration in global IP momentum; above-average levels of EPS-accretive M&A activity
Reward: Longer-term organic underperformance, which could drive weaker than-expected operational performance and a de-rating.
Michael Page
(MPI.L)
Credit Suisse
HOLT® Lens
Price: 416.8 p
Target: 380 p
MC: £ 1.4bn
We think that professional recruitment, particularly permanent recruitment faces structural headwinds from technology based alternative solutions (e.g. LinkedIn). While the professional agencies still offer a valid and valuable services, in our view, we expect the future to be tougher than the past. This will limit both organic gross profit growth as more, particularly larger, clients hire directly, and operational leverage given rising service requirements and lower volume growth. See our note (the Direct Approach, published 22 October 2015 for more detail. In the short term we also expect that growth rates slowed through the end of 2015 putting negative pressure on 2016 consensus (CS forecasts are 3% below IBES consensus)
Risks: cyclical growth in UK and Europe is sufficient to offset in the near term the structural headwinds from technology based alternatives,
Reward: Gross profit growth and operational leverage are limited by clients hiring more candidates directly, which limits volume growth across the network. At 17.9x 2016E PE compared to the other professional staffers at an average of 14.7x that is not reflected in the current share price.
Research Team
Andrew Grobler | [email protected] | +44 20 7883 5943
Karl Green | [email protected] | +44 20 7888 2629
Daniel Hobden| [email protected] | +44 20 7883 3290
Industrials Business & Professional Services (IV)
April 2016 Slide 37
Research Team
Andre Kukhnin | [email protected] | +44 20 7888 0350
Jonathan Hurn | [email protected] | +44 20 7883 4532
Max Yates | [email protected] | +44 20 7883 8501
Tiantian Li | [email protected] | +44 20 7883 1552
Industrials
Capital Goods (I)
TOP OUTPERFORMS
Company Pricing Investment Thesis
Assa Abloy
(ASSAB.ST)
Credit Suisse
HOLT® Lens
Price: Skr 160.4
Target: Skr 195
MC: Skr 173.2bn
We believe the market concerns over soft Q1 are now fully discounted while the fundamental investment case is intact and valuation is
undemanding. (1) Q1 concerns vs outlook for rest of the year: There is a number of factors at work that are negatively impacting Q1 performance
that either reverse later in the year or at least lessen later in the year. These are (i) selling days effect (1 less in Q1 but +2 in Q2 - Easter), (ii) FX
margin dilution (-30bps in Q1 but neutral in Q2 onwards), (iii) tougher comp effect in Global Tech (H1 specific) and (iv) M&A margin dilution (-30bps
in Q1 which we estimate peak impact). (2) Fundamental investment case intact based on organic growth accelerating (cyclical recovery and shift to
electro-mechanical locks) and the Acquire & Restructure models: On organic growth, we would highlight that data on European construction during
Q1 has been supportive to our thesis, especially France. On acquire and restructure, we highlight that the acquisition pipeline remains very strong
and we expect Assa to launch a new manufacturing footprint programme during this year.
Investment case: (1) Electro-mechanical locks. This segment has grown at a double-digit rate in 2012-14, driving all of Assa's group organic
growth. We expect it to accelerate to 15% with rising technology acceptance (backed by feedback from trade fairs such as IFSEC recently) and
with Assa gaining share from recent new product launches. (2) Hospitality digital keys. Hotels have started actively adopting mobile keys
technology, pioneered by Assa. In response, we have compiled a model of potential lock upgrades and digital key issuance that points to an EBIT
opportunity equivalent to 3% of our 2017 group forecast with further upside in outer years. (3) Next MFP programme potential. Assa management
is in the final stages of the company's fifth manufacturing footprint adjustment programme and we see scope for the next programme to be
launched this year given cSEK 7bn of sales added through 18 acquisitions since the last programme launch. Catalyst: Q1 2016 results on 27 April.
Allegion Q1 results on 28 April Doka CMD on 4-5 April in Germany. The stock is trading on P/E of 21x 2016 and 18.3x 2016, which represents a
c10% discount to its high quality growth construction-exposed peer group while continuing to offer a superior earnings growth profile.
Halma
(HLMA.L)
Credit Suisse
HOLT® Lens
Price: 915.5 p
Target: 955 p
MC: £ 3.5bn
This includes Halma delivering 12% EBITA CAGR 2010-2015 which we think can continue despite the weak outlook for the sector; It has amongst
the lowest level of historic margin volatility over the cycle of just 370bp peak to trough vs. sector average of 840bp, which positions it well for 2016
when sector pricing pressure is likely to intensify; Cash conversion is firmly in the sector upper quartile; And it serves safety legislation driven end
markets.
Why it can continue to deliver good growth: This will be organic and M&A driven. Management have a target of doubling profit over a 5 year period
(or by 2019) using both. Organically - we discount 6% EBITA CAGR growth over the next 3 years on the back of factors including market share
gains and new products introduced into its legislation driven end markets of buildings, environmental, process, medical. As a sense check organic
revenue/profit ex-FX was +10% / +6% in H1. M&A will supplement this. Halma does on average 3 deals a year and has at least £150m to spend.
We think the divisions have a better spread of opportunities vs. 12 months ago.
What does this mean for the valuation: If we assume that the profit growth continues at the historic rate of 12% CAGR through 2019 from a
combination or organic growth and M&A at c9x EV/EBITA we derive 50p of EPS in 2019. Assuming no derating of the current PE multiple (which
we see as fair considering the growth rate / track record) and discounting at an 8% WACC, we derive a fair value of 955p. If management can
deliver their target of doubling profit over a 5 year period to 2019, and applying the same multiple/discount rate we get a value of 1096p.
Valuation: 24x 2016 earnings and broadly inline with the average of 22x for the higher quality industrials of Assa, Geberit and Legrand. It is also
trading inline with the consumer staples with which it has shown similar characteristics.
April 2016 Slide 38
Research Team
Andre Kukhnin | [email protected] | +44 20 7888 0350
Jonathan Hurn | [email protected] | +44 20 7883 4532
Max Yates | [email protected] | +44 20 7883 8501
Tiantian Li | [email protected] | +44 20 7883 1552
Industrials
Capital Goods (II)
TOP OUTPERFORMS
Company Pricing Investment Thesis
Prysmian
(PRY.MI)
Credit Suisse
HOLT® Lens
Price: € 20.14
Target: € 21
MC: € 4.4bn
We believe that at Prysmian there is scope for organic growth to step-up vs history and believe that further cost actions can support
margins. Also we see potential for value –accretive M&A in 2016 as a further positive catalyst. We are 4% ahead of 2016 consensus EBIT.
(1) Organic growth step-up: Having historically lagged Electrical peers Prysmian's has been the fastest growing Electrical in 2015 (6.6% vs
1% for peers). We expect above average growth to continue in 2016E and 2017E which we believe can drive a re-rating.
(2) Cost actions to support margins in 2016: Two key actions supporting margins are in Prysmian's Telecom and Submarine businesses. In
Telecom we believe ramping up production in Romania has potential to move EBITDA margins towards 15% by 2017. In Submarine (ex
Westlink) 2014 EBITDA margins are -200bps and we believe improved execution is a focus for management in 2016. In a bull case on
margins we would be +9% vs consensus.
(3) M&A as a catalyst in 2016: We view potential for mid-sized (c€900m) M&A as attractive optionality for Prysmian. Given Prysmian's
strong M&A track record we would expect a deal to be taken well by the market.
(4) Valuation: Prysmian trades on c.10x 2016 EV/EBITA which is a -20% discount to Cap Goods. We also view the c.7% 2016 FCF yield
as attractive.
April 2016 Slide 39
Industrials
Capital Goods (III)
Research Team
Andre Kukhnin | [email protected] | +44 20 7888 0350
Jonathan Hurn | [email protected] | +44 20 7883 4532
Max Yates | [email protected] | +44 20 7883 8501
Tiantian Li | [email protected] | +44 20 7883 1552
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Sandvik
(SAND.ST)
Credit Suisse
HOLT® Lens
Price: Skr 85.25
Target: Skr 65
MC: Skr 106.9bn
We continue to see key risks to Sandvik’s earnings due to: (1) volume risk in General Industrial; (2) mining downturn proving more
protracted owing to Systems; and (3) the structural competitive threat for crushers in Construction and the lower end of Mining as well as a
risk in Machining Solutions.
Risk: The key upside risk is better-than-expected execution on the restructuring programme and a higher retention rate on savings, as well
as a cyclical recovery.
Wartsila
(WRT1V.HE)
Credit Suisse
HOLT® Lens
Price: € 39.39
Target: € 36
MC: € 7.8bn
On Wartsila, we see the following key risks underpinning our Underperform rating: (1) risk to 2015 orders, for which we forecast
-6% and we think the consensus is too bullish on orders picking up in H2; (2) customers pushing out order deliveries and cancelling in
Marine, which is a -4% risk to our EBIT (we are already -5% vs consensus for 2016); (3) limited scope for margin expansion in lower
growth, which implies achieving the 14% margin target in the near term unlikely; and (4) valuation, as Wartsila is trading at a premium to
Mechanicals, which we think is unwarranted given its end market weakness.
Risks to our investment case: Positive surprises on EBIT margins driven by cost savings or Power plant order momentum surprising
positively and offsetting Ship Power weakness.
April 2016 Slide 40
Research Team
Neil Glynn | [email protected] | +44 20 7883 6929
Tim Ramskill | [email protected] | +44 20 7883 7361
Julia Pennington | [email protected] | +44 20 7888 0157
Industrials
Transport
TOP OUTPERFORMS
Company Pricing Investment Thesis
International
Airlines Group
(ICAG.L)
Credit Suisse
HOLT® Lens
Price: 532.5 p
Target: 852 p
MC: € 14.8bn
IAG is our top pick based on:
(1) Self-help opportunities including BA’s potential to approach easyJet’s levels of profitability on the short haul and helping IAG to more
than double EBIT from €1.4bn in 2014A to €3.6bn in 2016E (€3.4bn ex-Aer Lingus);
(2) Heathrow capacity constraints, which could allow BA to protect fuel tailwinds better than peers, supplementing ex-fuel margin expansion;
and (3) cash flow generation set to take on LCC characteristics as IAG produces double-digit FCF yields from 2016E, as outlined in our
Ideas Engine note from 23 October 2014, titled “Turning British Airways more orange”. With an annual, sustainable double-digit FCF yield of
6-11% in 2016E-2020E, we think IAG currently is considerably undervalued.
The key risk to our thesis represents pricing, as is usual for an airline. Each 1% movement in pricing/revenues has a c€200m impact on
IAG EBIT, on a 2016E base of €3.6bn before considering other factors.
International Airlines Group is a European Focus List stock for Credit Suisse.
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Deutsche Post
DHL
(DPWGN.DE)
Credit Suisse
HOLT® Lens
Price: € 24.3
Target: € 20.89
MC: € 29.5bn
We are cautious on DP DHL given: (i) 2015A operating cash flow enjoyed the best conversion from EBITDA performance since 2006A at
99% versus a 10Y average of 72% and we expect a deterioration in 2016E to 89% (based on maintained WC intensity) to drive a FCF fall
from €1.7bn to €1.4bn while our 2016E EBIT of €3.3bn sits below consensus of €3.5bn, (ii) a year of transition (2015) blighted by
exceptionals serves as a reminder of DP DHL's poor track record in terms of earnings quality – Credit Suisse HOLT ® ranks DP DHL 9th
out of 13 European Transport stocks and we consider it crucial that the company recovers from 2015 to begin to build a track record of
clean earnings, coupled with strong earnings-cash flow conversion, and (iii) while DP DHL achieved a FCF yield of 6% in 2015A, and
rewarded patient shareholders with a €1bn buyback on top of a €1bn regular dividend (aggregate 7% yield), a ROCE nearing 6% in 2016E
does not yet cover a 7.5% WACC. These concerns are supplemented by Amazon risk to the medium-to-long term as it rolls out its own
delivery network following its establishment of logistics capabilities in the US, and UK in particular.
April 2016 Slide 41
Research Team
Harry Goad | [email protected] | +44 20 7883 5942
Samuel Thomas| [email protected] | +44 20 7888 9609
Materials Building Materials & Construction (I)
TOP OUTPERFORMS
Company Pricing Investment Thesis
Lafarge-
Holcim
(LHN.VX)
Credit Suisse
HOLT® Lens
Price: SFr 45.75
Target: SFr 54
MC: SFr 27.8bn
The creation of LafargeHolcim heralds a new era in the global cement industry, forming a market leader that will place much greater
emphasis on ROCE and capital returns than has historically been the case. We believe the new company will deliver a more stable profit
stream and will exhibit improved capital discipline which will result in improved returns and higher free cash flow generation. We think this
can be delivered by a material reduction in growth investment in the coming years, which could be made possible by both the scale and
spread of the new group's portfolio as well as the significant spare capacity in the existing asset base.
Given its already strong balance sheet, we believe the substantial portion of surplus cashflow will be returned to shareholders via a
progressive regular dividend as well as special dividends. In 2016-18 we forecast a FCF yield of 7%, 12% and 12% with a total dividend
yield of 3%, 6% and 8%, with still robust Net Debt/EBITDA of 2.5x, 1.8x and 1.5x, respectively.
Travis Perkins
(TPK.L)
Credit Suisse
HOLT® Lens
Price: 1,821 p
Target: 2,200 p
MC: £ 4.6bn
Travis is our preferred play within the wider UK Housing sub-sector and our positive investment thesis is predicated on the following factors;
1) Cyclical - Given the broad exposure of the Group across all types of construction end markets we see it very much as a proxy for total UK
construction activity where we expect decent midterm growth. We also cite TPK as our preferred way to play the Government's desire to
materially increase UK housebuilding output; 2) Structural - the group is midway through a material investment program which was launched
late 2013 with a view to reinforce its position of market dominance, and its ability to continue to take market share. We expect the benefits
of this investment phase will become increasingly apparent in the next year through organic sales growth, while we are also excited by the
positive impact to free cash flow yields as relative capex spend peaks.
As a result of both cyclical and structural tailwinds we see positive momentum in all valuation metrics over the coming years. On 2016F we
see TPK on 0.77x EV/Sales, 13x EPS with an 7% FCF yield, which move to 0.70x, 11x and 9% by 2017.
April 2016 Slide 42
Research Team
Harry Goad | [email protected] | +44 20 7883 5942
Samuel Thomas| [email protected] | +44 20 7888 9609
Materials Building Materials & Construction (II)
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Persimmon
(PSN.L)
Credit Suisse
HOLT® Lens
Price: 1,995 p
Target: 1,383 p
MC: £ 6.1bn
There has been much to like about the Persimmon equity story in recent years, and we remain of the view that it is a quality operator.
However, we believe valuations have reached a point that look overstretched. Not only is the sector trading at a c.75% premium to its 20-
year average, but the premium at which Persimmon trades over and above the sector average has expanded to c.27% compared to its
c.10% historical average. We agree that there are reasons to justify why the sector warrants a premium of sorts relative to history given the
positive changes in capital discipline, but we think the extent of the upward rerating in both the sector and specifically in Persimmon have
been overdone.
To justify the TNAV multiples on which the sector and Persimmon now trade, we think one has to be able to successfully argue the case
that the industry has structurally changed to the extent that future ROCE will be structurally significantly higher into perpetuity than it has
been in the past. This is an argument that we do not fundamentally support. We recognise that industry capital discipline has improved, but
we do not believe that the current favourable disconnect between house prices and land prices, which is the critical structural factor in
ROCE, will persist forever. We worry that the equity market is now assuming that this favourable current dynamic is the permanent new
normal.
April 2016 Slide 43
Research Team
Chris Counihan | [email protected] | +44 20 7883 7618
Mathew Waugh | [email protected] | +44 20 7888 0194
Joe Bradley | [email protected] | +44 20 7883 1875
Materials
Chemicals (I)
TOP OUTPERFORMS
Company Pricing Investment Thesis
AkzoNobel
(AKZO.AS)
Credit Suisse
HOLT® Lens
Price: € 58.16
Target: € 71
MC: € 14.4bn
We believe the key earnings drivers for AkzoNobel are on balance turning positive in 2016. We estimate AkzoNobel raw materials are down
13% YoY - this is becoming increasingly relevant considering the working capital cycle of the paints business (building inventory throughout
the first quarter to stock for the seasonally busy summer painting season). Importantly, we believe Decorative Paints (and to a lesser extent
Industrial Coatings) has pricing power. We estimate this provides a ~10% YoY group EBIT tailwind. CS forecasts cost savings in FY16E of
€117mn, which offsets fixed cost inflation of ~€100mn. Whilst not the earnings growth driver of the past (AkzoNobel had achieved over and
above fixed cost inflation over the last two years), ensures any benefits from raw materials/volumes will fall to the bottom line. Currency is
becoming a greater headwind in emerging markets, require sustained price increases to offset.
Financially, we believe Akzo should consider using its balance sheet to reward shareholders. This is given: 1) Derisking of the major part of
the pension liability/shortfall (following the UK Triennial review); 2) Improvement in FCF generation (post pension we forecast average
~€300mn pa); 3) Sustainable earnings improvement – led by favourable price vs raws in 2016. This is despite European housing activity
being 20- 25% below mid cycle; and 4) Gearing (ND/EBITDA) of 0.5x (excluding pensions). Importantly, acquisition opportunities are
largely bolt on only and Akzo has limited capex requirements. Akzo’s balance sheet appears increasingly underlevered (€2-3bn headroom).
Arkema
(AKE.PA)
Credit Suisse
HOLT® Lens
Price: € 66.58
Target: € 71
MC: € 5.0bn
Arkema has pricing power across ~30% of its portfolio (Bostik, Technical Polymers, downstream resins/Sartomer). We believe these
segments benefit from a lower raw material environment (generate gross margin expansion). Across the balance of its portfolio, we
acknowledge that input cost volatility (largely petrochemical led) creates short term margin volatility. However, we note across the majority of
its commodity chemical exposures either 1) Supply/demand outlook is improving (excluding Chinese Acrylic Acid); or 2) Product spreads are
below mid cycle and in many cases approaching trough cycle. Arkema trades at 6.3x FY16F EV/EBITDA, which represents a 18% discount
to the broader European Chemicals. Excluding Bostik (peers trade on >12x EBITDA), we estimate this valuation discount is ~30%.
We are further encouraged by the positive early performance of the Bostik business, ~20% EBITDA growth under the first eight months of
Arkema's ownership. We believe the key areas of outperformance are yet to be fully realised (CS is ~20% above Arkema's 2017 EBITDA
targets), including: 1)Organic growth ahead of peers, as Bostik has greater management focus (represents a significantly greater proportion
of group earnings) under Arkema. We believe this provides market share growth (including catch up) opportunities; 2) Raw material cost
decline: We estimate 70% of Bostik raw materials are linked to oil inputs. Applying the forward oil/currency curves implies ~20% potential
upside to Bostik earnings (or an implied acquisition multiple of 8.5x); 3) Synergies: Bostik's results are yet to materially benefit from
synergies (management targets ~€30mn by FY17).
April 2016 Slide 44
Materials
Chemicals (II)
Research Team
Chris Counihan | [email protected] | +44 20 7883 7618
Mathew Waugh | [email protected] | +44 20 7888 0194
Joe Bradley | [email protected] | +44 20 7883 1875
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Air Liquide
(AIRP.PA)
Credit Suisse
HOLT® Lens
Price: € 95.4
Target: € 85.5
MC: € 32.9bn
We believe the agreed Airgas acquisition is an expensive way to enter more cyclical Packaged Gas end markets (FY15 transaction multiple
13.8x, 47% premium to Airgas historic multiple - 9.3x). We estimate it is 250bps ROCE dilutive (like for like ROCE premium to Linde now
50bps). We believe the AirGas business model is higher risk relative to Air Liquide's traditional tonnage (take or pay) business model. We
est. Air Liquide's proportion of tonnage revenues declines from ~38% to ~28% following this transaction. This increases group earnings
volatility – increasingly dependent on North American industrial end markets (arguably near peak cycle). Cost synergies provide a limited
offset ($200-$220mn to 2018).
Financially, we estimate post transaction leverage of ~3x (ND/EBITDA), well above historic average ~2x. We forecast cash dividend
coverage in FY17F of 1.2x only. This increased debt burden could limit the level of expansionary capital expenditure over the next 2-3 years
(albeit opportunities appear more limited in the current environment – as indicated by Air Liquide's shift towards M&A), to return the balance
sheet to an A credit rating. This may positively impact returns on new projects for the broader industry.
BASF
(BASFn.DE)
Credit Suisse
HOLT® Lens
Price: € 64.11
Target: € 63
MC: € 58.9bn
We forecast continued cyclical challenges in 2016 as global chemicals oversupply increases from 11% to 14% (CS EBIT flat yoy). However
our greater concern is now mid-term (2017 and beyond) market expectations (10% above CS) given the structural changes to the Asian
chemicals market: 1) Strategic threat from Asia: We believe tier 1 Chinese producers have significant overlap with BASF and are expanding
into key areas including battery materials, superabsorbants & advanced plastics. We note that tier 2 producers are moving from basic
plastics to rubbers, engineering plastics and electronic chemicals. 2) Asian Technology Risk Accelerating: We believe that lower tier Chinese
producers now present a credible threat over much of BASFs portfolio. We estimate that Chinese producers are expanding (and can
compete) in over c40% of BASF's portfolio. We forecast credible new entrants across 25% of the portfolio. We believe greater competition
in the market from less disciplined players could challenge mid-term returns - CS forecasts 18% ROCE and 17% EBITDA margins vs
consensus 18-19%). 3) Structural slowdown in China Chemicals: China has contributed c40% of global chemicals demand growth over the
last ten years (1.4x GDP multiplier). However we believe above market growth is now dissipating due to i) lower infrastructure investment, ii)
saturation of product penetration, and iii) lower growth targets. Based on lower growth estimates for China, muted European recovery and a
risk to peak cycle in the US - we forecast 300bps organic growth to 2018 (vs consensus 500bps).
April 2016 Slide 45
TOP OUTPERFORMS
Company Pricing Investment Thesis
Aperam
(APAM.AS)
Credit Suisse
HOLT® Lens
Price: € 33.6
Target: € 44
MC: US$ 3.0bn
Although we see some headwinds due primarily to seasonality and a lacklustre Q4, we do not change our view of fundamental recovery in
2016 – not least because we see China cutting exports as EU demand recovers, we are seeing material production cuts in the US, and also
because APAM is now effectively operating in protected markets in both the EU and Brazil. The weaker Real should also continue to offset
demand weakness in the Brazilian market.
Underpinning the investment case are valuation, balance sheet and FCF (all the vital ingredients we think of a proper long-term investment
case). We think APAM has a quality balance sheet, strong FCF and cheap valuation. Against a stable to better fundamental outlook, we see
scope for a very strong share price uplift if risk appetite recovers.
Boliden
(BOL.ST)
Credit Suisse
HOLT® Lens
Price: Skr 128.6
Target: Skr 145
MC: Skr 35.2bn
Boliden remains our top mid-cap in the mining space driven by: (1) exposure to our preferred commodity, zinc; (2) an undemanding
valuation; and (3) steady volume growth through the company’s mining and smelting operations over the next three years. We remain
positive on the fundamentals in the zinc market.
Following mine closures, both large mines reaching end of life and significant price related cuts by both Glencore and Nyrstar, we forecast
mine supply to decline by over 3% in 2016 and expect large deficits out to 2018.
Thyssen Krupp
(TKAG.DE)
Credit Suisse
HOLT® Lens
Price: € 19.14
Target: € 26
MC: € 10.8bn
The problem with TKAG is that when steel is weak the market does not seem to believe the TKAG SOTP valuation (which as we show
within looks compelling). This is easily solved, but has never been
addressed (since the attempt in 2000 to IPO 30pc of steel). We think the group should consider a partial IPO of steel and materials, which
in effect would create steel equity as an acquisition currency, and also provide funding to reduce debt / increase equity within the group. If
the group could merge with Tata Europe's flat rolled assets (especially Ijmuiden) the consequent synergy story could add further value, in our
view. The departure of Tata Europe (ex TKAG) CEO recently, and the press reports (Grimsby Telegraph) that the UK govt may assist with
the proposed Greybull purchase of Tata long products long products (deadline for Tata is end March) could all make a potential deal for Tata
flat Europe operations easier in our view.
Research Team
Michael Shillaker | [email protected] | +44 20 7888 1344
Liam Fitzpatrick | [email protected] | +44 20 7883 8350
James Gurry | [email protected] | +44 20 7883 7083
Materials
Metals & Mining (I)
April 2016 Slide 46
TOP UNDERPERFORMS
Company Pricing Investment Thesis
SSAB
(SSABA.ST)
Credit Suisse
HOLT® Lens
Price: Skr 30.47
Target: Skr 14.5
MC: Skr 15.6bn
SSAB is experiencing the full brunt of a downturn in its key markets (heavy transport, construction, mining, energy) and the pressures of
Chinese exports on global steel pricing. This slowdown in business is brining to the forefront debt maturities in 2016. We assume
refinancing at more than double the current interest rates (3%), but do not rule out a more negative debt scenario (closing of the CP market)
or the possibility of an equity rights issue to ease the heavy debt burden (7x ND:EBITDA last 12 months, >10x 12 months forward). We cut
to Underperform in October (SSAB - Giving way to Chinese exports, 26 Oct) which was followed by the profit warning in December. On our
low EBITDA estimates, working capital release means positive FCF is possible but it does not make for a strong equity case in the current
environment.
Vallourec
(VLLP.PA)
Credit Suisse
HOLT® Lens
Price: € 3.65
Target: € 2.4
MC: € 1.3bn
Valuation remains very difficult given limited visibility on numbers. Vallourec is a stock that could be materially higher than it is today if the
company achieves its long-term earnings targets. But we believe it also has potential to fall significantly lower if the outlook for the operating
environment does not improve and the risks to operating cashflows intensify as NWC release is exhausted. In such a scenario, the company
would then need to raise debt levels to fund capex and interest, which is long-term unsustainable, in our view.
Research Team
Michael Shillaker | [email protected] | +44 20 7888 1344
Liam Fitzpatrick | [email protected] | +44 20 7883 8350
James Gurry | [email protected] | +44 20 7883 7083
Materials
Metals & Mining (II)
April 2016 Slide 47
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Stora Enso
(STERV.HE)
Credit Suisse
HOLT® Lens
Price: € 7.62
Target: € 6.4
MC: € 6.0bn
Stora Enso has the biggest downside risk in European Paper & Packaging, in our opinion. Following the completion of a €200m cost take-out program no further restructuring has been announced while volume declines in the structurally declining paper operations have continued unabated. The end of cost restructuring in combination with weak prices and volumes for publication paper, a strong global supply response to record pulp industry profitability and growing fears of global excess paperboard capacity pose significant challenges for Stora Enso to sustain a positive momentum in underlying margins absent further FX tailwinds.
FX has been a theme in Stora Enso's performance since Q4 of 2014. While the key currencies (SEK, Euro) stabilised during the spring, the BRL added fuel to FX tailwinds in Q3. Stora Enso pre-announced better than expected operating performance in Q3 (€246m vs. guidance around €207m) mainly due to a better than expected performance from the pulp division (Biomaterials) driven by FX tailwinds from the weak BRL and better operational performance from the Nordic and Montes del Plata pulp mills.
We see a brewing industry issue from super profits from pulp; an unprecedented supply response. We maintain our cautious view on pulp and directionally on pulp exposure. Pulp made up >30% of EBIT in H1 and looks to approach 50% in Q3. The NBSK price, about 60% of Stora Enso's pulp net exposure, is under pressure and we expect this weakness to spread to hardwood pulp later in the year. We would recommend easing holdings of Stora Enso shares on near-term strength.
The issues facing Stora Enso are, in our view, compounded by potentially value destructive capital allocation that we see as a major drain on cash flow through 2018/19. The €1.6bn investment in an integrated greenfield pulp/paperboard mill in China is the most challenging. While Stora Enso talks about project returns "clearly exceeding the group ROCE target of 13%," we see returns well below cost of capital, consistent with the return profile from other international companies’ packaging investments in China. With the shares trading at an average 2014-16E fully loaded free cash flow yield of 4.4% vs. the 8.5% sector average, we believe the market is too complacent about Stora's weak cash flow and the risk the largest investment in the company's history could fail to live up to, in our view, lofty expectations.
Research Team
Lars Kjellberg | [email protected] | +46 8 5450 7926 Materials
Paper & Packaging
TOP OUTPERFORMS
Company Pricing Investment Thesis
Smurfit Kappa
(SKG.I)
Credit Suisse
HOLT® Lens
Price: € 23.58
Target: € 31.1
MC: € 5.4bn
Smurfit Kappa is at an attractive inflection point and entering a period with strong earnings growth. This is following a period with tepid EBITDA growth (absolute and relative peers), due to a combination of capital allocation focused on debt deleveraging and adverse currency movements (mainly Venezuela). The transformation comes from a directional change in SKG’s capital allocation towards growth (M&A) and capex driven margin expansion.
In addition, we see additional tailwinds from GDP+ demand growth benefitting from strong growth in e-commerce and corrugated board price increases. Slow growth vs. peers is reflected in a significant valuation discount that we expect should narrow and ultimately close as SKG’s growth accelerates.
April 2016 Slide 48
Research Team
Charles Brennan | [email protected] | +44 20 7883 4705 Technology
Software & Services
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Sage Group
(SGE.L)
Credit Suisse
HOLT® Lens
Price: 625.5 p
Target: 560 p
MC: £ 6.8bn
We think that Sage faces a significant internal challenge in trying to rationalise the technology estate that has amassed through over 100
acquisitions over the past 15 years. This process comes with unknown risks around customer churn.
At the same time as dealing with this internal challenge, the market is becoming more competitive, especially in the cloud. Sage is late to
this trend and consequently losing market share.
We think Sage needs to go through a phase of reinvestment into R&D, sales and marketing that will limit margin upside potential. Given the
shares are trading on multi-year valuation highs, we see no catalysts for outperformance.
The risk to our target price is a wholesale change in the business model, to move away from licences towards a cloud business model. This
would depress near-term earnings but could drive higher value of the medium term. However, we see no indication that management is
prepared for this transition.
TOP OUTPERFORMS
Company Pricing Investment Thesis
SAP (SAPG.F)
Credit Suisse
HOLT® Lens
Price: € 67.62
Target: € 85
MC: € 83.1bn
Investor sentiment at SAP is improving on the back of growing confidence that SAP can manage the cloud transition, without too much
disruption to the core business. This view is underpinned by the launch of S/4 HANA, the latest version of the core ERP suite, which should
form the start of a multi-year upgrade cycle. In addition to a more coherent product strategy, the message on capital discipline is also
encouraging. Notably, management seems committed to the view there will be no more sizeable deals, meaning shareholders can start to
benefit from cash flows. As investor confidence returns, we believe the shares will continue to re-rate.
The risk to our target price and Outperform rating is macro risk as some elements of IT spend and decision making can get deferred in
times of uncertainty.
Dassault
Systemes
(DAST.PA)
Credit Suisse
HOLT® Lens
Price: € 70
Target: € 85
MC: € 18.0bn
Dassault is a leading vendor in the Product Lifecycle Management (PLM) market. We believe this offers above-average
medium-term growth as IT penetration increases in the manufacturing industry and software vendors like Dassault increase its addressable
market by moving out of the engineering department. These drivers should enable Dassault to hit its target of doubling EPS over the next
five years. Against this backdrop, FY15 was a year of accelerating growth which builds strong momentum into FY16. Our thesis across the
sector is that companies with strong balance sheets are likely to outperform, and Dassault's strong net cash position gives the company
optionality to continue bolt-on M&A to keep EPS momentum positive. We think the shares could continue to re-rate with likely EPS
upgrades.
The risk to our target price is continued weakness in JPY. (Dassault has JPY revenues, but limited costs so this impacts margins.)
Meanwhile, management has reflected some macro caution, but if macro concerns deepen, then Dassault will not be immune.
April 2016 Slide 49
TOP OUTPERFORMS
Company Pricing Investment Thesis
Nokia
(NOKIA.HE)
Credit Suisse
HOLT® Lens
Price: € 5.22
Target: € 8.2
MC: € 30.2bn
Driven by our view around quality of Nokia's patents and higher than targeted cost savings with Alcatel-Lucent deal, we see NOK + ALU
delivering 2018 EPS (fully taxed) of €0.50. Specifically, we are looking for €1.1bn of IPR revenues long term (by 2017) along with potential
to save €1.2bn of net cost synergies with the ongoing NOK+ALU integration (higher than company's guidance of €900mn).
As such, we believe that clean EBIT for NOK+ALU can grow from €2.9bn in 2015 (11% margin) to €4.0bn by 2018 (16% margin) driving
our TP of €8.20. Given nearly 60% potential upside, we reiterate Outperform.
Nokia is a Credit Suisse European and Global Focus List Stock.
Infineon
Technologies
AG
(IFXGN.DE)
Credit Suisse
HOLT® Lens
Price: € 12.38
Target: € 14.25
MC: € 14.0bn
We continue to see Infineon as a beneficiary of increasing semi content in cars, along with ongoing gradual improvement in margins. We
reiterate our Outperform rating (TP of €14.25).
We see two drivers for this growth:
Assuming normal seasonality for Jun-Q (+6% qoq) and Sep-Q (+2% qoq), we believe that FY16 revenues can reflect 14% yoy growth (vs.
company guidance of 11-15% range). Specifically, IFX noted continued strength in Auto (no unit weakness yet seen across all key markets
Europe, US and China) driven by safety standards and electrification, along with ongoing rise in PA/RF content in Communication, partly
offset by a recent slowdown in smartphones (within PMM). We model 13.7%/8.4% growth in top-line for FY16/FY17 (note FY16 includes
~4ppt of benefit from IRF acquisition and ~1.5ppt from FX).
In spite of weak margin guidance for Mar-Q (13% vs. CS/cons at 16%/15%) owing to annual price reductions in Jan, higher ramp-up
costs for Kulim2 fab and adverse product mix, IFX continues to expect 16% EBIT margins for FY16. This would imply 2HFY16 margins of
~18% or up 450bp hoh. We have seen an average of 400bp of hoh margin improvement in 2H in the last 3 years (260bp in 2H15, 280bp
in 2H14 and 640bp in 2H13. We model EBIT margins of 15.9% for FY16, and 17.0% for FY17.
Research Team
Achal Sultania | [email protected] | +44 20 7883 6884
John Pitzer| [email protected] | +1 212 538 4610
Technology
Hardware & Semis (I)
April 2016 Slide 50
Research Team
Achal Sultania | [email protected] | +44 20 7883 6884
Kulbinder Garcha | [email protected] | +1 212 325 4795
Technology
Hardware & Semis (II)
TOP UNDERPERFORM
Company Pricing Investment Thesis
Gemalto
(GTO.AS)
Credit Suisse
HOLT® Lens
Price: € 58.65
Target: € 53
MC: € 5.2bn
Gemalto announced that Olivier Piou, CEO of Gemalto, has decided to retire end of Aug 2016. Philippe Vallee, COO of Gemalto, will be proposed by the Board to be appointed the new CEO effective 1st Sep 2016. Olivier Piou will also be proposed by the Board to continue to serve as non-executive director of Gemalto, which will support the delivery of the 2017 long term plan of €600mn PFO first introduced in Sep-13 (later updated in Mar-15 to €660mn+ to reflect SafeNet).
Post the 2015 results, we adjust down our revenue estimates by 2%/3% for 2016/2017 as we see signs of slowing EMV in China along with continued pressure on SIM, partly offsetting continued strength in US EMV and Government. However, with better opex control and expectation for GM recovery, our EBIT estimates for 2016/2017 go up slightly by 3%/1% to €500mn/€540mn. But due to slightly higher tax rate, our 2016 EPS estimate remains unchanged at €4.10, but 2017 goes down by 2% to €4.40. We also roll forward our valuation to 2017 which drives our TP of €53 (vs. €50 previously).
GTO continues to benefit from M2M (~10% of sales growing at 15-20%) and Government (~13% of sales growing at low-teens); we now see some signs of slowing growth in Payments or EMV (~32% of sales). China EMV was down yoy in Q415. We see Payments business returning back to mid to high-single-digit growth in 2016 as we expect US to remain strong for another 12 months. Further SIM and related services (~30% of sales) is likely to continue to see downward pressures given slowing unit growth and continued ASP decline(which is ~10-15% pa). Even with some benefit from LTE mix shift, we see this business declining 5% over 2016/2017. This drives our view that group sales will grow 5% over 2016/2017
The company has given guidance for 2016 GMs to rise to 150bp to 40.5%. While we see certain drivers for improvement (like ramp down of US EMV costs and top-line growth), we view this as quite optimistic (CSe at 39.7%).
According to the scenario analysis, to achieve 40.5% GMs, GMs in the SIM business have to be flat with 200-250bp improvement in all other businesses. We see both these as unlikely outcomes given pressures in SIM, slowing growth in Payments ex US and increasing competition from local players in US and China.
STMicro
(STM.PA)
Credit Suisse
HOLT® Lens
Price: € 4.97
Target: € 5
MC: US$ 5.2bn
Despite the $170mn savings plan announced related to Digital restructuring, we note that STM will struggle to reach beyond 6% EBIT margins on a sustainable basis (well below industry levels). As such, we reiterate Underperform rating and our TP of €5.00.
We estimate that OMs in Core business is ~8% implying $525mn of EBIT. This would imply EBIT loss of $350mn in Imaging and Discontinued businesses. Of this $350mn loss, STM has announced a restructuring plan to address $170mn of costs in its STB/Gateway business. Even if we allow for full retention of savings along with FX tailwinds in 2016, we still believe that EBIT may only expand from $174mn (2.5% margins) in 2015 to $319mn (4.8% margin) in 2016, and then to $400mn (or 6.0% margin) in 2017.
We see STM delivering ~6% OMs post the restructuring plan (and even that includes R&D funding) in 2017. Hence, we value shares on EV/sales of 0.65x, which leads to our TP of €5.00.
April 2016 Slide 51
TOP OUTPERFORMS
Company Pricing Investment Thesis
BT Group
(BT.L)
Credit Suisse
HOLT® Lens
Price: 441.15 p
Target: 510 p
MC: £ 43.9bn
We see upside potential from the recently approved EE deal, RPL growth and cost cutting. The BT-EE acquisition was approved with no remedies
and we believe the EE acquisition could allow BT to take market share in the UK business segment and also upsell content to BT’s newly acquired
mobile subscriber base.
In our view, the Ofcom initial conclusions from the Strategic Review contained few major surprises. Despite Ofcom reserving “the right to require BT
to spin off Openreach as an entirely separate legal entity, with its own shareholders” Ofcom did not propose a structural separation of Openreach,
even highlighting the considerable cost, undertaking and disruption this would involve. Although a structural separation proposal was looking
increasingly unlikely in the run up to February’s announcement, we still believe this removes one of the major risks for BT. Furthermore, Ofcom
made a general comment on its conference call today that regulation over the past 10 years had largely worked and it had found no evidence that
Openreach has discriminated against resellers in the past – important in the context of perceived Openreach independence. That said there still
remains the question of how Ofcom will “overhaul Openreach’s governance and strengthen its independence from BT”. A proposal put forward by
BT has been viewed by Ofcom as not going far enough so this remains an area of uncertainty.
Including just our forecasted cost synergies from EE, the deal is 7% accretive to FCF/share ~7% in year 3, on our published merfer model, and lifts
EBITDA CAGR slightly to >4%, justifying a valuation closer to 8.0x EV/EBITDA, in our view. There could also be potential upside to these forecasts
if: (1) EE helps BT gain market share in the UK business market; and (2) if BT upsells BT Sport to EE's >24m mobile customers, expanding GB
per EE sub, and therefore ARPU.
BT Group is a Global and European Focus List stock for Credit Suisse.
Research Team
Justin Funnell | [email protected] | +44 20 7888 0268
Jakob Bluestone | [email protected] | +44 20 7883 0834
Paul Sidney | [email protected] | +44 20 7888 6015
Telecommunications
Telecommunication Services
April 2016
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Swisscom
(SCMN.VX)
Credit Suisse
HOLT® Lens
Price: SFr 497.9
Target: SFr 475
MC: SFr 25.8bn
Swiss mobile competition has worsened gradually this year (mostly roaming cuts) and took another step down with Salt's 30-40% cut in late
August. We do not model in any major price cuts from Swisscom or Sunrise, but expect Swisscom Residential net adds to weaken with ARPU
deteriorating as well as subs to tilt more towards no-frills.
Fixed estimates unchanged – but with downside risks: We already assumed weaker fixed-line loss and revenue growth in our forecasts. We
continue to see a tail risk from Salt launching a fixed broadband offer at some point. We estimate Salt could launch fiber triple-play at ~CHF60 (a
40-50% discount to current retail prices) and still generate gross profit in line with Iliad fixed line in France. Whether Salt decides to enter Swiss
fixed remains to be seen, but the attractive economics of wholesale broadband in Switzerland could ultimately draw it into the market.
Still premium rated: Swisscom has de-rated from 9x EV/EBITDA to just over 8x currently (peers at 7x). We expect organic EBITDA growth to turn
slightly negative in 2016, suggesting that this is still a high multiple. The Swiss market used to deliver growth significantly outstripping European
averages but this quarter both fixed and mobile revenue growth slowed to in-line with European peers, and we expect European growth to continue
to improve as Switzerland continues to decelerate.
Slide 52
TOP OUTPERFORMS
Company Pricing Investment Thesis
Centrica
(CNA.L)
Credit Suisse
HOLT® Lens
Price: 233.7 p
Target: 270 p
MC: £ 11.8bn
Concerns on the upstream business have driven down the stock, and we view these as overdone. At c224p/share, the shares reflect c£2bn
value for British Energy and the hydrocarbon production businesses (equivalent to c2.5x EV/EBITDA). FCF contribution from the upstream
is still positive above US$30/bbl brent crude, c30p/therm gas and c£30/MWh GB baseload power. We think that c7% EBIT margins in the
UK energy supply business (British Gas) are sustainable. Next catalyst is the Moody’s view on the Baa1 credit rating, which we think
Centrica can keep.
Endesa
(ELE.MC)
Credit Suisse
HOLT® Lens
Price: € 17.06
Target: € 19.7
MC: € 18.1bn
The stock, on our numbers, has not been this oversold since 2012. The recent underperformance was mainly driven by political risk,
following the inconclusive Spanish election on December 20th. Howeever, we continue to see Endesa as the strongest dividend play in the
sector, offering 6.7-7.5% dividend yield in 2016E-17E, supported by an under-geared balance sheet (1.4x ND/EBITDA in 2016E,
excluding provisions). The stock trades on 7.9x 2017E EV/EBITDA (sector on 9.0x) and 14.9x 2017E P/E (vs. sector 14.5x). We believe
the premium v. the sector on P/E to be completely justified by Endesa’s under-geared balance sheet.
Iberdrola
(IBE.MC)
Credit Suisse
HOLT® Lens
Price: € 5.84
Target: € 6.5
MC: € 37.4bn
Solid 7% earnings CAGR places Iberdrola at the top-end of the sector in terms of growth. We have recently increased total capex in 2016-
20E to €21bn from €15bn previously, a move that was confirmed by the company in their February 24 business plan. At the same time,
Iberdrola also announced the first dividend increase in 3 years (from €0.27 to €0.28), anticipating a move we were expecting in 2017. We
believe the recent underperformance, mainly driven by political risk, leaves the stock, trading at a small discount to the sector (2017E P/E:
13.7x v. 14.5x; 2017E EV/EBITDA: 8.2x v. 9x), at an attractive entry point.
Research Team Vincent Gilles | [email protected] | +44 20 7888 1926 Mark Freshney | [email protected] | +44 20 7888 0887 Stefano Bezzato | [email protected] | +44 20 7883 8062 Guy MacKenzie | [email protected] | +44 20 7883 9534 Wanda Wierzbicka | [email protected] | +44 20 7888 8030
Utilities
Gas & Multi Util ities (I)
April 2016 Slide 53
Utilities
Gas & Multi Util ities (II)
TOP UNDERPERFORMS
Company Pricing Investment Thesis
National Grid
(NG.L)
Credit Suisse
HOLT® Lens
Price: 991.4 p
Target: 820 p
MC: £ 37.1bn
We believe NG is faced with low asset base growth (CS est. c5% p.a., versus the company’s c6-7% p.a. aspiration). Allowed returns are
falling with the lower cost of debt index, and we think achieved group ROEs will fall from c12% to c10% by 2021. The stock is expensive,
on a c51% premium to combined RAB and rate base as of March 2017, compared to the peak of c54%. We believe a sale of the UK gas
distribution businesses at a high premium to RAB (e.g. c45%) is also priced-in. Low UK RPI inflation (e.g. c1%) means there is little
retained regulatory equity and the stock underperforms when RPI falls below 2%.
Terna (TRN.MI)
Credit Suisse
HOLT® Lens
Price: € 5.07
Target: € 4.1
MC: € 10.2bn
We currently rate Terna Underperform with a €4.1 Price Target, implying c.17% downside on the current share price. With improved
regulatory clarity and strong defensive qualities, our rating on the stock is entirely driven by valuation. The current multiples are at historical
peaks, with over 50% premium on equity RAB v. <10% on a 10-year average. The dividend yield (c.4.2%) remains below the average of
the sector (c.5.2%) and its closest peer (Snam, TP €4.1, 4.5%). Over the last 18 months, the stock has shown an almost perfect negative
correlation to falling sovereign yields; as a result, should sovereign yields start recovering, we would expect Terna to derate rapidly.
Suez
(SEVI.PA)
Credit Suisse
HOLT® Lens
Price: € 16.32
Target: € 14.3
MC: € 8.9bn
The shares trade close to 2x book value despite earning an RoE in-line with cost of equity, suggesting a recovery in returns is more than
priced in. We see limited organic growth prospects and a shift towards competitive, low margin activities reducing leverage to any potential
improvement in industrial production and waste volumes.
Verbund
(VERB.VI)
Credit Suisse
HOLT® Lens
Price: € 11.4
Target: € 10
MC: € 4.0bn
At the current share price, investors are paying for a swift adoption of MSR that would take the carbon price near to the switch level (from
coal to gas). We see no justification in paying a 20% premium to the sector on 2017E PE given a 2017E DY at 2.9% (vs the sector at
5.1%). We believe the market still has not adjusted its views for the declining prices and resulting lower DPS.
April 2016
Research Team Vincent Gilles | [email protected] | +44 20 7888 1926 Mark Freshney | [email protected] | +44 20 7888 0887 Stefano Bezzato | [email protected] | +44 20 7883 8062 Guy MacKenzie | [email protected] | +44 20 7883 9534 Wanda Wierzbicka | [email protected] | +44 20 7888 8030
Slide 54
TOP OUTPERFORMS
Company Pricing Investment Thesis
Autoneum
(AUTON.S)
Auto Parts & Equipment
Credit Suisse
HOLT® Lens
Price: SFr 232.7
Target: SFr 280
MC: SFr 1.1bn
We continue to rate Autoneum Outperform with the stock a constituent of the Swiss High Conviction List. We believe that management will
be able to unlock more EV for investors as it is pursuing a very disciplined and consistent strategy (1) maximising the share-of-wallet in its
existing customers base, (2) targeting further blue-chip customer gains in China, in particular, (3) expanding the production footprint in high
growth countries such as North America, (4) addressing the demand of global OEM carmakers with innovations, and (5) improving the
operational excellence across the many manufacturing sites. More short term Autoneum could continue benefiting from favourable market
conditions and a small currency tailwind. The current depressed situation in Latam offers meaningful potential upside in case the end-
markets are bottoming out.
We expect management to continue to brief us about customer gains and product launches which we believe is likely to be supportive for
the shares
OC Oerlikon
(OERL.S)
Machinery
Credit Suisse
HOLT® Lens
Price: SFr 9.45
Target: SFr 11
MC: SFr 3.2bn
The stock remains a constituent of our Swiss High Conviction Ideas list. Michael Süss, who took over the role as new Chairman in April
2015, is implementing the strategy set out at the CMD in November 2015 consistently and with discipline. Replacing the CEO is a major
step for transforming Oerlikon into a global powerhouse for surface solutions and will help investors to regain confidence in the company.
We continue to see a lot of value on earnings, cash flow and yield perspective as well as an increasingly robust balance sheet. Following the
divestment of Vacuum and the appointment of a new CEO, we expect the company to brief us about the implemented actions to fix the
problems at Drive Systems. We think that the company exiting this business (or parts of it) is the next step.
Research Team
Patrick Laager | [email protected] | +41 44 334 60 76
Felix Remmers | [email protected] | +41 44 333 05 48.
Switzerland
Swiss SMID (I)
April 2016 Slide 55
Research Team
Andrew Grobler | [email protected] | +44 20 7883 5943
Karl Green | [email protected] | +44 20 7888 2629
Switzerland
Swiss SMID (II)
TOP UNDERPERFORMS
Company Pricing Investment Thesis
DKSH
Holdings
(DKSH.S)
Diversified Commercial Svc
Credit Suisse
HOLT® Lens
Price: SFr 65.35
Target: SFr 55
MC: SFr 4.3bn
We expect DKSH to face headwinds from weakening macro confidence in Asian end markets and greater competition that will put
incremental pressure on both underlying volumes and reported results.
In current economic and competitive conditions we think that DKSH will only generate low single digit EPS growth in 2016E, which we do
not think is reflected in the current valuation at 20.7x 2016E PE. In the Consumer Business unit, we expect weakness in FX rates and
falling consumer confidence and slowing tourism in Thailand to limit underlying growth rates. In addition we think that competitive pressures
will see further headwinds to growth rates.
In the longer term, we expect that demographic headwinds in the key Thai economy will limit growth in demand. In the Healthcare business
unit we think that increased competition will put further pressure on margins within the division.
April 2016 Slide 56
TOP OUTPERFORMS
Company Pricing Investment Thesis
Erste Bank
(ERST.VI)
Credit Suisse
HOLT® Lens
Price: € 24.16
Target: € 32
MC: € 10.4bn
Erste is our top pick within CEE and CIS banks. The stock has lagged other CEE banks YTD, due to concerns around the impact of
negative rates in Eurozone and, particularly, the Czech Republic. We think these fears are overdone. Management have been relatively vocal
about the impact of such a move, however, we think the likelihood of negative rates in the Czech Republic is relatively small. The central bank is stimulating the economy via an FX ceiling and appears to see negative rates as a poor policy choice. We think the recovery in the
Eurozone should help stimulate loan growth across the CEE region. This should boost profitability as growth is likely to be higher in higher
margin countries, such as Romania, Czech and Slovakia, which is likely to reduce the drag from lower rates.
Research Team
Hugo Swann | [email protected] | +44 20 7883 2574
Victoria Cherevach | [email protected] | +44 20 7883 4890
Emerging Markets
EMEA Banks
April 2016 Slide 57
TOP UNDERPERFORMS
Company Pricing Investment Thesis
PKO BP
(PKO.WA)
Credit Suisse
HOLT® Lens
Price: zł 26.3
Target: zł 21
MC: zł 32.9bn
PKO BP is our top Underperform in CEE and CIS banks. We remain negative on the Polish banks sector where we think (i) valuations are
too rich, and (ii) political uncertainties are heightened, most notably with regards to resolution of CHF loans. We think interest rates in
Poland are likely to stay lower for longer, though we incorporate a hike in 2017E. Should this not come through, there is a risk to that
margins and profitability do not recover as quickly as we expect. Margin recovery is a key factor to out ROTE improvement over 2016-17E
(from 8.7% in 2016E to 9.4% in 2017E). In addition, we remain concerned by the political environment in Poland. The government appears
to be increasingly interfering in the running of the banks and the economy. As PKO BP is c30% owned by the government, we think it is the
most at risk from potential interference.
We expect the bank to generate a RoTE of only 8.7% in 2016E. We think these returns are low for a bank trading on 1.2x TBV 2016E.
Research Team
Semyon Mironov | [email protected] | +7 495 662 8510
Mikhail Priklonsky | [email protected] | +7 495 662 8511
Emerging Markets
EMEA Metals & Mining
TOP OUTPERFORMS
Company Pricing Investment Thesis
Alrosa
(ALRS.MM)
Credit Suisse
HOLT® Lens
Price: Rbl 71.7
Target: Rbl 100
MC: Rbl 527.5bn
We remain positive on diamond sector outlook supported by Alrosa’s comments at Investor day. We believe the middle- and down-stream
has almost de-stocked after Alrosa and De Beers reduced sales by 35% in 2015 and now inventories returned to 2011-12 levels, on our
estimates. We assume flat diamond prices throughout this year, but in response we model 20% gem-quality sales volumes growth in 2016 .
As a result, we expect Alrosa to generate impressive cash flows and return peer-leading dividends to shareholders. We think pay-out ratio
will be increased to 50% of adjusted net income starting from 2016 dividends (to be paid in 2017), implying DY of c10%, on our estimates.
April 2016
TOP UNDERPERFORMS
Company Pricing Investment Thesis
KGHM Polska
Miedz S.A.
(KGH.WA)
Credit Suisse
HOLT® Lens
Price: zł 68.65
Target: zł 48
MC: zł 13.7bn
KGHM’s investment case is undermined by our negative copper outlook. Despite potential pressure on cash flows from weaker commodity
prices, the company continues to carry out its huge investment program. Although KGHM will become a significantly larger company in five
years, a heavy pipeline of projects entails substantial capex over the next three to four years, resulting in negative free cash flows until 2019.
We doubt the market would now be willing to pay for longer-term growth prospects, focusing instead on copper price downside risks and
short-term FCF generation.
Slide 58
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Surgutneftegas
(SNGSyq.L)
Credit Suisse
HOLT® Lens
Price: US$
5.54
Target: US$ 5
MC: US$
24.8bn
We maintain our negative stance on Surgutneftegas GDRs as we see negative operational momentum and the lowest prospect for dividends
in the sector. According to our estimates, SurgutNG will not be able to cover the total dividend organically (similar to last year), and as such
we expect management to keep the ordinary dividend to a minimum. (We note that dividends for holders of ORDS/GDRs are discretionary.)
Research Team
Ilkin Karimli | [email protected] | +44 20 7883 0303 Emerging Markets
EMEA Oil & Gas
April 2016 Slide 59
Research Team
Pieter Vorster | [email protected] | +27 11 012 80 64
Richard Barker | [email protected] | +27 11 012 8051
Brian Mushonga | [email protected] | +27 11 012 8052
Emerging Markets
South Africa (I)
TOP OUTPERFORMS
Company Pricing Investment Thesis
Naspers
(NPNJn.J)
Internet Services
/ Media
Credit Suisse
HOLT® Lens
Price: R
2,068.16
Target: R 2,550
MC: R 841.4bn
EM ecommerce the heart of the Naspers' investment case: With exits from lower growth DM assets over the last 12-18 months, Naspers is
increasingly focused on the fast-growing ecommerce opportunity in major emerging markets (93% of NAV on our estimates including
Tencent and Mail.ru). Tencent is the main driver of earnings and valuation upgrades, but we continue to believe that the value of Naspers'
other ecommerce assets with generally market leading positions is not fully reflected in the Naspers' share price. We focus on classifieds,
where Naspers leads in 25 markets with a combined addressable GDP comparable to China. We find that Naspers' early embrace of mobile
has strengthened its competitive position, in Argentina and South Africa allowing OLX to overtake previously entrenched but less agile
competition. Catalysts: Naspers FY3/16 results 29th June.
Naspers is a Global Focus List stock for Credit Suisse.
Mr Price
Group Limited
(MPCJ.J)
Department
Stores
Credit Suisse
HOLT® Lens
Price: R 172.33
Target: R 212
MC: R 43.7bn
Although Q3 retail sales growth of 6.5% after an also low 8.6% at the H1 stage, was disappointing, our analysis shows a much less
negative picture for the core South African MRP Apparel business. Yet further merchandising and stock availability issues in the quarter are
of concern to us, and improvement on this front would be key for the company to rebuild credibility with investors. We do, however believe
that changes in the merchandising and resourcing team structures flagged last year are yet to bear fruit given merchandise ordering lead
times. Notwithstanding short-term pressures, we believe the group remains best placed to benefit from growth in what we view as an
underpenetrated value/fast fashion segment in South Africa and export its successful model further afield.
We have analysed the 2.1% sales growth reduction and estimate that a decline in credit sales, excluding MRP Apparel in South Africa,
accounted for more than half of the group sales growth reduction. Although clearly not a positive, we do not believe this affects the longer-
term growth outlook for the group. Within the core MRP Apparel, we estimate that Africa (10% of divisional sales) accounted for half of the
division's 2.9% lower growth, with MRP South Africa showing a much more modest 1.6% reduction in growth and cash sales growth
declining by only 1.1% to 9.9%. Note that after a disappointing Q3 trading update we reduced our FY16 diluted HEPS estimate by 4.9%
and our FY17 estimate by 7%.
April 2016 Slide 60
Research Team
Pieter Vorster | [email protected] | +27 11 012 80 64
Brian Mushonga | [email protected] | +27 11 012 8052
Emerging Markets
South Africa (II)
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Discovery
Holdings Ltd
(DSYJ.J)
Insurance
Credit Suisse
HOLT® Lens
Price: R
118.54
Target: R 81
MC: R 76.7bn
We remain cautious on the investment case for Discovery (see Earnings risk is to the downside, 6 Oct 2015) owing to limited cash
generation in its businesses outside of Health Administration in South Africa, the risks attached to an increasingly tough operating
environment in South Africa and the lack of a compelling business case for Discovery's UK businesses. We view the debt build-up in
VitalityLife, Discovery's UK life insurance operation, as aggressive and believe VitalityHealth’s lack of scale places this business at a serious
disadvantage relative to larger competitors in the UK Health Insurance space. Thus far, there has been limited evidence of Discovery's ability
to export its wellness-based insurance model outside South Africa. For this reason, we place no value on Discovery's operations outside of
South Africa.
The key risk to our negative thesis on Discovery is the emergence of cash from the SA Life Insurance business or from Discovery’s UK
businesses, although we place a low probability on such outcomes in the near term.
April 2016 Slide 61
Research Team
Ates Buldur | [email protected] | +90 212 349 0459
Onur Muminoglu | [email protected] | +90 212 349 0454
Atinc Ozkan | [email protected] | +90 212 349 0453
Emerging Markets
Turkey
TOP OUTPERFORMS
Company Pricing Investment Thesis
Halkbank
(HALKB.IS)
Regional Banks
Credit Suisse
HOLT® Lens
Price: TL 10.44
Target: TL 12.67
MC: TL 13.1bn
Halkbank has underperformed peers substantially in the past two years, bringing the stock’s relative valuation to attractive levels. Political
uncertainty and repeat elections have been the most recent drivers of weak stock price performance, in our view, and the stock should
benefit from a single party government as a state bank.
Halkbank has a distinctive business model that delivers an above peer group average sustainable ROE. Widespread distribution, long-term
relationships with SME clients and a comfortable funding structure are some of the important characteristics of this model. Contrary to the
common market perception, the bank has a defensive long-term positioning to interest rate changes, and we see this as favourable. The
regulatory measures introduced over the past few years have a relatively low impact on Halkbank's earnings, owing to its low retail loan
exposure. The cut in risk weights for pensioners' loans and the bank's revaluation of tangible assets have helped it to defend its capital
adequacy.
April 2016
TOP UNDERPERFORMS
Company Pricing Investment Thesis
Vakifbank
(VAKBN.IS)
Regional Banks
Credit Suisse
HOLT® Lens
Price: TL 4.7
Target: TL
4.61
MC: TL
11.8bn
We do not see Vakifbank's below-peer sustainable ROE, relatively high leverage and low Tier-1 ratio as a favourable combination in the
medium-to-long term. The stock deserves to trade at deeper discounts, in our view.
We think consensus is optimistic on Vakifbank's earnings in 2016 and beyond. Our 2016 earnings growth estimate of 6% is significantly
below that of peers. We do not like the bank's relatively high dependence on TL repo funding and relatively low free capital-to-assets ratio.
We note the aggressive growth in retail and SME segments in recent years. The shift in the loan mix had a positive impact on the NIM but
the CoR effect is yet to be seen. Relatively high inflows to Category II loans and relatively high Category II loans as a percentage of total
loans could be taken as a precursor for asset quality deterioration.
Slide 62
Valuation: Outperforms (I)
Company Tickers Price TP % Upside
PE (x) EPS Growth (%) PB (x) ROE (%) Yield (%) Performance
2016 2017 2016 2017 2016 2016 2016 1M 3M 12M
Airbus Group AIR.PA € 56.35 € 80 +42.0% 15.4 12.5 4.8 22.8 9.1 59.4 3.1 -6.3% -5.3% -10.3%
Arkema AKE.PA € 66.58 € 71 +6.6% 12.4 11.0 27.1 12.7 1.2 9.6 3.6 4.5% 14.2% -10.5%
AkzoNobel AKZO.AS € 58.16 € 71 +22.1% 13.3 12.8 8.8 4.0 2.0 15.3 2.9 3.4% -1.4% -22.3%
Alrosa ALRS.MM Rbl 71.7 Rbl 100 +39.5% 5.1 4.9 29.7 3.4 2.2 43.8 9.8 1.5% 24.5% 15.6%
Aperam APAM.AS € 33.6 € 44 +31.0% 12.8 9.6 35.8 33.9 1.3 9.9 3.3 2.1% 19.1% -11.1%
Assa Abloy ASSAb.ST Skr 160.4 Skr 195 +21.6% 21.2 18.5 8.3 14.3 3.8 17.9 1.7 -0.9% -5.3% -12.3%
Autoneum AUTON.S SFr 232.7 SFr 280 +20.3% 11.7 10.3 45.1 13.8 2.7 23.3 2.6 -5.0% 21.5% 6.9%
AVIVA Plc AV.L 432.2 p 620 p +43.5% 12.4 10.0 41.0 23.6 1.1 9.0 5.6 -12.8% -10.3% -23.0%
AXA AXAF.PA € 20.18 € 25.5 +26.4% 8.3 8.2 8.2 1.9 0.8 9.6 6.1 -6.7% -15.7% -17.3%
Boliden BOL.ST Skr 128.6 Skr 145 +12.8% 16.1 12.2 -17.1 31.4 1.3 8.1 2.1 -6.1% 9.0% -31.0%
BT Group BT.L 441.15 p 510 p +15.6% 14.2 13.2 -0.1 7.7 35.5 249.9 3.2 -3.9% -7.4% -3.3%
Carnival CCL.L p 3711 p 4173 +12.4% 15.7 12.9 24.6 21.5 1.7 10.7 2.3 8.8% -4.8% 10.6%
Centrica CNA.L 233.7 p 270 p +15.5% 14.9 14.4 -9.1 3.6 8.3 55.0 5.3 1.7% 11.2% -10.8%
Capita CPI.L 1034 p 1350 p +30.6% 13.4 12.5 7.6 7.0 5.4 40.1 3.4 -0.3% -13.2% -9.9%
Danske Bank DANSKE.CO Dkr 175.5 Dkr 221 +25.9% 9.7 9.1 4.0 7.0 1.1 11.5 5.1 -9.4% -4.4% -8.1%
Dassault Systemes DAST.PA € 70 € 85 +21.4% 28.5 25.7 9.1 11.1 4.6 16.4 0.8 1.4% 1.4% 9.6%
Diageo DGE.L 1897.5 p 2100 p +10.7% 21.6 19.7 -0.6 9.5 5.6 26.0 3.1 1.3% 2.5% -2.2%
Endesa ELE.MC € 17.06 € 19.7 +15.5% 13.6 15.2 11.1 -10.1 2.0 14.6 7.3 -0.6% -5.3% -9.6%
Erste Bank ERST.VI € 24.16 € 32 +32.5% 8.9 8.0 33.5 10.7 0.9 10.0 5.6 -4.7% -9.4% -0.7%
Fiat Chrysler Automobile FCHA.MI € 6.51 € 10 +53.7% 4.2 3.8 521.4 12.1 0.5 12.7 0.0 -4.1% -12.4% -58.2%
Grand City Properties GYC.DE € 19.8 € 21.85 +10.4% 26.4 21.9 36.2 20.3 1.5 5.7 1.7 5.8% 3.2% 10.6%
Halkbank HALKB.IS TL 10.44 TL 12.67 +21.4% 4.9 4.2 14.0 19.0 0.6 12.0 3.0 -4.7% 1.2% -19.7%
Halma HLMA.L 915.5 p 955 p +4.3% 26.6 24.2 10.3 10.2 6.6 24.9 1.4 3.9% 7.9% 26.2%
Iberdrola IBE.MC € 5.84 € 6.5 +11.2% 14.9 13.9 2.1 7.2 1.0 6.7 4.7 -4.4% -7.1% -2.2%
International Airlines Group ICAG.L 532.5 p 852 p +60.0% 5.5 5.3 72.7 4.2 1.8 35.7 4.6 -1.6% -9.7% -12.7%
Infineon Technologies AG IFXGn.DE € 12.38 € 14.25 +15.1% 16.1 13.7 26.7 17.2 2.7 17.0 1.8 4.7% 1.9% 3.9%
Imperial Brands IMB.L 3822.5 p 3900 p +2.0% 15.9 14.7 13.7 8.1 5.9 37.3 4.1 1.9% 5.8% 18.2%
Intesa Sanpaolo ISP.MI € 2.33 € 3.3 +41.4% 10.8 9.3 26.1 16.4 0.8 7.3 7.8 -14.6% -21.4% -27.0%
Kingfisher KGF.L 377.2 p 425 p +12.7% 17.2 15.3 5.2 12.3 1.4 8.2 2.7 10.2% 11.2% 4.2%
Lafargeholcim LHN.S SFr 45.75 SFr 54 +18.0% 19.5 11.8 41.6 64.7 0.9 4.5 3.4 7.7% 0.9% -35.9%
London Stock Exchange LSE.L 2793 p 3350 p +19.9% 21.4 18.4 0.8 16.3 3.3 15.2 1.4 -2.6% 10.0% 8.6%
LVMH LVMH.PA € 146.05 € 168 +15.0% 17.7 16.6 14.8 7.1 2.7 15.6 2.8 -7.2% 6.0% -15.4%
Mr Price Group Limited MPCJ.J R 172.33 R 212 +23.0% 18.6 16.4 7.0 13.6 6.1 34.9 3.6 1.9% -10.7% -37.7%
Nokia NOKIA.HE € 5.22 € 8.2 +57.1% 18.5 -19.8 2.0 10.6 2.9 -3.1% -24.1% -32.8%
Novartis NOVN.S SFr 71.85 SFr 100 +39.2% 16.4 14.2 -2.8 15.7 2.3 14.6 3.9 -1.4% -13.3% -28.6%
April 2016 Slide 63
Valuation: Outperforms (II)
Company Tickers Price TP % Upside
PE (x) EPS Growth (%) PB (x) ROE (%) Yield (%) Performance
2016 2017 2016 2017 2016 2016 2016 1M 3M 12M
Naspers NPNJn.J R 2068.16 R 2550 +23.3% 45.8 27.3 62.8 67.6 6.3 13.3 0.3 6.7% 9.3% 4.5%
OC Oerlikon Corp AG OERL.S SFr 9.45 SFr 11 +16.4% 19.1 17.1 144.8 12.0 1.6 8.5 2.6 -5.0% 11.3% -22.5%
L'Oreal OREP.PA € 153.95 € 166 +7.8% 23.9 22.2 4.2 7.5 3.5 14.7 2.1 -1.5% 2.0% -13.8%
Prudential PRU.L 1313 p 1761.81 p +34.2% 11.3 10.3 4.9 9.6 2.4 21.0 3.4 -2.6% -4.4% -22.0%
Prysmian PRY.MI € 20.14 € 21 +4.3% 13.9 12.5 5.0 11.1 2.8 20.1 2.2 3.4% 5.2% 3.0%
Royal Dutch Shell plc RDSa.L p 1732 p 1970 +13.7% 24.0 13.3 -38.4 80.5 1.0 4.0 7.6 3.8% 28.7% -15.0%
Roche ROG.S SFr 242.5 SFr 300 +23.7% 17.3 15.6 8.4 10.5 8.1 47.7 3.4 -1.4% -9.0% -12.7%
SAP SAPG.F € 67.62 € 85 +25.7% 16.7 15.4 7.9 8.1 3.2 19.0 1.6 -3.7% -6.7% -1.6%
Securitas SECUb.ST Skr 137 Skr 140 +2.2% 17.3 15.7 9.3 9.8 3.6 20.9 2.7 6.4% 13.6% 4.9%
SGS Surveillance SGSN.S SFr 2103 SFr 2200 +4.6% 22.8 20.1 19.2 13.3 9.9 43.6 3.2 3.0% 13.8% 10.6%
Smurfit Kappa SKG.I € 23.58 € 31.1 +31.9% 10.4 9.8 15.7 6.3 2.1 20.8 3.3 1.4% 1.0% -20.1%
Straumann STMN.S SFr 340 SFr 370 +8.8% 29.0 25.6 24.3 13.0 7.5 25.8 1.3 3.7% 13.4% 28.9%
Thyssen Krupp AG TKAG.DE € 19.14 € 26 +35.9% 17.5 11.5 93.6 51.8 2.9 16.3 1.0 9.4% 20.0% -25.2%
Travis Perkins TPK.L 1821 p 2200 p +20.8% 12.7 11.1 9.3 14.0 1.5 11.7 3.0 2.3% -5.6% -9.1%
UBM plc UBM.L 596 p 650 p +9.1% 17.5 13.3 12.6 31.7 3.6 20.6 3.7 -0.3% 14.2% 3.5%
Whitbread WTB.L 3832 p 5140 p +34.1% 16.2 15.3 11.2 6.2 3.1 19.1 2.4 0.9% -7.4% -28.9%
Zoopla Property Group Plc ZPLAZ.L 245.4 p 290 p +18.2% 21.6 16.1 33.5 33.6 7.2 34.0 1.6 4.2% 9.1% 18.0%
April 2016 Slide 64
Valuation: Underperforms (I)
Company Tickers Price TP % Upside
PE (x) EPS Growth (%) PB (x) ROE (%) Yield (%) Performance
2016 2017 2016 2017 2016 2016 2016 1M 3M 12M
Admiral ADML.L 1930 p 1740 p -9.8% 17.5 16.6 6.1 5.1 8.6 49.3 6.5 0.8% 18.0% 25.4%
Ashtead Group AHT.L 842 p 770 p -8.6% 10.2 9.9 32.1 2.2 2.5 24.7 2.4 7.3% -19.3% -23.0%
Air Liquide AIRP.PA € 95.4 € 85.5 -10.4% 17.9 17.8 -0.8 0.1 2.0 11.4 2.7 -3.9% -1.7% -22.0%
Ashmore Group ASHM.L 289.3 p 250 p -13.6% 20.6 20.8 -36.9 -1.1 3.0 15.5 5.8 9.2% 29.3% -5.7%
AstraZeneca AZN.L 4065 p 4000 p -1.6% 30.4 32.1 -23.3 -5.1 4.0 13.0 4.8 0.5% -7.5% -13.8%
BASF BASFn.DE € 64.11 € 63 -1.7% 17.5 15.4 -12.5 13.8 1.9 10.6 4.5 -0.5% -0.3% -33.1%
Brenntag BNRGn.DE € 51.18 € 42 -17.9% 18.3 17.1 7.9 7.0 3.1 17.0 2.1 9.9% 10.0% -13.1%
BP BP.L 351.85 p 330 p -6.2% 48.0 12.5 -67.6 282.7 1.0 2.1 8.0 1.0% 4.8% -25.3%
Burberry Group BRBY.L 1297 p 1050 p -19.0% 18.4 19.0 -8.6 -3.0 3.7 20.2 2.7 -5.9% 16.6% -27.1%
Capital & Counties Properties CAPCC.L 338.9 p 310 p -8.5% -137.3 -115.4 -366.1 -18.9 1.0 -0.7 0.4 4.1% -13.9% -17.8%
Compass CPG.L 1264 p 1140 p -9.8% 21.8 19.8 8.2 10.2 10.1 46.4 2.5 3.9% 10.1% 4.3%
Danone DANO.PA € 60.93 € 56 -8.1% 20.2 18.8 2.5 7.4 2.8 13.7 2.8 -4.6% 0.0% -6.4%
DKSH Holdings DKSH.S SFr 65.35 SFr 55 -15.8% 20.7 19.8 4.7 4.8 2.6 12.6 2.1 -2.8% 9.0% -18.1%
DNB DNB.OL Nkr 97.5 Nkr 91 -6.7% 8.0 7.9 -10.1 1.3 0.8 10.3 3.9 -8.7% -1.5% -29.1%
Deutsche Post DHL DPWGn.DE € 24.3 € 20.89 -14.0% 13.3 12.2 50.0 9.0 2.6 20.6 4.0 3.3% 2.6% -21.0%
Discovery Holdings Ltd DSYJ.J R 118.54 R 81 -31.7% 18.5 15.2 -3.2 21.7 2.6 13.8 1.4 5.4% -1.0% -16.5%
GN Store Nord GN.CO Dkr 134.3 Dkr 125 -6.9% 16.3 16.1 59.2 1.3 3.9 23.9 0.9 0.8% 4.2% -8.5%
Gemalto GTO.AS € 58.65 € 53 -9.6% 14.3 13.3 20.4 7.2 1.9 13.7 -10.2% 1.5% -25.4%
Inditex ITX.MC € 28.53 € 25 -12.4% 30.9 28.8 15.0 7.4 9.6 30.9 1.6 -3.6% -4.9% -7.9%
KGHM Polska Miedz S.A. KGH.WA zł 68.65 zł 48 -30.1% 8.6 10.7 -19.5 0.7 7.6 2.9 -5.3% 22.8% -42.2%
Michael Page MPI.L 416.8 p 380 p -8.8% 17.9 15.1 9.3 18.8 5.8 32.1 4.9 5.5% 1.9% -21.5%
National Grid NG.L 991.4 p 820 p -17.3% 16.1 16.9 6.1 -4.7 2.9 18.2 4.4 2.7% 5.2% 9.8%
PKO BP PKO.WA zł 26.3 zł 21 -20.2% 13.7 12.0 -20.4 14.2 1.0 7.6 3.6 -3.8% 5.3% -23.3%
Banco Popular POP.MC € 2.18 € 2.08 -4.5% 11.6 8.5 286.8 37.2 0.4 3.2 3.4 -18.5% -16.8% -52.8%
Persimmon PSN.L 1995 p 1383 p -30.7% 11.7 12.8 2.1 18.2 0.5 0.3% 4.7% 19.4%
Rolls-Royce RR.L 664 p 540 p -18.7% 25.3 22.0 -55.1 15.3 2.3 19.8 2.0 -3.2% 18.5% -29.6%
Sandvik SAND.ST Skr 85.25 Skr 65 -23.8% 17.9 15.3 -4.2 16.5 3.1 17.5 4.1 4.0% 22.0% -11.9%
Swisscom SCMN.S SFr 497.9 SFr 475 -4.6% 16.1 16.3 3.6 -1.3 3.7 23.0 4.4 -4.0% 0.0% -9.7%
Suez SEVI.PA € 16.32 € 14.3 -12.4% 20.9 19.2 12.9 9.0 1.9 9.3 4.0 3.5% -4.3% -4.4%
Sage Group SGE.L 625.5 p 560 p -10.5% 23.1 20.9 9.0 10.7 7.2 31.5 2.2 6.6% 7.2% 31.0%
Svenska Handelsbanken SHBa.ST Skr 100.9 Skr 94 -6.8% 12.8 12.3 0.7 4.7 1.4 11.0 5.0 -14.0% -4.7% -22.7%
Surgutneftegas SNGSyq.L US$ 5.54 US$ 5 -9.7% 700.1 569.9 -69.5 22.8 31.4 5.5 0.0 -3.7% 24.9% -21.0%
Swiss Re SRENH.S SFr 88.4 SFr 88 -0.5% 12.3 12.1 -36.1 2.3 0.9 8.3 5.2 -1.1% -8.5% -8.3%
SSAB SSABa.ST Skr 30.47 Skr 14.5 -52.4% -5.0 -5.0 -751.1 0.6 0.4 -8.1 1.6 10.6% 53.4% -31.5%
Stora Enso STERV.HE € 7.62 € 6.4 -16.0% 11.9 14.2 -7.5 -16.4 1.1 9.0 4.3 1.1% -6.7% -26.4%
April 2016 Slide 65
Valuation: Underperforms (II)
Company Tickers Price TP % Upside
PE (x) EPS Growth (%) PB (x) ROE (%) Yield (%) Performance
2016 2017 2016 2017 2016 2016 2016 1M 3M 12M
Statoil STL.OL Nkr 127.9 Nkr 90 -29.6% 441.4 16.9 -95.3 2519.2 1.2 0.3 5.9 -1.2% 22.2% -16.7%
STMicroelectronics NV STM.PA € 4.97 € 5 +0.5% 20.7 16.3 61.0 27.1 1.1 5.2 7.0 -6.9% -12.1% -45.0%
Terna TRN.MI € 5.07 € 4.1 -19.1% 17.9 16.8 -3.7 6.7 2.8 15.6 4.1 4.8% 6.4% 18.7%
Vakifbank VAKBN.IS TL 4.7 TL 4.61 -1.9% 5.8 5.0 5.1 15.7 0.6 10.8 1.7 5.9% 24.7% 7.8%
Verbund VERB.VI € 11.4 € 10 -12.2% 17.1 17.7 -15.0 -3.5 0.8 4.7 2.9 7.3% 5.9% -28.6%
Vallourec VLLP.PA € 3.65 € 2.4 -34.2% -3.9 -8.6 76.2 55.1 0.7 -28.9 -16.3% -1.6% -75.1%
Volkswagen VOWG_p.DE € 106.4 € 79 -25.8% 7.7 7.9 13.2 -2.4 0.6 7.3 1.5 -6.4% -11.7% -57.2%
Wolters Kluwer WLSNc.AS € 35.17 € 31.1 -11.6% 17.1 16.1 4.7 6.7 4.0 23.9 2.2 2.4% 16.1% 10.3%
Wartsila WRT1V.HE € 39.39 € 36 -8.6% 16.3 15.5 7.4 5.2 3.2 19.3 3.0 1.9% 0.2% -10.8%
April 2016 Slide 66
Disclosures
Companies Mentioned (Price as of 11-Apr-2016)
AVIVA Plc (AV.L, 432.2p) AXA (AXAF.PA, €20.18) Admiral (ADML.L, 1930.0p) Air Liquide (AIRP.PA, €95.4) Airbus Group (AIR.PA, €56.35) AkzoNobel (AKZO.AS, €58.16) Alrosa (ALRS.MM, Rbl71.7) Aperam (APAM.AS, €33.6) Arkema (AKE.PA, €66.58) Ashmore Group (ASHM.L, 289.3p) Ashtead Group (AHT.L, 842.0p) Assa Abloy (ASSAb.ST, Skr160.4) AstraZeneca (AZN.L, 4065.0p) Autoneum (AUTON.S, SFr232.7) BASF (BASFn.DE, €64.11) BP (BP.L, 351.85p) BT Group (BT.L, 441.15p) Banco Popular (POP.MC, €2.18) Boliden (BOL.ST, Skr128.6) Brenntag (BNRGn.DE, €51.18) Burberry Group (BRBY.L, 1297.0p) Capita (CPI.L, 1034.0p) Capital & Counties Properties Plc (CAPCC.L, 338.9p) Carnival (CCL.L, 3711.0p) Centrica (CNA.L, 233.7p) Compass (CPG.L, 1264.0p) DKSH Holdings (DKSH.S, SFr65.35) DNB (DNB.OL, Nkr97.5) Danone (DANO.PA, €60.93) Danske Bank (DANSKE.CO, Dkr175.5) Dassault Systemes (DAST.PA, €70.0) Deutsche Post DHL (DPWGn.DE, €24.3) Diageo (DGE.L, 1897.5p) Discovery Holdings Ltd (DSYJ.J, R118.54) Endesa (ELE.MC, €17.06) Erste Bank (ERST.VI, €24.16) Fiat Chrysler Automobile (FCHA.MI, €6.5) GN Store Nord (GN.CO, Dkr134.3) Gemalto (GTO.AS, €58.65) Grand City Properties (GYC.DE, €19.8) Halkbank (HALKB.IS, TL10.44) Halma (HLMA.L, 915.5p) Iberdrola (IBE.MC, €5.84) Imperial Brands (IMB.L, 3822.5p) Inditex (ITX.MC, €28.53) Infineon Technologies AG (IFXGn.DE, €12.38) International Airlines Group (ICAG.L, 532.5p) Intesa Sanpaolo (ISP.MI, €2.33) KGHM Polska Miedz S.A. (KGH.WA, zł68.65) Kingfisher (KGF.L, 377.2p) L'Oreal (OREP.PA, €153.95) LVMH (LVMH.PA, €146.05) Lafargeholcim (LHN.S, SFr45.75) London Stock Exchange (LSE.L, 2793.0p) Michael Page (MPI.L, 416.8p) Naspers (NPNJn.J, R2068.16) National Grid (NG.L, 991.4p) Nokia (NOKIA.HE, €5.22) Novartis (NOVN.S, SFr71.85) OC Oerlikon Corp AG (OERL.S, SFr9.45) PKO BP (PKO.WA, zł26.3) Persimmon (PSN.L, 1995.0p) Prudential (PRU.L, 1313.0p) Prysmian (PRY.MI, €20.14) Roche (ROG.S, SFr242.5) Rolls-Royce (RR.L, 664.0p) Royal Dutch Shell plc (RDSa.L, 1732.0p) SAP (SAPG.F, €67.62) SGS Surveillance (SGSN.S, SFr2103.0) SSAB (SSABa.ST, Skr30.47) STMicroelectronics NV (STM.PA, €4.97) Sage Group (SGE.L, 625.5p) Sandvik (SAND.ST, Skr85.25) Securitas (SECUb.ST, Skr137.0) Smurfit Kappa (SKG.I, €23.58) Statoil (STL.OL, Nkr127.9) Stora Enso (STERV.HE, €7.62) Straumann (STMN.S, SFr340.0) Suez (SEVI.PA, €16.32) Surgutneftegas (SNGSyq.L, $5.54) Svenska Handelsbanken (SHBa.ST, Skr100.9) Swiss Re (SRENH.S, SFr88.4) Swisscom (SCMN.S, SFr497.9) Terna (TRN.MI, €5.06) Thyssen Krupp AG (TKAG.DE, €19.14) Travis Perkins (TPK.L, 1821.0p) UBM plc (UBM.L, 596.0p) Vakifbank (VAKBN.IS, TL4.7) Vallourec (VLLP.PA, €3.65) Verbund (VERB.VI, €11.4) Volkswagen (VOWG_p.DE, €106.4) Wartsila (WRT1V.HE, €39.39) Whitbread (WTB.L, 3832.0p) Wolters Kluwer (WLSNc.AS, €35.16) Zoopla Property Group Plc (ZPLAZ.L, 245.4p)
Disclosure Appendix
Important Global Disclosures
Alexander Haissl, Simon Irwin, Guillaume Gauvillé, CFA, Joseph Barnet-Lamb, Tim Ramskill, CFA, Charlie Mills, Thomas Adolff, Jan Wolter, Richard Burden, Ben Richford, Tom Mills, Christoph Gretler, Jo Walton, Olivier Brochet, Andy Grobler, CFA, Andre Kukhnin, CFA, Neil Glynn, CFA, Harry Goad, Chris Counihan, Michael Shillaker, Lars Kjellberg, Achal Sultania, Justin Funnell, Vincent Gilles, Patrick Laager, Hugo Swann, Semyon Mironov, Ilkin Karimli, Pieter Vorster and Ates Buldur each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. F or Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges fo r Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 57% (39% banking clients)
Neutral/Hold* 31% (29% banking clients)
Underperform/Sell* 11% (45% banking clients)
Restricted 1%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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See the Companies Mentioned section for full company names
The subject company (KGH.WA, VOWG_p.DE, BP.L, BRBY.L, ZPLAZ.L, TRN.MI, BASFn.DE, HLMA.L, DAST.PA, LSE.L, GYC.DE, DANO.PA, DGE.L, AIR.PA, ERST.VI, SHBa.ST, ALRS.MM, IFXGn.DE, ISP.MI, ELE.MC, AXAF.PA, DANSKE.CO, BT.L, HALKB.IS, AKE.PA, PRU.L, RDSa.L, AV.L, SGSN.S, NOKIA.HE, AHT.L, FCHA.MI, WLSNc.AS, DNB.OL, SKG.I, SAPG.F, POP.MC, KGF.L, SEVI.PA, STL.OL, GN.CO, IMB.L, NG.L, LHN.S, ROG.S, AKZO.AS, PKO.WA, AZN.L, VERB.VI, NPNJn.J, DPWGn.DE, CPG.L, OERL.S, NOVN.S, LVMH.PA, TPK.L, BNRGn.DE, GTO.AS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (BP.L, ZPLAZ.L, TRN.MI, DGE.L, ERST.VI, SHBa.ST, ISP.MI, ELE.MC, AXAF.PA, DANSKE.CO, PRU.L, RDSa.L, SGSN.S, NOKIA.HE, FCHA.MI, DNB.OL, POP.MC, KGF.L, IMB.L, NG.L, LHN.S, AZN.L, CPG.L, NOVN.S) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (VOWG_p.DE, ERST.VI, SHBa.ST, ISP.MI, AXAF.PA, DANSKE.CO, FCHA.MI, POP.MC, ROG.S) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (BP.L, SHBa.ST, ISP.MI, DANSKE.CO, PRU.L, RDSa.L, SGSN.S, DNB.OL, POP.MC, NG.L, LHN.S, NOVN.S) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (BP.L, ZPLAZ.L, TRN.MI, DGE.L, ERST.VI, SHBa.ST, ISP.MI, ELE.MC, AXAF.PA, DANSKE.CO, PRU.L, RDSa.L, SGSN.S, NOKIA.HE, FCHA.MI, DNB.OL, POP.MC, KGF.L, IMB.L, NG.L, LHN.S, AZN.L, CPG.L, NOVN.S) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (PRY.MI, KGH.WA, BP.L, BRBY.L, ZPLAZ.L, TRN.MI, BASFn.DE, HLMA.L, DAST.PA, LSE.L, GYC.DE, DANO.PA, DGE.L, AIR.PA, ERST.VI, CCL.L, SHBa.ST, ALRS.MM, IFXGn.DE, ISP.MI, ELE.MC, AXAF.PA, DANSKE.CO, BT.L, HALKB.IS, AKE.PA, PRU.L, RDSa.L, AV.L, SGSN.S, NOKIA.HE, AHT.L, FCHA.MI, WLSNc.AS, DNB.OL, SKG.I, SAPG.F, POP.MC, KGF.L, SEVI.PA, STL.OL, GN.CO, IMB.L, TKAG.DE, NG.L, LHN.S, AKZO.AS, PKO.WA, AZN.L, VERB.VI, NPNJn.J, DPWGn.DE, CPG.L, OERL.S, NOVN.S, LVMH.PA, TPK.L, BNRGn.DE, GTO.AS) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (VOWG_p.DE, ERST.VI, SHBa.ST, ISP.MI, AXAF.PA, DANSKE.CO, FCHA.MI, POP.MC, ROG.S) within the past 12 months
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (MPI.L, LSE.L, DGE.L, CCL.L, AKE.PA, PRU.L, AV.L, FCHA.MI, SKG.I, KGF.L, RR.L, PSN.L, DPWGn.DE, ICAG.L, SGE.L, BNRGn.DE).
As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (SGSN.S, SRENH.S, LHN.S, OERL.S, NOVN.S, SCMN.S).
Credit Suisse has a material conflict of interest with the subject company (SGSN.S) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program.
Credit Suisse has a material conflict of interest with the subject company (CPI.L) . Gillian Sheldon, a Senior Advisor of Credit Suisse, is a board member of Capita Plc (CPI.L).
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Important Regional Disclosures
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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
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Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (ZPLAZ.L, HLMA.L, UBM.L, SKG.I, KGF.L, IMB.L).
The following disclosed European company/ies have estimates that comply with IFRS: (VOWG_p.DE, OREP.PA, BP.L, ASSAb.ST, ITX.MC, TRN.MI, STERV.HE, ADML.L, BASFn.DE, HLMA.L, MPI.L, ASHM.L, DAST.PA, LSE.L, DANO.PA, DGE.L, AIR.PA, ERST.VI, CCL.L, SHBa.ST, ISP.MI, AXAF.PA, DANSKE.CO, CNA.L, BT.L, PRU.L, RDSa.L, AV.L, SGSN.S, NOKIA.HE, FCHA.MI, WLSNc.AS, DNB.OL, UBM.L, SAPG.F, POP.MC, KGF.L, RR.L, SRENH.S, IBE.MC, SECUb.ST, PSN.L, STL.OL, GN.CO, IMB.L, TKAG.DE, NG.L, LHN.S, AKZO.AS, PKO.WA, AZN.L, SAND.ST, DPWGn.DE, VLLP.PA, SSABa.ST, CPG.L, SGE.L, TPK.L, SCMN.S).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (VOWG_p.DE, BP.L, ZPLAZ.L, BASFn.DE, DGE.L, ERST.VI, SHBa.ST, IFXGn.DE, ISP.MI, ELE.MC, DANSKE.CO, CNA.L, PRU.L, RDSa.L, SGSN.S, FCHA.MI, DNB.OL, UBM.L, SKG.I, SAPG.F, POP.MC, SRENH.S, SEVI.PA, IBE.MC, STL.OL, IMB.L, NG.L, LHN.S, AZN.L, OERL.S, NOVN.S, SCMN.S) within the past 3 years.
As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of SRENH.S
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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Bank Credit Suisse (Moscow) ......................................................................................................................................................... Semyon Mironov
Credit Suisse International Alexander Haissl ; Simon Irwin ; Guillaume Gauvillé, CFA ; Joseph Barnet-Lamb ; Tim Ramskill, CFA ; Charlie Mills ; Thomas Adolff ; Richard Burden ; Ben Richford ; Tom Mills ; Jo Walton ; Olivier Brochet ; Andy Grobler, CFA ; Andre Kukhnin, CFA ; Neil Glynn, CFA ; Harry Goad ; Chris Counihan ; Achal Sultania ; Justin Funnell ; Vincent Gilles ; Hugo Swann ; Ilkin Karimli ; Pieter Vorster ; Richard Kersley ; Brandon Vair
Credit Suisse Securities (Europe) Limited......... Jan Wolter ; Christoph Gretler ; Michael Shillaker ; Lars Kjellberg ; Patrick Laager ; Ates Buldur
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