INDEPENDENT RESEARCH Top Picks 11th October 2017 Top Picks 4Q2017 Top Picks
AB INBEV BUY EUR128 This is the last volume of our quarterly ‘Top Picks’ for 2017. The list is not ACCORHOTELS BUY EUR49.5 intended to be a model portfolio, but simply reflects a pure stock-picking ASML BUY EUR155 exercise in our coverage universe. It reflects a bias towards themes that ASTRAZENECA BUY 5380p we believe fit best with the current environment: self-helped businesses, DANONE BUY EUR80 steady organic growth and/or earnings momentum. DBV TECHNOLOGIES BUY EUR105 Our list has produced a poor performance in Q3 2017, at +0.4% HEIDELBERGCEMENT BUY EUR95 INDRA SISTEMAS BUY EUR16 compared to +2.3% for the DJ Stoxx600, with strong performances INGENICO GROUP BUY EUR119 from DBV and Michelin unable to compensate for setbacks on Elior, NOVARTIS BUY CHF92 Fresenius and Suez. Our cumulative performance since Q1 2012 is now RENAULT BUY EUR99 +138% vs. +59% for the Stoxx600. European equity markets have been lacklustre in Q3, mainly because of the rise of EUR in July-August. This trend has reverted somehow over the last weeks, driven by growing prospects of more US rates’ hikes than previously anticipated, offering a better market momentum since September. However, the very low level of volatility with the VIX index below 10 (suggesting some risks could be mispriced…), the overall negative USDEUR impacts that will gradually materialise with the next sets of publications, and the ongoing Amazon disruption that is affecting more and more business models (especially in the Consumer segments), prompt us to remain very selective. For our Q4 list we have therefore decided to focus on 11 stocks (out of 161 stocks) that offer better-than-average, short-term visibility: self- helped drivers, steady organic growth and/or earnings momentum.
This document is a compilation of the notes written to update our Top Pick list
Q1 17 Q2 17 Q3 17 BG Top Picks 8.35% -0.05% 0.39 STOXX EUROPE 5.45% -0.46% 2.3% STOXX EUROPE 4.99% -1.22% 1.62%
Analyst: Olivier Pauchaut 33(0) 1 56 68 75 49 [email protected]
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Top Picks
Table of contents
Construction & Materials | Q4 Top Pick HeidelbergCement (FV EUR95 vs EUR93) on the back of positive momentum ...... 5
Hotels & Nursing Home | Top picks Q4: AccorHotels again ...... 6
Automotive | Q4 2017 Auto & Parts Top Pick: Renault ...... 8
Utilities | Top Picks Q4 2017: we see limited short-term catalysts (that have not been priced- in…) ...... 9
TMT |Q3 2017 review and our TMT Top Picks for Q4: ASML, Indra Sistemas and Ingenico Group ...... 11
Healthcare | Deep changes to our list for Q4 2017 ...... 15
Consumer | Q4 Top Picks: Danone (Buy-FV :EUR80) and AB Inbev (Buy-FV: EUR128) ...... 18
Business Services | No Top Pick ...... 20
Insurance | No Insurance Top Pick in Q4 ...... 21
Bryan Garnier stock rating system ...... 22
Top Picks
Our top picks for 4Q 2017 are
Fig. 1: Valuation ratios: 4Q 2017 Top Picks
Market Cap. EV/EBIT(x) PER (x) RDT (%)
(EUR) 2017e 2018e 2017e 2018e 2017e 2018e FV
ACCORHOTELS 12 487 16.8 13.4 44.2 35.6 1.2% 1.4% BUY 49.50
HEIDELBERGCEMENT 16 832 12.9 10.7 14.3 12.0 2.2% 2.9% BUY 95.00
RENAULT 25 337 1.6 1.3 5.6 5.4 4.3% 4.6% BUY 99.00
ASML 62 649 27.9 21.8 32.5 25.2 0.8% 1.0% BUY 155.00
INGENICO GROUP 4 886 14.1 11.1 16.5 14.2 1.9% 2.3% BUY 119.00
INDRA SISTEMAS 2 311 13.3 9.7 19.2 14.2 2.7% 3.4% BUY 16.00
DBV TECHNOLOGIES 1 936 NM NM -12.7 -9.6 0.0% 0.0% BUY 105.00
NOVARTIS 219 815 24.5 20.5 18.4 16.2 2.7% 3.1% BUY 92.00
ASTRAZENECA 65 473 23.1 19.5 17.3 17.4 4.1% 4.1% BUY 5380.00
DANONE 46 353 - - 20.3 18.6 2.7% 2.9% BUY 80.00
AB INBEV 176 944 19.6 17.0 27.9 22.7 1.9% 2.3% BUY 128.00
Source: Company Data; Bryan, Garnier & Co ests.
Changes : Fig. 2: Dividend payments: 4Q 2017 Top Picks
+RENAULT No dividends +ASML +NOVARTIS +ASTRAZENECA +DANONE
-ELIOR -ESSILOR -FRESENIUS -MICHELIN -SUEZ ENV.
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Top Picks
Top picks for 3Q 2017 performances
3Q 2017 perf. incl. Div.
Euro Local Ccy Euro Local Ccy ACCOR -0.3% -0.3% -0.3% -0.3%
ANHEUSER-BUSCH INBEV 4.1% 4.1% 4.1% 4.1%
DBV TECHNOLOGIES 15.6% 15.6% 15.6% 15.6%
ELIOR PARTICIPATIONS (Out 27 Jul.) -13.5% -13.5% -13.5% -13.5%
ESSILOR INTL. (Out 28 Jul.) 1.0% 1.0% 1.0% 1.0%
FRESENIUS (XET) -9.1% -9.1% -9.1% -9.1%
HEIDELBERGCEMENT (XET) -1.5% -1.5% -1.5% -1.5%
INDRA SISTEMAS 4.6% 4.6% 4.6% 4.6%
INGENICO GROUP 1.5% 1.5% 1.5% 1.5%
MICHELIN 7.6% 7.6% 7.6% 7.6%
SUEZ -5.80% -5.8% -5.8% -5.8%
3Q 2017* Top picks average Perf. 0.39% 0.39% 0.39% 0.39%
STOXX EUROPE 600 2.32 3.31
STOXX EUROPE 50 1.62 2.80
Source: Company Data; Bryan, Garnier & Co ests.
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Top Picks
Construction & Materials | Q4 Top Pick HeidelbergCement (FV EUR95 vs EUR93) on the back of positive momentum Published on 26th September
1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q3 2017 Cons & Mat 3.0% -2.8% 0.3% 7.8% Share price performances have been very mixed within our coverage, with negative or poor DJ Stoxx 600 2.6% -1.0% 2.0% 6.2% performances for CRH (-1%), HeidelbergCement (1%), Vicat (-1%) and Imerys (+1.4%). These *Stoxx Sector Indices companies were penalised by a relatively quiet first half, usually difficult weather and sometimes specific issues (i.e. Egypt for Vicat, poor volumes for Imerys in Q2). USD exposure didn’t help, Companies covered either. The best performer was Eiffage (+9% so far), while both Vinci and Saint-Gobain were CRH BUY EUR35 strong too, with a 6-7% increase. LafargeHolcim was penalised by reaction to the analysts' Market Last Price EUR30,6 EUR25,594m breakfast comments yesterday.
EIFFAGE NEUTRAL EUR90 Last Price EUR86,56 Market EUR8,483m WHAT WE SEE FOR Q4 2018
HEIDELBERGCEMENT BUY EUR95 vs 93 We expect a less negative weather impact in H2, although admittedly, the South-East of the United Last Price EUR83,7 Market EUR16,607m States, as well as Mexico, will be penalised in the short term because of the hurricanes and
IMERYS NEUTRAL EUR82 earthquakes (we expect no positive impact from future reconstruction, yet). But key cement Last Price EUR76,6 Market EUR6,095m markets are expected to perform better in H2, in particular the US as a whole or Indonesia, while
LAFARGEHOLCIM NEUTRAL CHF55 the recovery is expected to continue in various markets, in particular in western Europe, although there are some concerns regarding the UK. In France, toll roads traffic should continue Last Price CHF56,5 Market CHF34,290m on a similar and steady trend (2.2% Vinci Autoroutes +2.7% APRR). Plus, French Contractors are SAINT GOBAIN BUY EUR53 likely to win new contracts for Grand Paris. Last Price EUR49,61 Market EUR27,799m
VICAT NEUTRAL EUR60 CONCLUSIONS AND TOP PICKS Last Price EUR61,29 Market EUR2,752m In this context, we have decided to keep HeidelbergCement as our Top Pick for Q4. We see short
VINCI NEUTRAL EUR80 term catalysts that should benefit the share price. Last Price EUR80 Market EUR47,473m Firstly, key markets should be strong in H2. US construction was disappointing in H1, with the gradual fading of construction spending of around USD1.2 trillion SAAR (from 7.3% y/y increase in January to 1.8% last July) but the lead indicators are usually rather solid (ABI, Dodge
Momentum Index…). The US accounts for approx. 25% of EBITDA. Volumes in Indonesia (10% of EBITDA) were steady too with a 5% increase YTD at end-August for the market and +2% for Indocement, but we suspect prices are solid and management comments on the outlook are definitely upbeat (management said some kilns might be restarted to satisfy demand). Comments on Western Europe (20% of EBITDA) are positive with a recovery expected in Spain and Italy (where LafargeHolcim has reported more than 23% volumes growth in H1 2017) and a solid outlook in Germany and France. Secondly, HeidelbergCement's H1 2017 EBITDA was penalised by a EUR46m negative price impact in Indonesia, Ghana and Thailand (compared with a total EUR6m lfl variance). But we understand that Indocement decided to stop promotions since last Summer (and prices are stabilising), we note that Dangote prices in Ghana were up sequentially this year and that prices have stabilised in Thailand. Thirdly, momentum looks fine per see. Within our coverage, HEI is the only stock down YTD along with CRH, with a -6% underperformance. 2018e EV/EBITDA stands at 7.1x vs 7.8x for LafargeHolcim and 8.1x for CRH. Risks related to the integration of Italcementi are probably behind us, while most of the restructuring costs and synergies are now running virtually at full pace. We have updated our forecast model (slightly more organic growth, FX and macro assumptions updated), leading to a 2% increase on average in EBITDA over 2017e-2019e, translating into a EUR95 FV vs EUR93 previously, with an unchanged approach. Some risks remain. Indonesia costs remain an issue (coal), while Egypt (6% of capacity) is a very complicated market, especially since the devaluation of the Pound (last year in November). Click here to download
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Top Picks
Hotels & Nursing Home | Top picks Q4: AccorHotels again Published on 26th September
1 M 3 M 6 M 31/12/16 LOOKING BACK AT Q3 2017 Travel&Leisure -0.5% -6.2% 3.3% 4.5% No real surprises during the H1 results season with releases mostly in line with expectations and DJ Stoxx 600 2.0% -1.4% 2.5% 6.0% confirming recent market trends showing, 1/a slowdown in RevPAR growth in the US, 2/ a *Stoxx Sector Indices recovery well underway in the European countries most affected by exceptional events, 3/ still sustained growth in southern European countries and in the UK and 4/ challenging conditions in Companies covered some areas such as Brazil. ACCORHOTELS BUY EUR49,5 As such, Hotels share prices clearly reflected geographic exposure with AccorHotels reporting the Market Last Price EUR41 EUR11,840m best performance, albeit slightly negative, down 0.3% in absolute terms and -1% vs. the DJ
InterContinental Hotels SELL 3520p compared with respectively -7.9% and -8.5% for Melia Hotels and -13.3% and -13.9% in euro Last Price 3803p Market GBP7,225m terms for IHG.
MELIA HOTELS BUY EUR15 Last Price EUR12,19 Market EUR2,800m In dependence care, the gap in growth momentum between the two European leaders was again confirmed in Q2. Orpea continued to outperform Korian, gaining 5.5% in Q3 in absolute terms and 4.8% vs. DJ Stoxx compared with Korian, down respectively 7.9% and 8.6%. Companies covered KORIAN BUY EUR35 WHAT WE SEE FOR Q4 2017 Last Price EUR28.245 Market EUR2,287m Despite good results for the hoteliers most exposed to European countries, and especially for ORPEA BUY EUR89 AccorHotels, which published consolidated revenue up 8.5% in organic terms with strong Last Price EUR102.4 Market EUR6,150m leverage to EBIT up c. 34%, the stock market performance at the end of this publication was disappointing. The main explanation was the lack of new concrete items concerning the project "booster". Once again, the project obviously requires more time than expected so that the conditions satisfy all parties. As a reminder, beyond the amount of the transaction, the parties will be bound for a certain number of years by a management contract in favour of AccorHotels, which will also remain a shareholder in AccorInvest. Here's hoping that expectations will be rewarded!
After the strong performance in H1 (best in the segment at +18.1% in absolute terms and +12.5% vs. DJ Stoxx), some profits were taken on Melia Hotels, despite good results and prospects for sustained growth. Nevertheless, ahead of short term results (the summer season has been pretty good), we would highlight the fact that the group's exposure to Mexico (eight hotels) and the Caribbean (Cuba with 26 hotels, Dominican Republic with six Hotels, Porto Rico with one in full property) could weigh on Q1 2018 bookings (high season), after the recent earthquakes and hurricanes, even if only three hotels need to be closed for renovation work. In this context, we are expecting no significant share price rebound.
Regarding nursing homes, Korian’s valuation was largely affected after H1 results, excessively so in our opinion. Indeed, H1 results were in line with expectations, despite lower earnings from Germany, and FY guidance was confirmed, which the group's transformation plan is well underway and on track with positive signs on cost savings or on rental renegotiations. As such, confirming our FY 2017 estimates which are in line with management's expectation, we are convinced that management’s medium-term objectives (i.e. EBITDA margin of 14% in 2019) could be exceeded (our forecast is 14.3%) and we maintain our Buy recommendation with a FV EUR35 (+27%).
CONCLUSIONS AND TOP PICKS We confirm AccorHotels as our Top Pick for Q4, for the following reasons: • AccorHotels is the hotelier the most exposed to Europe (53% of the room offer o/w 26% in France & Switzerland) where RevPARs should continue to benefit from the more positive economic environment and favourable comps. • Even if longer than expected, the Booster project will be finalised i.e. the disposal of a significant part of AccorInvest assets, valued of EUR7.6bn o/w EUR6.6bn is for sale. Management expects to divest between 50% and 80% of that amount to deconsolidate AccorInvest. Assuming that AccorHotels sells off 70%, the group will receive EUR4.5bn. Most of the cash received from the disposal will be available for use, management is ruling out no options (organic growth, shareholder returns, selective M&A, balance sheet optimisation). We are convinced that some cash could be retained for organic growth (brand investments, digital services) or selective bolt-on M&A, but based on the last three year investment strategy (“disruptive” investments amounted to around EUR500m and digital plan of EUR250m), we estimate that EUR3bn could be returned to shareholders i.e. around EUR10 per share.
Top Picks
• The world's fifth-largest hotel group has lofty ambitions with the aim of rounding out the hospitality principle with three complementary verticals: Hotels, by becoming a pure operator under franchise and management contracts, which will remain the core business, but also momentum in two associated business lines, one dedicated to travel via the rental of luxury residences with Onefinestay, SquareBreak, Oasis, Travel Keys, VeryChic and recently Availpro and the other offering local services destined for people outside the group's hotels, especially based on John Paul.
NEXT CATALYSTS AccorHotels: Q3 revenue on 19th October, 2017 IHG: Q3 IMS on 20th October, 2017 Melia Hotels: Q3 results on 8th November, 2017 Orpea: Q3 revenue Korian: Q3 revenue on 18th October, 2017
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Top Picks
Automotive | Q4 2017 Auto & Parts Top Pick: Renault Published on 27th September
1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q3 2017 Auto & Parts 8.5% 6.0% 4.6% 8.2% While we well anticipated the progressive market slowdown during Q3 compared with the previous DJ Stoxx 600 2.6% -1.0% 2.0% 6.2% two quarters (around +2% in production vs. +3% in H1) we thought the decline would have been *Stoxx Sector Indices stronger especially in emerging markets and in the US. As such, we did not appreciate investor interest for high beta stocks within the automotive sector. During Q3, the SXAP index Companies covered outperformed the Stoxx 600 index (+8.7% vs. +1.2%) after underperforming it during the second BMW NEUTRAL EUR87 quarter. Within our coverage, the best performers were automotive suppliers: Faurecia Market Last Price EUR84,78 EUR55,710m benefited from the upgrade to its 2017 guidance for both sales and profitability and continued
CONTINENTAL SELL EUR178 its rerating effect (+31% over the quarter), while Hella posted +23.5% and Plastic Omnium Last Price EUR210,8 Market EUR42,161m generated a 12% performance. All carmakers underperformed except Peugeot (+13%) which
DAIMLER BUY EUR85 posted solid H1 2017 operating metrics. The Renault share was only up 2.6% while BMW was up Last Price EUR66,7 Market EUR71,358m 4.6% and Daimler was up 5.3%. Tiremakers performed relatively well on the back of lower FAURECIA BUY EUR57 natural rubber price inflation. Michelin performed less well than Continental (+7% for Michelin Last Price EUR58,53 Market EUR8,079m vs. +12% for Continental) due mainly to the important depreciation of the USD relative to the HELLA BUY EUR46 EUR (-5% YoY, -7% QoQ and -12.5% on a YTD basis). As a reminder among our auto coverage at BG, Michelin is the auto stock the most exposed to the USD with of its sales being in USD Last Price EUR53,25 Market EUR5,917m 38% (strong exposure to North American market combined with 100% USD sales for mining business) MICHELIN BUY EUR138 and adjusted negatively its FX guidance on 2017. Last Price EUR124,45 Market EUR22,437m
PEUGEOT SELL EUR19 WHAT WE SEE FOR Q4 2017 Last Price EUR19,74 Market EUR17,861m Q4 is set to be a difficult quarter for auto production and auto demand with a difficult base of
PLASTIC OMNIUM NEUTRAL EUR38 comparison for sales growth (especially in China) while production could be affected by Last Price EUR35,87 Market EUR5,416m inventories optimisation, especially in the US, where tension on demand is quite important RENAULT BUY EUR99 notably for carmakers not so exposed to SUV segment. We then expect production to decline Last Price EUR81,34 Market EUR24,054m by 3-4% over fourth quarter. We assume SXAP index will not outperform again Stoxx 600 index. VALEO SELL EUR57 CONCLUSIONS AND TOP PICKS Last Price EUR62,33 Market EUR14,938m As for Q4, we have entered Renault to the BG Top Pick list as for the auto stocks contribution. Given the important valuation gap between auto suppliers and auto carmakers (6.8x of P/E 18-19e for
carmakers vs. 12x for suppliers) driven notably by the strong share price outperformance of the former compared with the latter since the beginning of the year. While we agree with investors that suppliers offer higher sales growth potential and still generate higher margin improvement than most of their direct clients; we also believe at some point that high multiples will progressively alter this outperformance. Within our new carmakers coverage, we have therefore added Renault as a top pick for Q4, mainly to play the strategic plan conference the group will organise on 6th October in Paris. We hope to get more details on how the group will reach its 2022 7% EBIT margin target and how synergies with the Alliance will positively affect the group’s operating costs. More details on electrification of the Renault/Dacia brands will be well appreciated. We have a Buy recommendation on Renault with a FV @ EUR99.
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Top Picks
Utilities | Top Picks Q4 2017: we see limited short-term catalysts (that have not been priced-in…) Published on 27th September
1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q3 2017 Utilities 0.0% -1.7% 5.5% 9.0% The utilities sector outperformed the Stoxx Europe 600 in Q3 2017 by 240bps (+3.6% for SX6P vs. DJ Stoxx 600 2.7% -1.3% 2.0% 6.3% +1.2% for the Stoxx Europe 600). Since the beginning of the year, the Utilities sector has also *Stoxx Sector Indices outperformed the Stoxx Europe 600 (+9.0% vs. +6.3% for the Stoxx Europe 600).
Companies covered Within our coverage, the best performers in Q3 2017 were EDF (+14.0%), E.ON (+13.0%) and Engie ALBIOMA BUY EUR21 (+8.4%). We believe their respective performances can be explained by various specific factors. Market Last Price EUR18,92 EUR579m E.ON and Engie both reported solid H1 2017 results with their respective transformation plans
E.ON BUY EUR10,5 (deleveraging, cost-savings, asset rotation) well-ahead of schedule while organic growth in core Last Price EUR9,317 Market EUR20,508m businesses was stronger than initially expected. As we already highlighted over the past few
EDF NEUTRAL EUR8,9 months, EDF’s stock price and valuation were highly sensitive to variations in power prices. Last Price EUR10,825 Market EUR31,256m Over the quarter, power prices in both France (+15.1%) and Germany (+18.7%) were up
EDP RENOVAVEIS NEUTRAL EUR6,3 sharply on the back of likely Franco-German initiatives on the carbon market (cf. our morning Last Price EUR7,198 Market EUR6,279m mail on this topic: EDF – Carbon market initiatives would be positive…but we remain cautious at
ENGIE BUY EUR15,5 this stage). We calculate that for each additional EUR1/MWh in French forward power prices, EDF’s EPS could rise by about 5%, so could our Fair-Value. Last Price EUR14,32 Market EUR34,873m
INNOGY NEUTRAL EUR35 Over the quarter, Suez’s performance was rather disappointing however (-5.9%) lagging behind Last Price EUR37,365 Market EUR20,758m that of Veolia (+4.6%). H1 2017 results were indeed lower than expected with the group having SUEZ BUY EUR17 been penalised by 1/a negative calendar effect in Q2 2017 which led waste volume processes to Last Price EUR15,25 Market EUR9,354m be sharply down yoy (-2.4% in Q2 2017 vs. +1.9% in Q1 2017) and by 2/a negative comparable
VEOLIA NEUTRAL EUR19,5 basis in the international segment due to the end of significant contracts in the US and in China Last Price EUR19,465 Market EUR10,966m over the quarter (-3.3% organic growth for the division, at the revenues’ level, in Q2 2014)
VOLTALIA BUY EUR14,5 Last Price EUR10,92 Market EUR534m WHAT WE SEE FOR Q4 2017 What we see for Q4 2017 is actually broadly in line with what we already saw for Q3 2017.
Companies in the integrated utilities universe should remain involved in large M&A speculation,
we believe. Disposals should remain on the agenda in Q4 2017 with Engie (Australie, UK, Chile, Brazil) or E.ON (non-core assets and Uniper on which Fortum is likely to launch an offer). Spanish utility Iberdrola is also said to be looking at European assets which could possibly include innogy (after speculation of a tie-up between Engie and innogy back in Q2 2017). X factor on this topic will remain RWE’s position. As a reminder, RWE is still a c. 77% shareholder of innogy and considers its subsidiary as a financial investment. As for now, innogy’s dividends enable RWE to more than offset its cash-out inherent to provisions’ utilization.
Despite a poor performance in Q3 2017 (-6.1% for Albioma and -8.8% for Voltalia) after a solid rally in H1 2017 (+14.4% for Albioma and +27.0% for Voltalia year-to-date), we believe momentum for European renewable companies remains positive on the back of a solid M&A trend. Over the past few months, EDF has acquired Futuren, Direct Energie has acquired Quadran and oil & gas company Total has acquired a 23% stake in EREN RE. As for Albioma and Voltalia specifically, the sharp increase in power prices in Brazil over the past few months (above BRL500/MWh) could positively impact groups’ earnings in H2 2017. But this should remain marginal, we believe, given their highly contracted business profile.
As for power prices, a further increase would definitely depend on the potential agreement that could be reached by France and Germany in the carbon market. A first “deadline” has already been set up with the COP23 scheduled for this November in Germany. Note however that part of this potential upside seems to have already been priced-in as shown by the strong increase in French forward power prices over the past few months (c. +15% in Q3 2017) and EDF’s performance (c. +26% since the beginning of August 2017).
CONCLUSIONS AND TOP PICKS The Stoxx Europe 600 Utilities is trading at a c. 6% premium to its 10-year historical EV/EBITDA average and at a c. 15% premium to its 10-year historical P/E ratio. Clearly, growth prospects are higher than they used to be in recent years, but in a context of uncertainty over changes in interest rates, valuation does matter. The sector as a whole, would suffer from a further increase in interest rates – just like it did in end-2016 – with dividend-paying stocks becoming less attractive.
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Top Picks
We additionally see rather limited company-specific catalysts in Q4 2017 (except, maybe, Suez’s expected Investor Day dedicated to GE Water) that may not have been already priced-in by the market. We have therefore decided not to put any utilities stocks in our BG Top Picks list for Q4 2017. Our Buy recommendations remain unchanged – on Engie (FV @ EUR15.5/share), Suez (FV @ EUR17.0/share), E.ON (FV @ EUR10.5/share), Albioma (FV @ EUR21.0/share) and Voltalia (FV @ EUR14.5/share) – as they are mainly based on rerating stories (Engie through its transformative asset rotation programme, Albioma with an enhanced renewables profile), recovery and deleveraging stories (E.ON with the upcoming sale of its stake and Uniper and expected increased growth investments) or new business profile with enhanced mid-term growth perspectives (Voltalia with the acquisition of Martifer Solar and Suez with the acquisition of GE Water).
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Top Picks
TMT |Q3 2017 review and our TMT Top Picks for Q4: ASML, Indra Sistemas and Ingenico Group Published on 28th September
1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q3 2017 Softw.& Comp. 4.2% -0.1% 6.7% 14.2% In Q3 2017, the DJ STOXX Europe Software & IT Services and Telecom indices were up 3% and DJ St oxx 600 3.1% -0.1% 2.8% 6.7% outperformed the DJ STOXX Europe 600 index by only 2%. *Stoxx Sector Indices During the period, the best performers were Wirecard (+37%, thanks to short covering and strong operational performances), STMicroelectronics (+29%, increasing investors’ confidence Companies covered regarding ST’s FY17 guidance), and Worldpay (+29%, following the friendly takeover bid from ALTEN BUY EUR86 Vantiv). The worst performers were Gemalto (-27%, after the 4th profit warning in a row), Market Last Price EUR74.63 EUR2,518m Axway Software (-27%, profit warning in July) and Altice (-15%, notably due to fears of a
ALTICE BUY EUR22.8 massive merger with Charter Communication in the US and a lack of visibility in France). Last Price EUR17.095 Market EUR27,002m Our Top Picks were Indra Sistemas (+4.5%, Q2 2017 sales 3% below consensus but management
ALTRAN TECHNOLOGIES BUY EUR19 confident in revenue turnaround and EBIT margin acceleration in H2 2017) and Ingenico (+1.3%, Last Price EUR15.42 Market EUR2,711m good perf. following Q2 and the acquisition of Bambora, then impacted by the departure of Mr ams NEUTRAL CHF65 Vacheron). Last Price CHF69.5 Market CHF5,867m
ASML BUY EUR155 WHAT WE SEE FOR Q4 2017 based on industry analysts’ forecasts, we continue to expect some Last Price EUR141.05 Market EUR60,858m For Software & IT Services, growth acceleration in IT spending for 2017, with est. +7-8% for Software (vs. +6% for 2016), still ATOS BUY EUR153 driven by increased acceptance of the now-established cloud model without harming the Last Price EUR129.1 Market EUR13,582m traditional licence-based model as much as feared and est. +4-5% for IT Services (vs. +4% for AXWAY SOFTWARE SELL EUR21 2016) driven by digital transformation projects. As mentioned several times before, Brexit has Last Price EUR22.32 Market EUR464m had no significant impact on IT spending in the UK and elsewhere so far. In addition, fears that
BOUYGUES NEUTRAL EUR37 the US Congress will amend the H-1B visa policy have been downplayed as Indian IT Services Last Price EUR40.285 Market EUR14,403m companies increase their reliance on local hiring and offshoring and the use of automation
CAPGEMINI BUY EUR113 technologies. While Software vendors face no big hurdle for 2017, except potentially the Last Price EUR99.03 Market EUR16,751m economic environment, the main challenge facing IT Services companies is the transition to
CAST NEUTRAL EUR3.6 Digital as this requires a transformation of their own business (cloud-based infrastructure, Last Price EUR3.46 Market EUR56m service automation through machine learning and artificial intelligence…). For Payments: 1) Ingenico Group (Buy – FV of EUR119) has a strong multi-channel offer, is more DASSAULT SYSTEMES NEUTRAL EUR86 exposed to payment services (38% in pro-forma terms) and now ticks the merchant acquiring Last Price EUR85.21 Market EUR22,085m box thanks to the acquisition of Bambora. The group should at least meet its FY 2017 guidance DIALOG BUY EUR59 (~+7% in lfl revenue growth and slight increase in EBITDA margin i.e. >20.6%), given VeriFone's Market Last Price EUR37.042 EUR2,829m recent comments (encouraging regarding EMV in the US and reassuring on India). The seasonal
GEMALTO SELL EUR39 effect is set to be favourable in H2 this year (the group needs 8.5% lfl growth in H2). 2) Wirecard Last Price EUR38.32 Market EUR3,465m (Buy – FV of EUR82). It is very likely that the group will up its current 2017 guidance (EBITDA of
ILIAD BUY EUR255 EUR392-406m) and 2020 targets (revenue >EUR2.5bn and EBITDA margin of 30-35%) again Last Price EUR222.95 Market EUR13,094m before the end of the year. This will force short sellers to continue to cover their short positions
INDRA SISTEMAS BUY EUR16 (estimated 8.7%). Finally, we consider Wirecard is the most suitable PSP for a prospective Last Price EUR13.205 Market EUR2,333m takeover bid in all of our coverage (93% free float). 3) Worldline (Buy – FV of EUR37) is one of
INFINEON BUY EUR22.1 the leading PSPs in Europe since the acquisition of Equens and KB. We expect the group to post back to normative organic sales growth (5-7%) as of Q3 (end of the radar contract loss). The Last Price EUR20.85 Market EUR23,682m group should step up its M&A activity in the coming months (some of which could be INGENICO GROUP BUY EUR119 “transforming”, likely a payment subsidiary of a bank). 4) Worldpay (Sell – FV of 278p) received Last Price EUR80.51 Market EUR5,021m a firm offer backed by management (55p in cash and 0.0672 new Vantiv shares for each WPG M6 NEUTRAL EUR20.5 share and a dividend of 5p; this represents 397p/share). We do not expect a counterbid or the Last Price EUR19.27 Market EUR2,436m deal to be blocked by US anti-trust authorities since Worldpay's positions in this region are
MELEXIS SELL EUR49 weak. 5) Nets (Sell – FV of DKK119) has received a friendly takeover offer of DKK165/share in Last Price EUR78.23 Market EUR3,160m cash from Hellman & Friedman (a 10% premium vs. the IPO price). Upside potential was limited
NETS SELL DKK119 as the share price had already factored in speculative appeal for the last few months. 6) Last Price DKK162.2 Market DKK32,507m Gemalto (Sell – FV of EUR39) recently issued its 4th profit warning in a row for 2017 (now
ORANGE BUY EUR17 targeting a PFO of EUR293-323m). Although we believe the group has finally taken sufficient Last Price EUR13.89 Market EUR36,948m precautions in the payments and SIM businesses (both between -15% and -20%), we consider it is still ambitious to expect growth in its Enterprise, M2M and government programmes SAGE GROUP NEUTRAL 830p businesses (incl. 3M IMB) to offset the decline in the other two activities. We are not ruling out Last Price 690p Market GBP7,458m another PW by the year-end. SAP BUY EUR115 For Semiconductors: while the summer period was full of doubts regarding the end of the year, we Last Price EUR91.66 Market EUR112,605 have also seen numerous semiconductor market forecasts increase for FY17 from market
SFR Group NEUTRAL EUR29.2 watchers including respectable ones such as WSTS, IC Insights and Gartner. We now have a Last Price EUR34.5 Market EUR15,204m consensus for a FY17 up 16.3% but we believe there is high chance it could end up above this
SOFTWARE AG BUY EUR45 level. This implies Q4 sales down about 12% sequentially while the market continues to benefit Last Price EUR40.25 Market EUR3,075m from ever increasing ASPs in several product categories, especially memory products, and traditional seasonality points to a flattish Q4. Overall, most of the groups involved in the
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SOITEC BUY EUR60 automotive segment have not been impacted by a slowdown in car production as we mentioned Last Price EUR54.87 Market EUR1,721m earlier and most segments show signs of ongoing strong performances. As such, groups we
SOPRA STERIA GROUP BUY EUR178 cover should enjoy strong momentum until the end of this year as far as we can see. We remain Last Price EUR155.95 Market EUR3,203m confident regarding Dialog (Buy, FV EUR59), Infineon (Buy, FV22.1), Soitec (Buy, FV EUR60) and STMicroelectronics (Buy, FV EUR16.5). We continue to adopt a cautious approach to ams STMICROELECTRONICS BUY EUR16.5 (Neutral, FV CHF65) Melexis (Sell FV EUR49) and u-blox (Neutral, CHF185) which appears to be Last Price EUR16.185 Market EUR14,746m well valued given potential growth prospects. Note that stocks of Apple suppliers (ams, Dialog, BUY EUR40 SWORD GROUP STMicroelectronics) might go through a period of turbulence due to some uncertainties Market Last Price EUR34.8 EUR332m regarding the ramp of the production of the new iPhone X but we remain convinced that
TELECOM ITALIA SELL EUR0.78 momentum will rapidly strengthen around the iPhone X going forward. Among equipment Last Price EUR0.805 Market EUR17,091m suppliers, i.e. ASML (Buy, FV EUR155) in our coverage, visibility and momentum are both above
TEMENOS GROUP NEUTRAL CHF100 average. The continuous ramp of 10nm and 7nm provide a usual cycle boost while the Last Price CHF97.2 Market CHF6,887m acceleration of investments in China add further dynamism.
TF1 BUY EUR13.2 For Media, despite favourable results from both TF1 and M6 in Q2, the negative read across from Last Price EUR12.22 Market EUR2,563m the WPP and Prosieben publications and declarations in August weighed on media group stock
UBISOFT BUY EUR52.5 performances and cast doubt over the French advertising market in H2. Nevertheless, we remain of the market driven by the post electoral context and an Last Price EUR56.71 Market EUR6,489m confident as to the recovery improvement in the economic environment in France. We have an estimate of +0.2% growth for u-blox NEUTRAL CHF185 the TV market over 2017, vs -0.7% and +0.6% for Omnicom and Zenith’s latest updates Last Price CHF181.4 Market CHF1,259m respectively. WIRECARD BUY EUR82 As far as TF1 group (Buy – FV EUR13.2) is concerned we expect continued growth in revenues, Last Price EUR76.47 Market EUR9,449m driven by an improving TV advertising market and good audience share in the summer. In July
WORLDLINE BUY EUR37 and August, the group posted an audience share of c. 26.6% in comparison with c. 25.4% in the Last Price EUR35.57 Market EUR4,702m year-earlier period, with the TF1 channel accounting for more than 40% of the group's audience
WORLDPAY SELL 278p increase, and we expect the trend to continue in the following months driven notably by the Last Price 406.8p Market GBP8,136m performance of LCI. As far as M6 group (Neutral – FV EUR20.5) is concerned we also expect good Q3 results, despite a more difficult comparison basis. Indeed, the audience market share of the group stood at c. 14.3% compared with c. 14.6% a year earlier, mostly explained by tough comps in July 2017 (-
1.4ppt yoy) due to the broadcasting of the European football championship in 2016. Nevertheless, let us note the company registered its best historical ratings during this period at 24.6% (+1.3ppt yoy) among the commercial target (women under 50-years of age). For Telecoms, stock performances were sluggish in Q3. Although all players except SFR posted yoy revenues and EBITDA growth in Q2, the French environment still appears highly unstable, and the French telecoms market still conveys much uncertainty, from pricing, regulatory and strategic standpoints. As far as Iliad (Buy – FV EUR255) is concerned, Free was the only player in Q2 in France posting growing ARPUs both in fixed and mobile (+0.3% and +2.1% yoy in fixed and mobile respectively). Mobile net adds should keep on outperforming the market in H2, with an improvement in the customer mix still driving value creation. Waiting for the launch of a new Freebox v7, Iliad’s growth in fixed should keep on slowing down, while sustained Fiber net adds above 50k should help drive future EBITDA growth. As far as Orange (Buy – FV EUR17) is concerned, for the first time in years it posted a rise in revenues in France (+0.5% in Q2). Orange should still be steaming ahead in fibre recruitments, while its convergence strategy should fuel the same dynamics as in the previous quarters. As far as other business units are concerned, we expect double digit EBITDA growth to continue in Spain, while results in MEA and Enterprise should improve. As far as Bouygues (Neutral – FV EUR37) is concerned, welcome news could come from Bouygues Telecom over H2, driven by the summer price increases both in fixed and mobile, but the collateral impact of the new pricing policy on the group’s commercial performance is unknown, and fixed arpu was much in pressure in Q2 (-7% yoy). As such, we remain cautious on the telecoms outlook for the moment, but the sky might be clearer on the construction side, with good news possibly on the cards, linked to the improvement in the economic environment and the possible acceleration of the Grand Paris works after Paris was awarded the 2024 Olympics. Concerning Altice (Buy – FV EUR22.8), in France, we believe visibility remains limited. Recovery seemed underway in mobile in H1 but mobile postpaid ARPU is back under pressure (+0.7% yoy in Q2 vs +3.6% in Q1) despite a favourable comparison basis, and the performance in fibre, a key driver in EBITDA improvement, is still sluggish (+35k in Q2, below Orange and Free). While revenues narrowed again in Q2 (-0.4% yoy) the impact of summer price hikes should be highly positive, both on fixed and mobile revenues, visible as soon as Q3, but we believe the collateral impact on churn should be material. In addition, SFR’s declarations regarding the own roll-out of a very high speed network in less dense areas has cast doubt on the efficiency of the group’s CAPEX spending in France. In the US (which accounts for 38% of Altice’s EBITDA in Q2), we believe the outlook is much more positive. The high speed focused strategy is proving successful, the cord cutting impact is very progressive, while more synergies and cost savings are
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still to come, and the read across with the latest warning from Comcast should be limited. Merger with Charter Communications seem to be ruled out for the moment, and the timing of future M&A operations remains uncertain.
As far as Telecom Italia (Sell, FV – EUR0.78) is concerned, we remain very cautious. We believe the good financial and commercial performance posted in Q1 and Q2 should continue, but Iliad’s threat will only get stronger, and visibility remain low given governance turmoil, and disputes between Vivendi and the Italian government. For Video Games: We remain optimistic on Ubisoft (Buy – FV EUR52.5). The group is catching up competition on the online front, and notably regarding additional contents. It needs to sell less games to generate operating profit. As a result, we see upside for the group’s current guidance both for Q2 (~EUR190m in sales i.e. +34% YoY) and FY 2017-18 (~EUR1,700m in sales i.e. +16% YoY, and non-IFRS EBIT of EUR270m i.e. margin of 15.9%). Around 20th November 2017, Vivendi could virtually cross the 30% threshold after the acquisition of double voting rights (the trigger level for a mandatory bid) but it could opt for bearer shares to remain below this level. In the situation where Vivendi would sell its stake (it will register a potential capital gain of c.EUR1bn).
CONCLUSIONS AND TOP PICKS In Software & IT Services, while most of our stocks have performed well or caught up their share price performance gap since the beginning of the year, as for Q3 we recommend buying specific stories based on a recovery scenario which has not been priced in yet. As such, we keep Indra Sistemas in our Top Pick list: 1) We consider Indra is the last recovery story in IT Services in Europe, while the restructuring work undergone since 2015 is paying off, especially on free cash flow and net debt; 2) whereas management is set to announce a new strategic plan by end- 2017, we consider that the organic decline seen in H1 2017 (-4%) is not representative of what we expect over the full year (+1%) given the catalysts likely in H2: significant electoral contracts (Argentina, Angola etc.), renewed growth in the transport and traffic division, end to the negative base effect caused by the halt to a BPO contract with Vodafone in July 2016; 3) management is likely to confirm the initial cost synergies (EUR30.5m) to stem from the acquisition of Tecnocom, which could make Indra’s IT business decently profitable; 4) the stock is attractively valued while we expect a CAGR in our EPS estimate of 40% over 2016-2019e. In Payments, we keep Ingenico Group (Buy, FV EUR119) on our Top Pick list. We see upside this year thanks to better than expected H1 top line, better comparison base in H2 and potential good news from the US (arrival of the former top executive from VeriFone Jennifer Miles mid- July and EMV migration coming from US small & mid-sized merchants could pick up some time in H2 in our view). The share price is undervalued at only 10.3x EV/EBITDA over 12 rolling months. The stock currently deserves to come back to at least EUR100, above all since the acquisition of Bambora. To go beyond it will need a catalyst (e.g. a guidance upgrade, a confirmation of a pick- up in EMV in the US…). In Semiconductors, we add ASML (Buy, FV EUR155) to the list as we believe the share price will benefit from 1/ strong momentum in the equipment market with 10nm continuously expanding and orders linked to the preparation of the 7nm a leading-edge maker, 2/ still improving visibility on EUV tools thanks to an already strong order book (production capacities full until the end of 2018) and high chance to see additional orders to be announced during Q3 results (18 Oct 2017), 3/ low/reasonable consensus expectations with Q3-Q4 top line anticipations at EUR2,181m and EUR2,250m respectively, i.e. Q3 estimates are below group guidance in a context of stronger than expected backdrop, and 4/ low but increasing probability to see 2020 guidance revised upward as we tend to get closer and faster to the EUR11bn revenue target. With 2016/2019e CAGR on EPS of 24%, ASML’s shares currently trade on PEG ratio of about 1.7x. In Telecoms, due to a more cautious outlook on the sector and to a lack of obvious catalysts over the coming months, we do not include any stocks in our top pick list. Lack of visibility in France and interrogations about M&A operations at Altice USA might weigh on Altice’s stock performance, although we expect a catch up. As always, the sluggish stock performance of Orange not withstanding good commercial and financial results does not incite us to add Orange to our top pick list, although we expect visible improvements in Q3 notably in the MEA region. Regarding Iliad, we do not see major short term catalyst: the launch of an innovative Freebox v7 might be coming up, but timing remains uncertain, and the Italian launch is still far off. In Media, due to the lack of obvious catalysts over the coming months, we do not include any stock in our top pick list. Indeed, TF1 stock is up 11.4% since the warnings from WPP and Prosieben in late August, more than 450bps above CAC40 and Stoxx Europe 600 Media over the period, and we believe the negative read across has been correctly adjusted. In Video Games, In Video Games, 2017 should be buoyant for Ubisoft (Buy, FV EUR52.5). Ubisoft has performed very well in terms of fundamentals and its prospects as well as those of the sector are so good that it has enough to convince shareholders it can remain independent. Last 13
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year we were 80% certain that Ubisoft’s fate was sealed and that the situation would end in a takeover bid, but this year we see it as 50/50. In the situation where Vivendi would sell its stake, we believe UBI shares should prove resilient (like in July 2010 when EA sold out 14.8% of Ubisoft’s share capital).
NEXT CATALYSTS Software & IT Services: TCS’ Q2 FY18 results on 12th October after the Indian markets close. IBM’s Q3 2017 results on 17th October after US markets close. Both SAP and Software AG may pre- announce Q3 2017 results on the week of 9th October. Q3 2017 sales and results for European companies officially start on 17th October (Temenos) and end on early November (Indra). Infosys’ Q2 FY18 results on 24th October before the Indian markets open. Payments: Worldline’s investor day on 3rd October and Q3 sales on 23rd October, Ingenico’s Q3 sales on 25th October (after trading), Gemalto’s Q3 sales on 27th October (before trading), Nets’ fiscal Q3 on 9th November and Wirecard’s Q3 earnings on 15th November (before trading) and Worldpay’s FY earnings in March 2018. Semiconductors: ASML Q3 results and Soitec Q2 sales on 18th October. ams Q3 results on 24th October. Melexis Q3 results on 25th October. u-blox Analyst day on 31st October. Dialog Q3 results on 7th November. Infineon FY17 results on 14th November. Telecoms: Orange Q3 results on 26th October, Altice Q3 results on 2nd November, Bouygues Q3 results on 16th November, Telecom Italia’s Q3 results on 10th November, Iliad Q3 revenues expected mid-November. Media: TF1 Group Q3 results expected on 30th October. M6 Group Q3 results expected on 7th November. Video Games: Ubisoft’s fiscal H1 earnings 2017-18 on 7th November (after trading).
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Healthcare | Deep changes to our list for Q4 2017 Published on 29th September
LOOKING BACK ON Q3 2017 1 M 3 M 6 M 31/12/16 The third quarter 2017 was a tough one for the healthcare sector in Europe with, in the end, an Healthcare 3.7% -4.0% 0.0% 5.2% overall performance negative of 1.6pp in absolute terms to date and negative by 2.7pp relative DJ Stoxx 600 3.8% 0.1% 2.4% 6.9% to the Stoxx Europe 600. As a consequence, the performance is turning negative over the first 9 *Stoxx Sector Indices months of the year too. This reflects very few meaningful gains among heavy-weight stocks, Companies covered profit-taking moves among year-to-date winners and a handful of “accidents”. ABLYNX BUY EUR22 Last Price EUR12.515 Market EUR769m Large capitalisations had a difficult third quarter ranging from non-events (Bayer, Roche and Sanofi ASTRAZENECA BUY 5380p were between -1% and +1%) to lost opportunities, with the exception of Novo Nordisk, which posted another good quarter (+9%) and pursued its recovery after a disastrous calendar year in Last Price 4909p Market GBP62,143m 2016. UK stocks were the most in trouble during the summer period having all performed badly: BAYER NEUTRAL EUR108 AstraZeneca (-5%) was hit by rumours about the departure of its CEO (unfounded) and even Last Price EUR112.9 Market EUR93,362m more by the failure of MYSTIC to reach the PFS co-primary endpoint; GSK (-9%) missed the BIOMERIEUX NEUTRAL EUR182 opportunity of a first talk between its new CEO Emma Walmsley and the investment community Last Price EUR68.75 Market EUR8,137m since little was announced while mid-term guidance was reiterated; lastly Shire (-12%) had
BONE THERAPEUTICS BUY EUR28 another difficult quarter which reflects the sum of questions and concerns about several of its Last Price EUR10.265 Market EUR70m business lines going forward, including haemophilia of course but also HAE and rare diseases
CELYAD BUY EUR51 where competition is strengthening. Last Price EUR46.225 Market EUR440m
DBV TECHNOLOGIES BUY EUR105 Against this difficult landscape, it is fair to report however that several smaller market capitalisations Last Price EUR70.64 Market EUR1,703m did well although they did not weigh much on the sector performance. Among those, we would pick Celyad (+26%) boosted by a favourable environment in the CAR-T space, Galapagos (+24%), ERYTECH BUY EUR32 which benefited from good developments in-house and setbacks with competitors, Bone Last Price EUR23.09 Market EUR271m Therapeutics (+17%), which reported strong clinical results and DBV (+15%), which was one of FRESENIUS MED.CARE NEUTRAL EUR90 our picks and performed well in anticipation of still-to-come phase III results for Viaskin Peanuts Market Last Price EUR82.67 EUR25,459m (PEPITES), expected in mid-October.
FRESENIUS SE BUY EUR87 Last Price EUR68.09 Market EUR37,698m WHAT WE SEE FOR Q4 2017
GALAPAGOS BUY EUR67 From a macro perspective, we do not expect major disruptions in the healthcare environment since Last Price EUR87.08 Market EUR4,430m risks of transformative measures for the US system are increasingly less likely in view of recent
GENEURO BUY EUR9 developments and so it is now fair to anticipate limited changes to the conditions in which Last Price EUR4.05 Market EUR59m companies operate within the biggest and most profitable market, which is good news in
GENMAB BUY DKK2000 absolute terms and for the sake of the guidance exercise for 2018 too. Since innovation is stronger than ever (33 drugs have been approved by the FDA year-to-date, making 2017 a Last Price DKK1402 Market DKK85,717m record year), we expect a stable environment to have a positive impact overall on revenue GLAXOSMITHKLINE NEUTRAL 1710p growth rates and margin developments. Last Price 1482p Market GBP72,892m
INNATE PHARMA BUY EUR23 However, macro factor also include non-healthcare topics and issues of course and here, we have Last Price EUR10.17 Market EUR583m seen already in the past few weeks a rising influence of geopolitics in terms of currency rates,
IPSEN BUY EUR126 interest rates, raw material prices etc… and this is likely to impact sector allocation. We would Last Price EUR113.4 Market EUR9,487m not rule out a move towards defensive sectors in such a context and healthcare may not be in a
KORIAN BUY EUR35 too bad shape in such circumstances. Last Price EUR28.24 Market EUR2,287m
MERCK KGaA BUY EUR118 On the micro side, a few highly-expected catalysts should take materialise during Q4 including, not Last Price EUR97.31 Market EUR42,308m exhaustively: 1/ Bayer’s first if not final feedback from regulators about the Monsanto acquisition, Novartis review’s decision about Alcon’s future; 2/ several key phase III trial read- MORPHOSYS BUY EUR67 outs including PEPITES for DBV Technologies, IMpower150 or HAVEN-3 for Tecentriq and Last Price EUR71.65 Market EUR2,102m ACE910 respectively for Roche; 3/ FDA approvals for key drugs like benralizumab for NOVARTIS BUY CHF92 AstraZeneca or semaglutide for Novo-Nordisk. We also expect Investor Days to eventually Last Price CHF82.55 Market CHF216,020 influence stocks while medical congresses are less obvious catalysts except maybe the ASH.
NOVO NORDISK BUY EUR327 Last Price DKK303.5 Market DKK595,638 CONCLUSIONS AND TOP PICKS
ORPEA BUY EUR89 We have catalysts for some of our European stocks under coverage in Q4 and macro-environment Last Price EUR100.65 Market EUR6,045m looks not so bad for the sector. As such, we will favour stories that we believe are at the
QIAGEN BUY EUR34 beginning of a new growth phase, although we never know if it is going to materialise over a Last Price EUR26.82 Market EUR6,191m quarter. If there is one catalyst strong enough to drive share price performance for a specific stock in our ROCHE HOLDING NEUTRAL CHF267 universe, this certainly concerns DBV Technologies is due to report the PEPITES phase III trial Last Price CHF247 Market CHF173,533 headlines by mid-October. This is what we played already in Q3 and which worked quite well but since the outcome of the trial is still ahead of us, we have decided to keep the stock in the list at least until the news since it represents a dramatic change in the story and meaningful upside in
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SANOFI NEUTRAL EUR91 terms of valuation: our FV is still more than 50% above the current share price. Beyond phase III Last Price EUR84.02 Market EUR106,075 results, we would expect investors’ focus to gear towards the group’s pipeline, which is deeply
UCB SELL EUR66 undervalued at present. Last Price EUR60.16 Market EUR11,701m
ZEALAND BUY DKK180 Looking for other opportunities, we had four good candidates on the starting line: AstraZeneca, Last Price DKK120.5 Market DKK3,705m Ipsen, Novartis and Novo Nordisk, all with BUY recommendation already. We are confident that
they will all be winners in the sector over the coming 12-18 months. It is obviously more difficult
to assess what might happen over only a 3-month period. In the end, we have decided to opt in favour of AstraZeneca and Novartis. So, why not Ipsen and Novo-Nordisk? Well, firstly, because we lack catalysts by year-end, except the possibility of another guidance increase which would indicated that everything is going very well, starting with Somatuline. However, we know that phase III trials in 1L mRCC are about to report and some read-across against cabozantinib might be done. Also, AAA is coming with a potential approval of Lutathera in early 2018 whereas activity around Sandostatin LAR generics seems increasing. It remains a strong idea for the medium-term. As long as Novo Nordisk, it has already performed very well since we upgraded our rating in July and we don’t know how the group will approach the exercise of a first guidance for 2018, to be done in connection with Q3 numbers. With heavy launching activities for semaglutide and ACE910 impacting NovoSeven, we may expect some caution. That said, a more stable environment should help Novo Nordisk perform well with best-in-class products. Now, why do we take AstraZeneca and Novartis for the last quarter of the year? ASTRAZENECA (BUY – FV GBp5,380) was upgraded recently as the company was presenting phase III data results at ESMO for both durvalumab in stage III unresectable NSCLC (PACIFIC) and for osimertinib in 1L EGFR mutation-positive NSCLC (FLAURA). We have a strong conviction that the two together will represent over USD6bn in additional annual sales for AZ at peak with a high margin contribution. We assume that all models are not yet fully adjusted for such significant upside. Moreover, the timing is very good since it helps offset the disappointment from MYSTIC that missed its PFS endpoint. We have removed MYSTIC fully from our model and so it is fair to approach it now as pure upside since many IO trials have reached OS endpoint after failing on PFS (CHECKMATE-214 for the last one in mRCC). Durva (in monotherapy and with tremelimumab) has a second chance to make a come-back in stage IV NSCLC with ARCTIC which should also report data in Q4. We also note that AZ should have benralizumab approved during the quarter, in severe asthma. Some kind of Investor Day still looks possible by year-end which would summarize the upcoming rich news flow for 2018 and put everything in perspective. As we look at the consensus, we do not see reasons for any concern since revenues are expected to rise by only 1% and core EPS by 3%, which is representative of a last transitioning year before the start of the growth phase (core EPS CAGR of 12% over the 2017-2023 period). We do not see how it could be worse but brighter scenarios exist, with no doubt. In any case, our current FV of GBp5,380 offers upside. NOVARTIS (BUY – FV CHF92) was upgraded in July and has performed honourably since then but we believe this has little to do with our investment case that a new story is just starting to kick off, which has been further substantiated by the recent announcement of a CEO change. So, we do expect Novartis to share the conclusions of the strategic review about Alcon and our guess is that the future of Alcon will be outside the group and an exit process by way of an IPO if market conditions permit early 2018. As a consequence, the old conglomerate that divested three out of its six businesses in 2014 will bring the list down to two after this transaction. And it might be expected that within those remaining two businesses i.e. Pharmaceuticals and Sandoz, parts are able to be discussed too. Similarly, we anticipate discussions with GSK about the minority stake in the CH joint-venture. Another asset swap could make sense for the two parties. No need to talk about Roche’s stake, which is another pocket of potential returns to shareholders. As such, in short, Novartis is poised to be active in terms of Corporate activities which could result in meaningful returns for its stakeholders (new shares, buy-backs, exceptional dividend etc…). Moreover, and simultaneously, we see the two above-mentioned divisions at the start of a new growth phase thanks to an impressive series of product launches. Entresto and Cosentyx are already on the right trajectory but Kisqali, Kymriah, AMG334, BAF312, RH258 or secukinumab will soon add to the momentum. At the same time, we expect Sandoz to benefit from several biosimilar launches and so the two should be aligned to post significant revenue growth. Together with good cost management and some mix effects, this should also translate into margin improvement, resulting in above-average core EPS growth in years to come (CAGR 11% over 2017-2021). Our FV is based on the group’s current structure of course but we see upside should Corporate activities result in value creation (independent Alcon could be valued more than as a division, asset swapped against minority stake in CH could represent superior NPV, etc …). Click here to download
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Consumer | Q4 Top Picks: Danone (Buy-FV :EUR80) and AB Inbev (Buy-FV: EUR128) Published on 2nd October
LOOKING BACK ON Q3 2017 1 M 3 M 6 M 31/12/16 Our Consumer “Top Picks” encompass all our Consumer franchises: Luxury, Consumer Goods, Retail, Pers & H/H Gds 2.7% -1.2% -0.9% 9.9% Spirits, Brewers, Food and e-commerce. Globally, our “Consumer” stocks had a rather weak DJ Stoxx 600 5.4% 2.0% 2.5% 7.4% performance in Q3 2017 with an aggregate increase of around +1% (-0.8% vs DJ Stoxx) of which *Stoxx Sector Indices +1.2% for Luxury groups, -0.6% for Food & Beverages, -4.4% for Consumer and -6% for Retail. Companies covered Food & Beverages: In the first half AB InBev had underperformed by 20% vs Heineken and 13% vs. adidas Group NEUTRAL EUR182 the Stoxx600, as 2016 and H1 2017 results from its main US and Brazilian market underwhelmed Last Price EUR191.4 Market Cap. EUR40,044m the market. However, we are expecting a stronger operational performance in the second half of BEIERSDORF NEUTRAL EUR86 the year in its key Brazilian market. All spirits stocks dropped in Q3, excluding Diageo (+5.6% vs DJ Stoxx over the quarter) which revised its margin guidance (+175bps vs +100bps for the three Last Price EUR91.367 Market Cap. EUR20,722m years ended FY2019) and announced a share buyback programme of GBP1.5bn in 2017/18. BIC NEUTRAL EUR110 vs.118 Within the food sample, only Unilever was up slightly (+0.8% in relative) while Danone and Last Price EUR101.4 Market Cap. EUR4,819m Nestlé were respectively down 1.8% and 4.6%. BURBERRY SELL 1490p Food retail: The whole food retail sector remains impacted (-6% relative performance) following Last Price 1760p Market Cap. GBP7,526m Amazon's bid for Whole Foods Market (see our B'Goods 2). Investors steered clear of Ahold CHRISTIAN DIOR BUY EUR190 Delhaize (-8%) which, in their minds, would be in the front line if Amazon and Walmart were to Last Price EUR270.95 Market Cap. EUR48,909m initiate a price war stateside (see our B’Goods 11). They also shied away from Carrefour (-25%), ESSILOR BUY EUR135 which issued a profit warning (~30% subsequent EPS adjustment), the reasons for which (kitchen Last Price EUR104.75 Market Cap. EUR22,880m sinking from and/or deterioration in the underlying business?) remain unclear. GRANDVISION BUY EUR26.5 Luxury goods: On average, the luxury goods groups index was almost stable with a ~1% increase, Last Price EUR21.395 Market Cap. EUR5,444m implying +2% vs DJ Stoxx. Again, the situation was mixed, albeit to a lesser extent than in previous quarters. While Hugo Boss and Moncler were the best performers (respectively +21% GROUPE SEB BUY EUR160 and +19%), followed by Richemont (+11%), Ferragamo was the worst-performing stock (+3%). Last Price EUR155.2 Market Cap. EUR7,786m LVMH share price increased by 6%. HERMES Intl BUY EUR442 Optical & Eyewear: needless to say the sector had a fairly weak performance over the quarter (-9% Last Price EUR426.559Market Cap. EUR45,030m on average) following unhelpful H1 publications, investors’ wait-and-see behaviour pending the
HUGO BOSS NEUTRAL EUR74 finalisation of the EssilorLuxottica deal and the weakening USD which is harmful to the sector, Last Price EUR74.59 Market Cap. EUR5,251m GVNV excepted. As a consequence, EI and LUX were down 7%, GVNV contracted 9% and SFL INTERPARFUMS BUY EUR37 dropped by 11%. Last Price EUR33.77 Market Cap. EUR1,319m Consumer Goods: ADS gained 12% on the back of better-than-expected Q2 results and a guidance KERING NEUTRAL EUR296 upgrade, although the share price has stabilised since then. The same was true for SEB (Q3 -2%) Last Price EUR337.05 Market Cap. EUR42,559m after an impressive rally in 2016 and ytd (+19%). There are still question marks on BIC (-2%) with L'OREAL BUY EUR188 regard to its sales and earnings momentum, especially in the Shavers business. The weakening USD favoured some arbitrage moves between ITX (-6%), which is affected by the stronger EUR, Last Price EUR179.9 Market Cap. EUR100,744m and H&M (+1%), which outsources extensively in Asia. Our cosmetics groups posted rather LUXOTTICA BUY EUR62 flattish performances: ITP was up 2% while L’Oréal and Beiersdorf were down by 2.5% and 1% Last Price EUR47.29 Market Cap. EUR22,934m respectively. LVMH NEUTRAL EUR227 WHAT WE SEE FOR Q4 2017 Last Price EUR233.45 Market Cap. EUR118,355m Food & Beverages: We expect another good quarter for our spirits groups, as emerging markets are MONCLER BUY EUR24 recovering and the US proves to be resilient. Food companies should show an improving growth Last Price EUR24.42 Market Cap. EUR6,220m pace in Q3 as comps are far less demanding than in H1. RICHEMONT BUY CHF92 Food Retail: From now on, we are waiting for Mr Bompard to outline his vision and ambitions in a Last Price CHF88.5 Market Cap. CHF46,197m much-awaited speech that the CEO is due to give by the end of the year and that should shake up SAFILO NEUTRAL EUR6.5 what will now be event-driven momentum. As far as Ahold Delhaize is concerned, beyond the Last Price EUR5.655 Market Cap. EUR354m market sentiment linked to Amazon, sales momentum should be impacted by forex headwinds linked to the USD (-3.1% consolidated impact, ceteris paribus). SALVATORE FERRAGAMO NEUTRAL EUR23 Luxury Goods: After an excellent H1, with average organic sales growth of 7%, driven especially by Last Price EUR23.75 Market Cap. EUR4,009m LVMH (+12%), Moncler (+15%) and above all Kering (+26%), we expect a gradual slowdown for THE SWATCH GROUP NEUTRAL CHF332 these groups in coming quarters due to the far more demanding comparison basis, this gradual Last Price CHF402.8 Market Cap. CHF21,992m sales growth slowdown should even accelerate in Q4 versus Q3. For Q3, we expect 8% organic TOD'S GROUP SELL EUR57 sales growth for LVHM (vs +12% in H1) and +16% for Kering, of which +26% for Gucci vs. Last Price EUR59.95 Market Cap. EUR1,984m respectively +25% and +39% in Q2. On the other hand, we anticipate some gradual acceleration in Q4 for other players such as The Swatch Group, Richemont and Ferragamo. Actually, for AB INBEV BUY EUR128 them, the comparison basis is easier in H2 vs H1. Furthermore, the EUR strengthened in Q3 Last Price EUR101.3 Market Cap. EUR171,525 (despite a very slight rebound in recent days) against most currencies, including the USD (which CAMPARI BUY EUR6.2 has lost 12% YTD) and the negative impact should be especially felt in Q4 2017 and probably Last Price EUR6.14 Market Cap. EUR7,132m beyond if the EUR remains at its current level (Q1 2018). These two factors, combined with a CARLSBERG NEUTRAL DKK670 strong share price rally YTD lead us to be more cautious for coming quarters, especially for Last Price DKK689 Market Cap. DKK104,337m Kering and (but to a lesser extent) for LVMH. Consumer Goods: Favourable momentum remains the investor's best friend, as it is the main
catalyst for the share price performance. We expect the Q3 performances to be globally in line
Top Picks
DANONE BUY EUR80 with Q2 for ADS and SEB, even if beating CS forecasts may become more difficult in light of their Last Price EUR66.37 Market Cap. EUR44,515m respective rallies. Because of weaker-than-expected trends in the US shaver and lighter markets, DIAGEO NEUTRAL 2320p BIC has just revised down its FY sales guidance (“slight below 2%” vs. +3-4% initially) and the FY Last Price 2453p Market Cap. GBP61,638m NIFO margin target (decline <100bp) remain untouched. Q3 numbers are expected to be more supportive for our entire optical sample even though investors would remain cautious pending HEINEKEN BUY EUR101 the completion of the merger and given the weak USD, which is not totally factored in by CS Last Price EUR83.65 Market Cap. EUR48,183m forecasts. It is worth noting that GVNV is less affected by this issue (USD = ~3% of total sales) and BUY EUR15.7 MBWS will benefit from a particularly favourable comparison base this quarter. Fundamentally, we Last Price EUR14.18 Market Cap. EUR402m favour ITX over H&M but we would not be surprised if the latter recovers gradually after a MOLSON COORS SELL significant derating (-17% ytd) if turnaround initiatives deliver their first results. Last Price USD81.64 Market Cap. USD17,578m CONCLUSIONS AND TOP PICKS NESTLE NEUTRAL CHF89 Food & Beverages: We keep AB InBev (Buy-FV: EUR128) as our top pick for Q4. Next to a Brazilian Last Price CHF81.1 Market Cap. CHF252,396m rebound, group margins are expected to be carried by a quick capture of the remaining USD2bn PERNOD RICARD BUY EUR123 in synergies. With this new phase of margin expansion to happen quicker than widely anticipated Last Price EUR117.05 Market Cap. EUR31,068m the investment case for AB InBev should return to the forefront: improved geographical REFRESCO GROUP BUY EUR21.8 diversification after the SABMiller acquisition; market leadership in nine out of its 10 top markets international premium Last Price EUR17.04 Market Cap. EUR1,383m (80% of volumes); opportunities in the high-end beer market with its portfolio (Budweiser, Stella Artois, Corona) and with craft brews; REMY COINTREAU NEUTRAL EUR100 and significant opportunities for further consolidation (M&A is one of the core competencies of Last Price Market Cap. EUR5,043m EUR100.2 its management). ROYAL UNIBREW NEUTRAL DKK306 We add Danone (Buy; Fair Value: EUR80) to the top pick list. Danone should see a return to growth Last Price DKK345 Market Cap. DKK18,182m in Q3, with organic sales expected to rise 2.9% after +0.2% in Q2 and +0.7% in Q1. This should be UNILEVER NEUTRAL EUR50 mainly driven by Specialized Nutrition (28% of sales in 2017) where sales should rise 9% organically Last Price EUR50.04 Market Cap. EUR139,535m (+5.5% in Q2). The infant milk formula market in China has returned to mid-single digit growth (+1% UNILEVER Plc NEUTRAL 4530p in 2016 and +10% in 2015) thanks to the end to the one-child policy. On top of that, the Last Price 4319p Market Cap. GBP54,091m implementation of the new regulation has been postponed by 12 months, which means Danone has now until 1st January 2019 to convert its indirect sales into direct. In the meantime, it should AHOLD DELHAIZE NEUTRAL EUR14.97 continue to benefit from good growth in the indirect. Waters (19% of sales in 2017) should also be Last Price EUR15.82 Market Cap. EUR20,270m very solid, with 5% organic sales growth in Q3 (vs +0.3% in Q2). The destocking of the Mizone brand, CARREFOUR BUY EUR22 which had started in Q3 2015 is now completed. Essential dairy and plant-based (EDP) in Noram (19% of sales in 2017) should remain in negative territory (an estimated -1.5%) but improve vs Q2 Last Price EUR17.095 Market Cap. EUR13,243m and Q1 (both down 2.9%). The fixing of executional issues at WhiteWave is taking some time but we CASINO GUICHARD BUY EUR58 remain convinced the plant-based exposure is highly attractive. In the US, in the 52 weeks to 12 Last Price Market Cap. EUR5,570m EUR50.18 August, retail sales of plant-based foods and beverages rose 8.1%, which compares to a decline of DELHAIZE BUY EUR104.5 0.2% for all foods and beverages. EDP International (34% of sales in 2017) remains the negative and Last Price EUR102.8 Market Cap. EUR10,751m is the only division which should not show any improvement vs Q2. Our estimate calls for 1.8% DIA BUY EUR6 organic sales decline. The group will publish its Q3 sales on 17th October. Last Price EUR4.935 Market Cap. EUR3,072m Food Retail: In any case (Ahold Delhaize and Carrefour especially) the spectre of Amazon is hovering H & M NEUTRAL SEK260 over market sentiment with the slightest announcement from the group creating an incredible wave Last Price SEK211 Market Cap. SEK349,220m of panic within the industry. Subsequently, we believe that investors remain in the same INDITEX BUY EUR38 uncomfortable zone of uncertainty as in Q3 and we do not expect the sector to rebound any time Last Price EUR31.885 Market Cap. EUR99,374m soon. For this reason, at this stage, we have decided not to put any food retailers in Bryan Garnier’s Q4 top pick list. JERONIMO MARTINS NEUTRAL EUR15 Luxury Goods: Unsurprisingly, we prefer to not add any luxury goods groups to our Q4 2017 Last Price EUR16.69 Market Cap. EUR10,503m Consumer top picks, following our latest luxury report. Most luxury stocks are trading at a METRO AG SUSPENDED U.R. premium to their historical averages since 2010. The sector premium is close to 35% on average, Last Price EUR9.963 Market Cap. EUR3,229m of which 38% for LVMH and even 50% for Kering while it is no more than 6% for RMS. SFER is RALLYE NEUTRAL EUR17 even trading at a 5% discount versus the historical average hence our recent recommendation Last Price EUR15.68 Market Cap. EUR816m upgrade from Sell to Neutral. TESCO SELL 170p Consumer Goods: at this stage, it is hard to bring a top pick idea to light among our recent strongest Last Price 187.15p Market Cap. GBP15,327m convictions: we are missing some upside potential on some of our stocks: Moncler (pending the YOOX NET-A-PORTER NEUTRAL EUR25 “Patent Box” impact) and SEB (CMD on WMF on 22-23 November) for which a higher synergy Last Price EUR33.17 Market Cap. EUR4,447m plan and the FX tailwind may lead to future upwards revisions. Antitrust authorities are currently ZALANDO SELL EUR30 reviewing the EI-LUX merger, implying some volatility and a lack of visibility in the meantime. Last but not least, continues to see its momentum hampered by the weaker USD (60% of Last Price EUR42.4 Market Cap. EUR10,489m ITX sourcing denominated in EUR). Against this unfavourable environment, we do not put any
Consumer Goods stocks in the Consumer top pick list. Click here to download
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Top Picks
Business Services | No Top Pick Published on 3rd October
1 M 3 M 6 M 31/12/16 LOOKING BACK AT Q3 2017 Support&Service 4.7% 4.1% 6.3% 13.5% The earnings season was marked by Philippe Salle’s decision to leave Elior, another profit warning DJ Stoxx 600 3.7% 2.8% 2.4% 7.9% from Sodexo and more recently, the acquisition of EAG Laboratories by Eurofins, which is one of *Stoxx Sector Indices the largest M&A deals made by the group, with a positive impact on 2018e EPS of 13%. As such, share price sclearly reflected these events with Elior reporting the worst performance down c. Companies covered 12% in absolute terms and c. 14% vs. DJ Stoxx, Sodexo was down respectively c. 7% and 9% and BUY EUR23.65 BUREAU VERITAS Eurofins was up 8.4% and 6% vs. DJ Stoxx. vs. NEUTRAL vs.20 No major moves concerned Edenred, up 1.1% in absolute terms and broadly flat vs the DJ Stoxx, and Last Price EUR22,0 Market Cap. EUR9,753m Compass Group even if the share price was affected recently by Richard Cousins' decision to COMPASS GROUP NEUTRAL 1550p step down from his role as CEO on 31st March 2018 and to retire on 30th September 2018. The Last Price 1599p Market Cap. GBP25,288m share was down 2.6% in absolute terms and in euros and 4.8% vs. DJ Stoxx. EDENRED NEUTRAL EUR22 The picture was mixed for the two TIC sector leaders with a rebound for Bureau Veritas of 12.7% in Last Price EUR23,4 Market Cap. EUR5,524m absolute terms while SGS was broadly flat in Swiss francs and down 4.5% in euros. Following the ELIOR SELL EUR28 negative valuation impact after H1 results end of July, Bureau Veritas benefited early September Last Price EUR23,0 Market Cap. EUR3,987m from positive recommendations, highlighting notably no more decrease in the most cyclical EUROFINS SCIENTIFIC SELL EUR460 businesses i.e. new construction in Marine and in Oil & Gas capex in Industry. Last Price EUR540, Market Cap. EUR9,197m WHAT WE SEE FOR Q4 2017 SGS SA BUY CHF2370 In food services, Q4 stock performances should be broadly in line with what we saw in Q3. Last Price CHF2310 Market Cap. CHF17,635m For Sodexo, following Q3 revenue, management downgraded its FY guidance to between 1.5% and NEUTRAL EUR101 SODEXO 2%. Note that this guidance takes into account the negative impact of the RWC effect EUR105, Last Price Market Cap. EUR15,913m representing 0.5% and the positive impact of the 53rd fiscal week in NA for 0.7%. After factoring
in these points, we have moved our estimate to the low-end of the bracket, thereby implying
organic growth in Q4 revenue of 4.8% o/w almost 50% driven by a calendar effect, i.e. a significant improvement compared with the previous quarter (organic revenue growth was up 1.6% in Q3, 1.7% in Q2). For Elior, note that Philippe Salle is due to step down from his functions at the end of November 2017. Even though we cannot prejudge the group's ability to continue its huge expansion under the oversight of a new CEO yet to be hired, we still are in a period of uncertainty that could also see the departure of close team members (voluntary or not), which could temporarily destabilise the group further. As such, we remain cautious on the stock. No surprises are expected for Compass Group and Edenred with guidance confirmed after the latest results, which were perfectly in line with consensus estimates. Two years after the presentation of BV 2020, Bureau Veritas is due to hold an Investor Day in early December that is likely to focus on the group's main transformations under its growth initiative. The annual SGS Investor Day is scheduled for the end of October.
CONCLUSIONS AND TOP PICKS No top pick for Q4 in business services. Nevertheless, following the RS we hosted in Luxembourg and Brussels last week with Bureau Veritas, we have adopted a more positive view on the stock and have upgraded our recommendation to Buy from Neutral with a FV of EUR23.5. In fact, most of the group's cyclical segments i.e. Marine and Oil&Gas capex in Industry seem to have stabilised. The BV 2020 ambition presented in early October 2015, with the five growth initiatives, should start to pay off, after a slower start than initially anticipated. The group is comfortable with the current consensus i.e. top line organic growth of 1.7% after 1.3% in H1 with a negative impact from forex in reported terms, and adjusted operating margin of around 16% (our estimate is 15.9%). Medium term guidance has been confirmed with the target of reaching 5-7% organic growth by 2020 (more 5% than 7%) with adjusted operating margin of 17%. As such, a reasonable level of optimism could return and BV 2020 objectives seem feasible to us.
NEXT CATALYSTS Edenred: Q3 revenue on 13th October Bureau Veritas: Q3 revenue on 25th October – Investor days on 7th & 8th December (Paris/Rotterdam) Eurofins: Investor day on 25th October (Nantes) & Q3 IMS SGS: Investor Days on 26th & 27th October (Vietnam) Sodexo: FY 2016-2017 results on 16th November Compass Group: FY 2016-2017 results on 21st November Elior: FY results on 6th December Click here to download
Top Picks
Insurance | No Insurance Top Pick in Q4 Published on 5th October
1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q3 2017 Insurance 2.7% 1.6% 3.9% 5.6% The insurance sector outperformed the market slightly in Q3 2017 (100bps), with FX volatility, the DJ Stoxx 600 3.9% 1.9% 3.0% 8.1% rise in natcat burden and changing mood in interest rates as the main drivers. Aegon and Allianz *Stoxx Sector Indices were the best performers (both up 6.7% vs. sector), while reinsurers like Hannover Re and Swiss Re were the worst performers. Companies covered Rates and spreads were pretty stable overall, offering limited momentum for the sector. The 10Y NEUTRAL EUR6 AEGON Euro rate is at 1.01% (vs. 1.05% at end-June), the 10Y US rate is at 2.33% (vs. 2.30% at end-June). Market Last Price EUR4.873 EUR10,212m Equity markets were also pretty flattish overall, with the DJ Stoxx600 up 2%.
ALLIANZ BUY EUR195 As expected, Q2 numbers showed no major breakthrough in operating trends. Allianz, CNP and Last Price EUR191.25 Market EUR85,317m Coface reported better-than-expected Q2 numbers.
AXA BUY EUR29.5 Last Price EUR25.6 Market EUR62,089m WHAT WE SEE FOR Q4 2017
CNP ASSURANCES SELL EUR18.5 Q3 2017 numbers due to be reported in late October and early November, will show the impact of Last Price EUR19.84 Market EUR13,623m the intense hurricane season. Some reinsurers (including Hannover Re, Munich Re and Scor)
COFACE NEUTRAL EUR6.8 have already reported Q3/FY warnings. Allianz will also be impacted. But more importantly, they have made it clear that the 2017 hurricane season was “only” an Last Price EUR9.28 Market EUR1,459m earnings event, not a capital event. So dividends and share buy-backs are not at risk so far, but EULER HERMES NEUTRAL EUR92 of course natcats can happen anytime anywhere, so watch out. And at this time the overall Last Price EUR101.1 Market EUR4,311m potential impact on future pricing is unclear. HANNOVER RE NEUTRAL EUR114 Other operating trends should not be impacted. Bear in mind that the lower USD will also have its Last Price EUR102.75 Market EUR12,391m first negative impacts for companies with significant US operations (Aegon, reinsurers, Allianz,
MUNICH RE SELL EUR180 AXA). Last Price EUR181.2 Market EUR28,091m The lack of momentum in interest rates is of course bad news, especially for ROI prospects. Based on
SCOR BUY EUR38.5 our theoretical bond portfolio (40% Euro govies, 10% US govies, 25% investment grade Last Price EUR35.805 Market EUR6,874m corporates, 5% high yield corporates, 20% financials), the current spot average investment rate
SWISS RE SELL CHF96 (c. 1.6%) is below the 2017ytd level (c. 1.65%), while the 5-year moving average is c. 50bps lower Last Price CHF88.65 Market CHF30,979m than a year ago, suggesting ROI will remain under pressure (until 2020 on average should rates stay where they currently are). ZURICH INSURANCE NEUTRAL CHF295 However, companies will not deviate from current strategies, i.e. mitigating the current low ROI LastGO Price CHF295.8 Market CHF44,766m environment by focusing on underwriting profitability through better risk management and cost
control, price discipline, a more favourable product-mix in Life/Protection, a prolonged focus on
capital allocation and cash flow management. Companies will also continue to focus on shareholder returns to manage their capital base. This strategy helps protect overall profitability.
CONCLUSIONS AND TOP PICKS We see no major self-help catalyst in the short term for the sector, and we believe only a new phase of rising interest rates (driven by major benchmarks, not risk premiums vs. benchmarks) and a better USD environment might have a positive, noticeable impact on the sector. The bad news is that we have poor visibility on these ones. Consequently, we have decided to refrain from adding any Insurance stock in our Q4 Top Pick list. Our current favourite stock is Allianz, as we believe in the ongoing, gradual transformation of the life/health book of business (i.e. gradual RoRAC improvement) and the ongoing recovery of Pimco.
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Top Picks
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