4.1. What Are Adhesives?
INDEPENDENT RESEARCH Henkel 9th November 2017 Strong grip in a challenging environment HPC Fair Value EUR139 (price EUR120.90) BUY Coverage initiated
Finalised on 8th November In a slowing Food and HPC sector, Henkel's very resilient growth Bloomberg HEN3 GY profile stemming from a combination of defensive HPC businesses and Reuters HNKG.F cyclical adhesive activities provides the group refuge stock status. This 12-month High / Low (EUR) 128.9 / 106.4 Market capitalisation (EURm) 21,540 resilience coupled with strict cost control and a very solid balance sheet Enterprise Value (BG estimates EURm) 23,798 prompt us to initiate coverage of the preferred share with a Buy Avg. 6m daily volume ('000 preferred 453.8 recommendation and a FV of EUR139. shares) Preferred shares’ free Float 100 A long-term growth profile. Henkel's dual HPC/adhesives profile 3y EPS CAGR 8.4% ensures the group a (3-4% organic growth) Gearing (12/16) 0% long-term resilience Dividend yields (12/17e) 1.47% irrespective of the economic cycle in a universe where numerous Food- HPC groups have seen their organic performance more than halved since YE December 12/16 12/17e 12/18e 12/19e 2012. Revenue (EURm) 18,714 20,083 21,073 22,167 EBIT(EURm) 3,172 3,475 3,761 4,017 Adhesives as a growth engine. Adhesives should continue to drive the Basic EPS (EUR) 4.74 5.13 5.53 5.93 Diluted EPS (EUR) 5.36 5.88 6.38 6.84 group's growth in coming years and offset the temporary weakness in HPC EV/Sales 1.27x 1.19x 1.09x 0.99x activities. Henkel's organic growth is set to run at 3.2 % in 2017, in the EV/EBITDA 7.1x 6.5x 5.7x 5.0x middle of the guidance range provided by the group (2-4%) and despite EV/EBIT 7.5x 6.8x 6.1x 5.4x P/E 22.5x 20.6x 18.9x 17.7x anaemic growth in the Beauty division for which we are not ruling out a ROCE 16.7 13.8 14.0 14.5 sales warning at the Q3 publication on 14th November. Share price on November 7th The group's "margin story" is not over yet. Underlying EBIT 133.5 128.5 margin should continue to widen by more than 30bp a year on 123.5 average to reach an historical level of 18.3% in 2020, driven by ongoing 118.5 113.5 cost-saving programmes, a positive mix coming from the robust 108.5
103.5 Adhesives division as well as lesser dilution from the integration of Sun 98.5 Products. Despite the integration of bolt-on acquisitions, Henkel's debt 93.5 88.5 ratio is expected to be low, thereby paving the way for sizeable 06/05/16 06/08/16 06/11/16 06/02/17 06/05/17 06/08/17 06/11/17 HENKEL PREF. (XET) SXX EUROPE 600 potential acquisitions as of 2018 (>EUR13bn). Buy, Fair Value of EUR139. Henkel's 2018e P/E stands at 19x, vs 23x for HPC and 22x for adhesives. The combination of a DCF calculation and an SOTP valuation points to a Fair Value of EUR139 per preferred share, implying upside of 15%. We initiate the stock with a Buy recommendation. The forthcoming earnings publication on 14th November could provide an attractive entry point.
Analyst: Research Associate: Virginie Roumage, CFA Clément Genelot 33(0) 1.56.68.75.22 33(0) 1.56.68.75.60 [email protected] [email protected]
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Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 16,428 18,089 18,714 20,083 21,073 22,167 Change (%) 0.4% 10.1% 3.5% 7.3% 4.9% 5.2% LFL CHANGE 3.4% 3.0% 3.1% 3.2% 3.5% 3.6% EBITDA 2,660 3,105 3,345 3,662 4,035 4,335 Adjusted EBIT 2,588 2,923 3,172 3,475 3,761 4,017 Change (%) 2.9% 12.9% 8.5% 9.5% 8.2% 6.8% Financial results (49.0) (42.0) (33.0) (33.8) (23.6) (13.7) Pre-Tax profits 2,195 2,603 2,742 3,006 3,241 3,475 Tax (533) (635) (649) (752) (810) (869) Minority interests 33.6 49.0 41.0 33.7 36.7 39.3 Group share net profit 1,628 1,921 2,053 2,224 2,397 2,570 Group share restated net profit 1,896 2,112 2,323 2,547 2,766 2,963 Change (%) 7.5% 11.4% 10.0% 9.6% 8.6% 7.1% Cash Flow Statement (EURm) Operating cash flows 2,225 2,384 2,837 3,005 3,337 3,544 Change in working capital (311) 0.0 13.0 (29.9) (34.7) (38.3) Capex, net (518) (590) (523) (763) (801) (842) Financial investments, net (1.0) (25.0) (6.0) (33.8) (23.6) (13.7) Dividends (548) (597) (666) (732) (793) (861) Other (1,436) (680) (1,224) (1,442) (276) (1,713) Net debt 153 (335) 2,301 2,258 1,326 296 Free Cash flow 1,333 1,690 2,205 2,105 2,425 2,591 Balance Sheet (EURm) Tangible fixed assets 2,461 2,661 2,887 3,903 4,430 4,917 Intangibles assets 10,590 11,682 15,543 15,998 16,202 16,410 Cash & equivalents 1,228 1,176 1,389 2,559 2,531 2,731 current assets 6,811 6,917 8,213 9,780 10,108 10,701 Total assets 20,961 22,323 27,917 31,030 32,142 33,490 Company description L & ST Debt 1,744 884 3,725 4,852 3,892 3,062 Henkel operates globally with a well- Shareholders' funds 11,644 13,811 15,183 16,579 18,168 19,854 balanced and diversified portfolio. The Total Liabilities 9,317 8,512 12,734 14,451 13,974 13,636 Capital employed (BG Calculation) 14,423 15,832 20,052 21,642 22,458 23,248 company holds leading Ratios positions with its three business units Adjused operating margin 15.75 16.16 16.95 17.30 17.85 18.12 in both industrial and consumer Adjusted tax rate 24.00 25.00 24.70 25.00 25.00 25.00 businesses thanks to strong Adjusted net margin 11.54 11.68 12.41 12.68 13.13 13.37 brands, innovations and technologies. ROE (after tax) 16.48 15.46 15.44 15.50 15.35 15.05 ROCE (after tax) 19.91 15.56 16.71 13.84 14.05 14.53 Henkel Adhesive Technologies is the Net debt/EBITDA 0.06 (0.11) 0.69 0.62 0.33 0.07 global leader in the Gearing 0.15 0.06 0.25 0.29 0.21 0.15 adhesives market across all industry Pay out ratio - preferred share 29.75 29.97 30.09 30.07 30.06 30.05 segments worldwide. In its Laundry & Total number of shares, diluted (‘000) 434,278 434,278 434,278 434,278 434,278 434,278 Home Care and Beauty Data per Share (EUR) Care businesses, Henkel holds strong EPS - Preferred share 3.76 4.43 4.74 5.13 5.53 5.93 Restated EPS - Preferred share 4.38 4.87 5.36 5.88 6.38 6.84 positions in many markets and % change 7.5% 11.3% 10.0% 9.6% 8.6% 7.1% categories around the world. BVPS - total shares 26.50 31.46 34.64 37.84 41.49 45.35 Operating cash flows 5.12 5.49 6.53 6.92 7.69 8.16 FCF - total shares 3.07 3.89 5.08 4.85 5.58 5.97 Net dividend per Ordinary share 1.29 1.45 1.60 1.76 1.91 2.04 Net dividend per preferred share 1.31 1.47 1.62 1.78 1.93 2.06
Source: Company Data; Bryan, Garnier & Co ests.
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Table of contents
1. Investment Case ...... 4 2. Henkel in short...... 5 3. A resilient growth profile ...... 9 4. Adhesives driving growth ...... 12 4.1. What are adhesives? ...... 12 4.2. Henkel is well placed to capture growth in the sector ...... 13 4.3. Ramp-up in adhesives driven by… ...... 17 4.3.1. … a recovery in general industry … ...... 18 4.3.2. … technological trends in automotive and … ...... 19 4.3.3. … more complex and efficient consumer electronics where assembly is key ...... 23 4.4. Back to unseen organic growth levels for six years ...... 26 5. HPC: better trend from 2018 ...... 28 5.1. A sector eaten away by competitive intensity in mature countries...... 28 5.1.1. Consolidation of retailers and price war in Europe ...... 28 5.1.2. The shadow of a price war is hanging over the US ...... 30 5.2. Laundry & Home Care up 2.8% in 2017 ...... 31 5.2.1. A division primarily based on laundry ...... 31 5.2.2. Deceleration since the start of 2017 ...... 32 5.2.3. Strong potential in the US thanks to the acquisition of Sun and the "premiumisation" of the portfolio ...... 33 5.2.4. Acceleration in the Laundry & Home Care division as of 2018 after a difficult 2017 ...... 37 5.3. Beauty Care sales up 1.2% in 2017 ...... 38 5.3.1. Two major challenges to avoid price pressure in Europe ...... 38 5.3.2. A complicated product positioning ...... 39 5.3.3. Disadvantageous geographical exposure ...... 42 5.3.4. Growth in Beauty Care set to reach a low point in 2017 ...... 44 6. Constant margin improvement enabled by exemplary financial control ...... 46 6.1. Margin historically driven by cost-saving programmes ...... 46 6.2. The margin story is not over ...... 47 7. Pro-active and rigorous asset management ...... 50 7.1. A solid balance sheet structure ...... 50 7.2. New sizeable acquisitions are possible ...... 50 7.3. Tactical disposals set to continue ...... 52 8. Buy, Fair value: EUR139 ...... 53 8.1. Position relative to the consensus ...... 53 8.2. Stock price performance and multiples ...... 53 8.3. DCF valuation ...... 55 8.4. SOTP valuation ...... 57 Bryan Garnier stock rating system...... 59
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1. Investment Case
The reason for writing now In a slowing Food and HPC sector, Henkel's very resilient growth profile stemming from a combination of defensive HPC businesses and cyclical adhesive activities provides the group refuge stock status. Momentum in the Adhesive Technologies division underpins the group's growth and makes up for the weakness in the two other HPC divisions. Henkel's very robust balance sheet also provides it the possibility of making a sizeable acquisition.
Valuation Our valuation of the Henkel preferred share yields a Fair Value of EUR139 and points to upside potential of around 15%. It is derived from a DCF calculation of EUR144 as well as an SOTP valuation of EUR134. The Henkel preferred share is trading on 2018e P/E of 19x, or a 15% discount relative to the average of HPC peers and 13% discount with its peers in the adhesives segment.
Catalysts Henkel is due to report Q3 earnings on 14th November 2017. Despite the expected dynamism of adhesives (+5.0%e in organic terms) and the resilience of laundry (+3.0%e), the performance in the Beauty Care division is set to disappoint again (+0.5%e). A downward adjustment of sales growth guidance in Beauty cannot be ruled out and would open an attractive entry point for Henkel's long-term growth case.
Difference from consensus For 2017, we are situated slightly below the market in terms of sales and slightly ahead on the underlying EBIT. Whereas the consensus has already started to reduce its estimates for the Beauty Care division, we believe that forecasts for the Adhesive Technologies divisions do not yet fully reflect growth potential in this division, which is also beneficial for the group's margin and EPS.
Risks to our investment case A deterioration in the industrial backdrop or even a premature cycle reversal would take a significant toll on the Adhesive Technologies division (47%e of sales and 49%e of 2017 underlying EBIT) and on our forecasts.
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2. Henkel in short
Fig. 1: Company history
1876 Creation of Henkel by Fritz Henkel with a sachet-conditioned textile detergent as its first product
1922 Launch of adhesive production
1985 First listing of Henkel preferred shares
1995 Acquisition of Schwarzkopf
1996 First listing of Henkel ordinary shares
1997 Acquisition of the global glue and adhesive brand Loctite
2001 Disposal of Cognis (chemicals manufacturer specialised in healthcare) in order to refocus on mass consumer goods and industrial technologies
2004 Acquisition of Dial (soaps) and Advanced Research Laboratories (consumer hair products)
2008 Acquisition of National Starch Adhesives and Electronic Materials (wood adhesives)
2009 Simone Bagel-Trah takes over from Albrecht Woeste, both members of the Henkel family, as Chairman of the Henkel Supervisory Board
2013 The Henkel family extends its share-pooling agreement
2014 Acquisition of Spotless Group (household products), Sexy Hair (professional hair care) and Bergquist Company (electronics adhesives)
Hans Van Bylen, previously in charge of the Beauty division, is nominated Chairman of the Management Board, taking over from Kasper Rorsted, who 2016 moved to adidas Group
2016 Acquisition of Sun Products Corporation (laundry products) in North America
2016 Presentation of Henkel 2020+ strategic plan
Source: Henkel.
Henkel has the unusual feature of being listed through two distinct German share classes:
Ordinary shares, guaranteeing voting rights but with low liquidity due to the fact that the Henkel family owns more than 61% of these shares and hence, voting rights via a shareholding agreement.
Preferred shares with no voting rights, which benefit from high liquidity and large free float with dividends of EUR0.02 higher than those allocated to ordinary shares.
This shareholding structure enables the group to protect itself from any hostile acquisition attempt, at least as long as the Henkel family shareholding pact is in place (it was recently prolonged for an undetermined duration and can only be broken by a shareholder as of 31st December 2033). The Henkel family therefore owns 36% of the capital and 61% of the group's voting rights.
Fig. 2: A dual listing system
Ordinary share Preferred share Shares issued (m) 259.8 178.2 o/w Free float 38.98% 97.9% o/w Treasury stock (Henkel Group) - 2.1% o/w Henkel family shareholding pact 61.02% - Liquidity Low (89,000/day on average High (473,000/day on average) Voting rights Yes No Dividends Ordinary Preference (+EUR0.02 vs. ordinary)
Source: Company Data; Bryan, Garnier & Co ests.
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Henkel is present in both: 1/ the essentially B2C segment of HPC, with cosmetics (19% of sales), detergents and cleaning products (34% of sales, up 300bp after consolidation of Sun), as well as 2/ the industrial segment, which responds primarily to a B2B logic via adhesives (47% of sales). Adhesives have proved to be the most profitable business for the group.
Fig. 3: A group reliant on adhesives Breakdown of sales by business– 2017e Breakdown of underlying EBIT by business – 2017e
Beauty Care Beauty Care 19% 19%
Adhesive Adhesive Technologies Technologies 47% 49%
Laundry & Home Ca re Laundry & Home 34% Ca re 32%
Source: Bryan, Garnier & Co ests
Henkel boasts a well-filled and sizeable brand portfolio, at the top of which Loctite in adhesives, Schwarzkopf in cosmetics and Persil in detergents. The group also has more modestly sized yet well recognised brands such as Pritt and Pattex in adhesives, Fa and Diadermine in cosmetics and Bref and Eau Ecarlate in household products. The top 10 brands in the portfolio have constantly increased their contribution to sales generation and now account for 63% of total sales. Management aims to bring the weight of these 10 brands to 75% by 2020.
Management aims to Fig. 4: Main brands in each division increase the weight of these 10 brands to 75% of sales by 2020
Source: Bryan, Garnier & Co ests
Henkel is active on all continents, albeit with greater presence in Europe (44% of sales), North America (26% of sales) and Asia Pacific (16% of sales), which are geographical regions where industrial activity is the most developed and demand for personal care and home care products is the highest.
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Fig. 5: Still highly exposed to Europe … Breakdown of sales by region– 2017e Breakdown of non-adjusted EBIT* by region – 2017e
Corporate 1% Latin America Western Europe Latin America 4% 30% 6% Africa/Middle East Western Europe 3% 48% Africa/Middle East Eastern Europe 7% 8% North America 26% Eastern Europe 14% Asia-Pacific 16% North America Asia-Pacific 21% 16%
Source: Bryan, Garnier & Co ests.
* including restructuring costs and other non-recurring items
Emerging markets account for 42% of the group's sales. Their share is set to strengthen with the new strategic plan for 2020 that notably aims to invest more in this country category. By our estimates, China is at the top of the list (around 7% of sales), followed by Russia (5% of sales), Turkey (3% of sales) and India (3% of sales).
Fig. 6: … and mature markets Breakdown of sales by country category – 2017e Breakdown of sales by country– 2017e
UK; 2% India; 3% Turkey; 3%
Russia; 5% Others; 44% Emerging markets; 42% China; 7% Mature markets; 58% Germany; 12%
United States; 24%
Source: Bryan, Garnier & Co ests.
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Fig. 7: SWOT
Strengths Weaknesses
An ownership structure focused on the Henkel family ensuring Highly exposed to the Beauty and Laundry divisions in Western long-term industrial management Europe where the price backdrop is difficult given the extent of concentration and the price war between retailers
A diversified portfolio of recognised brands A lack of diversification in the portfolio of cosmetics products in terms of price segment and distribution channel
A leadership position in the adhesives market with high entry barriers
Opportunities Threats
A solid balance sheet and high cash generation providing the Risk of cycle reversal in the adhesives business possibility of making sizeable acquisitions
Ongoing digitalisation of the Beauty division to target younger Operating and financial risks associated with the current and more Asian customers integration of Sun Products
Source: Bryan, Garnier & Co ests.
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3. A resilient growth profile Henkel has a very resilient growth profile enabled by its presence in a cyclical business (adhesives) combined with its two other defensive HPC activities (cosmetics and household products). Adhesives are currently making up for temporary weakness in the HPC activities which tend to perform less well during periods of economic recovery.
Adhesives are currently This complementary dual exposure provides Henkel a degree of long-term resilience irrespective of the offsetting temporary cycle in a Food-HPC environment where growth is tending to run out of steam. Indeed, major groups weakness in HPC in the sector are facing a notorious slowdown in growth levels, with their product portfolios not businesses managing to refocus quickly enough on the Millenial generation’s new consumption behaviours (fresh, healthy and local produce). As such, whereas organic growth at other groups in the sector more than halved between 2012 and 2017e (2.0x for Danone, 2.3x for Unilever and Nestlé and >5.0x for Reckitt) to reach low points, Henkel has benefited from a far more stable pace of growth (of 3- 4% over the period). The group has therefore only notched down slightly the organic growth corridor it forecasts for the new strategic plan (2016-2020) compared with the last one (2012-2016) from 3-5% to 2-4%.
Fig. 8: Change in organic growth in the Food-HPC universe
7%
6%
5%
4%
3%
2%
1%
0% 2012 2013 2014 2015 2016 2017e Henkel Danone Nestlé Unilever Rec kitt
Source: Companies Data; Bryan, Garnier & Co ests (except for Reckitt whose 2017e performance is based on the group’s guidance).
The poor Q2 2017 performance (2.2% organic growth) cannot be extrapolated to coming quarters given the number of temporary factors that affected growth: calendar effects associated with the The poor Q2 organic 1/ performance of the group Easter holidays for the Adhesive Technologies division; 2/ the integration of Sun Products (the second- cannot be extrapolated. largest acquisition made by the group), which prompted a violent promotional campaign by Procter & Gamble, which can only be temporary; 3/ a plunge in volumes in the Beauty Care division following the price hike implemented in Q1. Hence, we foresee an acceleration in Q3 with an organic growth of 3.4%, mainly driven by the dynamism of adhesives (+5.0%e) and the resilience of laundry & home care (+3.0%e). However, a downward revision of sales guidance in the beauty division (+0.5%e in Q3) cannot be ruled out at the forthcoming publication on November 14th.
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Fig. 9: Change in Henkel organic growth
5% 4,3% 4,0% 3,7% 3,5% 3,6% 3,4% 3,3% 4% 3,3% 3,2% 3,2% 2,9% 2,9% 2,8% 2,3% 2,4% 2,2% 3%
2%
1%
-1% Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17e Q4-17e Price effect Volume effect Organic sales growth
Source: Company Data; Bryan, Garnier & Co ests.
We are forecasting organic growth of 3.2% for 2017 and 3.5% for 2018, in line with the group's growth guidance between 2 and 4%. Out to 2020, our estimates are at the top-end of the range with an We are forecasting organic sales CAGR of 3.5% (vs. guidance for 2-4%). This performance is likely to stem above all from organic growth of 3.2% the strength of the Adhesive Technologies division (the group's biggest division in terms of sales), for 2017 and 3.5% for which has accelerated sharply since the end of 2016 and has offset the slowdown in the Beauty Care 2018 for the group and Laundry & Home Care divisions.
Apart from resilient organic growth, Henkel is set to continue suffering from a disadvantageous forex effect (-1.8%e in 2017 and -2.2%e in 2018) stemming above all from the USD (estimated exposure of around 24% of sales) and to a lesser extent, the Turkish lira, the Egyptian pound and the Chinese yuan. Whereas the group was forecasting a neutral currency effect, if not slightly negative for 2017, the recent appreciation in the USD against the EUR could lead it to review its expectations at the Q3 earnings publication.
The perimeter effect is set to contribute substantially to Henkel's growth in 2017 (+5.9%e vs. mid single-digit guidance), driven in particular by the integration of Sun Products in the Laundry & Home Care division (the company had full-year sales of around EUR1.45bn in 2016), which started Q3 2016, as well as the integration of Darex Packaging Technologies and Sonderhoff in the Adhesive Technologies division as of H2 (for which combined sales totalled some EUR350m in 2016). In order to reflect the group's M&A strategy, confirmed for small and mid-sized companies in coming years and integrated into the 2020 strategic plan by management, we have assumed that EUR350m (observed average over 2015-16 excluding Sun Corporation) in sales is acquired and self-financed a year as of 2018 and out to 2020.
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Fig. 10: Group and divisional sales figures
EURm 2015 2016 2017e 2018e 2019e 2020e
Henkel Group
Sales 18,089 18,714 20,083 21,073 22,167 23,308
% reported 10.1% 3.5% 7.3% 4.9% 5.2% 5.1%
% FX 4.4% -3.6% -1.8% -2.2% 0.0% 0.0%
% acquisitions/disposals 2.7% 4.0% 5.9% 3.6% 1.6% 1.5%
% organic 3.0% 3.1% 3.2% 3.5% 3.6% 3.6%
Underlying volume growth 1.3% 2.9% 3.0% 3.0% 3.1% 2.9%
Underlying pricing growth 1.7% 0.2% 0.2% 0.5% 0.5% 0.7%
Adhesive Technologies
Sales 8,992 8,961 9,325 9,823 10,369 10,905
% reported 10.6% -0.3% 4.1% 5.3% 5.6% 5.2%
% organic 2.4% 2.8% 4.5% 4.2% 3.9% 3.6%
Underlying volume growth 0.9% 2.5% 4.3% 3.7% 3.4% 3.1%
Underlying pricing growth 1.5% 0.3% 0.2% 0.5% 0.5% 0.5%
Laundry & Home Care
Sales 5,137 5,795 6,754 6,956 7,332 7,739
% reported 11.0% 12.8% 16.6% 3.0% 5.4% 5.5%
% organic 4.9% 4.7% 2.8% 3.5% 3.8% 4.0%
Underlying volume growth 2.7% 4.7% 3.0% 3.0% 3.3% 3.0%
Underlying pricing growth 2.2% 0.0% -0.2% 0.5% 0.5% 1.0%
Beauty Care
Sales 3,833 3,838 3,885 4,174 4,347 4,545
% reported 8.1% 0.1% 1.2% 7.5% 4.1% 4.6%
% organic 2.1% 2.1% 1.2% 2.0% 2.5% 3.0%
Underlying volume growth 0.6% 1.7% 0.4% 1.5% 2.0% 2.5%
Underlying pricing growth 1.5% 0.4% 0.8% 0.5% 0.5% 0.5%
Source: Bryan, Garnier & Co ests.
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4. Adhesives driving growth
4.1. What are adhesives? Adhesives cover an entire range of chemicals that are present in many day-to-day objects such as books, cars and smartphones. Oil derivatives such as natural or synthetic rubber, resins and solvents (albeit increasingly targeted by authorities for their impact on the environment) therefore enter into the composition of these adhesives. Adhesives in the wider sense of the term can also include coatings, which are also chemical substances aimed at sealing joints or windows.
Several types of adhesives exist today with different chemical structures. These are chosen depending on their ability to stick to the surface of the parts assembled:
Hot-melt adhesives, obtained by merging several synthetic rubbers without using solvents, provide a high degree of adhesiveness and sealing while respecting the environment. Their resistance is nevertheless severely tested in the event of wide variations in temperature or the use of solvents on their surface.
Solvent-based adhesives, stemming from a mixture of natural rubber and resin in a solvent, offer immediate adhesion and excellent resistance to cold as well as adhesiveness on plastic products contrary to acrylic adhesives.
Water-based adhesive acrylics, made up of aqueous dispersion acrylic resins, present good resistance to heat, to UV light and average adhesiveness, but are not recommended for plastic products.
Self-adhesives form a bind when pressure is applied to the adhesive so that it sticks onto the surface. No solvents, water or heat are necessary to activate the adhesive. This technology is most often used for plasters, adhesive tapes and labels.
Fig. 11: Breakdown of global adhesives market by type - 2016
Adhésifs "hot- melt"; 15%
Adhésifs base Adhésifs aqueuse; 46% autocollants; 18%
Adhésifs base s ol vent; 21%
Source: Adhesives mag; Bryan, Garnier & Co ests.
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With the emergence of the chemicals industry and synthetic polymers, the number of adhesive and coating formulas has rocketed and chemical products such as solvents, resins and rubber have become vital in the make-up of virtually all adhesives (replacing tree sap, bees wax and even tar). Manufacturers of adhesive products have therefore become specialty chemicals industrialists with substantial exposure to raw materials derived from oil products, such as rubber.
The B2C business only Applications for adhesives are extremely widespread and concern both professional uses (construction, represents around 10% of the total adhesives and automotive, food manufacturing, electronics and general industry via machinery in assembly lines) and coatings sector individual uses (with products sold in DIY stores). However, the B2C business only represents around 10% of the entire sector, bearing in mind that the "DIY, craft" category also covers craftsmen whose construction and renovation business follows the same trends as construction groups. For this reason, we focus more on the industrial B2B segment hereafter.
Fig. 12: Global adhesives and coatings market by segment of application
Construction 19%
Adhesive tapes 15%
Automotive 12%
General industry - assembly lines 11%
DIY, craft 10%
Coatings 10%
Electronics 8%
Packaging 8%
Medical hygiene 3%
Other consumer goods 4%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Source: HB Füller; Bryan, Garnier & Co ests.
4.2. Henkel is well placed to capture growth in the sector Status of uncontested leader … In an adhesives and coatings market estimated at EUR43bn on a global scale according to the European association for the adhesives and coatings industry (FEICA), Henkel alone boasts market share of Henkel has market share of 21%, more than three around 21% with more than EUR8.9bn in sales generated in the business. The group is therefore a times that of its first rivals clear leader in the sector with market share of more than triple that of its major challengers namely Sika, 3M, HB Füller and French group Bostik recently acquired by Arkema. Apart from the top 10 groups, which catches the majority of sales in the sector, the rest of the ecosystem is very fragmented with a multitude of very specialised players, whether in terms of product offer or geographical presence.
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Fig. 13: Global adhesives and coatings market - 2016
Others; 44% Henkel; 21%
Sika; 6%
Main brands at Henkel 3M; 6% Adhesive Technologies
H B Fuller; 5%
Roya l ; 3% RPM; 4% ITW; 4% Dow; 4% Arkema; 4%
Source: HB Füller; Bryan, Garnier & Co ests.
The group's three main brands generate more than 61% of sales in the division with Loctite (sealing adhesives and coatings used by all types of industrial customers), Technomelt (thermomelting adhesives designed for packaging) and Bonderite (surface treatment in line with the needs of the automotive, aerospace and general industry). By extending the panel slightly, the division's 10 largest brands generate >80% of sales.
Henkel's leadership stems from both the extent of its product portfolio which covers almost all of the 50 identified segments in the adhesives and coatings market, as well as from its geographical presence. We estimate that the three main regions in the industrial adhesives market, namely North America, Europe and Asia (30% each), are also the main areas of exposure for Henkel Adhesive Technologies with Europe (~40% of sales), North America (~30%) and China (~15%). For this Source: Henkel reason, we mainly focus on these regions hereafter.
Fig. 14: Diversified geographical and business exposure – 2017e
Breakdown of Henkel Adhesive Technologies’ sales by geography Breakdown of Henkel Adhesive Technologies’ sales by business
Japan, Australia, Industrials oriented New Zealand; 5% business (BtoB) Electronics; 11% Consumers' products Consumer, sold through Europe; 40% Craftsmen and Rest of Emerging retailers (BtoC) markets; 10% General Industry; Building; 20% 14%
China; 15% Transport & Metal; 22% Packaging and Consumer Goods; 33% North America; 30%
Source: Bryan, Garnier & Co ests.
… stemming from constant innovation and … Henkel has developed a strategy to attract and retain customers founded in particular on innovation and the constant renewal of its product portfolio. In concrete terms, the group recently unveiled:
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In the automotive sector, a hybrid adhesive enabling different materials to stick together, for example light and flexible parts (fibre, plastic and aluminium) on rigid and heavy structures (metal).
In the infotainment field, conductive adhesive inks enabling a film to be directly stuck onto a curved surface to make a screen (for use in a vehicle cockpit or in the design of connected household appliances).
In electronics, a range of lead-free adhesives used in the semiconductors encapsulation process.
Innovation is a key factor in the adhesives market. R&D spending stands at 3.2% of sales at Henkel, Henkel's R&D spending is above the average of adhesive and coatings players of 2.5% (according to FEICA). 70 basis points higher than the sector average Fig. 15: R&D spending as a % of sales
4%
3,2%
3% 2,8% 2,5%
2%
1,4%
1%
0% Henkel Adhesives Sika Group Sector average HB Fuller Gr oup
Source: Companies Data; Adhesives mag; Bryan, Garnier & Co ests.
The very well reputed brand portfolio owned by Henkel with names such as Loctite for industrial groups and Pritt for individual consumers and which currently generates a substantial share of sales, also enables the group to spend less on marketing for these brands and to focus resources on innovation. Henkel's innovation policy is reflected in the fairly regular renewal of products sold since around 30% of annual sales (EUR2.6bn in 2016) is generated in products launched less than five years ago.
In order to discover new technologies, Henkel recently opened its own venture capital fund, the aim of which is to take minority stakes in start-up companies, with which it jointly develops projects concerning new adhesive technologies and applications.
… close proximity with customers A quarter of employees in Apart from constant innovation that enables Henkel to regularly renew its product portfolio, the group the Adhesive also relies on a large team of 6,500 customer facing technical experts whose mission is to manage Technologies division commercial relations with its near 130,000 professional customers (industrial groups or retailers). manage commercial Responsible for 20 client accounts each, these sales staff/technical experts are mostly specialised in one relations segment and must maintain close relations with their representatives in order for the group to understand their clients' needs well ahead of time, to develop products tailored to demand and
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Henkel
to carry out tests at the client’s plant before industrialising the adhesive required. This is above all a means of ensuring that the efforts made in terms of innovation will be reflected in sales.
Henkel's proximity with its customers is also visible via its production strategy, with a low capital intensive production network (small sized factories that capitalise on the group's technology and require little capital), which grant the flexibility of remaining as close as possible to customers even if the customer relocates their own production sites. Openings and closures of production sites are very frequent at players such as carmakers and components manufacturers for example. In these two markets, Henkel has a very dense network of production sites throughout the world (for the automotive sector) and in the three major global production areas (for electronics). This goes down We estimate that particularly well with industrial groups who are generally seeking to limit the number of suppliers for a industrial clients represent same part. more than 85% of sales at Henkel Adhesive This production density combined with a strong innovation policy ensures Henkel market Technologies share gains in segments destined for industrials (for which estimated sales represent more than 85% of total sales in the Adhesive Technologies division at Henkel).
Fig. 16: Henkel is well positioned to capture growth in the most buoyant segments
Growth Henkel % sales Henkel Segment End market Volatility Boosts/Barriers Henkel’s competitive advantage potential leadership Adhesive Reduction in vehicle weight, Carmakers and Innovation and dense production Transport High High momentum in connected and Strong 22% parts makers network throughout the world electric vehicle Semiconductors Miniaturisation of components Innovation and dense production Electronics and consumer High High and increased complexity of Strong 11% network in China, US and Europe electronics assembly Manufacturing Global recovery in industrial Dense production network General industry High High Good 14% industrials production throughout the world Recovery in market accentuated by infrastructure plans in Dense production network in Construction Construction High Medium Medium ~10% China/US, difficulties in the central Europe Middle East Food manufacturing Trends for more flexible Innovation and dense production Packaging Low Low Strong ~33% and HPC packaging network throughout the world products Consumer Very difficult and deflationary Leading brands in Europe, DIY, retailing Low Low Strong ~10% adhesives competitive environment challengers in the US
Source: Bryan, Garnier & Co ests.
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4.3. Ramp-up in adhesives driven by… In the adhesives market, which is by nature far more volatile than other sectors such as cosmetics and home care products, Henkel Adhesive Technologies has mostly been capable of generating robust organic growth levels. Volume effect is frequently the only component of this growth given the difficulty in implementing price hikes in a difficult competitive backdrop and with oil prices that have been low until recently.
Growth has picked up Over the past three quarters, growth has picked up considerably. The outstanding performance in Q1 again over the past three 2017 was admittedly aided by a calendar effect, but this rebalanced in Q2. The rebound in growth has quarters been driven by robust development in the auto sector (with trends to reduce the weight of vehicles, more connectivity and robotisation), the take-off in electronics (essentially in smartphones and digital tablets) and the recovery in industry in general (recovery in industrial production in mature countries and episodic rebound in automotive repairs noted in Q2).
The three segments mentioned above posted organic growth levels of between 8 and 12% over the first half of 2017. In contrast, the situation is more complicated for consumer adhesives, especially in Europe, and adhesives for construction that are suffering in the Middle East.
On a regional level, growth is above all underpinned by emerging markets with China, India, Mexico and Turkey in the lead. Among the mature markets, Germany stands out for its healthy performance whereas North America, which has so far been stagnating, now seems to have returned to positive territory.
Fig. 17: Henkel's organic growth in adhesives is gaining momentum
6% 5,5%
5% 4,3% 4,1% 4,0% 4% 3,7% 3,4% 3,3% 2,7% 3% 2,6% 2,5% 2,3% 2,4% 2,1% 1,7% 2%
1%
0%
-1% Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17
Price effect Volume effect Organic sales growth
Source: Company Data; Bryan, Garnier & Co ests.
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Henkel
4.3.1. … a recovery in general industry … Henkel Adhesive Technologies derives 14% of its sales from the general industry segment, excluding associated industries such as consumer electronics, transport, construction and packaging. This segment General industry covers an extremely wide range of players that need adhesives for both: represents 14% of sales at Henkel Adhesive The Technologies design of machines making up assembly lines at industrial groups.
Assembly of manufactured products on assembly lines at industrialists that require adhesives to be bound while ensuring a degree of impermeability, UV protection and even protection from solvents (generators and engines, filters, pumps, compressors, heating systems, ventilation and air- conditioning, household appliances, sporting equipment, clothing and shoes).
Maintenance and repairs of assembly line machinery as well as after sales products (including among others, needs for adhesives when replacing a vehicle windscreen).
We believe a trend reversal has been underway in industrial production since the beginning of 2017 as A trend reversal has been shown by the rise in production indices in H1 in the three main industrial markets of China, the US underway since the start of the year in industrial and the EU (respectively +6.9%, +1.5% and +2%). Forecasts suggest a rebound in growth in industrial production production from 1.8% in 2016 to 3.7% in 2017e and 3.4% in 2018e. The correlation is high (98%) between changes in global industrial production and organic growth in Henkel's Adhesive Technologies division.
Fig. 18: Heading for an improvement in industrial production in favour of Henkel
10%
5%
3,7% 3,4% 2,7% 1,8% 0%
-5%
-10% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e Worldwide industrial production index growth Henkel Adhesives organic sales growth
Source: Henkel; Oxford Economics; Bryan, Garnier & Co ests.
The genuine root of the rebound expected in the industry in coming years lies in mature regions where production indices are accelerating. The European Union still seems to be driven by the catching up effect in its industry (industrial production still below its pre-crisis level), while the US recently saw its industrial production pick up thanks to more robust domestic demand, slightly better oil prices and a decline in the dollar.
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Despite a Chinese economy that has been in a controlled transformation for several years, heading towards more services to the detriment of industry, growth in industrial production remains resilient (+6.2% estimated for 2017) and clearly stronger than in other major mature industrial countries.
Fig. 19: Growth in industrial production
Industrial Production index 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e
European Union 3.7% -1.8% -13.8% 6.7% 3.3% -2.0% -0.5% 1.1% 2.2% 1.6% 2.3% 1.4% 1.1%
US 2.5% -3.5% -11.5% 5.5% 3.1% 3.0% 2.0% 3.1% -0.7% -1.2% 1.9% 2.5% 1.6%
China 15.1% 9.8% 10.4% 12.6% 10.7% 8.4% 8.0% 7.4% 6.2% 6.1% 6.2% 5.3% 4.5%
Source: Oxford Economics; Bryan, Garnier & Co ests.
4.3.2. … technological trends in automotive and … The adhesives sector has also been driven for some time by structural factors on a global scale that increase usage of these products in assembly of all new vehicles. The average weight of adhesives per vehicle is therefore expected to rise from 15kg/vehicle at present to more than 20kg by 2020. Automotive represents Henkel seems to be one of the best placed in this segment of growth with its wide range of products around 20% of sales at destined for assembly of plastic/aluminium components as well as electric/electronic components Henkel Adhesive associated with engine electrification. Henkel Adhesive Technologies derives 22% of its sales from the Technologies transport segment and around 20% from automotive more specifically according to our estimates.
Fig. 20: Vehicle assembly is set to require an average of 20kg of adhesives by 2020 Weight of adhesives and coatings in individual vehicles Application scope of adhesives in vehicle assembly (yellow surfaces)
100% Others Others Adhesives; 1% Adhesives; 2% 90% Rubber; 6% Rubber; 7%
80% Aluminium; 10% Aluminium; 13%
70% Plastic; 16% Plastic; 18% 60%
50%
40%
30% Steel; 60% Steel; 55%
20%
10%
0% 2016 2020e Source: ATKearney; Adhesives mag; Bryan, Garnier & Co ests.
The rising use of adhesives in the automotive industry stems from two technological trends that are: 1/ engine electrification to reduce emissions of polluting gases and conform to regulatory standards, 2/ development of connected vehicles that require more sensors and screens.
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Heading for greener vehicles where weight reduction is vital Governments in mature countries have implemented strict regulations to reduce CO2 emissions in order to limit the impact of polluting gases on the environment and the health of the population. The auto sector is indeed one of the main ones targeted in the fight against pollution since the transport sector accounts for around one third of CO2 emissions in the world. The EU and China are therefore targeting a reduction of more than 40% in emissions of CO2 (g/km) by 2025 for passenger cars, with this figure nudging 50% in the case of the US.
Carmakers estimate that the main source of leverage they can use to reach these emission standards is electrification of vehicle transmission, which alone would contribute to 66% of the total reduction required by the European standard. However, in order to electrify cars their weight needs to be reduced.
Fig. 21: Electrification is an excellent way of reducing emissions CO reduction targets (CO g/km) Contribution to reducing emissions in Europe (CO g/km)
200 ₂ ₂ 66% of the reduction ₂ 180 180 >-40% 160 160
140 130 125 120 115 100 95 95 90 80 75 60 2015 2020 2025 EU China US
Source: Faurecia; Plastic Omnium; Bryan, Garnier & Co ests.
This context of tougher regulations is a major catalyst for the development of adhesives in the auto sector. Vehicle design is indeed set to rely more on lighter and more flexible materials (e.g. doors, hatchback, sun roofs, bonnets and boots), which can only be assembled with adhesives and no longer soldered or riveted like metal. While this is valid for all vehicle types, whether they are fitted with conventional or electrified engines, the trend towards lighter components is stronger in hybrid and electric vehicles.
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Henkel
Fig. 22: Electric vehicles are not set to remain a niche market Breakdown of production for passenger cars and utilities vehicles - Breakdown of production for passenger cars and utilities vehicles - 2016 2026e
Full electric vehicle; 2% Plug-in hybrid; 4% Full electric Mild hybrid; 3% Conventional vehi cle; 7% engine; 57%
Conventional engine; 91% Plug-in hybrid; 18%
Mild hybrid; 18%
Source: IHS; Bryan, Garnier & Co ests.
A reduction in weight is more than vital to enable electric vehicles, and to a lesser extent hybrid vehicles, to get beyond the two main barriers that are currently slowing their widespread uptake (2% of global car registrations in 2016 were entirely electric): 1/ the high cost of the battery; 2/ still lacking autonomy to incite car drivers to abandon internal combustion engines in a backdrop where recharging infrastructure is also lacking in density. However, reducing the weight of electric cars should enable either the carmaker to fit the car with a less powerful (and hence cheaper) battery, for a virtually equivalent level of autonomy, for a more accessible end-sales price, or to increase the car's autonomy CAGR in hybrid and by maintaining the same battery and for a virtually identical end sales price. electric vehicles expected to run at 19% over 2016- 2026e This is an essential condition to enable a widespread uptake of electric vehicles and to reach 7% market share by 2026, as estimated by IHS. In a global automotive market expected to grow slightly in volume terms, hybrid and electric vehicles stand out as the genuine growth engine with a CAGR of 19% expected over 2016-2026e.
Heading for a more connected vehicle with an omnipresence of sensors and screens 4G/5G has now become crucial to enable vehicles to gather and exchange data on driving conditions. Automotive players (joined by new entrants) have therefore invested heavily in introducing more connectivity on-board and more precisely in the dashboard. These investments are also made from a longer-term perspective of developing the autonomous vehicle. As such, the architecture needs to be rethought to integrate smartphones and tablets while installing sensors for data collection is also essential.
This transformation aims to place the vehicle at the heart of an ecosystem where all objects are able to communicate with each other and is set to increase the amount of equipment necessary within a vehicle:
Concerning infotainment, major auto parts suppliers such as Continental estimate that the number of screens installed in the cockpit (also known as the Human Machine Interface) could easily reach
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five per vehicle compared with two at present (a central screen and a driver's screen). However, assembling ever thinner and more flexible screens requires very specific adhesives.
In terms of connectivity, the number of sensors installed in a vehicle to enable it to better apprehend and interact with its environment could rise from an average of two today to 20 further out (lidar, radar, camera, infra-red and ultrasonic scanning) with a fully autonomous vehicle. These are all elements that need to be fixed onto the car and on its internal structure using adhesives designed for this purpose. Although the genuine take-off of the autonomous vehicle is not expected before 2030, given the time it will take for the regulatory framework to adapt and for drivers to be willing to get into a robotised vehicle, the multiplication of driver assistance functions in passenger cars such as "park assist" (only fitted in 14% of cars sold in 2016, this percentage should rise to more than 90% of new car registrations by 2035) is already likely to increase the number of sensors per vehicle to around six.
Fig. 23: Healthy growth prospects for adhesives
Units 2016 2035e Change
Passenger cars registered (m) 91 124 +36%
o/w equipped with ADAS functionalities (m) 13 102 +701%
o/w fully autonomous (m) 0 10 nm
Average number of sensors per car with ADAS 2 6
Average number of sensors per autonomous car 30
Total number of sensors to fix (m) 25 912 x35,8
Passenger cars registered (m) 91 124 +36%
Average number of screens per car 2 5
Total number of screens to produce (m) 182 620 x3.4
Source: Continental; Valeo; McKinsey; IHS; Bryan, Garnier & Co ests.
Fig. 24: From a manual cockpit to an ultra-digitalised and connected cockpit Opel Mokka cockpit Bosch futurist demonstration cockpit
Source: Opel; Bosch.
Note that in addition to providing adhesives used by parts makers, carmakers and electronic groups to assemble and fix screens and sensors, adhesives are also used by semiconductors groups that assemble chips and printed circuits that are themselves part of the screens and sensors. Finally, although it is
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difficult to quantify, the development of electric and connected vehicles requires greater electricity consumption due to the battery and the number of electronic devices installed in the cockpit. In order to shoulder this consumption, an overhaul of the electric architecture is vital in vehicles, thereby implying even more adhesives to protect this more complicated architecture.
4.3.3. … more complex and efficient consumer electronics where assembly is key The consumer electronics market (around 9% of the global adhesives market and 11% of Henkel Adhesive sales) above all concerns smartphones, digital tablets and laptop computers. Adhesives are used in these devices in the protective covering, the electronic encapsulation, the mounting surface Electronics represent 11% and cabling. of Henkel Adhesive Technologies sales Consumer electronic devices should continue to play a role of growth engine for both adhesives sector and for Henkel, whose expertise in this segment has long been recognised. Future Market Insight is expecting the segment to grow at a pace of around 8% a year over the next 10 years in order to double in size. We believe three trends favour these prospects:
An ever rising number of consumer electronics devices sold in the world.
An increased use of adhesives per device in order to meet miniaturisation trends.
A value effect associated with the rising demand for very specific adhesives, if not tailor-made ones.
The end market is vast in volume terms with almost 1.5bn smartphones, 180m tablets and 155m laptop computers sold in the world in 2016. After suffering a virtual stagnation in 2016 (due to weak smartphone sales following a lack of innovation, which was felt especially at Apple), growth should pick up again as of this year driven by both economic factors (renewed innovation) and structural ones (emergence of the middle classes in emerging countries).
Fig. 25: The recent blip in smartphone, tablet and laptop sales seems to have passed Smartphone sales (m of units) - 2016 Smartphone, tablet and laptop computer sales (m of units) 2,050 2,000 7% 2 000 1,929 1,866 1,808 1,810 6%
Tablets; 182; 1 500 5% 10% 4% Laptops; 155; 9% 1 000 3% Smartphones; 1 473; 81% 2% 500
1%
0 0% 2015 2016 2017e 2018e 2019e 2020e
Smartphones Tablets Laptops YoY growth Source: Statista; IDC.
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Henkel
Whereas the majority of purchases of consumer electronic devices in mature regions such as the US and Europe are replacement purchases, long-term growth in the market is based on a catching up of the low level of penetration in emerging countries.
The smartphone penetration level is the most obvious, with wide gaps between mature countries (around 60-70%) and emerging markets with just 45% in China and 16% in India. This equipment rate is expected to rise sharply in coming years and should widen by 800 basis points by 2019 to reach 53% in China (or a gain of >100m devices) and 24% in India (or a gain of >120m devices).
Fig. 26: Smartphone penetration rate in the population - 2016
80% 73% 70% 65%
60%
50% 45%
40%
30%
20% 16%
10%
0% US Western Europe China India
Source: eMarketer.
Adhesives in consumer electronics are also well placed to drive some of the trends to make devices smaller and ever more efficient. These technological demands imply incorporating increasingly small electronics components and optimised assembly, in favour of the quantity of adhesives used in the assembly process for a single device. Miniaturisation trends favourable to adhesives Taking the example of Apple iPhone smartphones, over the last 10 years, the size of the screen has increased by 60% whereas the telephone is now 40% slimmer than it was. In order to achieve this, electronic groups require more adhesives that are also very specific if not customised.
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Henkel
Fig. 27: Ever slimmer smartphones with increasingly large screens
6 0,6
5 0,5
4 0,4
3 0,3
2 0,2
1 0,1
0 0 iPhone iPhone iPhone iPhone iPhone iPhone iPhone iPhone iPhone iPhone iPhone iPhone iPhone 3G 3GS 4 4S 5 5S 6 6S 7 6 Plus 6S Plus 7 Plus Screen size (inches) - lhs Thickness (inches) - rhs
Source: Lifewire.
Fig. 28: Application scope of adhesives (surfaces in red) Smartphone Digital tablet
Source: Tesa.
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Henkel
4.4. Back to unseen organic growth levels for six years We expect organic growth in the Adhesive Technologies division of 4.5% for 2017, which is slightly higher than the group's guidance (between 2 and 4%) and 4.2% in 2018. Although fundamental trends in the automotive and electronics sectors have been underpinning adhesives for several years The Adhesive already, better than expected industrial production in the US and China has surprised sector players in Technologies division should be the main driver recent quarters. behind the group's growth in 2017 and 2018 Current production forecasts now strengthen our conviction that the acceleration undertaken since the start of 2017 in adhesives is sustainable over the rest of the year as well as in 2018.
As with each period of rebound in the adhesives segment, volumes are primarily set to drive Henkel's growth. The price effect is nevertheless set to strengthen in H2 2017 and over 2018 via price hikes that were communicated and negotiated in H1 and which should gradually be rolled out in H2 to counterbalance the recent rise in certain commodities due to an increasingly large mismatch between supply and demand (propylene, ethylene, methanol, butadiene, isoprene and acetone). American group HB Fuller and European group Bostik also announced price hikes (of around 5-8% for North America for HB Fuller).
Fig. 29: BG growth estimates in the Adhesive Technologies division
5% 4,5% 4,2% 3,9% 4% 3,6% 3,6% 3,7%
3% 2,8% 2,7% 2,4% 2%
1%
0% 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e Price effect Volume effect Organic sales growth
Source: Bryan, Garnier & Co ests.
In the event of a downturn in the cycle, we believe that Henkel will be less affected than its rivals in terms of both volumes and prices, for two reasons:
Its more diversified exposure in terms of product segments which include consumer adhesives (glues, coatings and adhesives sold in hypermarkets and DIY stores) and adhesives used in the manufacturing of consumer products and their packages enabling the group to reduce its cyclical nature and cushion the plunge in volumes during crisis periods.
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Henkel
This ability to restrict the decline in volumes via the B2C segment and clients that manufacture consumer goods enables Henkel to occupy its production chains to a minimum level, to cover its overheads and therefore to limit price cuts contrary to its peers that are only exposed to very industrial B2B segments. This was observed in 2008 and 2012 when volumes collapsed, with the Henkel better protected in price effect saving organic growth in the Adhesive Technologies division. the case of a reversal given its exposure to Fig. 30: Less cyclicality than for more B2B rivals consumer segments 14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4% Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Henkel Adhesives Sika Tesa (Beiersdorf) HB Fuller
Source: Company Data; Bryan, Garnier & Co ests.
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Henkel
5. HPC: better trend from 2018
5.1. A sector eaten away by competitive intensity in mature countries Henkel's strong presence We estimate that Henkel's strong presence in Western Europe (~40%e of sales in the Beauty Care in western Europe division and ~35%e of sales in Laundry & Home Care), where pressure from retailers is intense, exposes (around 40% of sales in the group to sharp price tension. Indeed, Henkel's Beauty and Laundry & Home Care divisions have a Beauty Care and 35% in Laundry & Home Care) large number of retail groups among their top 10 customers who are increasingly aggressive in terms of prices such as Walmart, Rewe, Carrefour and Kaufland (Lidl).
Fig. 31: Estimated exposure of Henkel sales by region - 2016 Henkel Beauty Care Henkel Laundry & Home Care (post acq. de Sun Products)
North America; 25% North America; Western Europe; 30% Western Europe; 35% 40% LatAm; 5%
LatAm; Asia / Middle- 5% East; 15% Asia / Middle- East; 10% Eastern Europe; Eastern Europe; 20% 15%
Source: Bryan, Garnier & Co ests.
The competitive backdrop is indeed complicated for consumer products in mature markets (groceries, dairy, fresh products, home care, hygiene etc.) with increased penetration of modern retailers (supermarkets, hypermarkets and discount stores) and above all in Western European countries. Suppliers’ price effect in the region is increasingly under pressure from retailers in order to back the price war. Beyond Europe, we now fear that the situation could spread to the US, where Amazon's move into physical food retailing is capable of triggering another price war between retailers.
5.1.1. Consolidation of retailers and price war in Europe For several years now, the game of trade negotiations has been profoundly reshaped. Retail banners and their purchasing platforms, which aim to gather orders and then divide them between the stores, have indeed tended to massively consolidate throughout Western Europe and especially in France.
Market share at the four leading retailers has therefore reached 69% in the UK and 47% in Spain, which is one of the most fragmented European countries in terms of retailing. In France, several retailers have merged their purchasing platforms since 2014: Intermarché and Casino in October 2014
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Henkel
and Carrefour and Cora in December 2014. Systeme U and Auchan, who had been collaborating since 2014 in the field of purchasing, announced at the beginning of 2017 the merger of their purchasing platforms. Since then, market share at the top four purchasing platforms has risen from 68% to 92% in fast-moving consumer goods according to Kantar Worldpanel.
Fig. 32: Change in competitive landscape of mass retail purchasing platforms in France June 2014 September 2017
Top 4: 92% Top 4: 68% Casino - Others; 0,6% Carrefour; Others; 0,3% Intermarché; 21,8% 26,3% Aldi; 2,2% Aldi; 2,2% Delhaize; 3,3% Lidl; 5,3%
Leclerc; 19,9% Lidl; 4,7% Carrefour - Delhaize; 23,5% Sys tème U; 10,3% Leclerc; 21,2%
Intermarché; 14,4% Auchan; 11,3% Sys tème U - Auchan; 21,2% Casino; 11,5%
Source: Kantar Worldpanel; Bryan, Garnier & Co ests.
The synergies obtained in purchases have therefore helped to pursue the price war that has been raging since 2013. Today there are seven large-scale European purchasing platforms armed with theoretical sales levels (sum of sales of each member banner, or an indicator of their weight compared with suppliers) that exceed EUR100bn.
Fig. 33: Main purchasing platforms in Europe
Platform Retailer Theoretical sales
EMD Casino, Markant, Euromadi, ESD Italia, Tuko, ESD Italia, Musgrave, Supergro, Asda, Kaufland EUR178bn
Alidis Intermarché, Edeka, Coop Suisse, Conad, Colruyt, Eroski EUR140bn
AMS Ahold Delhaize, Migros, Morrisons, Esselunga, Jeronimo Martins, ICA, Hagar EUR136bn
Eurochan Auchan, Metro, Système U EUR135bn
Coopernic Rewe, Lerclerc, Coop Italia, Ahold Delhaize EUR104bn
INCAA Casino, Intermarche, Dia ND
Eurolec Leclerc, Rewe ND
Source: Companies Data; Bryan, Garnier & Co ests.
This situation has clearly made negotiating terms more difficult with retailers, who now have numerous arguments to obtain price cuts and margin guarantees: threat of delisting, increase in payment The price effect in fast- timeframes, rise in shelf space costs (associated with placement of products in the aisles), higher moving consumer goods advertising spending etc. The price effect for fast moving consumer goods has weakened constantly in has weakened constantly Western Europe since 2013. Nielsen estimated that in 2016, 23% of fast-moving consumer goods sales in Western Europe since in Europe concerned promotional sales. 2013
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Henkel
Fig. 34: Breakdown of growth in fast-moving consumer goods in western Europe
2% 2,0%
1% 0,7% 0,6% 0,5% 0,3% 0,2%
0%
-0,6% -1%
-1,5% -2% 2013 2014 2015 2016
Price effect Volume effect
Source: IRI Worldwide, Garnier & Co ests.
Price pressure is set to last for some time. With Alexandre Bompard’s arrival as CEO at Carrefour, No. 1 European and French retailer, an increase in promotional investments and price adjustments across its French hypermarkets must be expected.
5.1.2. The shadow of a price war is hanging over the US The situation in the US could also worsen, with a competitive landscape radically modified by the emergence of European hard discounters as well as the warning signs of a price war that Amazon and Walmart seem ready to engage, to the detriment of suppliers that will most probably be obliged to contribute to reduce end sales prices.
The arrival of German hard discounters Lidl (aiming to open 900 stores by 2022, making it the third player in terms of sales points) and Aldi (arrived in June 2017 and planning 100 openings by the end of the year) should notably back the development of the hard-discount segment, which is worrying the competition so much. Although it is still nascent, with a market share of around 2%, hard-discount is expected to grow rapidly (+10% CAGR by 2020 vs. 2% for more traditional retailers according to Bain & Cie). However, this surge in hard-discounters is already encouraging retailers to reduce their prices and to extend their own-brand offers to secure their customer traffic.
Amazon has announced drastic price cuts in all Whole Foods Market stores throughout the US (on average -25% in a range of star products) as of the first day of its integration. Amazon also stated that Heading for a national other price cuts were coming. With the aim of protecting its market share and countering Amazon, price war in the US? Walmart should clearly follow the trend and operate price adjustments on a national level. This escalation involving the national no. 1 retailer (USD308bn in sales in the US) is therefore likely to trigger a national price war in which other US retailers will have to take part, whereas they were so far used to regional competition in prices.
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Henkel
5.2. Laundry & Home Care up 2.8% in 2017
5.2.1. A division primarily based on laundry Henkel's Laundry & Home Care division is primarily reliant on its laundry business (72% of sales) with brands positioned in detergents (Persil, Sun, Purex), softeners (Purex, Snuggle, Vernel) and additives (Eau Ecarlate). We have identified Persil as the group's main global brand in the Laundry & Home Care division. This premium detergent brand (around EUR1.3bn in sales, or more than 20% in sales in the division and 7% of the group's sales) is now a key brand on the retailers’ shelves.
Fig. 35: Main Henkel brands in the Laundry & Home Care division
Source: Henkel; Bryan, Garnier & Co ests.
The global laundry care market was estimated at around USD76bn in 2016, primarily based on three major markets, namely China, Europe and the US, with Henkel ranking no. 3 with 7% market share (vs. 5% before the acquisition of Sun) behind Procter & Gamble and Unilever.
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Henkel
Fig. 36: Global laundry products market - 2016 Market breakdown by region Competitive backdrop – market share (post-acq. of Sun by Henkel)
China; 20% Procter & Gamble; 25%
RoWorld; 44%
Others; 57% Europe; 20% Uni lever; 11%
Henkel; 7% North America; 16%
Source: Euromonitor; Statista; Companies Data; Bryan, Garnier & Co ests.
5.2.2. Deceleration since the start of 2017 The division's performance has been slowing since early 2017 with organic growth in sales of just 2.1% in Q2 vs 3.0% in Q1 and 4.7% for the year of 2016. Organic sales growth of just 2.1% in Q2 The loss of momentum noted lies in Laundry Care (72% of the division's sales). The sub-segment has been suffering from a promotional ramp-up led by Procter & Gamble and Church & Dwight in North America in response to the acquisition of Sun Products as well as still sluggish demand in Western Europe where price pressure remains high.
The slowdown in the laundry segment has not been offset by the healthy performance in the home care segment (28% of sales in the division). The roll-out of innovations such as the toilet cleaning block Bref Power Activ (equipped with a 4-in-1 formula: cleaning mousse, anti-scaling formula, dirt protection and freshness) or the launch of variations of phosphate-free Somat tabs for dishwashers in several dozen countries have contributed significantly to growth in the home care segment.
This period of low growth only seems temporary to us. The promotional strategy via which Procter & Gamble and Church & Dwight are trying to capture market share while Henkel's management is focused on integrating and restructuring the Sun brands is not sustainable (over June-August alone, we noted a more than 5% price cut on average relative to the same period last year in Procter & Gamble's liquid detergents Tide and Church & Dwight's Arm & Hammer liquid detergents according to IRI data). Furthermore, the acquisition of Sun Products as well as the premiumisation of Henkel's portfolio in laundry detergents in the US are promising over the medium term.
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Fig. 37: Organic growth in Henkel Laundry & Home Care sales
6,0% 6% 5,2% 5,5% 5,3% 5% 4,6% 4,7% 4,7% 4,2% 4,0% 4,4% 4,3% 4% 3,5% 3,0% 3% 2,1% 2%
1%
0%
-1%
-2% Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Price effect Volume effect Organic sales growth
Source: Company Data; Bryan, Garnier & Co ests.
5.2.3. Strong potential in the US thanks to the acquisition of Sun and the "premiumisation" of the portfolio The acquisition of Sun, the second-largest operation in Henkel's history
Henkel acquired and integrated Sun Products in September 2016 for EUR3.2bn (EV/sales multiples of Sun Products is the 2.2x), making it the second-largest acquisition ever made by the group. Owned by a private equity fund, second-largest acquisition Sun Products was a US group present in the laundry market (90% of sales) and other home-care made by Henkel products (10%). It was mainly exposed to the US (96% of sales) and to a less extent Canada (4%). The (EUR3.2bn) company boasted a solid competitive positioning (no. 3 in detergents and no. 2 in softeners) via a recognised brand portfolio including Sun, All and Snuggle (65% of sales) as well as products manufactured for third parties (35% of sales).
Fig. 38: Geographical exposure of Henkel's Laundry business Pre-acquisition of Sun – 2016e Post-acquisition of Sun – 2016e pro-forma
North America; 13%
North America; Western Europe; 26% 31% Western markets; 43%
LatAm; 2% Emerging markets; 44%
Asia / Middle- Eastern Europe; East; 20% 21%
Source: Bryan, Garnier & Co ests.
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Henkel
Increasing the size in the US
The acquisition of Sun Products has enabled Henkel to massively increase its size in the North American laundry market and to reshape the competitive landscape that was historically dominated by Henkel has become no. 2 Procter & Gamble. Henkel previously only had 7% market share in the country putting it in the fourth in detergents in the US with 19% market share position, with its entry range brand of detergents and softeners Purex as well as its more premium brand Persil recently introduced to the continent. However, the acquisition of Sun Products enabled it to become the no. 2 with market share of 19%, ahead of Church & Dwight. From a wider perspective, Henkel has become the no. 4 player in the entire US Laundry & Home Care market (vs. no. 8 previously on Euromonitor figures).
Fig. 39: Competitive landscape in US laundry market
100% 6% 6% 7% 19% 80% 12%
14% 14%
60%
40%
61% 61%
20%
0% 2016 pré ac Sun 2016 post acq Sun P&G Church & Dwight Sun Products Henkel Others
Source: Euromonitor; Bryan, Garnier & Co ests.
In the hugely competitive US market, where innovation is key and marketing investments crucial to stand out from Procter & Gamble's leading brands (i.e. Gain and Tide), reaching critical mass seems increasingly vital in order to dilute R&D spending and advertising. This factor probably explains why Unilever withdrew from the segment in 2008 and partly why Henkel acquired Sun Products. However, Henkel needs this cost dilution to underpin an innovation resurgence in the Sun Products brands historically under-invested by their previous owner.
Henkel is also in a position to step up spending on the development of new chemical formulas such as washing capsules, that are particularly popular with the Millenial generation, but in which P&G has taken the lead with its Tide Pods offer, and to generalise innovation via all its brands produced in North America. Another clear advantage of the increase in Henkel's weight in the US is that its negotiating power with retailers will also be strengthened.
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Henkel
Making the portfolio more premium
The US market is proving The US, which generates 15% of revenues in the global laundry products market, presents attractive to be the most buoyant premiumisation potential with growth in the premium segment set to total 8% vs. 5% for the total for Henkel market according to Nielsen. The share of premium products is smaller (39%) than in Western European markets such as Germany, France and Italy (around 50%).
Fig. 40: Share of premium in the laundry market - 2016
60% led by Procter & led by 2-3 companies Gamble
40%
50% 48% 46% Henkel is present in the 20% 39% US premium segment via Persil and Snuggle
0% USA Italy Germany France
Source: Henkel.
The share of premium products in the US is destined to catch up the level in Western Europe, especially with current momentum in new upscale detergent and softeners formulas (for example in pods) which tend to appeal more to younger generations and which are driving market growth. The pod and single- dose segment already accounts for 15% of the US market but is currently led by Procter & Gamble (~80% market share according to Euromonitor), which benefits from its status as a first-entrant with its compartmented pod offer (3-in-1 Tide Pods: detergent, stain remover and brightener) that captures 90% of market growth according to the group.
The premium segment is currently virtually exclusively controlled by a major brand, namely Tide by Procter & Gamble. However, a new competitive landscape should emerge with momentum in Henkel's upscale brand Persil ProClean (also advanced in the pods and doses formats) and the premium Snuggle softener recently acquired via Sun Products.
The acquisition of Sun Products has indeed enabled Henkel to obtain an upscale softener brand Sun Products enables (Snuggle) to round out its offer that was previously focused on the mid-range with Purex. A price review Henkel to enter the undertaken on the Walmart website shows that Snuggle is positioned slightly above the Procter & premium softeners market Gamble brand Gain (USD5.2/litre for Snuggle vs. USD5,1/litre for Gain) whereas Purex softeners sell for an average price of USD3.8/litre.
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Henkel
Fig. 41: Henkel's detergent brand portfolio in the US
Av. price Brand Product Segment Competitive positioning (USD/litre) Sun Heavy duty detergent Value 1,8 Historical positioning through Sun Corporation
Purex Heavy duty detergent Mid-tier 3,3 Good positioning
All Heavy duty detergent Mid-tier 3,7 Historical positioning through Sun Corporation
Purex Fabric conditioner Mid-tier 3,8 Good positioning
Snuggle Fabric conditioner Premium 5,2 Historical positioning through Sun Corporation
Persil Heavy duty detergent Premium 5,3 Since early 2015
Source: Company Data; Walmart online prices (at 12/09/2017); Bryan, Garnier & Co ests.
Henkel has deployed its entire upscale detergent product range Persil, that is already recognised in Europe, under the Persil ProClean brand (average price of USD5.3/litre on the Walmart website on our review) in the US since Q1 2015.
Development potential looks substantial for Persil in the US now that the brand's distribution network is operational throughout the country (more than 75% of the sales points initially targeted by Henkel already offer Persil products on their shelves). The brand has the potential to challenge Procter & Gamble in the premium segment, particularly by selling very good quality products to retailers that Henkel is targeting 10% would like to reduce their offer of Procter & Gamble products and diversify brands on their shelves market share in the US by (recent friction between Procter & Gamble and Walmart). Persil ProClean has already captured >3.5% 2020 with its upscale of the market according to Henkel and the division's marketing director expects this share to reach 10% Persil brand by 2020. This level of market share gains, which we consider credible given the marketing efforts made and the increase in the group's weight relative to retailers thanks to the acquisition of Sun Products should therefore make Persil a sizeable challenger to Tide in the upscale segment.
Fig. 42: Average price (USD/litre) of leading liquid detergents in the US
Xtra 1,2 Church & Dwight Arm & 2,2 Hammer
Sun 2,8
Purex 3,2 Henkel
All 3,7
Persil 5,3
Gain 4,1 Procter & Gamble Tide 4,7
0 1 2 3 4 5
Source: Walmart online prices (at 12/09/2017); Bryan, Garnier & Co ests.
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Henkel
5.2.4. Acceleration in the Laundry & Home Care division as of 2018 after a difficult 2017 We are forecasting organic sales growth in the Laundry & Home Care division of 2.8% in 2017, in line with the group's guidance (between 2 and 4%).
The low point seems to have been reached in H1 2017 (2.5% organic growth). A return to normal Organic sales growth of promotional activity at Procter & Gamble and Church & Dwight in laundry products in North America 3.5% in 2018 after 2.8% suggests a slight recovery in organic growth at Henkel Laundry & Home Care as of Q3 which should in 2017 continue in coming quarters. We are forecasting organic growth of 3.5% in 2018, with the performance set to be driven this time by the Laundry segment, contrary to trends noted in recent quarters.
The acquisition of Sun Products has enabled the group to increase its weight in the US and strengthen its negotiating clout with retailers. Henkel's new size in the region also provides it greater firepower in terms of R&D and marketing spend. In addition, the integration of upscale softener Snuggle and the development of the Persil ProClean premium brand in the US should enable Henkel to move upscale and capture higher growth in the segment and to protect itself further from price pressure.
Fig. 43: BG laundry & Home Care growth estimates
6% 5,7% 4,7% 4,6% 4,9% 5% 4,7% 4,0% 4% 3,8% 3,5% 2,8% 3%
2%
1%
0%
-1% 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e Price effect Volume effect Organic sales growth
Source: Bryan, Garnier & Co ests.
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Henkel
5.3. Beauty Care sales up 1.2% in 2017
5.3.1. Two major challenges to avoid price pressure in Europe Henkel's Beauty Care division is primarily based on its hair care activity (~70% of sales), with the flagship Schwarzkopf brand. The brand generates around EUR2bn in sales via all hair product segments (colour, styling, care) and several distribution channels (mass retailing, hair-dressers, spas, chemists, e- commerce), equalling to more than 50% of sales in the division and 11% of the group's sales. Henkel is primarily seen as a challenger within the beauty sector (with global market share in beauty of around 2%) explained notably by the group's significant interest in the hair-care segment.
Fig. 44: Portfolio of major Henkel brands in the Beauty Care division
Source: Henkel.
Fig. 45: Global competitive landscape in Beauty & Personal care - 2016
L'Oreal; 14% Uni lever; 10%
P&G; 8%
Estee Lauder; 6%
Others; 35% Shiseido; 4%
Beiersdorf; 3%
Henkel; 2%
Source: WWD Beauty Biz ranking.
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Henkel
Growth has slowed significantly in recent quarters with Q2 organic growth at 0.0%, the worst performance seen in the division since 2009, vs. 2.3% in Q1 and 2.1% over full-year 2016.
Q2 2017 was the group's This slowdown in growth reflects an increasingly difficult competitive backdrop for HPC groups worst performance since in Western Europe (~40%e of sales in the Beauty Care division) where the healthy performance in 2009 in Beauty Germany did not manage to offset the weak volumes and price pressure suffered by Henkel in the rest of the region. This trend is particularly visible in France and Italy. In major emerging markets, growth in China nevertheless remains temporarily affected by the sudden change in consumer habits to focus massively on digital channels rather than physical stores.
Note that the sharp increase in the price effect in Q1 (change in price policy) could explain the decline in volumes in Q2 (particularly noticeable in Western Europe).
Fig. 46: Organic growth in Henkel Beauty Care sales
3,0% 3% 2,6% 2,4% 2,6% 2,1% 2,1% 2,1% 2,3% 2,1% 2% 1,9% 1,7% 1,1% 0,8% 1%
0% 0,0%
-1% Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Price effect Volume effect Organic sales growth
Source: Company Data; Bryan, Garnier & Co ests.
We consider that the Beauty Care division suffers from its geographical exposure and product positioning.
5.3.2. A complicated product positioning The Beauty Care division is suffering from its product portfolio massively focused on:
Less buoyant categories (hair care and shower products);
Henkel Beauty Care has Despite low growth prospects (<2% CAGR over 2016-2021e) in the flagship category: hair care, which global market share of 6% represents 70% of sales in the division (no. 2 in western Europe, no. 1 in eastern Europe), Henkel in hair care. continues to place this business at the heart of its strategy. We can therefore expect its weight in the group's portfolio to increase or at least remain the same. Henkel is therefore planning to ramp-up in this segment by strengthening its offering in colorants and styling products.
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Henkel
Fig. 47: 2017-21e CAGR in segments where Henkel is present Main Henkel Beauty Care brands Baby and child
4% Skin care Deodorants
Fragrances 3% Oral care Hair care 21e - Bath & shower 2% CAGR 2017 CAGR
1%
Source: Henkel 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% % Henkel Bauty Care sales
Source: Euromonitor; Bryan, Garnier & Co ests.
The price ranges most exposed to price pressure (mass entry-level);
Concerning its price positioning, Henkel only has very few premium or luxury product ranges/ brands. These only generate around 3% of sales in the division on our estimates. We have only identified two, which presented the characteristics of the upscale segment: the Ultime line by Schwarzkopf (hair care products associated with top model Claudia Schiffer) and the Alterna brand acquired in 2014 (hair care, shampoos, conditioners, styling products).
The premium/luxury Fig. 48: Breakdown of Henkel Beauty sales by price segment segment only accounts for around 3%e of sales in the Premium/Luxury; 3% division
Mas s; 97%
Source: Bryan, Garnier & Co ests.
However, this premium/luxury segment generated 210bp of growth more than the mass segment in colorants and 180bp in other hair products in 2016.
40
Henkel
Fig. 49: Gap in growth noted in 2016 between premium and mass segments
9% 8,6%
8%
7% 6,5% 6,2% 6% 5,5% 5,2% 5,3% 5% 4,6%
4% 3,5%
3% Beauty & Beauty & Colour Colour Skin care - Skin care - Hair Hair personal personal cosmetic s -cosmetic s - premium mass products - products - care - care - mass premium mass premium mass premium
Source: Euromonitor.
The most complicated distribution channels (mass retailers).
The group remains primarily exposed to the complicated mass retail channel. This positioning places the group in head-on competition with mass retailers or even their powerful purchasing agencies during price negotiations.
Henkel has nevertheless made efforts to strengthen its positions in other distribution channels such as the professional segment. The group has acquired three companies specialized on the professional circuit since 2014 with the American brands Sexy Hair, Kenra and Alterna in 2014, Pravana in Henkel Beauty is the world no. 3 in September 2017 and the American brands of Shiseido’ professional hair care business (Zotos professional hair care International) whose integration is expected in 2018. The professional channel now accounts for around (~20% of sales) 20% of sales in the Beauty Care division (world no. 3 in professional hair care essentially via the Schwarzkopf Professional, Syoss and Kenra Professional brands very present in mature markets) and should continue to gain ground with the integration of nearly EUR200m of sales acquired from Shiseido. Despite a flat professional market, slowed by lower footfall in hair salons and a lower average spend, Henkel can count on its innovative ability (particularly in offers for blond hair) to continue to grow and gain market share.
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Henkel
Fig. 50: Degree of usage of distribution circuits by Henkel Beauty Care
Supermarkets 5
4
3
2
1
E-commerce 0 Professional
Pharmacies
Source: Bryan, Garnier & Co ests.
5.3.3. Disadvantageous geographical exposure Cosmetics are above all an offer-driven business, with price and volume effects both suffering for several years in mature countries where demographics and the rise of standard of living are no longer there to underpin growth, whereas price pressure and promotional intensity is mounting.
Henkel Beauty seems to However, Henkel suffers from a very disadvantageous geographical mix with a clear overexposure to be the division most mature markets and above all to Western Europe (~40%e of sales). This dependence is felt in exposed to western the group's ability to grow via prices up against increasingly concentrated and powerful distributors in Europe (~40%e of sales). Europe (price effect close to 0% over full-year 2016) and despite its solid innovation policy (>45% of sales is generated via products launched less than three years ago). Concerning North America (~15%e du CA), to which Henkel Beauty is not very exposed at present, the region tends to perform well despite the slight decline in the mass market as recently pointed out by Coty and L’Oréal. This performance stems from the deployment in the country of product lines by the Schwarzkopf brand (Schwarzkopf Hair Color in 2015 and Gliss in early 2017) and the regular renewal of Dial shower gel products.
In terms of major emerging markets, Henkel Beauty Care suffers from its under-exposure to Asia (leading cosmetics market) with just 10% of its sales generated in the region (in the Middle-East and with extremely low presence in Japan), whereas the region (excluding Japan) represents more than 20% of the global beauty & personal care market. Asia harbours robust growth drivers with increased awareness of personal hygiene and beauty and the improvement in the standard of living of consumers, primarily driven by momentum in the middle classes in emerging markets (60% of individuals belonging to the emerging class are likely to be located in Asia in vs. <25% today according to American think thank Brookings).
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Henkel
Fig. 51: Unbalanced geographical exposure Henkel Beauty Care – 2016 Beauty & personal care market - 2016
Japan 7% Asia (excl. Japan) 23% North America; 25% Europe Western Europe; Oceania 24% 40% 8% LatAm; 5% Africa Asia / Middle- 6% East; 15% North America LatAm 20% Eastern Europe; 12% 15%
Source: Euromonitor; Bryan, Garnier & Co ests.
Given the increasing importance of the Millenial generation in Asia (200 million individuals concerned in China alone), as well as in mature markets, strengthening the digital offering seems to be the most efficient means of winning market share. Note that this generation, born between 1980 and 2000, grew up in a digitalised environment and is now highly focused on smartphones, social networks and online purchases. Social networks have notably encouraged Millenials in emerging countries to westernise themselves by buying European and US brand products.
Beauty & personal care is a market that is turning towards e-commerce extremely quickly. Euromonitor and Research and Markets estimate that by 2020, the online beauty & personal care market should grow by almost 17%/year vs. less than 3% for the entire beauty & personal care market! In this increasingly digitalised new world, China is emerging as the most advanced country in terms Digitalising its offering as of e-commerce and cosmetics are no exception to the rule. The penetration of e-commerce in these far as possible would be the most efficient way for products is close to 20% in China (vs. 7.3% worldwide), or a level far higher than the global average Henkel to expand in Asia and in mature countries such as the UK and the US. Digitalising its offer to the maximum would therefore be the most efficient way for Henkel to expand in Asia and more specifically in China, in order to rebalance its geographical exposure.
Fig. 52: Conquering China by e-commerce seems to be the most efficient solution Penetration of e-commerce in beauty & personal care sales – 2016-2020e CAGR in the global beauty & personal care 2016 market
20% 19,7%
15% Total market 2,7%
11,1%
10% 8,1% Worldwide 7.3%
4,8% 4,5% 5% Online market 16,7%
0% China UK US France Germany 0% 5% 10% 15% 20% Source: Euromonitor.
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Henkel
In order to align its offer with this e-commerce trend, Henkel Beauty Care already laid the foundations of digitalisation several years ago by setting up partnerships with Chinese online sales giants such as Alibaba (2015) and more recently JD.com. Alibaba's Tmall website therefore sells the Henkel Beauty benefits from partnerships with majority of Henkel's main cosmetics brands (Schwarzkopf, Syoss, Fa, Right Guard, Dial and Alibaba and JD.com in Diadermine) in China and also boasts exclusivity in certain product launches. In 2015 alone, Henkel China introduced 13 brands and more than 80 products to the Chinese market via its partnership with Tmall in all of the categories of its product portfolio.
These tie-ups have since taken a dominant position in Henkel Beauty Care's business in China since e- commerce represents 50% of sales in the division in the country (where L’Oréal only derives 30% of its mass cosmetic sales online in comparison). Henkel now states that it is the leader in online sales of hair care products in China.
An acceleration in digitalisation would above all involve an extension in the product range available online, in the number of countries concerned and the optimal use of data collected via e- commerce to fine-tune the offer both online and in physical stores. The use of bloggers and influencers on social networks is also likely to be stepped up in order to underpin new product launches, especially those destined for younger generations. These actions are nevertheless likely to take time to pay off and enable the division to strengthen its presence in Asia.
5.3.4. Growth in Beauty Care set to reach a low point in 2017 With the lack of a genuine short-term improvement in the competitive environment in Henkel's main markets, we expect organic growth in sales in the Beauty Care division of 1.2% over 2017, below 2017 Beauty Care’s organic the group's forecast growth range of 2-4%. A sales warning for this division cannot be ruled out at growth to come out below the earnings publication on 14th November. The group's mostly mainstream exposure in the mass the group’s forecasts retailing circuit in Western Europe considerably weakens the price effect's contribution to growth, despite a structurally strong innovation policy at Henkel (more than 45% of sales is generated via products launched less than three years ago).
However, we expect a gradual improvement as soon as next year with organic growth of 2.0%. The roll-out of the Schwarzkopf and Gliss brands in North America should pay off, especially in the professional circuit. The potential of Gliss, which was introduced at the start of 2017, is rising now We expect a gradual that the brand has reached a distribution rate of 60% in the US. Besides, we believe in the ability of the improvement as soon as Beauty Care division to step up its transformation towards a business that is even more digitalised and next year with a greater Asian focus. The sudden change of direction within the division since 1st November as well as the Investor Day in June 2017 exclusively focused on the Beauty division seem to confirm that the weakness in Beauty Care will now be a priority in the group's strategy.
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Henkel
Fig. 53: BG growth estimates in the Beauty Care division
3,1% 3,0% 3,0% 3%
2,5%
2,1% 2,1% 2,0% 2,0% 2%
1,2%
1%
0% 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
Price effect Volume effect Organic sales growth
Source: Bryan, Garnier & Co ests.
45
Henkel
6. Constant margin improvement enabled by exemplary financial control 6.1. Margin historically driven by cost-saving programmes Underlying EBIT margin (adjusted for exceptional operating costs and restructuring expenses) widened by 280bp between 2012 and 2016 to reach 16.9%. This represents an average annual improvement of 70bp a year over the period. This performance has been constant over time and is the Underlying EBIT margin up 280bp between 2012 fruit of the group's culture of budgetary discipline. and 2016 Fig. 54: Henkel underlying EBIT margin
18% 17,4%
16,9% 17% 16,2% 15,8% 16% 15,4%
15% 14,1%
14% 2012 2013 2014 2015 2016 H1 2017 Adhesives Technologies Home & Laundry Care Beauty Care Group
Source: Company Data; Bryan, Garnier & Co ests.
Henkel's financial strictness has involved numerous cost-saving programmes including measures to cut costs, streamline promotional campaigns and constantly improve the efficiency of its production and procurement channels.
These initiatives are reflected in the group's accounts, with a significant decline in inputs, marketing and distribution spending as a percentage of sales (the top two contributors to the margin increase since 2012). Control of these spending items also involves control of headcount. Henkel has proved its ability to maintain virtually stable headcount while increasing the level of sales (sales adjusted for forex up 4.8% a year on average since 2012 vs. just 2.5% for headcount).
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Henkel
Fig. 55: Change in current operating margin at Henkel since 2012
c.90% of margin improvement
Source: Company Data; Bryan, Garnier & Co ests.
6.2. The margin story is not over The departure of former CEO Kasper Rorsted in 2016 does not jeopardise the group's margin story since the strong discipline in costs seems to stem more from Henkel's corporate culture rather than the influence of its manager. New CEO Hans van Bylen also assured the ongoing optimisation of the group's cost structure at the event “Henkel 2020+ - Update on strategic priorities” (November 2016), by presenting the prolongation of the Most Efficient Structures savings programme and the launch of three new ones with the first effects due as of 2017:
Four cost saving ONE! Global Supply Chain: optimising the overall cost of the supply chain by fully integrating programmes to underpin the synergies available between the group's three divisions. The plan is to be rolled out in North margin improvement America and Europe as of 2018. A common IT platform was introduced in Asia as of 2017.
Net Revenue Management: maximising efficiency and the selectiveness of promotional campaigns via a tighter collaboration with retailers and a better monitoring of consumer expectations (already implemented in North America for the Laundry & Home Care division, a roll- out throughout all divisions is currently underway in North America and Europe).
Value-creating Resource Allocation: improving the budget allocation by prioritising projects that generate the most growth and create value.
Most Efficient Structures: transferring certain activities and processes from the divisions to the group's services pole (more than 3,000 employees) ensuring very standardised, robotised and digitalised management. The programme also includes a consolidation of the group's manufacturing network between its divisions.
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Henkel
Fig. 56: Henkel cost savings programmes
Cost savings programmes Metric targeted Coverage First benefits Until
ONE! Global Supply Chain Gross margin Across all business units early 2017 2020
Value-creating Resource Allocation Operating margin and capex Across all business units mid-2017 2020
Most efficient structures Gross and operating margins Across all business units 2017 2020
Net Revenue Management Organic sales growth Across all business units 2018 2020
Source: Company Data; Bryan, Garnier & Co ests.
We believe the Henkel margin story is not over yet and expect an improvement in underlying EBIT Underlying EBIT margin up 35bp in 2017 and 55bp margin (excluding restructuring costs and non-recurring items) of around 35bp in 2017 and 55bp in in 2018 2018 to reach historical levels of respectively 17.3% (in line with the group's target to generate a margin of more than 17% in 2017) and 17.8%. Over 2016-2020e, the average pace of margin improvement is set to exceed 30bp. Three profitability drivers should underpin our estimates:
1/ The group is benefiting from a positive margin mix prompted by the acceleration in the Adhesive Technologies division (adhesives generate more than 50% of EBIT and are the most The Adhesive profitable division with underlying EBIT margin of 18.6% in H1 2017). Technologies division is set to be the main 2/ The temporary dilutive effect on underlying EBIT margin in the Laundry & Home Care profitability driver division due to the integration of Sun (-130bp in Q1 2017 and -120bp in Q2 2017) is set to disappear between now and the end of 2018 with the profitability of the Sun activities (around 12%e in Q2 2017) set to rapidly catch up Henkel's (>18.5%). This catching up should mainly be driven by the regrouping of administrative functions in North America, synergies (equivalent of >10% of sales of Sun Products during the first two years) stemming from supply, production and the scale effect in negotiations with distributors.
3/ The continuation and roll-out of numerous cost-saving programmes that should produce their first effects as of 2017.
The three above-mentioned factors should easily offset the negative impact on margins caused by higher commodities prices in H1 (mainly chemicals components used in manufacturing adhesives and designing detergents) and which should materialise in the group's P&L account as of Q3 and Q4.
Driven by a constantly widening EBIT margin and well-controlled financial costs and taxes, adjusted net earnings per preferred share should grow by 8.0% on average over 2016-2020 (in line with the group's guidance of 7-9%) and notably reach EUR5.88 in 2017.
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Henkel
Fig. 57: Group and divisional underlying EBIT margin
EURm 2015 2016 2017e 2018e 2019e 2020e
Henkel Group
Current EBIT 2,923 3,172 3,475 3,761 4,017 4,270
% reported 12.9% 8.5% 9.5% 8.2% 6.8% 6.3%
Current margin 16.2% 16.9% 17.3% 17.8% 18.1% 18.3%
Change in bp 41 79 35 55 27 20
Adhesive Technologies
Current EBIT 1,534 1,629 1,751 1,891 2,023 2,145
% reported 9.4% 6.2% 7.5% 8.0% 7.0% 6.0%
Current margin 17.1% 18.2% 18.8% 19.2% 19.5% 19.6%
Change in bp -19 112 60 41 26 15
Laundry & Home Care
Current EBIT 879 1,000 1,156 1,249 1,336 1,429
% reported 17.4% 13.8% 15.6% 8.0% 7.0% 7.0%
Current margin 17.1% 17.3% 17.1% 17.9% 18.2% 18.4%
Change in bp 92 15 -14 77 27 25
Beauty Care
Current EBIT 610 647 672 725 762 800
% reported 12.1% 6.1% 3.8% 8.0% 5.0% 5.0%
Current margin 15.9% 16.9% 17.3% 17.3% 17.5% 17.5%
Change in bp 58 94 43 3 14 8
Source: Bryan, Garnier & Co ests.
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Henkel
7. Pro-active and rigorous asset management 7.1. A solid balance sheet structure With the large acquisition of Sun Products in 2016, Henkel's net debt reached a peak of EUR2.3bn or Henkel has net a net debt/EBITDA ratio of 0.7x, which is still low. debt/EBITDA of less than 1.0x We expect the net debt/EBITDA multiple to rapidly fall to a level close to 0x in 2019 following a constant improvement in the group's free cash flows and despite EUR700m in annual acquisitions paid in cash for modestly sized companies (or around EUR350m in sales/year, the observed average over 2015-16 excluding Sun, with an EV/sales multiple of around 2x, in line with the acquisition multiples seen over the past two years) integrated into our model in order to reflect the group's M&A strategy, which has been confirmed for coming years.
Fig. 58: A healthy profile backed by high cash flow generation Henkel FCF generation Henkel net debt
2 500 3 000 0,7x 0,6x 2 589 2 000 2 500 2 418 2 205 2 105 1 500 0,3x 2 000 1 690 1 000 1 616 0,1x 0,1x 1 500 1 333 500 - 0,1x 1 000 0 - 0,4x -500 500
-1 000 0 2013 2014 2015 2016 2017e 2018e 2019e 2013 2014 2015 2016 2017e 2018e 2019e Net debt Net debt/EBITDA Source: Company Data; Bryan, Garnier & Co ests.
7.2. New sizeable acquisitions are possible Henkel has the profile of a consolidator in view of:
Its high free cash flow generation (EUR2.2bn).
Its very solid balance sheet (net debt/EBITDA <1x).
Its shareholder returns policy that is limited to a maximum pay-out ratio of 30%, since buybacks are not part of the group's DNA.
Its good acquisitions track-record in terms of both small companies and large groups (>five acquisitions a year on average with National Starch, Sun Products, Dial and Schwarzkopf among the most notable).
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Henkel
Based on this fact, the increasing cash pile could be reinvested in sizable acquisitions (at least equivalent to that of Sun Products: >EUR3bn) by 2018-2019, after the time it takes to digest the integration of Sun Products. Taking the highest net debt/EBITDA ratio shouldered by the group over the past 10 Henkel would have >EUR13bn to make a years as a ceiling (2.9x in 2008), we estimate that Henkel could invest more than EUR13bn in a sizeable acquisition as of sizeable acquisition as of 2018 and more than EUR16bn as of 2019. 2018 The simulation below already includes EUR350m in sales per year acquired from bolt-on M&A operations and does not take account of eventual synergies or capital increases.
Fig. 59: Simulation of debt capacity
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Assumption of sales (EURm) 2 000 4 000 6 500 8 500
Average EBITDA margin 15% 15% 15% 15%
EBITDA (EURm) 300 600 975 1 275
2018e
Adhesive & HPC sectors average 2018e EV/Sales 13,8x
EV of the target (EURm) 4 154 8 308 13 500 17 654
Net debt (=EV of the target + group's net debt) 5 488 9 642 14 834 18 988
Consolidated EBITDA (EURm) 4 335 4 635 5 010 5 310
Net debt/EBITDA 1,3x 2,1x 3,0x 3,6x
2019e
Adhesive & HPC sectors average 2019e EV/Sales 12,9x
EV of the target (EURm) 3 884 7 768 12 622 16 506
Net debt (=EV of the target + group's net debt) 4 190 8 074 12 929 16 812
Consolidated EBITDA (EURm) 4 636 4 936 5 311 5 611
Net debt/EBITDA 0,9x 1,6x 2,4x 3,0x
Source: Company Data; Bryan, Garnier & Co ests.
Large acquisitions seem unlikely in the Adhesive Technologies division. Henkel's dominant position in this market would expose it to regulatory competition issues and the group is above all seeking to acquire small companies that have developed niche technologies that it can exploit and roll out via its global industrial network. Following the transforming acquisition of Sun Products in North America, given Henkel's already solid competitive positioning in Europe and the group's reticence to position on the home care product segments in China and India, the Laundry & Home Care division also seems to be fairly unlikely for a major M&A operation.
In contrast, the Beauty Care division (which generated the lowest growth in the three divisions), seems to be the best placed to benefit from a large-scale acquisition. We could expect a ramp-up The Beauty Care division in Henkel's core category of hair care. This choice would be coherent with the group's aim to focus on could be the next one to segments where it is already strong in order to maximise the yield on cash already invested whereas acquire a sizeable target entering a segment such as make-up or perfumes would require huge investments to reach a vital critical mass. Furthermore, make-up and perfumes are attracting attention from many rivals and therefore have very high acquisition multiples (probably too high according to Henkel's strict criteria).
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Henkel
A target exposed to To meet the group's various criteria (reasonable multiples, combination of a solid product/country professional/upscale hair positioning, target to strengthen in core segments), Henkel could seek to acquire groups present in care and emerging professional upscale hair care exposed to emerging markets. markets
7.3. Tactical disposals set to continue In line with the asset turnover strategy put in place in the Adhesive Technologies division for several years already, the disposal of activities that are considered to have been commoditised by the group or that are becoming commodities, is likely to continue. These disposals have historically taken place step by step (a few every year) and with a limited impact in terms of loss of sales or cash obtained (low double-digit on average per operation). Over the long term, this strategy nevertheless aims to protect pricing power and EBIT margin in the division by only holding onto the most technological high value-added activities.
After selling off several construction adhesives, electronic mould adhesives and chemical additives businesses throughout the world, the Packaging sub-division is due to be re-calibrated. The cardboard packaging gluing/assembly activities could also be targeted in order to better focus the Loctite and Technomelt businesses which offer value added solutions for flexible packaging (which is in increasing demand to meet ever-stricter food safety standards).
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Henkel
8. Buy, Fair value: EUR139
Our valuation of the Henkel preferred share yields a Fair Value of EUR139 and points to a 15% upside. It is derived for 50% from a DCF calculation that works out to EUR144 and 50% from an SOTP valuation that works out to EUR134.
8.1. Position relative to the consensus For 2017, we are situated slightly below the market in terms of sales and slightly ahead on the underlying EBIT. Whereas the consensus has already started to reduce its estimates for the Beauty Care division, we believe that forecasts for the Adhesive Technologies divisions do not yet fully reflect growth potential in this division, which is also beneficial for the group's margin and EPS.
Fig. 60: Consensus/ Bryan, Garnier & Co estimates
2017 2018 2019
BG CS BG CS BG CS
Sales 20 083 20 254 21 073 20 800 22 167 21 499
Difference -0,8% 1,3% 3,1%
EBIT 3 475 3 434 3 761 4 200 4 017 3 862
Difference 1,2% 3,5% 4,0%
EPS 5,88 5,79 6,38 6,21 6,84 6,58
Difference 1,6% 2,8% 3,8%
Source: Reuters; Bryan, Garnier & Co ests.
8.2. Stock price performance and multiples Henkel’s preferred share has underperformed the DJ Stoxx index by 3.8% over the past three months and 2.7% since the start of 2017.
Fig. 61: Performance (%) relative to DJ Stoxx over past three months HPC universe Adhesive universe
Beiersdorf 4,5 3M 9,4 Unilever DR 3,1
Colgate Palmolive 2,5 ITW 6,3
Procter & Gamble 1,8 Sika 5,9 L'Oréal -1,5
Henkel -2,1 HB Fuller 5,5
Reckitt Benckiser -8,8 Henkel -3,8 Coty -8,9 - 10 -8 -6 -4 -2 0 2 4 -6 -4 -2 0 2 4 6 8 10 12 Source: Thomson Reuters Datastream.
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Henkel
Fig. 62: Performance (%) relative to DJ Stoxx since the start of the year HPC universe Adhesive universe
Unilever 16,7 Sika 38,1 Beiersdorf 9,3
L'Oréal 0,8 3M 17,9
Colgate Palmolive -1,6 ITW 16,9 Henkel -2,7
Procter & Gamble -6,1 HB Fuller 7,7
Reckitt Benckiser -10,6 Henkel -2,7 Coty -23,1 - 30 - 25 - 20 - 15 - 10 -5 0 5 10 15 20 - 10 0 10 20 30 40 50 Source: Thomson Reuters Datastream.
Henkel is trading on a significant premium relative to its historical average of the past 10 years (21% in terms of EV/EBIT and 22% in terms of P/E).
Fig. 63: Change in Henkel multiples over the past 10 years Henkel EV/EBIT since 2007 Henkel P/E since 2007
17 22
16 20 15
14 18
13 16 12
11 14
10 12 9
8 10 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Oct-08 Oct-09 Oct-10 Oct-11 Oct-15 Oct-16 Oct-17 Oct-07 Oct-12 Oct-13 Oct-14 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 HENKEL EV/EBIT 12M FWD Average HENKEL P/E 12M FWD Average Source: Thomson Reuters Datastream.
However, in forward terms, on 2018e P/E, the share is trading on a 15% discount relative to peers in the HPC segment and 13% relative to peers in the adhesives segment. The 2018e P/E for the Henkel preferred share works out to 19x for an adjusted earnings per preferred share CAGR of 7.4% over 2017-2020e.
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Henkel
Fig. 64: Multiples table
EV to sales EV to EBIT P/E 2018 2019 2020 2018 2019 2020 2018 2019 2020
Unilever 3.0 x 2.9 x 2.7 x 16.7 x 15.4 x 13.2 x 20.3 x 18.1 x 15.9 x
L'Oréal 3.9 x 3.6x 3.4 x 20.9 x 19.3 x 17.9 x 26.9 x 25.3 x 23.8 x
Beiersdorf 2.9 x 2.8 x 2.6 x 17.3 x 15.9 x 15.1 x 27.6 x 25.3 x 23.3 x
Procter & Gamble 3.7 x 3.6 x 3.5 x 16.6 x 15.7 x 14.9 x 20.7 x 19.4 x 18.2 x
Colgate Palmolive 4.2 x 4.0 x 3.9 x 15.9 x 15.0 x 14.2 x 22.8 x 21.1 x 19.2 x
Coty 2.4 x 2.4 x 2.3 x 22.3 x 17.1 x 14.5 x 22.3 x 15.8 x 12.9 x
Reckitt Benckiser 4.4 x 4.1 x 3.7 x 15.9 x 14.6 x 13.0 x 18.6 x 17.2 x 15.7 x
HPC average 3.5 x 3.3 x 3.2 x 17.9 x 16.1 x 14.7 x 22.7 x 20.3 x 18.4 x
Sika 2.7 x 2.4 x 2.2 x 17.7 x 15.6 x 13.9 x 25.5 x 23.1 x 18.8 x
3M 4.5 x 4.4 x 3.8 x 18.2 x 17.5 x 15.0 x 23.9 x 22.2 x 20.6 x
HB Fuller 1.3 x 1.6 x 1.4 x 13.0 x 14.8 x 13.0 x 18.2 x 15.2 x 12.6 x
ITW 4.0 x 3.8 x 3.7 x 16.0 x 15.1 x 14.4 x 21.8 x 20.3 x 18.6 x
Adhesive average 3.1 x 3.1 x 2.8 x 16.2 x 15.8 x 14.1 x 22.4 x 20.2 x 17.7 x
Henkel 2.4 x 2.2 x 2.1 x 13.6 x 12.4 x 11.1 x 19.4 x 18.3 x 16.7 x
Source: Thomson Reuters Datastream.
8.3. DCF valuation Discounting cash flows puts the value per share at EUR144. Beyond our 2018-2021e estimates set out previously, we have the following assumptions:
WACC of 6.9% stemming from a cost of equity of 7.2% with:
• A risk-free rate of 1.6%
• A market risk premium of 7.0%
• An adjusted three-year beta vs. DAX of 0.8
A growth rate to infinity of 2% as of 2027;
An average recurring tax rate of 25% aligned with the company's guidance;
A growth rate of 4.0% in 2022 (no longer including our assumption for EUR350m in annual sales acquired by the group between 2018 and 2020), which then decelerates gradually to land at 2% in 2027, and underlying EBIT margin rising by 10bp annual between 2023 and 2027.
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Henkel
Fig. 65: DCF model (1)
EURm 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 21 073 22 167 23 308 24 110 25 074 25 947 26 734 27 440 28 070 28 631
% change 4,9% 5,2% 5,1% 4,0% 4,0% 3,5% 3,0% 2,6% 2,3% 2,0%
Adjusted EBIT 3 761 4 017 4 270 4 459 4 713 4 903 5 079 5 240 5 389 5 525
Adjusted EBIT margin 17,8% 18,1% 18,3% 18,5% 18,8% 18,9% 19,0% 19,1% 19,2% 19,3%
- Income taxes -934 -1 001 -1 066 -1 117 -1 178 -1 226 -1 270 -1 310 -1 347 -1 381
+ Depreciation 770 847 897 920 957 990 1 020 1 047 1 071 1 093
as % of sales 3,6% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8%
+ Change in WC -35 -38 -40 -28 -29 -30 -31 -32 -33 -33
as % of sales -0,2% -0,2% -0,2% -0,1% -0,1% -0,1% -0,1% -0,1% -0,1% -0,1%
Operating cash flows 3 562 3 825 4 060 4 234 4 462 4 637 4 798 4 945 5 080 5 203
- CAPEX -801 -842 -886 -916 -953 -986 -1 016 -1 043 -1 067 -1 088
as % of sales -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8%
Free cash flow 2 762 2 983 3 175 3 318 3 510 3 651 3 782 3 902 4 013 4 115
Discount coefficient 0,94 0,87 0,82 0,76 0,72 0,67 0,63 0,59 0,55 0,51
Discounted FCF 2 584 2 612 2 602 2 544 2 518 2 452 2 377 2 295 2 208 2 119
Fig. 66: DCF model (2)
Sum of discounted cash flows 24 311
+ Terminal value 44 451
+ Financial assets 883
- Net debt -2 258
- Minorities -31
- Provisions -4 828
Equity value 62 528
Number of shares - Ordinary & preferred (m) 434
Fair Value (EUR) per preferred share 144
Source: Bryan, Garnier & Co ests.
Fig. 67: Sensitivity table for our DCF-derived Fair Value
Growth rate
1,0% 1,5% 2,0% 2,5% 3,0%
6,1% 144 158 175 196 224
6,3% 138 150 166 185 209
6,5% 132 144 158 175 197
6,7% 127 138 150 166 185
WACC 6,9% 122 132 144 158 175
7,1% 117 127 137 150 166
7,3% 113 122 132 143 157
7,5% 109 117 126 137 150
7,7% 105 113 121 131 143
Source: Bryan, Garnier & Co ests.
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Henkel
8.4. SOTP valuation A sum-of-the-parts valuation yields a Fair Value of EUR134. Multiples in each of the group's divisions are calculated based on:
Sika, HB Füller, 3M and ITW for Adhesive Technologies;
Reckitt Benckiser, Unilever, Procter & Gamble and Colgate Palmolive for Laundry & Home Care;
L’Oréal, Beiersdorf and Coty for Beauty Care.
We have not applied a conglomerate discount. This practice does not seem appropriate in the case of Henkel, that has managed to combine its three different divisions perfectly (Adhesives, Home & Laundry Care and Beauty Care) to build a resilient growth profile irrespective of the economic cycle. This specific feature is Henkel's strength during periods of slower growth in the Food-HPC sector like the present one. Presence in the three businesses also enables the group to strengthen its negotiating clout with retailers and to pool a number of divisional processes within a common platform.
Fig. 68: Calculation of multiples
Adhesive Technologies EV/EBIT 18e
Sika 17,7x
HB Fuller 13,0x
3M 18,2x
ITW 16,0x
Average 16,2x
Laundry & Home Care
Reckitt Benckiser 15,9x
Unilever 16,7x
Procter & Gamble 16,6x
Colgate Palmolive 15,9x
Average 16,3x
Beauty Care
L'Oréal 20,9x
Beiersdorf 17,3x
Coty 22,3x
Average 20,2x
Source: Thomson Reuters Datastream.
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Henkel
Fig. 69: SOTP valuation
EURm Sales 18e Adj EBIT 18e Adj EBIT margin 18e EV/EBIT EV
Adhesive Technologies 9 823 1 891 19,3% 16,2x 30 681
Beauty Care 4 174 725 17,4% 20,2x 14 630
Laundry & Home Care 6 956 1 249 17,9% 16,3x 20 321
Corporate 120 -104 nm 17,6x -1 826
Henkel Group 63 806
Net debt -1 326
Minorities -33
Provisions -5 004
Financial assets 922
Equity value 58 364
Number of shares (m) - Ordinary & preferred 434
FV per preferred share - EUR 134
Source: Bryan, Garnier & Co ests
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Henkel
Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a BUY recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to NEUTRAL be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a SELL recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings
BUY ratings 52% NEUTRAL ratings 33,1% SELL ratings 14,9%
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