AFS Dividend Review Week 19, 2019

The Week Ahead Ex-dividend dates: 13 May: 14 May: 15 May: Volkswagen 16 May: ArcelorMittal, , Royal Dutch Shell, SAP 17 May: BMW

Events: 14 May: , results; STMicroelectronics capital markets day; , Volkswagen AGM 15 May: ABN AMRO, Credit Agricole results; Deutsche Post, SAP AGM 16 May: , NN Group results; BMW, , EssilorLuxottica AGM 17 May: Aegon, Engie, , , Unibail-Rodamco AGM

What to watch: ENGIE – will trade ex-dividend next week on the 21st of May. Both an ordinary dividend of EUR 0.38 per share and a special dividend of EUR 0.37 per share will be paid out on that date to compensate for Engie’s move to a single annual dividend payment instead of a semiannual distribution.

Engie also introduced a new dividend policy last February. From now on it will pay out between 65% and 75% of net recurring income as dividend. Engie added that the 2019 dividend will be at the upper end of the payout range. This implies a dividend of EUR 0.80 per share based on Engie’s guidance of net recurring income between EUR 2.5 billion and EUR 2.7 billion. This is below the 2020 dividend future’s last traded level of EUR 0.758, even when taking the adjustment ratio of approximately 0.97 into account that will be applied following the special dividend.

EuroStoxx50 News

[7 May] BMW – CFO Nicholas Peter said during the earnings call that he sees no reason to move away from the current 30% to 40% dividend payout range at this point in time, which thus could pave the way for another dividend cut. BMW specified the sum it set aside for a potential antitrust fine at EUR 1.4 billion, while it earlier said it had set aside more than EUR 1 billion for the matter. The provision will cut 1.5% from BMW’s EBIT margin this year. As a result, it now expects its EBIT margin to be between 4.5% and 6.5%. Pre-tax profit is still expected to decrease significantly from last year’s EUR 9.815 billion.

BMW reported a revenue decrease of 0.9% in the first quarter. I still expect BMW to earn revenue around last year’s EUR 97.5 billion since the company expects sales to pick up in the second half of the year. Assuming an EBIT margin of 5.5%, in the middle of the target range, and net interest income of EUR 700 million for the full year, pre-tax profit is estimated at about EUR 6.1 billion. Investor relations told me that the company expects the net tax rate to be slightly below 30% this year. Applying the 28.6% net tax rate in Q1 for the full year would lead to net income around EUR 4.35 billion or EPS of EUR 6.60. This would lead to a 2019 dividend of EUR 2.65 per share at the top end of the dividend payout range. BMW’s 2020 dividend future last traded above this level at EUR 2.90.

BMW still expects free cash flow to be around last year’s EUR 2.7 billion level, which is sufficient to cover the 2018 dividend of EUR 2.3 billion. The company has sufficient financial room to keep the dividend at a more elevated level, but the CFO’s comments point out that this likely won’t be the case.

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AFS Dividend Review Week 19, 2019

[8 May] – plans to spin off its gas and power unit plus its 59% stake in Siemens Gamesa. The listing is expected to take place in September 2020 and Siemens aims to retain a stake of just below 50% in the listing. The move is part of Siemens’ “fleet of ships” masterplan to separate its different businesses within the conglomerate. Siemens already carved out Healthineers as part of the plan, merged its wind turbine unit with Gamesa and wanted to merge its rail business with , which has been rejected by European authorities.

The gas and power business has dragged Siemens’ profitability because orders have slowed down amid the shift of customers towards renewable energy. The new entity will have annual revenue of EUR 27 billion, roughly one third of the group total, and an adjusted EBITA margin around 4%. Siemens expects revenue of the new entity to increase by 2% to 3% a year until 2023. The power and gas unit reported revenue of EUR 18.1 billion in 2018 and expects revenue of EUR 18.9 billion by 2021. Revenue was down 4% in 2018. It aims to increase the adjusted EBITA margin from 4% over 2018 to 8% by 2021 and to between 8% and 12% by 2023.

Peers GE and Mitsubishi Heavy trade at EV/EBITDA levels of 9 and 7, respectively. At a mid-point multiple, this implies a value of EUR 9.8 billion for the gas and power unit based on 2018 figures, which seems relatively low compared to its revenue. Note that depreciation of the power and gas unit was around EUR 500 million the past years, which I added to adjusted EBITA.

When using the 2021 targets – the first full year after the listing – the gas and power unit’s value increases to around EUR 16 billion at multiple of 8. The Siemens Gamesa stake has a market value of EUR 6 billion. I thus estimate the value of the spin-off to be between around EUR 22 billion, equivalent to EUR 25.90 per Siemens share. Since Siemens aims to distribute a little bit more than half of the new entity’s shares, the distribution in September 2020 would be roughly EUR 13.00 per Siemens share according to my estimates.

On a separate note, Siemens reiterated its 2019 outlook of EPS excluding severance charges between EUR 6.30 and EUR 7.00. The company pays out between 40% and 60% of EPS as dividend. The dividend was EUR 3.80 per share over 2018 and it has been raised in 10 cent increments since the 2015 payout, whilst applying a payout ratio just above 50%. I expect Siemens to pay out a dividend of EUR 3.90 per share over 2019, which would imply a payout ratio just under 60% at mid-point of the guidance range.

AFS GROUP AMSTERDAM Research: Jauke de Jong [email protected] +31 20 522 0242 The information and opinions contained in this document have been compiled or arrived from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates expressed in this document are subject to change without notice. AFS does not accept any liability whatsoever for any direct or consequential loss arising from the use of this document. This document is for information purposes only and is not, and should not be construed as, an offer to buy or sell any securities or derivatives. The information contained in this document is published for the assistance of the recipient, but is not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient.

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