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] r r Henkel 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. 2 Henkel 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 .........................................