Raising rating to 'Outperform' as worst-case scenario looks to be already priced in
09 August 2012
We have reduced our 2012 and 2013 operating profit estimates for Saint-Gobain (SGO) by 6% and 8% respectively. We now expect operating profits to fall by 14% in 2012 (down 17% year-on-year in H2) with only a very modest recovery next year even though SGO should get the full benefit from its €750m cost savings programme.
We believe our revised forecasts (EPS of 270c this year, 285c next year) reflect the challenges facing the business in the coming months. While we do not expect any further downward revisions, our worst-case scenario is that EPS falls to 220c next year.
SGO, at a P/E of sub-10x, EV/EBITDA, under 5x and EV/sales of 0.5x, is trading at substantial discounts to its long-term multiple averages. It is also trading at a significant (and much wider than normal) discount to its peers when measured on a sum-of-the parts basis. The prospective dividend yield is 4.7%, which we think provides a strong support at current levels. SGO also has the support of a robust financial position, with net debt/EBITDA under 2x.
SGO will still generate a ROIC above its WACC, yet the group's EV/IC (invested capital) multiple is only around 0.75x.
If anything, SGO should be trading at a higher-than-average multiple at this stage in the cycle. We are forecasting that SGO's operating margin drops to sub-7% in 2013; its long-term average is closer to 9%. There is no reason why this level cannot be regained over time as we view SGO's issues as cyclical rather than structural. We think the 20%-plus fall in the stock in the past year is overdone and are raising our recommendation to 'Outperform'.
For further detail, see our research report to be issued this morning.