European small and mid caps-Stock picks Q4 2007-Q1 2008 - Fourlis

Mid cap
European small and mid caps
17 October 2007
abc
Based on our DCF model, we derive a target price
of EUR19 and rate the stock Overweight,
implying 27% potential return.
Deutz is an independent manufacturer of diesel
and gas engines, with a highly recognised brand
image. Following several years of restructuring,
with a successful turnaround in 2002 and the
recent disposal of the power systems division, the
focus is now on the expansion of its compact
engines division. We expect Deutz to outperform
the market in terms of growth rates until 2009e
driven by rising captive production volumes. Our
DCF-based target price of EUR11 implies
potential return of about 17% on a 12-month
horizon. As our Neutral band for non-volatile
German stocks is 3.9-13.9%, we have an
Overweight rating on the stock.
Hochtief is a Germany-based construction service
company, with a wide global offering: planning,
financing, building and operating facilities. With its
recent acquisition of aurelis (real-estate subsidiary
of Deutsche Bahn), Hochtief gained access to a
broad strategic platform from which it should gain
access to project development and assetmanagement
know-how. Moreover, we view
Hochtief as being well positioned to benefit from
the increasing market demand for complex
infrastructure and building projects, not only in
emerging regions but also in developed countries
(PPP, facilities management, project development).
Our sum-of-the-parts valuation yields a fair value
of EUR108 (up from EUR101 previously),
implying potential return of 19% from the current
share price. We rate the stock Overweight.
Lanxess is a Germany-based global chemicals
company with a broad portfolio of basic to fine
chemicals and is among Europe’s major producers
of chemical and polymer products. Lanxess has
been transformed in record time from a merely
profitable restructuring case into a ‘normal’
specialty chemicals group, which is now on a
profitability par with its European peers.
However, the market still assigns a significant
discount to Lanxess, of more than 20% based on
2008-09e PE and EV/EBITDA multiples. As we
do not see this discount as justified, we reiterate
our Overweight rating on the stock, as well as our
target price of EUR47, which implies a potential
return of c32%.
Best ideas from our Greek
universe
Fourlis Holdings is a holding company
consisting of three main divisions: IKEA home
furniture, Intersport sportswear retail and the
wholesaling of electrical goods, with powerful
brands like Samsung and GE. The exclusive and
lucrative long-term IKEA franchise for Greece,
Cyprus and Bulgaria is the company’s key asset.
Moreover, Fourlis Holdings stands to gain from
the positive momentum of the exclusive Intersport
franchise, which we believe is well placed to
become one of the largest sportswear apparel
retail chains in southeast Europe. We expect EPS
CAGR of 42% for 2006-09e, primarily driven by
new IKEA store rollouts. Based on our sum-ofthe-parts
valuation, we reiterate our Overweight
rating on the stock and raise our target price to
EUR31.3 (from EUR25.5), implying 20%
potential return.
Metka is the leading electromechanical and metal
construction company in Greece, actively engaged
in the energy, defence and infrastructure sectors.
Because of its excellent track record and expertise
in energy projects, we are confident that Metka will
be a major beneficiary of the upcoming
liberalisation of the domestic energy market. In
addition, cooperation agreements with Endesa,
Helllenic Technodomiki and Alstom should provide
a steady flow of business, in our view. We rate the
stock Overweight, with a DCF-based target price of
EUR20.5, implying 13% potential return.
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