SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
Electrolux
Squeezed from all sides
We believe Electrolux is unlikely to replicate its strong performance
in 2009 for 2010. In 2009 it benefitted from both its US-rebranding
and a dramatic fall in its raw materials bill. Fundamentally Electrolux
is in a challenged position, with little power over either its suppliers
or customers, white-hot competition from Asian manufacturers and a
raw materials bill that has increased in 2010, despite recent easing of
some material prices. We reiterate our Sell rating and SEK164 price
target.
Raw materials headwind continues into 2011
Raw materials constitute 17% of sales, and fluctuations in price are a major driver of
earnings. Since 2004 Electrolux has absorbed an increase in its raw material bill of
Skr7.0bn. In 2009, the company positioned itself for falling raw materials prices by
moving to shorter-term contracts. This paid off in 2009, but the company failed to
lock in these lower rates for 2010 believing they would continue to fall. We believe
2Q10 will be the first quarter in which Electrolux experiences a headwind and that
this will continue through the remainder of 2010 (albeit with little additional risk
given 70% of steel required for 2010 has been locked-in with suppliers). Our
analysis indicates a Skr1bn raw material headwind in 2010 and a further Skr1.7bn
headwind in 2011. Without further restructuring savings, this headwind will directly
impact EBIT margins in the same way it can be shown has happened historically.
Margin gap to Capital Goods sector has widened
Electrolux has narrowed the margin gap to its appliance peers from 270bp in 2000
to 80bp in 2009 through restructuring and brand structure rationalisation, but it
has actually increased relative to the Capital Goods sector from 400bp in 2000 to
760bp in 2009. Electrolux’s valuation over the same period has recovered to such
an extent that it now trades inline with Cap Goods peers. Fundamentally
Electrolux is coming from a weaker position than the broader European Capital
Goods due to the characteristics of the appliance industry in which it operates.
Absent a change in the structure of the white goods industry we would continue to
argue a significant discount for Electrolux relative to the Capital Goods sector.
6.0% EBIT margin will be a challenge to achieve
Electrolux introduced a 6.0% EBIT margin goal in 2007 but even with the boost
from lower raw materials and ‘crisis management’ initiatives in 2009, it only
achieved 4.9% last year. In 2010, operational gearing, restructuring savings and the
North American rebranding will help the margin reach 6.1%, we believe, but
thereafter we see the margin falling in the absence of another significant
restructuring programme and charge. This is not inconsistent with Electrolux’s
guidance which is on a pre-restructuring basis, but we believe the market may be
overestimating profitability by assuming a 6.0% post restructuring margin.
Valuation: Deserves a discount to Capital Goods Sector
Electrolux is currently trading on 9.1x2011E EV/EBITA, inline with the European
Capital Goods sector average of 9.2x 2011E EV/EBITA. Our target price applies an
8.5x 2011E EV/EBITA multiple on which we find Skr164 per share value. We believe
Electrolux deserves this discount because 1. its growth has significantly
underperformed the sector over the last 10 years, 2. its margins are structurally
lower and under more pressure, 3. its value proposition to customers is weak
compared to companies with industrial customers, 4. it has limited emerging
market exposure and 5. its financial performance is too heavily dependent on raw
materials and factors beyond management’s control. Our DCF valuation yields
Skr154 per share value.
http://www.execution-noble.com
SELL
13% downside
Fair Value SEK 164
RIC, Bloomberg Code ELUXb.ST, ELUXB SS
Share Price SEK 190
Market Capitalisation $7,516m
Free Float 100%
$m 2009 2010E 2011E 2012E
Sales 109,132 109,123 112,790 116,696
Adjusted EBITA 4,940 6,229 6,205 6,054
Adjusted EPS 11.10 14.22 14.18 13.98
Dividend 4.00 4.60 4.95 4.62
FCF* 5,757 3,647 3,427 4,367
EV Adjustments** 2,168 2,233 2,300 2,369
Net Debt 4,068 1,657 -350 -3,187
* FCF = EBITDA - capex - NWC - int ex. - tax
** Pension, Tax, Equity and non-consolidated assets
X (unless stated) 2009 2010E 2011E 2012E
EV/Sales 0.4 0.6 0.5 0.5
EV/EBITA Adjusted 8.6 10.0 9.8 9.6
P/E Adjusted 10.6 13.4 13.4 13.6
Dividend Yield (%) 2.1% 2.4% 2.6% 2.4%
FCF Yield (%) 15.8% 6.2% 5.8% 7.4%
Net Debt/EBITDA 0.5 0.2 0.0 -0.3
Analysts
Nick Paton, CFA
+44 20 7456 1190
nick.paton@execution-noble.com
Rob Virdee
+44 20 7456 9222
rob.virdee@execution-noble.com
Page 33 of 44