1. Art and Diseño

INDUSTRY NOTE
Europe | Themes & Tactics
Europe Insights
10 December 2014
EQUITY RESEARCH EUROPE
Europe Insights
Structurally Challenged Stocks in 2015
Key Takeaway
Jefferies European Research has selected 8 Underperform-rated stocks that
offer potential downside in 2015 as structural challenges persist. The stocks
are Carnival, Elekta, Fresenius Medical Care, Royal Mail, Sandvik, Standard
Chartered, Stora Enso and Volvo.
Our analysts have written recently on these stocks highlighting major challenges that leave
earnings and valuations at risk. For some, the structural problems have been in place for a
while but we believe that all 8 names will continue to face fundamental headwinds in 2015,
even if a European and broader Global recovery is stronger than expected.
Carnival: Our in-depth study of historic cruise price data leads Ian Rennardson to conclude
that market expectation for a decent rebound in net revenue yields is too optimistic.
Carnival's discounting of close-in prices continues to deteriorate, off a weak initial pricing
position. It will have to continue to invest in its fleet in a mix of non-revenue generating
maintenance areas before it can move to address its significant competitive disadvantage.
This makes cash returns less likely. Recent oil price falls have lifted the shares but this low
quality earnings tailwind masks significant underlying issues.
Elekta: Martin Brunninger believes that efficiency improvements will continue to pressure
end market growth of Elekta's radiation therapy machines and that competitive pressures
in the high margin software division are likely to remain a significant drag on the business.
Over time, proton therapy will also create substitution headwinds for Elekta.
Fresenius: Slow to diversify away from dialysis care in the US, FMC is struggling to offset
structural earnings pressure as the US government claws back treatment cost reductions and
efficiency gains. Martin also highlights that sharp declines in new patient growth impact
the long term story. FMC trades on a sector multiple for half the growth.
Royal Mail: On-going competitive threats in mail (exacerbated by the recent Ofcom
decision around the USO) are being compounded by increasing competitive threats in Royal
Mail's parcel business, with revenues here now likely flat vs historic 10% growth. David
Kerstens sees downside risk to margins (80bps decline to 18/19e vs cons at +200bps) and
further risk to the shares even allowing for a more generous real estate valuation.
Sandvik: Recent work as part of our Cap Goods Team's initiation suggests that Sandvik
has demonstrated the worst structural margin erosion of the peer group over the last 11
years, with limited ability to change this dynamic. Graham Phillips expects the stock to
struggle in a low growth world, with high correlation to German IP and significant mining
and construction exposure (c.50% of sales).
Standard Chartered: Joe Dickerson maintains that capital intensive growth and a variety
of challenges (incl impairment risk given the sector and geographic exposures) will pressure
the CET1 ratio. Routes out of this problem will hurt earnings, returns and share price.
Stora Enso: The over-capacity in the graphic paper market is not a new problem. Justin
Jordan's recent initiation highlighted that beyond this, the balance sheet is the most geared
of its peers and expansion projects in both pulp (Montes del Plata) and renewable packaging
come with operational risk and, in China, uncertain end market demand.
Volvo: Also screening poorly in our cap goods initiation for structural margin erosion and
regulatory pressure, which past cost savings plans have not been able to offset. Cyclical
slowdown of construction equipment sales (especially in Asia) are forcing some tough
decisions around the future shape of this business and more pain could be felt from
customer defaults, as seen by the most recent SEK650m charge in Q4.
Jefferies Int'l Ltd. Equity Research *
International Analyst
+44 (0) 20 7029 8685 [email protected]
Ian Rennardson *
Equity Analyst
+44 (0)20 7029 8447 [email protected]
Martin Brunninger *
Equity Analyst
+44 (0)20 7029 8704 [email protected]
David Kerstens *
Equity Analyst
44 (0) 20 7029 8684 [email protected]
Graham Phillips *
Equity Analyst
+44 (0) 20 7029 8346 [email protected]
Joseph Dickerson *
Equity Analyst
+44 (0) 20 7029 8309 [email protected]
Justin Jordan *
Equity Analyst
+44 (0) 20 7029 8976 [email protected]
* Jefferies International Limited
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict
of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 11 to 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Summary of Contents
Page
page 2 of 14
Carnival - Ian Rennardson, European Travel and Leisure
Tel: +44 207 029 8447, Email: [email protected]
3
Elekta – Martin Brunninger, European Medtech
Tel: +44 207 029 8704, Email: [email protected]
4
Fresenius Medical Care – Martin Brunninger, European Medtech
Tel: +44 207 029 8704, Email: [email protected]
5
Royal Mail Group – David Kerstens, Postal Operators/Freight Forwarders
Tel: +44 207 029 8704, Email: [email protected]
6
Sandvik – Graham Phillips, European Capital Goods
Tel: +44 207 029 8346, Email: [email protected]
7
Standard Chartered - Joe Dickerson, UK and European Banks
Tel: +44 207 029 8309, Email: [email protected]
8
Stora Enso - Justin Jordan, European Paper & Packaging
Tel: +44 207 029 8976, Email: [email protected]
9
Volvo – Graham Phillips, European Capital Goods
Tel: +44 207 029 8346, Email: [email protected]
10
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Carnival – Issues are Structural not Cyclical
Investment Case for 2015
Carnival is having to discount in the ‘lates’ market more than its peers in order fill its ships, putting pressure on overall pricing. We think
this has been caused by under-investment in its fleet at the same time as peers upped the ante in terms of product quality and innovation.
We believe Carnival will take time to catch-up, if it ever does. We think the share price under-performance against Royal Caribbean (RCL,
Buy) will continue and reiterate our Underperform recommendation with $36/2300p PTs.
The bull-case on CCL is largely built on the premise that after a number of years marred by one-off issues, annual net revenue yield growth
will return to a 'normal' 4% - 5% and that costs will be cut over the next few years, meaning there is significant upside risk to estimates.
We disagree with this thesis. Our in-depth cruise industry price analysis shows that more than two years after the Costa Concordia disaster
and 18 months after the Carnival Magic and Dream issues, Carnival is still having to discount significantly more than its peers in the 'closein' period (1 to 3 months before sailing) in order to fill its ships. We estimate a meaningful 15% - 20% of cruises are sold 'close-in'. We
think this discounting means that any yield increases at CCL will be lower than those achieved by RCL.
We argue that this continued discounting is a consequence of a number of years of structural under-investment in CCL's product offering
from a features, environmental and maintenance capex point of view. This has been compounded by competitors such as RCL and NCLH
upping the ante in terms of new ship quality and innovation. CCL is having to spend considerably more than it originally planned on
keeping its ships competitive in order to regain lost ground on RCL in particular, whose ships resonate more with developing customer
preferences. It will take time to catch-up, if it ever does. This extra spending limits CCL's ability to return, as promised to shareholders,
excess cash, above the ordinary dividend. At the same time RCL has raised the possibility of share buy-backs/special dividends.
Consequently, we recently reduced our net revenue yield growth assumptions at CCL to 2.5% and 2.5% in FY15 and FY16 (from 2.5% and
3%). At the same time we raised our yield growth assumptions at RCL from 3% in both FY15 and FY16 to 4%. In addition, given recent
movements, we marked to market on fuel and FX. At CCL the headwind of a strong USD has not offset the benefits of a falling oil price,
and we raise our FY15/16 EPS estimates by an average of 5% after adjusting for lower yield assumptions.
Key Catalysts and Financial Data
Cruise Line Close-in Pricing 2011-2014
Key Catalysts
10%
2015 guidance due 3rd week December
Continued weak close-in pricing
5%
One-off events such as hurricanes, bird-flu
0%
Key Forecasts
Metric
Jef 15e
Cons '15e
Jef 16e
Cons '16e
Revenue ($M)
13632
13600
14504
14600
EPS ($)
$2.35
$2.25
$2.72
$2.98
Dividend Yield
2.3%
2.4%
2.3%
2.7%
P/E
18.8x
19.1x
16.2x
14.3x
EV/EBITDA
11.2x
10.9x
10.2x
9.3x
Source: Jefferies estimates, Bloomberg
-5%
-10%
-15%
2011
2012
Carnival
2013
Norwegian
2014
RCL
Source: Jefferies estimates
Valuation
We recently raised our CCL/CCL LN price targets to $36/2300p. This would leave the shares trading on their long term average PE and
EV/EBITDA ratios of 13.5x and 8.7x respectively. We reiterate our Underperform recommendation as we still see scope for the company to
disappoint against market expectations over the next few years and believe many of the issues it faces are structural rather than cyclical.
Risks are a downturn in US and European consumer spending, volatile fuel prices, tougher regulation, Fx and event risk.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
Base Case
2300p
% U/D-side Scenario
-16%
2.5% net revenue yield growth, bunker fuel at $552 per tonne
Upside Case
3300p
19%
5% net revenue yield growth, bunker fuel at $550 per tonne
Downside Case
1500p
-45%
Flat net revenue yield growh, bunker fuel at $600 per tonne
Source: Jefferies estimates
page 3 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Elekta – Software Hardening
Investment Case for 2015
Through FY14/15, Elekta’s sales and profits have missed consensus consistently and often significantly. The company has downgraded
guidance for each of the last four quarters and we are increasingly concerned about the lack of visibility that the pipeline offers. Our key
concerns are materialising and we see a persistence of structural challenges ahead: declining need for new instalments, consolidation of
cancer centres and further loss of share in software. We believe consensus remains over-optimistic over the medium term and we expect
forecasts to come towards us as the structural challenges persist. On P/E the stock trades at 18.9x 2015 P/E for growth of 6.7% vs the
sector on 19.6x for 10%. Our PT of SEK61 implies potential 21% downside.
The Structural Challenges
In EMEA the company has struggled with delays of significant orders and we believe the region is quickly moving towards a replacementonly market, as we have seen in the US (net new instalments -4% p.a since 2012). Innovation hinders new instalments as demand can be
absorbed by greater throughput rather than new capacity.
Healthcare reforms drive consolidation of cancer centres, increasing buying power at the cost of the manufacturers and a growing trend
towards large healthcare tender fosters greater pricing pressure. We believe key competitor Varian is better positioned than previously
with a versatile machine. Over the long-term we expect Proton Therapy to penetrate conventional RT from c.1% today to 15%-20%.
Of greatest concern to us, however, is the loss of share in the crucial US software market (up to c.80% gross margin), as reflected by the
fall in the Americas contribution margin from 31% to 25%. Elekta had built a dominant share, particularly in the OIS market (c.50%)
through effective strategy and a series of canny acquisitions but competition has intensified in recent years as innovative new packages,
like Raystation have built traction and it appears that Varian is converting more of its own machines back to its proprietary Aria/Eclipse
software. In our September initiation; “Initiating on Particle Therapy: Elekta Hold, IBA Buy” we estimated a 12%-15% EPS dilution in 2020e
based on our expectations for software share shifts.
Key Catalysts and Financial Data
Elekta CER Sales and Order Book Growth
Feb-15 3Q earnings report
Apr-15 ESTRO conference
May-15 FY14/15 Results
Key Forecasts
Metric
Cons '15e
Jef 16e
12,298
12,355
12,861
13,442
EPS (SEK)
4.13
4.10
4.41
4.79
Dividend Yield
0.0%
0.0%
0.0%
0.0%
Revenue (SEKm)
P/E
EBITDA Margin
Jef 15e
Cons '16e
18.9x
19x
17.7x
16.3x
21.0%
21.5%
21.2%
22.3%
Source: Jefferies estimates, FactSet
CER Sales & Order growth
Key Catalysts
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Elekta Sales Growth
Elekta Order Book Growth
Source: Jefferies estimates, company data
Valuation
Our PT of SEK61 implies potential downside of 21% and is based on a DCF valuation and cross-referenced with relevant peer multiples. On
P/E, the stock trades on 18.9 x FY15E and 17.7x FY16E, compared with the sector on 20.0x and 17.7x. We forecast EPS growth of 5.2% on
a 3-year CAGR (consensus 16.4%) compared to the sector offering 10.3%.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
% U/D-side Scenario
Base Case
SEK 61
-21%
Upside Case
SEK 79
1%
Volume decline in developed markets stabilises and near-term EM headwinds abate
Downside Case
SEK 39
-50%
Question marks intensify on balance sheet management, increasing pressure on CF
Elekta continues to cede share in the high-margin software and services businesses
Source: Jefferies estimates
page 4 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Fresenius Medical Care – Margins Under Pressure
Investment Case for 2015
US Dialysis Care continues to face structural earnings pressure as the US government continues to claw back potentially sustainable profit
accretion. While DaVita moved to diversify its business model by leveraging structural trends in US Healthcare, FMC was slow to act. We
remain cautious on the margin opportunity and risk profile of the new Care Co-ordination (CC) division and are not yet convinced that it
can succeed where previous attempts have failed. FMC trades on 20.8x FY15 P/E for 5% growth vs sector 19.6x for 10%.
The Structural Challenges
The payer mix is gradually deteriorating based on a sharp decline in new patient growth and consolidation, another significant historic
profit driver for dialysis, has come to an end as the market is now almost fully consolidated. Treatment cost reduction and efficacy gains
have not resulted in sustainable margin expansion as the US government has clawed back the majority over time and the company has not
been able to monetise it’s improvements in treatment quality. Models that are targeted purely at cost savings from US dialysis will
continue to disappoint in our view.
The company's latest focus on Care Co-ordination is a holistic approach towards dialysis cost savings which has already been tried for a
few decades with very modest success. We believe the new division does hold promise and should deliver upside over the longer-term.
The company guides for an additional $5.0bn in sales by 2020e. However, while we acknowledge that acquiring new sales is eminently
possible, we would question both the profit contribution and risk profile of these new opportunities.
On a 12m rolling basis, the group EBIT margin has fallen 200bps from 16.6% to 14.6% in the last two years. As the CC strategy continues
to be rolled out, we expect margins to come under further pressure (although no ROIC guidance given for CC). Having shown a worrying
trend through 1H14, NCI pay-away looked a touch better at 3Q14 but another area of concern is the deterioration in CF metrics with FCF
conversion at 44% of EBIT (from c.60% in 2012). We are yet to be convinced that CC can succeed where previous attempts failed.
Key Catalysts and Forecasts
MC EBIT Margin (12m Rolling) %
Key Catalysts
30-Apr-15 1Q15 Report
30-Jul-15 2Q Report
Key Forecasts
Metric
Revenue (USDm)
Jef 15e
Cons '15e
Jef 16e
Cons '16e
16,680
16,659
17,452
17,801
EPS (USD)
3.59
3.88
3.75
4.46
Dividend Yield
1.5%
1.3%
1.6%
1.4%
P/E
20.8x
19.2x
19.9x
16.7x
14.8%
14.7%
15.2%
15.2%
EBIT Margin
Source: Company data, Jefferies estimates, FactSet
EBIT Margin 12m Rolling %
17.0%
25-Feb-15 FY14 Report
16.5%
16.0%
15.5%
15.0%
14.5%
14.0%
Source: Jefferies estimates
Valuation
Our PT of €43 is DCF-based and triangulated with peer multiples. Risks include reimbursement changes, greater efficiencies, litigation and
greater pricing power with private payors. On P/E, the stock trades on 20.8x FY15E and 19.9x FY16E, compared with the sector on 19.6x
and 17.7x. We forecast EPS growth of 4.8% on a 4-year CAGR (consensus 7.5%) compared to the sector offering 10.3%.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
Base Case
EUR 43
Upside Case
Downside Case
% U/D-side Scenario
-28%
Care Co-ordination holds LT promise but squeezes margins and stretches valuation
EUR 66
11%
Flat or even upward re-basing on grounds of improved treatment quality
EUR 30
-50%
DaVita continues to take share of the lucrative commercial patients in the US
Source: Jefferies estimates
page 5 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Royal Mail – Increasing Competion Eroding Profitability
Investment Case for 2015
Royal Mail’s profitability is expected to be increasingly eroded by increasing competition in both letter post and parcels, which in our view
is not yet reflected in consensus estimates. Competition in letter post is set to increase after Ofcom recently concluded direct-delivery
competition does not pose a threat to the USO, while proposals for access pricing sound relatively more supportive of direct delivery
competition. Therefore, we think Whistl will now likely resume the roll-out of their direct-delivery network, which is expected to put
further pressure on Royal Mail's letter volumes and profitability of up to 250bps by FY18/19E (vs a UKPIL margin of 5.5% in FY13/14).
Royal Mail’s parcel growth engine is faltering, with increasing competition from Amazon reducing the growth of the addressable market
from 4% to 1%-2%, creating over-capacity and price pressure. The impact is worse than previously expected, with parcel revenues now
expected to remain stable at best in coming years, compared to historic growth of 10%. Parcels are no longer able to compensate for
expected increasing margin pressure in letter post and we are projecting Royal Mail’s adjusted EBIT margins will fall by 80bps to 5.0% by
FY18/19E, whereas consensus estimates still imply an improving margin trend of over 200bps, which we think is too optimistic.
Key Catalysts and Financial Data
EBIT Margin Development - JEFe v Cons
Key Catalysts
Q3 IMS in January 2015
8.0
End of access pricing consultation period on 24 Feb 2015
Ofcom decisions on access pricing expected summer 2015
6.0
Key Forecasts (£m)
Metric
Revenue
EPS
Dividend Yield
P/E
EV/EBITDA
Jef 15e
Cons '15e
Jef 16e
Cons '16e
9,439
9,463
9,405
9,520
30.3
32.3
24.2
28.0
5.1
5.2
5.1
5.2
13.4
12.6
16.8
14.5
5.2
6.0
5.6
5.5
Source: Jefferies estimates, FactSet
4.0
Consensus
JEFe
2.0
0.0
Source: Jefferies estimates, FactSet
Valuation
Royal Mail shares have underperformed the postal sector by 20% over the last six months and are trading at 9.2x FY15E EV/EBIT, implying
a 10% premium to the postal sector. Our DCF-based price target of 360p assumes a long-term EBIT margin of 5.0% before transformation
costs (compared to 5.8% underlying in FY13/14) and reflects assumed £150m higher pension cash contributions beyond FY17/18E and a
valuation of £660m for London development property. Key risk factors include e-substitution, increasing competition, regulatory
limitations and limitations to restructuring initiatives with a unionised labour force.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
Base Case
360p
% U/D-side Scenario:
-11%
£150m higher pension cash contributions beyond FY17/18E; £660m property valuation
Upside Case
500p
24%
PostNL/Whistl deciding not to resume the roll-out in the UK
Downside Case
300p
-25%
More severe margin pressure from increased competition in letters and parcels
Source: Jefferies estimates
page 6 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Sandvik – Highest Mining Exposure in 2015
Investment Case for 2015
We initiated coverage of Sandvik, along with the eleven other European Capital Goods companies, in our November 2014 report entitled
“Looking for Stars in a Low-Growth World”. Our analysis of Sandvik demonstrated the company had a high organic revenue correlation
with German IP (R² 75%) and the worst structural margin erosion (almost 300bp over 11 years). We prefer companies that are not IP
dependant for 2015 as we believe growth will remain subdued.
German IFO business expectations-next-six-months (our preferred relevant forward economic indicator) remains negative, Europe
continues to suffer from deflation and we expect further negative impacts from Russian sanctions. In addition, weaker commodity prices,
emerging markets and EM currencies are not good for European Capital Goods companies’ organic growth as they signal overall demand
weakness. The only bright spot is the US but Sandvik has only 18% of group sales into North America – this is below the European Capital
Goods sector average of 23%.
Sandvik continues to have the weakest end-market conditions due to its mining and construction exposure (almost half group sales).
Further analysis of the mining exposure also reveals more dependence on capex (falling 10%-15% p.a for next two to three years) v. opex
(production levels stable) and more exposure to opencut (e.g. coal very weak) v. underground (commodities prices fairing relatively
better). Overall we believe the long-term term sales target of 4%-5% annually as too ambitious. There is a tailwind in estimates from the
weak SEK but unless the SEK weakens again from here these are already included in our forecasts: Sandvik’s sensitivity is ±5% in a basket of
currencies is around ±SEK1.3b EBIT (±12%).
Encouragingly at the November 2014 CMD the company aims to release SEK4.5bn cash from working capital but we were disappointed
that the CEO stated that investors should not expect any major divestments. We had hoped Material Technology (15% of group sales)
could have been sold (competes against steel companies). We were also concerned that management expected an uptick in mining capex
in 2016 based on a management consultant study that did not seem to take into account cuts already announced by major mining
companies echoed by consensus estimates into 2015 and 2016.
Key Catalysts and Financial Data
Sandvik - Weak Organic Growth
Key Catalysts
German IP/IFO monthly
FY14 results – 29 January 2015
1Q15 results – 27 April 2015
Key Forecasts
Metric
Jef 15e
Cons '15e
Jef 16e
Revenue (SEK bn)
91.4
92.7
93.6
96.5
EPS (SEK)
5.36
5.56
6.16
6.52
Dividend Yield
Cons '16e
5%
4.80%
5.30%
5.20%
P/E
14.5x
14x
12.6x
11.9x
EV/EBIT
10.8x
10.2x
11.9x
11.7x
Source: Jefferies estimates, Factset
Source: Jefferies, company data
Valuation
Our price target of SEK68 is based on our view that any premium to the SXNP on traditional ratings is unjustified. We believe a discount is
fair due to structural margin problems, Sandvik’s high cyclicality and the poor IP outlook. Our PT is based on 2015 EV/EBIT of 10.5x and
P/E of 12.7x, representing a 10%-20% discount to the SXNP. These discounts are in-line with past trading ranges on these metrics and our
view of the issues and risks facing the company.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
Base Case
SEK 68
% U/D-side Scenario
-13%
Little organic growth expected due to stagnant Europe and weak China and Brazil
Upside Case
SEK100
27%
Strong German IP, commodity markets/construction markets have coincident recovery
Downside Case
SEK55
-29%
Cost cutting does not combat competitive pressures, returns, cash flow suffer, DPS cut
Source: Jefferies estimates
page 7 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Standard Chartered – Caught in a Vortex
Investment Case for 2015
Standard Chartered’s direction is uncertain. The bank’s growth over the past five years has been capital intensive and there are a variety of
headwinds likely to pressurize the CET1 ratio (credit risk migration and changes to the way the bank calculates exposure to financial
institutions, among others). We expect the CET1 ratio to trough in 2015 at 10.4% against a likely need to operate at 11.0% - 11.5%.
We believe the two primary options available to management to augment capital levels are: 1) shrink the asset base; 2) embark on a rights
issue. We believe the former is more likely because the investment proposition for a rights issue is weak at this stage. According to our
burn-down analysis, STAN would need $8.8bn of equity capital in a rights scenario.
In the scenario whereby STAN shrinks its loan book at a rate of 5% over 2015 and 2016, capital levels could reach 13.7% (though earnings
would fall a further 10% relative to our estimates). In either of these scenarios, we calculate 2016 RoTE falls to 8% meaning that investors
will have to re-assess sustainable return prospects for this bank.
Key Catalysts and Financial Data
STAN – 1yr forward consensus RoTE (1999 – present)
Key Catalysts
Results 4 March 2015
Key Forecasts
Metric
Revenue ($bn)
EPS (cents)
Dividend Yield
P/E
Jef 15e
Cons '15e
Jef 16e
18.5
19.1
19.2
Cons '16e
20.1
149.0
182.0
173.0
198.0
5%
5%
6%
6%
10.4x
8.5x
9x
7.8x
Source: Jefferies estimates, FactSet
Source: Jefferies estimates
Valuation
We value STAN at a base case of 730p with downside in a more bearish scenario to 530p. Our estimates for 2015 are 18% below the
Street and the variance to consensus is explained nearly exclusively by impairments where we expect deterioration to 90bps of loans.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Base Case
Upside Case
Downside Case
Value
% U/D-side Scenario
730
-25%
1036
7%
530
-45%
2% vol growth 14-16e, 90bs/75bps impairments/loans 15/16e, cost inflation at 2%, FY16 CET1 @10.6%
Loan growth 1% higher, credit quality stable (60bps impairements/loans), stable CIR, 16e CET1 @10.1%
5% loan contraction, impairments @110bps in 15 and 16e, stable CIR, FY16e CET1 @12.1%
Source: Jefferies estimates
page 8 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Stora Enso - Financial and Operational Risks
Investment Case for 2015
Stora Enso is a global paper, pulp & packaging company. While we are fundamentally supportive of its renewable packaging expansion
projects, Stora has a higher risk profile relative to peers with financial leverage of 2.8x net debt/EBITDA and capex commitments (€2bn+
over 2014-16) restraining the pace of deleveraging.
The Printing & Reading Division is c.40% of group sales. Structural demand decline in the European graphic paper market of -5% CAGR
(2007-2013) and industry over-capacity remains a concern. With digital media substituting paper, there is price/demand uncertainty until
post 1Q 2015 negotiations; further mill closures/disposals may be required (estimated €30-€60m closure cost per mill).
Supportive of using c. €250m cash generated from Paper to fund growth divisions, but FCF will decline with falling paper sales.
Stora Enso has been plagued by project delays in its new Montes del Plata pulp mill (Uruguay) and we highlight the operational risks in
their two key expansion projects;

€110m Varkraus (Finland) 4Q15: Conversion of UFP machine (office paper) to a Kraftliner (packaging paper) is technically
challenging and production ramp-up on new machines could take 18 months.

Potential €1.6bn Guangxi (China): This transformational project has project/operational ramp-up delays risks as well as market
demand uncertainty when the approved €760m Phase 1 investment comes on stream in mid-2016.
Within our European Paper & Packaging coverage we view Stora Enso as the most exposed to macro weakness due to its relatively higher
financial and operational risks relative to peers. Faster than expected declines in graphic paper demand would reduce FCF, lead to
exceptional mill closure charges and earnings downgrades.
Key Catalysts and Financial Data
Greater financial leverage relative to peers, 2.8x net
debt/EBITDA & capex of (€2bn+ over 2014-16)
Key Catalysts
European Paper capacity closures
Pricing in graphic paper, pulp & consumer board
FY14 results: Feb 4, 2015 & anncmts detailing group strategy under new CEO.
Key Forecasts
Metric
Jef 15e
Cons '15e
Jef 16e
Cons '16e
Revenue (€m)
9,993
10,316
10,269
10,477
EPS (€c)
Dividend Yield
P/E
EV/EBITDA
53.3
60.5
61.9
65.4
4.2%
4.2%
4.2%
4.3%
13.4
11.8
11.6
10.9
7.7
6.9
7.30
6.6
Source: Jefferies estimates, FactSet
Source: Jefferies estimates
Valuation
Our €5.50 PT is based on SOTP, equating to 6.6x CY15 EV/EBITDA, a discount to 7.3x of sector peers. Currently trading on a JEFe 7.6x
CY15 EV/EBITDA multiple we believe the market has underestimated the potential financial and operational risks that would be realised if
there are project/ramp-up delays and continued macro headwinds in Europe. Therefore, the key risks remain macro and declining graphic
paper demand/prices, which combined with potential operational project delays, could negatively impact performance over the next three
years. While long term we are positive on Stora’s renewable packaging division, in our SOTP analysis we applied a lower multiple to it
because of the higher project delay/ramp-up risks inherent in these large expansion projects.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
Base Case
€ 5.5
% U/D-side Scenario
-23%
FY13-16 Rev CAGR of -0.9%. Conservative view on macro & operational ramp up
Upside Case
€ 8.2
15%
No operational delays & slow-down in strual paper decline 0% Rev CAGR FY13-16
Downside Case
€ 3.5
-51%
Pulp & paper price declines combined with project delays & de-rating of the stock.
Source: Jefferies estimates
page 9 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Volvo – Challenges Into 2015 Remain
Investment Case for 2015
We initiated coverage of Volvo, along with the eleven other European Capital Goods companies, in our November 2014 report entitled
“Looking for Stars in a Low-Growth world”. Our analysis demonstrated the company had the second highest organic revenue correlation
with German IP (after SKF), the highest operational gearing and the second worst structural margin erosion (after Sandvik). We prefer
companies that are not IP dependant for 2015 as we believe growth will remain subdued. German IFO business expectations-next-sixmonths (our preferred relevant forward economic indicator) remains negative, Europe continues to suffer from deflation and we expect
further negative impacts from Russian sanctions. In addition, weaker commodity prices, emerging markets and EM currencies are not
good for European Capital Goods companies’ organic growth as they signal overall demand weakness. The only bright spot is the US
including industrial, construction and truck end-markets. Volvo has 23% of sales into North America – this is only in-line with the
European Capital Goods sector average and specifically US truck is only 15% of group sales.
Of more concern is Volvo’s Construction Equipment division’s exposure to Asia, at 41% divisional sales – these sales fell 19% in 2013 and
are down a further 13% YTD 2014 as Chinese mining and construction customers continue to face difficult market conditions. We are not
optimistic about the medium term outlook for Chinese construction as the building sector faces excess inventory/overbuild – Volvo also
has mining exposure in this division. We do not see significant benefit from recent interest rate cuts in China (more about helping Chinese
businesses with distressed balance sheets). Volvo is seeing first-hand how bad customer’s distressed balance sheets are as it stands as
guarantor to defaulting customers who borrowed to purchase their equipment (SEK650m charge to be taken in 4Q14).
Volvo hopes to realise SEK10bn cost savings from 2012-16e. We are encouraged by this but sceptical about the company retaining much
of the benefit. Past plans have not been enough to offset competitive pressures, structural issues and regulatory pressures on reduced
emissions/R&D. Gross savings could move EBIT margins to 9% but we see only one-third of savings retained and see 7% margin in 2016.
Portfolio restructuring could help Volvo but this appears to be at an end. It appears Penta (engines) and Buses will be retained and we
also believe management is committed to keeping Construction Equipment (CE). Management is rationalising and reducing the CE
product line-up but this in our view could be detrimental. The viability of the dealer/distribution network and their scale will be negatively
impacted by a reduced product line-up. In addition, we believe Asian competition will remain relentless in these segments.
Key Catalysts and Financial Data
Aggressive Earnings Revisions Chart
Key Catalysts
German IP/IFO monthly, Truck data monthly
Divisions expected to make releases regarding already announced 3Q cost plans
FY14 results – 5 Feb 2015
Key Forecasts
Metric
Jef 15e
Cons '15e
Jef 16e
Revenue (SEK bn)
283
293
282
306
EPS (SEK)
5.49
5.77
7.17
7.79
3.80%
3.80%
4%
4.50%
P/E
15.5x
14.7x
11.9x
10.9x
EV/EBIT
13.1x
11.9x
10.1x
8.7x
Dividend Yield
Cons '16e
Source: Jefferies estimates, Factset
Source: Jefferies estimates, Factset
Valuation
Our price target of SEK70 is based on 2015 EV/EBIT of 11.7x and P/E of 12.8x. Both these represent a discount to the SXNP on average of
about 10%, in-line with past trading ranges on these metrics and our view of the issues and risks facing Volvo. The EV/sales at our PT
equates to 0.7x, in-line with our 2016 EBIT margin target.
Valuation Scenarios
Long View Valuation Sensitivity
Price Target
Value
Base Case
SEK 70
% U/D-side Scenario
-18%
Little organic growth expected due to stagnant Europe and weak China and Brazil
Upside Case
SEK 110
29%
Strong German IP, China/Brazil revival, co-incident European & US truck recovery
Downside Case
SEK 50
41%
US truck market collapse, further Europe, China, Brazil weakness
Source: Jefferies estimates
page 10 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
Analyst Certification:
I, Jefferies Int'l Ltd. Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this research report.
I, Ian Rennardson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Martin Brunninger, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, David Kerstens, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
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or views expressed in this research report.
I, Graham Phillips, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
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or views expressed in this research report.
I, Joseph Dickerson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Justin Jordan, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
Registration of non-US analysts: Jefferies Int'l Ltd. Equity Research is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC
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and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company,
public appearances and trading securities held by a research analyst.
Registration of non-US analysts: Ian Rennardson is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not
registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and
therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst.
Registration of non-US analysts: Martin Brunninger is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not
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therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst.
Registration of non-US analysts: David Kerstens is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not
registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and
therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst.
Registration of non-US analysts: Graham Phillips is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not
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therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst.
Registration of non-US analysts: Joseph Dickerson is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not
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therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst.
Registration of non-US analysts: Justin Jordan is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/
qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
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For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/
Disclosures.action or call 212.284.2300.
Meanings of Jefferies Ratings
Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.
Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month
period.
page 11 of 14
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within
a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price
consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform
rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/
or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.
Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities
regulations prohibit certain types of communications, including investment recommendations.
Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on
the investment merits of the company are provided.
Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total
return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market
risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,
P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,
and return on equity (ROE) over the next 12 months.
Jefferies Franchise Picks
Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection
is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward
ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number
can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for
inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion.
Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick
falls within an investment style such as growth or value.
Risk which may impede the achievement of our Price Target
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the
financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based
upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of
the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and
income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial
and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may
adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such
as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report
• Carnival (CCL: $43.97, UNDERPERFORM)
• Carnival (CCL LN: p2,719.00, UNDERPERFORM)
• Elekta (EKTAB SS: SEK77.45, UNDERPERFORM)
• Fresenius Medical Care (FME GR: €59.67, UNDERPERFORM)
• Royal Mail Group Limited (RMG LN: p398.70, UNDERPERFORM)
• Sandvik AB (SAND SS: SEK77.20, UNDERPERFORM)
• Standard Chartered PLC (STAN LN: p944.30, UNDERPERFORM)
• Stora Enso Oyj (STERV FH: €7.11, UNDERPERFORM)
• Volvo AB (VOLVB SS: SEK83.90, UNDERPERFORM)
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating
BUY
HOLD
UNDERPERFORM
page 12 of 14
Count
Percent
Count
Percent
1035
813
147
51.88%
40.75%
7.37%
276
142
5
26.67%
17.47%
3.40%
Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
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Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.
Themes & Tactics
Europe Insights
10 December 2014
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Jefferies Int'l Ltd. Equity Research, International Analyst, +44 (0) 20 7029 8685, [email protected]
Please see important disclosure information on pages 11 - 14 of this report.