TheChek News Flow

Our in-depth analysis suggests that leading indicators, inflation and relative earnings

momentum – the drivers that stimulate and lead the capital goods sector's operating

and share price outperformance – continue to fade. Going into 2018, we still believe

this poses a risk to the sector's relative earnings power and to its near all-time high

valuations (detached from its cyclical roots, in our view). As a consequence, we have

recently downgraded or initiated coverage on cyclical names with a cautious view. With

this note, we downgrade dormakaba to Sell and Atlas Copco to Neutral.

We believe PMIs sentiment momentum is fading, meaningful industry verticals and

regions show signs of slowdown (outweighing acceleration in other regions and

segments). In this note we provide incremental evidence on how the commodity-led

reflation trend is losing steam, the China slowdown matters for Capital Goods Europe

and capex recovery trends remain modest. Historically, when leading indicators'

momentum peaks, we have seen c10% sector relative underperformance, especially

when valuations remain rich (the sector's 13x 12 month rolling fwd EV/EBIT valuation is

at a multi-year high, and seems disconnected from fundamentals now).

The capital goods sector is implying terminal growth rates of 6% for the sector (4%

average since 2005). Consensus is factoring in a 5% revenue CAGR and margins

reaching previous highs by 2019, which we consider too optimistic. In the long run, we

see many encouraging thematic angles on the sector (artificial intelligence, electric

vehicles, the internet of things, robotics, 3D printing), but for our core coverage

universe consensus appears to be factoring in a 10% EBIT CAGR for 2016-19 vs. our

6% CAGR, which leaves our estimates over 5% below consensus for the same period.

We look for transformation stories and attractive valuations (e.g. Alstom, Siemens,

Osram). On a relative basis, and despite valuations, we prefer resilient quality angles

from Legrand and the lagging recovery of Alfa Laval's end markets. We continue to be

cautious on the pro-cyclical expensive names like Kone, Krones, Sandvik, SKF.

EU said to have hardened the language of a proposed Brexit resolution for this week’s European Council summit - financial press 

- UK Brexit Sec Davis said on the weekend that last Friday’s Brexit deal was more a statement of intent than a legally enforceable thing.

Devialet built a car audio system for Renault’s Symbioz concept car

Devialet has always said that it wasn’t just a speaker manufacturer. The French startup has worked on its own amplification technology. It is supposed to be much better than everything else out there when it comes to building powerful-yet-compact speakers.

The company first partnered with Sky to build a surround sound TV speaker. And now, Devialet wants to be in your car.

Renault has been demonstrating its Symbioz concept car as the future of autonomous, connected and electric cars. And it seemed like a good playing ground to show off Devialet’s technology.

First, Devialet isn’t using traditional in-door speakers and subwoofers. The company relies on tiny sound modules that are six times smaller than traditional car speakers.

Second, the company uses empty spaces and pipes and make them vibrate. It creates a network of passive speakers to immerse yourself in the music.

Finally, the startup also has some custom software features to route the sound to the right speaker. Passive speakers can be used for background sounds while sound modules can take care of the rest.

This sounds nice on paper, so let’s hope that Renault is going to bring this technology to production vehicles. It’s clear that Devialet wants to go beyond putting its brand on regular speakers. The company wants to control the entire audio experience.

Glencore, the miner and commodity trader, is “able and willing” to grow its business through bolt-on acquisitions and expansion projects, striking a different tone to many of its rivals who are still focused on debt reduction.

Ahead of a briefing to investors later today, the Swiss-based company set out its strategy for 2018 and beyond, flagging its exposure to the raw materials that will power the electric vehicle revolution.

Glencore is a major producer of copper and cobalt from its mines in Australia, South America and the Democratic Republic of Congo. It is also a large nickel miner.

Glencore’s thinking marks it out from many of its peers who are still focused on reducing debts and returning capital to shareholders rather than growth and expansion.

“We will continue to focus on creating value through capital efficient growth within a conservative balance sheet structure. Partnerships to grow the business will remain a key element of our approach,” said Glencore chief executive Ivan Glasenberg, a renowned deal-maker, in a statement.

Over the past year, Glencore has joined forces with large sovereign wealth and pension funds to acquire assets. A year ago, it worked with the Qatar Investment Authority to buy a 19.5 per cent stake in Rosneft, the Russian oil company, and more recently it teamed up with Ontario Teachers’ Pension Plan to create a new base metals investment vehicle.

Glencore said on Tuesday that it was “able and willing” to grow its business by “reactivating idled capacity when appropriate”, expanding existing “brownfield” projects and through bolt on acquisitions.

On Monday, Glencore said it had completed an $880m upgrade project that will boost production of copper and cobalt and reduce costs at its Katanga mine in the Democratic Republic of Congo.

The company suspended production at Katanga in September 2015 so that its could start work on the construction of a new leach plant. The mine is expected to produce 150,000 tonnes of copper and 11,000 tonnes of cobalt next year, rising to 300,000 tonnes and 34,000 tonnes respectively in 2019.

Glencore, which is also a major producer of coal and zinc, made no changes to earnings guidance for its muscular trading arm on Tuesday but said the group would record earnings before interest, tax, depreciation and ammortisation of $16.2bn in 2018 at current and forward commodity prices.

It said the optimal net debt range for the business was $10-$16bn and its dividend policy for 2018 would comprise a fixed payment of $1bn plus a minimum payout of 25 per cent of the cash generated by its mines, or industrial assets.

Shares in Glencore have risen 26 per cent this year and closed at 351p on Monday

GEMALTO - Atos proposes to buy Gemalto, 42% premium,offer EUR46/shr (45)+30-35%

ATOS - Proposes to buy Gemalto at 42% premium, cash offer: EUR46/shr (131)..+5%

ASHTEAD - Beat & raise, plus increased capex plan & share buyback plan(2100)+4%

ELEMENTIS - Sale of its surfactants biz to Kolb Distribution for EUR39m(283)+2%

DRAX - Confirms trading remains inline with expectations.Strategy unch (274)+2%

RYANAIR - Has not received any notification of any industrial action (17.2).+2%

BALFOUR BEATTY - Positive, biz performing inline, mgmt is confident (277).+1-2%

FRAPORT - +ve; airport Nov passengers +21.1% y/y and Freight +4.7% y/y (88).+1%

AKZO - Lanxess said to team up with Apollo to bid for Akzo Chems unit (75)..+1%

AMADEUS - Prepares improved shareholder remuneration;Expansion reports(60)+0.5%

UNICREDIT - CMD. Lowers SREP requirement,fino sale & to raise div payout(17)u/c

GLENCORE - RNS. Largely nothing done, spot guidance is where street is (351)u/c

GEM DIAMONDS - Has received an offer to acquire 100% of Ghaghoo mine (75.8).u/c

MINERS - Copper -0.2%, Iron ore fut -3% and BHP OZ +1.65%, RIO OZ +1.11%..-0.5%

ILIAD - We DOWNGRADE to Neutral on FCF growth slowdown on competition (202).-1%

SAINT GOBAIN - We DOWNGRADE to Neutral, PO EUR50, '18-19 EPS cut by c7% (47)-1%

SWISSCOM - We DOWNGRADE to U/perform. Solid company,demanding valuation(513)-1%

UNIBAIL - Buying Westfield (Oz) at an 18% premium, offer: $10.01/shr (219)-2-3%

LANXESS - Said to team up with Apollo to bid for Akzo Chemicals unit (62).-1-2%

CARPETRIGHT - Warning. Sees FY results at the bottom end of estimates (167)-10%