* Reiterate Buy, Raise TP to €33 — In this report we look in depth at HealthTech
and provide findings from our proprietary healthcare capex surveys. Philips is a key
Buy across our sector and is part of the Citi Focus List Europe. YTD Philips has
underperformed the market (DJSTOXX) by >6% on the back of significant
consensus downgrades (cut by 23% and 19% for 2014 and 2015 respectively). We
believe that Philips is at a cross roads and expect outperformance. Following the
announcement of a break-up into two companies by 2016: HealthTech, and Lighting
Solutions, we set our €33 target price at our SOTP fair value.
* Downgrades are Nearing the Bottom — Philips at their CMD has confirmed that
the first products from the Healthcare Cleveland factory are now being shipped (the
ramp up will be back-end loaded). The recent FX moves have become a tailwind for
the first time since 3Q 2013. Our proprietary US and European Hospital Capex
Surveys point to improved growth outlook and our China Healthcare analysts in
their recent report conclude that despite the near-term caution, hospital
procurement demand looks to remain solid and suppressed demand may drive an
improved market in 2015
* Health Tech — On our 2015E forecasts the HealthTech company should generate
pro-forma sales of €14.7bn and an Adj EBITA margin 14.6% (excluding central
costs) improving towards 15.5% by 2016E (the company is guiding for 14-15.5%)
including cumulative savings of €300m under the new structure. We think the
business merits a multiple of 12x EV/EBITA implying an EV of c.€25.7bn. The new
structure could realize a total EV of €29bn, implying substantial upside potential.
* Attractive Valuation — On our 2015 forecasts, Philips is trading on a P/E of 12.5x
and EV/EBIT of 9.2x vs. its 10-year historical averages of 14.5x and 12.0x
respectively. Relative to the sector Philips is trading on a >15% discount on P/E and
EV/EBIT basis. An EV/Sales of 1.0x also looks attractive against our 12% EBITA
margin forecast in 2016 (company guidance: 11-12%).