* Raising EBIT forecasts by 3% on emerging markets and European growth spots
* Forecast EBIT rise of 46% to 2016 split between nearly two-thirds cost savings and one-third underlying trading
* Upgrading rating to Neutral (from Underweight) and raising target price to EUR44 from EUR32
>>> Raising target price on stronger ROIC recovery
- Our Underweight call since the end of January 2013 has not worked, with the shares rising
by 33% in that period, albeit outperforming the sector by only 1%. We have raised our
2014-16e EBIT forecasts by 3% on higher volume forecasts in emerging countries and
European renovation, slightly offset by lower expectations from Construction Products
activity in new US housing. Our EBIT forecasts for 2014-16 are in-line with consensus.
- r raised emerging countries volume growth forecast to compound growth of 7% to
2016 (5% previously) is based on market share gains on the back of the EUR3.6bn
investment since 2008, rather than any signals of a stronger structural upturn in the BRIC
dominated exposure. Construction lead indicator data underpins our raised forecasts for a
stronger recovery in renovation in the UK, Germany and Scandinavia (circa 28% 2013
sales) and supports our unchanged forecasts for a decline in new and renovation activity in
France, Spain and Italy (circa 30% 2013 sales).
- We are forecasting a 46% EBIT rise in the three years to 2016e comprising just over 60%
from all of the guided EUR0.8bn cost saving for 2014-15 and the balance from a 27%
underlying increase in trading EBIT, led by a 53% increase in Flat Glass from depressed
levels. Our EBIT forecasts flow to a ROIC increase from just 5.7% in 2013 to 8.7% in 2016e.
- Fairly priced on all valuation metrics
Our raised target price to EUR44 is based on raising our target enterprise value multiple
of 2016e invested capital to 1.1x (previously a 0.95x) as a result of the ROIC surplus to
our WACC estimate of 8.3%. Our target price implies a 2016e PE of 10.9x from 10.4x
currently and 2016e EV/EBITDA multiple of 5.7x from 5.6x.
The shares offer a reasonable dividend yield at 3.0% on our flat dividend forecast in
2014-15, which rises to 3.4% in 2016e on a normalised 35% payout.