Moving to an Overweight rating and €42 PT on supportive geographic exposure
and a Jan-17 price target of €42 (14% potential upside) from Not Rated
(Neutral rating and Oct-15 €37 price target prior to restriction). We think
SGO’s geographic exposure underpins our earnings forecasts in 2016,
following a wave of downgrades until recently, while we believe the group’s
strong balance sheet (1.2x 2016E net debt/EBITDA) and attractive 5/6%
2016/17E FCF yield justify re-rating to a share price currently trading on an
unwarranted 11% historically high discount to the sector on 6.9x/6.4x
2016/2017E EV/EBITDA.
* Geographic exposure supportive. We believe SGO’s geographic exposure
will support earnings growth in 2016 with c. 80% of revenues generated
from developed markets, and just 20% from emerging markets. We see an
uplift potential from the French market (25% of revenues) in 2016, but
conservatively forecast stable trends. We also believe growth in the US
(North America is the second largest market for SGO with 14% of 9m 2015
revenues) will remain attractive, supported by continued good momentum
in construction, while we note that comps for SGO’s exposure to the
industrials segment are undemanding given the strong decline in the
proppant market observed in 2015 (down c. 70%). The other key markets
for SGO are Scandinavia (12%), the UK (12%) and Germany (9%), all of
which we think should grow in 2016.
* Strong Balance Sheet and attractive FCF. Leverage has fallen from 1.9x
ND/EBITDA in 2012 to 1.7x in 2014. Taking account of the disposal of
Verallia, we expect ND/EBITDA to decrease to 1.2x in 2015E and 0.8x in
2017E (excl. Sika). We project FCF generation of c. €1.2bn p.a. in 2015-
2017 (c. 6% FCF yield), which should boost DPS and buybacks further.
* Sika negatives already discounted. We think the market has already
negatively discounted for this transaction while a positive decision from the
Zug court would mean SGO gets control of Sika, a good outcome in our
view. It also leaves little room for further surprises on the M&A front given
the group has already spent most of its acquisition target of €4bn.