(SG) Henkel : Limited visibility, but improving margins & undemanding valuation.

Limited visibility, but improving margins & undemanding valuation. Buy, TP €127=>117

Update Henkel’s FY15 results on 25/02 were perfectly in line with the company compiled consensus but the shares modestly underperformed the European Staples sector in the next few days. In part we think this may reflect some short term expectations that outgoing CEO Kasper Rorsted would seek to leave on a high, so some hedge funds may have been positioned for a beat. 2016 guidance is for 8-11% EPS growth (implying €5.27-€5.42 vs €5.28 pre-result consensus). There was some confusion over how to reconcile this with guidance of 2-4% OSG and a c.16.5% EBIT margin (implying c. +30bp) given FX headwinds. Management stated that, as in prior years, EPS is the dominant guidance.

SG view On 18.3x 2016E PE we think Henkel is undeniably cheap, trading at a 17% discount to Global Consumer Staples. However, near term visibility is also undeniably limited given recent management changes, macro uncertainty and the fact that for two years in a row Henkel’s EBIT margin expansion has been just 40bp, in line with peers but far short of historical rates. But then again historically it has been precisely such periods of macro uncertainty (Eurozone crisis in 2012, Russia in 2014) that have offered attractive entry points for Henkel. However we acknowledge that markets will likely wait for evidence that, once China headwinds are lapped, cost-cutting can continue to drive near best in class margin expansion at Henkel before giving it valuation credit.

How we value the stock Given lack of macro visibility, we value Henkel on a 5% discount to global Consumer Staples peers. This is 21x 2016e PE. Rolling this multiple onto our 2017e EPS number (to reflect the 12 month time horizon of our target price) yields our €117 price target, down from €127. We have trimmed 2017e EPS by 6%, half driven by FX and half by cuts to our margin forecasts (we had expected a margin beat for FY15).

Events, catalysts & risks to price target, rating & recommendation Next catalyst: Q1 16 results on 19 May 2016. See page 3 for risks.