* Response to key questions and Morpho analysis
We use this note to outline two things: 1) Provide feedback to key investor questions
we have received recently and 2) Outline our thoughts on the potential that Gemalto
could acquire Safran's Morpho division (Gemalto one of five parties bidding according
to Bloomberg 22 Sept 2016). At this point, we maintain our Neutral rating on Gemalto
as while the company has a number of good growth opportunities (M2M, enterprise,
government and payment), until we have clarity mobile is stabilising and the 2017E PFO
target is revised, we struggle to see the shares performing well. We do however believe
that valuation at current levels of 13x '17E P/E vs. peers on 14x provides some support.
* Responding to key questions
In response to key questions from investors: 1) We continue to believe Gemalto will
need to lower its FY17E PFO target of €660m (UBSe €576m) but we believe is only
likely to do this once it has completed its budgeting exercise (i.e. possibly FY16 results).
2) We see further opportunities for growth in payments and would see contactless in
the US as a key opportunity, although timing is unclear. 3) While there is much concern
around what embedded SIM standards might mean for Gemalto, we would continue to
see this as much as an opportunity for Gemalto as it is a risk and will likely take some
time before being implemented in smart-phone devices.
* Morpho acquisition analysis - could be an interesting opportunity for Gemalto
While the bidding process is still ongoing for Safran's Identity & Security division, we
have conducted a financial merger analysis. We estimate that if Gemalto were to
succeed and pay the €2.4bn that has been speculated in the press it could deliver 11-
31% EPS accretion depending on synergies/deal structure. However, to deliver a RoIC >
WACC we believe the business would need to generate >€150m synergies. We expect
it would be key for Gemalto to portray long-term benefits of the deal and we believe
there could be cross-selling opportunities for Gemalto into enterprise for biometrics.
* Valuation: €60.0 DCF-based price target (WACC 9%, g 2%)
We have left our forecasts largely unchanged and hence our price target remains €60.
The valuation for Gemalto does provide support at 13x '17E P/E but pending clear
visibility on Mobile stabilising we remain Neutral on the shares.