Henkel

Stock price: €38.8
Conclusion: Henkel looks relatively cheap compared with peers in home and personal care. Nevertheless, lower visibility in adhesives which account for close to half of the business, justifies lower multiples. Stock fairly priced.

Q1 results: sales up 7.8% (+8.8% organic) to €3.5bn. EPS doubled to €0.60. Guidance 2010: more than 15% growth in adjusted EBIT and EPS.

Q1 sales driven by a strong rebound in adhesives.
-Despite tougher comps than L’Oreal or Beiersdorf, Henkel posted solid growth in cosmetics (+5.5%) and in laundry (+3.6%).
-Comps were much easier in adhesives (+14.5%) with positive gains in electronics, transport, packaging and construction. Nevertheless, sales are still below 2008 levels. Henkel acknowledged that visibility remained poor for H2, in particular in the automotive sector.
-Pricing was negative (-1.8%), reflecting a highly competitive environment, notably in laundry and in adhesives. Personal care was the only category where Henkel managed to preserve positive pricing. Going forward, Henkel’s leadership in adhesives should give it more room for manoeuvre to return to positive pricing.
-We expect sales to increase 7.2% this year to €14.55bn, driven by 6% organic growth (+8% adhesives, +5% cosmetics, +4% laundry and home care).

Guidance (15%+EPS) could be upgraded
-We look for 11% adjusted EBIT margin (up 100bp against last year)
Margin in laundry should benefit from the reorganization of Henkel production sites in Western Europe combined with optimized cost structures in adhesives and higher capacity utilization. However,part of the gains should be offset by rising raw material costs (+5% for the year vs -1% in Q1) and negative pricing impact in laundry.
-EPS could achieve €2.30 per share (up 21%). Management guidance which is based on $1.38/€ exchange rate, might be revised upwards in Q2.
- 14% margin target by 2012 looks demanding. Most of the savings from Global Excellence (€160m 2010 vs €133m 2009) and National Starch integration (€225m 2010-€260m 2011) are now completed. In addition, we lack detailed segmented reporting to compare Henkel with peers and assess the risk of further increase in marketing spending.

Henkel trades at 16.9xP/E and 9.7xEV/EBITDA based on 2010 estimates, implying 18% discount to L’Oreal and Beiersdorf. We confirm our valuation range of €40-€44 per share.

Henkel

Stock price: €40.1
Conclusion: Henkel’s rerating stems from its superior growth in consumer combined with expected pick up in adhesives this year. Nonetheless, 2012 is approaching and the target of 14% margin looks agressive in light of 10% achieved last year. Henkel looks fairly priced based on our valuation range of €40-€44 per share.

2009 results: Sales down 3.9% to €13.5bn (-3.5% organic). EPS down 13% to €1.91. Guidance 2010: noticeable improvement in EBIT and adjusted earnings.

Henkel is bridging the gap with peers in consumers.
-Superior growth in cosmetics. Henkel outperformed both L’Oreal (-1%) and Beiersdorf (+1%) with 3.5% growth in 2009, despite an almost double digit decline of the hair salon market. First, part of Henkel’s personal care business relies on low priced hygiene products (soap, shower gel, deodorants..) which are less cyclical than premium priced categories. Second, Henkel hinges on three powerful brands Schwarzkopf, Dial and Fa which represent 80% of revenues.Innovation has accelerated, accounting for 40% of sales in the personal care division. Henkel gained share in the salon market, thanks to successful launches by Schwarzkopf. In addition to new products, Henkel is launching new brands such as Syoss, rolled out in 25 countries.
-Good resistance in laundry and home care with sales up 3.5% driven by pricing. However, Henkel is underexposed to Asia and Latam, which might hold back future growth.
-2010 outlook ? slight pick up in adhesives but pricing will be an issue.
Management expects a minor recovery in Europe and in the US in adhesives, notably in electronics, construction and automotive. Personal and home care markets could slowdown but Henkel plans to continue to outperform peers. Pricing and promotional activities could get tougher in 2010. We look for 2.5% organic growth this year.

Still a long way to go on the bottom line front.
-13% margin in consumers compares with 15% margin for best-in-class players in Europe. Henkel does not provide enough segmented information to explain the difference. However, we think this is a combination of a lower pricing power affecting the gross margin and higher selling and administrative expenses.
-14% margin target by 2012 requires 4 ppt gain in 3 years, which looks unprobable. Around 2/3 of savings expected from the Global Excellence programme and NS integration have been achieved and are now behind us. The remaining €150m would represent less than 1 ppt of sales by 2012, implying that 3 ppt should come from positive leverage..

Henkel trades at 18.4xP/E and 10.5xEV/EBITDA based on our 2010 estimates (€2.18 EPS-€1916mEBIDTA) at a slight discount to peers in cosmetics. We find the discount justified by its lower margin in cosmetics combined with greater cyclicality in adhesives. However, Henkel’s cash generation provides support to the stock price. Our DCF based valuation suggests a valuation closer to €44 per share.

Henkel

Stock Price: €32
Conclusion: Almost 16xP/E based on 2010 estimates looks full, considering the impact of increased competition in laundry and cosmetics and the risk of missing, once gain, 2012 margin target.

9 months results: Sales down 3.4% reported to €10.2bn (-4.8% like for like), adjusted earnings down 23.5% to €532m, EPS down 24%.

Following a relatively good performance in laundry and cosmetics in the first nine months, Henkel is looking for a deceleration by the end of the year. Both Reckitt and Unilever recently confirmed that promotional intensity is increasing, notably in Europe but also in Asia. As a result pricing could turn flattish while volume growth will continue to be held back by poor consumer sentiment.

Visibility on the margin front looks poor. Reported COGS improved by 210bp, but this is largely due to lower restructuring expenses. Adjusted COGS improved by only 50bp in the first nine months, despite the positive impact from lower raw material prices, the restructuring benefits and the synergies derived from the integration of National Starch. We expect adjusted EBIT margin to fall to 9% this year and believe that Henkel will find it hard to reach 14% by 2012. We expect EPS to decrease by 16% this year. The expected rebound in EPS next year will also depend on oil prices which are rising again and might put pressure on COGS, as raw material and packaging costs account for more than €4bn. As to marketing expenses, they keep rising as a percentage to sales. It remains to be seen what will be the retention rate of €450m costs savings forecasted from the Global Excellence programme and from National Starch integration by the end of 2012. We based our DCF valuation on a 12.5% EBIT margin assumption for 2012, which would represent a 350bp gain in three years.

Henkel trades at a 20% discount to L’Oreal based on 2010 P/E, which we find justified by the greater cyclicality of the portfolio and lower earnings visibility. DCF based valuation points to the high end of our valuation range of €32-35 per share.

Henkel

Stock price: €29
Conclusion: Multiples almost in line with HPC peers, which might no be sustainable. Our valuation range (€24-26 per share) suggests some downside risk.

H1: Sales down 6% like for like (down 1.3% reported to €6.7bn), adjusted net earnings down 34% to €292m. Guidance Q3: HPC growth could decelerate while adhesives should perform in line with Q2.

We think that the recent rerating of the group might not be sustainable.

1) Top line growth in consumer could decelerate in the second half of the year.
-Performance in laundry and home care was essentially driven by pricing which rose by 5% in H1, while volume were up only 1%. We expect the pricing impact to gradually diminish and be only partly offset by higher volume.
-The balance between volume (+1%) and pricing (+2.4%) looks more bearable in cosmetics.
-The current downturn seems to favor Henkel given its exposure to “basic” hygiene and cleansing products. It remains to be seen whether Henkel will continue to outperform peers when the economy picks up. We also expect L’Oreal to become more agressive in the hair color sector in order to regain the lost ground.

2) Turnaround in adhesives could take some time
Cyclical adhesives account for 45% of Henkel sales. According to management, sales trend in second half of the year could be “similar to or only slightly better” than Q2 which was down by 15.4%. Visibility remains limited in electronics, automotive and construction segments, notably in Europe.

3) Henkel profitability in HPC compares unfavourably with peers.
-We expect margins to achieve around 12% in home care and cosmetics in 2009 which is well below average in the sector (18-22% EBIT margin). Bridging the gap will be challenging given the lack of global scale in cosmetics, the focus on value products and the risk of rising marketing expenses.
-At the group level, we do not expect Henkel to reach its 14% margin target by 2012. First, management has a mixed track record and failed in the past to achieve previous profitability goals. Second, it would need to retain 100% of its savings programme, which is well above the average 50% rate seen in the sector. As a result for are looking for only 12% margin by 2010.

Henkel is up 36% YTD, trading at 20x and 16x P/E based on 2009 and 2010 estimates. We believe that a 20% discount to HPC is justified by the business mix of Henkel. Adhesives trade at lower multiple than HPC. Our SOP based on 9.5xEBITDA in cosmetics and 8x EBITDA in adhesives leads to €25 per share, in line with our DCF valuation.