Stock price: €40.1 ($54.12)
Conclusion: Henkel’s (OTCPK:HENKY) 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.