JPM_Europe Year Ahead 2019_watermark

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

DKr252.00

23 November 2018

Price Target: Dkr311.00

End date: 31 Dec 19

David AdlingtonAC

(44-20) 7134-5828 [e-mail] JPMA ADLINGTON <GO>

Underweight

SKr91.56

23 November 2018

Price Target: Skr68.00

End date: 31 Dec 19

David AdlingtonAC

(44-20) 7134-5828 [e-mail] JPMA ADLINGTON <GO>

Europe Equity Research

03 December 2018

Top pick – GN Store Nord

GN continues to look compelling into 2019. The Hearing division has a good set up with the launch of Quattro augmenting the earlier launch of LiNX 3D. Hearing margins should be supported by improving channel and product mix. FalCom, the military audio equipment business, could provide upside in 2019 to Hearing.

In Audio, the growth looks sustainable with the company pointing to markets growing at 10%. We expect GN Audio to continue to outgrow the market owing to the quality of its product portfolio and execution in the market. Improving volumes and growth should allow for margin expansion in the Audio business.

We expect the company to continue to operate its share buyback program.

Taking the above together, gives GN Store Nord growing EPS in the teens. In our view, the shares look good value for this level of earnings growth.

We are sanguine on potential headwinds, specifically; US OTC legislation, which we do not expect to materialize until at least 2020; and, Hearing competition, where we expect the market to continue to grow +5%, with GN well positioned to grow at least in-line with the market.

Least preferred – Getinge AB

Despite a spin-off of a division and a rights issue just over 12 months ago, we continue to have concerns on the balance sheet of Getinge. Free cash flow remains poor (restructuring costs continue to be a drag) and there are a number of further negative cash events on the horizon (litigation on hernia mesh products). Intangible assets on the balance sheet are currently valued ~24b SEK, (similar to the market cap); any write-down of goodwill would have implications for debt covenants which have historically been linked to net debt/equity ratios.

In addition, the trajectory for margins does not look positive despite consensus forecasting 60-70bps margin expansion for 2019 and 2020. We expect continued pressure on the gross margin owing to product and geography mix. We expect opex lines to remain bloated due to ongoing remediation of the FDA consent decree, sales force expansion in emerging markets, and stranded costs from the 2017 spin-off.

The shares look cheap against our coverage; however, we see downside risk to numbers, especially on the margin. However, of greater concern, in our view, is the balance sheet which we expect to become more of a focus for investors in the near term.

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

€19.94

23 November 2018

Price Target: €36.50

End date: 31 Dec 19

Luke NelsonAC

(44-20) 7134-5297 [e-mail] JPMA NELSON <GO>

Underweight

Skr198.26

23 November 2018

Price Target: Skr200.00

End date: 30 Dec 19

Luke NelsonAC

(44-20) 7134-5297 [e-mail] JPMA NELSON <GO>

Europe Equity Research

03 December 2018

Top pick – ArcelorMittal

ArcelorMittal is our top pick in the European Steel sector. We identify it as onerously cheap, as highlighted by a 2018/19E EV/EBITDA of 3.7/3.3x (JPM base case) vs. carbon steel peers’ 4-6x. Yet, MT is set to deliver compelling cash generation, where we forecast a 2018/19E FCF yield of 8%/19%.

MT represents one of the few companies in the domestic steel sector with idiosyncratic catalysts that can drive a medium-term re-rating. Foremost is a net debt target of $6bn, at which point management have committed to a larger return of surplus capital to shareholders. Our base case assumes the target is hit by YE'19 (although we as yet do not include the payment Essar, which is yet to be approved).

Other catalysts include the Ilva integration (~6Mt production), which is expected to be “EBITDA positive” in Year 1 but could be a significant earnings contributor if profitability can be lifted to the European segment avg of ~US$80-90/mt. The market gives MT little credit for a near-term turnaround of Ilva.

MT is current trading at a P/BV of ~0.6x (Bloomberg data), which is a level last seen in early / mid-2016 following which the equity rallied >70%. However, MT’s balance sheet is materially stronger today, as evidenced by a ND/EBITDA <1x by YE’18 vs 2.5x at YE'16. Furthermore, the market structure of its key regional exposures (NAFTA, Europe and China) is now more supportive.

Least preferred – Boliden

We reiterate our Underweight call on Boliden given its relatively less attractive valuation, downside risks for zinc, and recently announced higher capex.

Zinc downside risks: after several years of sizeable market deficits, we now expect the zinc market to be shifting back into surplus from 2019 onwards. We anticipate an increase in supply gradually in 2019 as concentrates flow through into refineries, perpetuating surplus levels. In anticipation of Chinese growth, we expect an increase in construction and infrastructure which will stimulate demand for zinc. However demand could be low due to infrastructure and construction numbers steadily increasing and offset by a higher supply level.

Higher capex constraining FCF: with Q3 results, BOL management announced that 2019 capex guidance of SEK ~8 bn, which was well above consensus of ~SEK 6bn at the time. This will constrain FCF into next year. We forecast BOL 2019-20E spot FCF yield of ~3.5%, in line with its EMEA base metal peers.

Upside risks to our negative investment thesis include a tighter than expected zinc market, which could support higher zinc prices and thus higher earnings for BOL. Additionally, a weaker SEK would be positive for BOL, given opex is primarily based in SEK.

Relatively expensive valuation: at current commodity price we calculate BOL trades on 12x PER 2019E and 5.4x EV/EBITDA with a ~3% dividend yield.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Overweight

2,347p

28 November 2018

Price Target: 2,800p

End date: 31 Dec 19

Christyan F MalekAC

(44-20) 7134-9188 [e-mail] JPMA MALEK <GO>

Top pick – Royal Dutch Shell A

Top quartile cash intensity (growth projects CFFO/boe and CFFO/sh 2018-22 CAGR). We forecast Shell’s 2019/20 growth projects deliver a best in class CFFO/boe of $33/boe (sector average $28/bbl) and CFFO/sh 2018-22 CAGR of just under 6% (sector avg 4.3%). The liquids biased and high margin nature of the GoM puts it alongside Brazil as one of Shell's key cashflow levers.

Cash ‘Jaws’ II (high cash intensity growth barrels + capital discipline = strong FCF outlook). As capital spend remains on track, Shell’s premium CFFO/boe helps underpin strong free-cashflow generation and competitive cash breakevens to 2022 despite a rising call on capex.

Buyback program underpins our investment thesis that Shell differentiates through its sector leading TSR with a 2019-22 cash return of 31% vs sector avg 26%. The total program remains ‘at least’ $25bn 2018-20 (subject to further progress on debt reduction and oil prices). JPMe: $4.5bn in 2018; $8.5bn in 2019 and $12bn in 2020.

On the front foot on Energy Transition. Amongst the majors, Shell is one of the best placed within our ESG framework and ranks top quartile on our metric of carbon footprint vs energy diversification. We expect further granularity on sources of New Energies differentiation with the June 2019 Management Day.

Underweight

€14.15

28 November 2018

Price Target: €13.50

End date: 31 Dec 19

Christyan F MalekAC

(44-20) 7134-9188 [e-mail] JPMA MALEK <GO>

Least preferred – ENI

Unattractive risk/reward on its long-term upstream portfolio. ENI’s long-term opportunity set offers growth, but at lower than average returns and with a heavy non-OECD skew.

Poor ranking on our downstream framework. ENI screens the least attractive among the majors on FCF coverage, unit margins, refining asset quality and operational leverage.

Underwhelms on energy transition. ENI screens least well on our Upstream flaring intensity metric and portfolio evolution to 2025 within our Energy transition framework. It will undoubtedly look to utilize G&P to manage its carbon footprint however despite that component to the business model, its carbon footprint vs energy diversification balance appears to be no more than mid-ranking.

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

588p

23 November 2018

Price Target: 780p

End date: 30 Jun 19

James ThompsonAC

(44-20) 7134-5942 [e-mail] JPMA THOMPSON <GO>

Europe Equity Research

03 December 2018

Top pick – Wood Group

Wood Group offers a diversified way to gain exposure to the oilfield services sector.

Wood provides technical services across the oil field value chain, with exposure to a number of growth areas such as US shale and MENA downstream. Its low-risk contracting style should be a relative strength in volatile market conditions, which we expect to continue into 2019.

The most important catalysts are evidence underlying pricing improvements and deleveraging. Wood’s post AFW acquisition balance sheet remains a source of concern in the market, and hence, delivery of leverage target (<1.5x ND/EBITDA) through 2019 should support the shares, while evidence that the market has bottomed (unit pricing basis) should also be a catalyst for relative outperformance.

Furthermore delivery of ‘GDP+’ type top-line growth, order book expansion and further synergy growth could also provide support for shares through 2019. We remain mindful of the potential risks, particularly around SFO risk and deteriorating macro environment, but see shares once again offering good value and see scope for them to outperformance in 2019.

Underweight

Nkr86.14

23 November 2018

Price Target: Nkr107.00

End date: 30 Jun 19

James ThompsonAC

(44-20) 7134-5942 [e-mail] JPMA THOMPSON <GO>

Least preferred – Subsea 7

We remain cautious on the outlook for Subsea7. The company has reset expectations for 2019, and consensus is therefore moderating to a more reasonable level. However, we still see a difficult offshore market, one which may be more reactive to oscillations in the oil price. The most recent price fall (in 4Q, peak to trough, Brent fell 33%) suggests to us that spending plans for 2019 may well be trimmed, and makes it more likely that core customers (IOCs) stick to MT budgets.

The risk to our more cautious view is a material pick up in large-scale offshore FIDs which have much greater vessel intensity and serve to soak up excess capacity for an extended period of time. While these may not impact 2019 utilization, new FID would give the market greater confidence on market tightness 2020+. That said, if these projects do not come through in a reasonable time frame, the risk is an underutilized fleet and prolonged period of competitive pricing.

Overall, 2019 is set to be a tough year, with good news largely coming via the orderbook across SURF and Renewables. We see limited earnings momentum, and believe this aspect will remain a headwind for the shares.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Overweight

DKr297.00

23 November 2018

Price Target: Dkr340.00

End date: 31 Dec 19

Richard VosserAC

(44-20) 7742-6652 [e-mail] JPMA VOSSER <GO>

Neutral

1,582p

23 November 2018

Price Target: 1,600p

End date: 31 Dec 19

James D GordonAC

(44-20) 7742-6654 [e-mail] JPMA GORDON1 <GO>

Top pick – Novo Nordisk

Confidence in superior growth to strengthen through 2019

As we look ahead to 2019, we see the headwinds around the insulin franchise lessening, 2019 consensus growth expectations looking underpinned and the new launches in GLP-1 franchise Ozempic and oral semaglutide likely to beat expectations in 2019 and 2020. We also see anticipation building through 2019 into the high dose semaglutide obesity Phase III data in 2020, which could drive longerterm upgrades. On our new forecasts, Novo offers a 2020-25 Sales CAGR that is double the sector, at 5%, leading to an EPS CAGR of 7%, 3pp faster the sector, and yet Novo’s premium on 2020E PE is now only 8%. Given the strong growth profile and more positive news in 2019, we see the shares restoring their 30% premium.

Recent launch of Ozempic and upcoming launch of oral semaglutide expected to substantially beat expectations

Our updated GLP-1 model expects a 2020-25 volume CAGR for the US GLP-1 market of 13% (ex US 8%). We see Ozempic benefiting from this and achieving significant market share gains to 27% by 2021, pushing our forecasts for Ozempic 25-11% ahead of consensus for 2019-2021. For oral semaglutide, we expect a very strong launch given the strong clinical profile; we see the GLP-1 market shifting towards oral and we are ahead of consensus estimates by 13% in 2020 and 31% in 2021 (JPMe DKr1.6bn and DKr6.2bn), and 46% ahead of consensus in 2025.

Least preferred – GlaxoSmithKline

Slowest growth in the sector in both 2019, and the medium-term

In 2019 we see GSK's Core EPS growth slowing down to flat in LC with likely genericisation of US Advair, slowdown in HIV growth, and increasing R&D spend. Beyond 2019 we anticipate only modest acceleration in EPS growth, with a Core EPS CAGR of only 4%, for both 2019-22 and 2020-23, lagging behind the sector, where we forecast a 6% CAGR over both time periods. With no Core EPS growth anticipated in the next 12 months, we expect GSK to hold the current multiple, underperforming the large-cap Pharma sector.

2019 HIV downside broadly offsets Shingrix upside

We forecast growth for GSK’s HIV franchise to slow from 10% LC in 2018, down to 4% LC in 2019, and our 2019 HIV forecasts are 5% / £0.3bn below company collated consensus. On the more positive side, our Shingrix forecasts are 34% / £0.3bn ahead of consensus, offsetting the HIV shortfall.

Limited pipeline optionality in 2019

(1.) '916 BCMA ADC for 4th-line multiple myeloma, already well appreciated (JPMe 70% prob of £2.0bn) (2.) Trelegy for Asthma, where the commercial potential is already captured in our £1.0bn forecast across Asthma/COPD. We also see a number of PI/II readouts, but we see these as too early to drive significant share-price performance, with pivotal data needed more meaningful upgrades.

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