JPM_Europe Year Ahead 2019_watermark

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

efficiency. 5) Shell in pole position on TSR. Shell differentiates through its sector leading TSR with a 2019-22 cash return of 31% vs sector avg 26% boosted by a buyback program that was launched with 1H18 results

Valuation

Our Dec-2019 PT is GBp 2,800 (for RDSA and RDSB). Our price target is set as an equal-weighted blend of SOTP and 2020E PER. Our SOTP at LT $60/bbl price deck is GBp 3,145. To this we apply a 15% discount. We target a 20% discount to sector 2020E PER multiple of 12.4x (9.9x), to this we apply a premium/discount, as we adjust the target multiple to account for its historical sector rating, recent portfolio developments and the outputs from our industrial analysis. For RD Shell, we apply an 11% premium giving a target multiple of 11.0x on 2020E EPS of $3.49.

Risks

Macro risks - The main generic risks, both to upside and downside, come from crude oil, natural gas or refining margins significantly differing from our assumptions.

A lower rate of change in capex reduction - owing to tightening in the supply chain and less cost deflation than anticipated.

Execution risk - on projects on the critical path to cashflow growth 2018-20.

Wood Group (Overweight; Price Target: 780p)

Investment Thesis

We believe Wood Group has a relatively attractive growth and risk profile. The acquisition of AMFW adds scale and diversifies its end market exposure, particularly expanding its exposure to high growth (renewable) and large (E&I) end markets. It does add some risk to the overall business profile (greater percentage of revenues derived from LSTK contracts, and capex), and our overall view for the Oil & Gas market remains subdued. Key to deal success will be delivery of synergies. The base target ($170m) adds 77p/shr to our valuation, with incremental synergies on both cost and revenue potentially offering more. We see favourable risk/reward and think near-term catalysts can take shares higher, hence we carry an OW recommendation.

Valuation

Our June-19 price target is based on our base case valuation which is the weighted average of three methods: 13x our Adj 2019E PER forecast, 9x our EV/EBITDA, and NPV at a 9.0% WACC. Our target multiples are primarily dictated by our estimate of earnings revision risk and sector cycle.

Risks to Rating and Price Target

We see the following main risks to our price target and Overweight rating:

The oil price falls again, further reducing operator activity levels, reducing outlook for revenue generation and increasing competitive pressures in oil and gas, reducing margins and adding balance sheet impairment risk,

End-market growth forecasts are too optimistic, leading to a smaller addressable market than expected and/or competitive pressures which impact margins,

Inability to deliver planned synergies (higher implementation costs or slower synergy capture) reducing the value of the acquisition of AMFW,

SFO investigation finds fault and results in a (potentially large) fine, impacting the value of the AMFW acquisition and impairing the WG balance sheet, and

Planned divestments not achieved or sold below mkt pricing slowing the pace of deleveraging.

Novo Nordisk (Overweight; Price Target: Dkr340.00)

Investment Thesis

Following three years of volatility and underperformance, we believe Novo is about to enter a new period of sustainable growth, which should drive the shares to outperform. As we look out to 2019, we see the headwinds around the insulin

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

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 longer-term 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 and, hence, upgrade to OW and raise our Dec-19 PT to DKr340 based on 18.3x 2020E EPS (a 30% premium to the sector).

Valuation

Our Dec-19 PT of DKr340 is based on 18.3x 2020E EPS, given the 2020-2023 EPS CAGR of 8.1% we see for Novo, which is ahead of the EU Large Caps sector on 6.0%.

Risks to Rating and Price Target

Key risks to our rating and target price include:

More aggressive price pressure than expected in the US could hit Novo’s growth.

Lower than expected growth of the GLP-1 franchise would yield upside to our forecasts.

Failure of semaglutide high dose in Phase III clinical trials for obesity would lead to downside to our forecasts.

Continued price pressure in the US insulin market from additional biosimilar competitors would offer downside to our forecasts.

Impact of Hemlibra on NovoSeven, NovoEight and N8-GP could be more significant than expected.

Unibail-Rodamco-Westfield (Overweight; Price Target: €196.00)

Investment Thesis

Unibail is one of the world’s leading owners and developers of shopping centre destinations across continental Europe, and the company’s acquisition of Westfield has strengthened its global footprint, exposing Unibail to the US and the UK retail markets. Unibail has great access to capital markets, in our view, its management team is excellent; we are Overweight.

Valuation

Our 12-month target price for Unibail-Rodamco is based on our total returns-based European Valuation Model, which takes into account whether a company creates or destroys value. We argue that companies that have a positive spread between returns and their weighted average cost of capital (WACC) should trade at a premium to NNAV, whereas those with a negative spread should be priced below NNAV. For Unibail-Rodamco, we calculate a positive value creation spread between our forecast total return and our WACC estimate. We apply this spread to the invested capital, discount back, and add/subtract to our NNAV forecast to derive our price target.

Risks to Rating and Price Target

Downside risks include disappointing retail sales, a rise in vacancies in prime shopping malls and falling values in continental Europe, the UK and/or the US. The company is also exposed to FX risk given the new markets of the US and the UK. Higher-than-expected costs associated with the extensive development pipeline could also have a negative impact on development profits.

Nokia (Overweight; Price Target: €6.50)

Investment Thesis

Nokia’s FY18 guide implies a major inflection in sales growth by year-end which has positive implications for '19. Nokia should benefit not only from 5G rollout but also three new product cycles – in radio, IP routing and optical. We reiterate our Overweight rating on the stock and €6.5 Dec-19 target.

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

Valuation

Our price target is based on 23x ’19E EPS (and implies 18x ’20E EPS). We believe that Nokia stock will begin to re-rate as the company delivers on margin guidance and the market begins to look forward to 2020 where consensus has networks revenue up only 1.7% from 2017 and EBIT of 9.5% which is at the lower end of company guidance of 9-12%.

Risks to our Rating and Price Target

Key risks to our rating and price target are:

Weaker-than-expected telco capex spending, which would result in downside to our estimates;

Lowerand/or slower-than-expected realization of cost synergies associated with Alcatel Lucent acquisition, which would result in downside to estimates and stock price;

Market share loss and competitive pressure in Nokia networks division; and

Slowerand lower-than-expected progress in monetization of Nokia’s IP portfolio over the next 12-18 months could be negative for the Nokia share price.

Dassault Systèmes (Overweight; Price Target: €145.00)

Investment Thesis

We have an Overweight rating on Dassault with a price target of €145 for December 2019. The company is actively expanding its addressable market and we expect to see accelerated revenue growth driven by: 3DEXPERIENCE product cycle, industry diversification, cloud and Marketplace, plus acquisitions. Dassault has a large addressable market of >$28 billion for software, and the company is expected to grow faster than the market via its 3DEXPERIENCE platform and new industry verticals. We model a 14% EPS CAGR 2017-2023e, which could be further supplemented by accretive acquisitions. Cash flow remains strong and net cash sits at around €2bn. We believe Dassault is one of the most forwardlooking and future-relevant technology companies in our European coverage.

Expanding TAM and gaining share – Dassault has continued to expand its TAM (€28bn in software) as it targets more verticals, and also more users within existing customers. The company’s platform-based approach is a key differentiator in the market, and should support continued market share gains.

3DEXPERIENCE product cycle with adoption gaining traction with the likes of Boeing, Scania, ExxonMobil, Bouygues Construction, Amgen and numerous others. Around a third of new licenses are already 3DEXPERIENCE, and the platform upgrade drives higher pricing as well as more cross-selling opportunities.

Industry Focus and Diversification - Dassault holds strong market share in its core markets (Aerospace, Automotive, and Industrials) and continues to grow solidly by offering solutions that can be used by not just the engineering department, but also project management, compliance, manufacturing, marketing and by executive management. IoT and autonomous driving are drivers in the core. Meanwhile, Dassault is also expanding the application of its products and 3DEXPERIENCE platform into less penetrated markets like high Tech, Consumer Packaged Goods and Retail, Life Sciences, AEC (Architecture, Engineering and Construction) and others. Combined, new industries now account for 1/3 of Dassault’s revenues.

Cloud is becoming more relevant: While just 1-2% of revenues today, this is likely to accelerate in the near term, driving by a combination of product availability and functional coverage, plus growing customer interest in using PLM in the cloud. Cloud also opens up new customers in the SME market who would not typically purchase Dassault’s high end onpremise products.

Acquisitions could add around 4-6% to Dassault’s revenue growth over the mid-term, by our estimates. Net cash was €2.0bn plus the company has another €1bn facility. Operating cash flow also remains strong (at €745m in FY17), which gives Dassault plenty of headroom for acquisitions – although the company has typically proven that it will be patient when it comes to price/value.

2023 EPS Target is €6, approx. 16% CAGR. Dassault guides for around 9% organic growth, plus up to 4-6% of M&A, operating margin improvement of +50bp per year, and a 1pt tax rate improvement.

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

Valuation

Our price target of €145 for December 2019 is based on our DCF valuation and supported by valuation multiple comparisons with competitors in the global software industry. For our DCF, we use a 10-year forecast, with a WACC of 6.2%, beta of 0.98, and a terminal growth rate of 2%. With regards to comparative valuation multiples, we believe the primary multiples used by investors are EV/EBITDA and P/E, and we compared Dassault to its PLM peers. We believe Dassault should trade at a premium to the sector due to 1) its visible recurring revenues and upcoming contracts (like Boeing), 2) strong market position and products, including the unique 3DEXPERIENCE platform, 3) high and expanding operating margins, 4) significant cash position and consistent operating cash flow.

Risks to Rating and Price Target

Dassault’s growth is largely dependent on its ability to penetrate its newly expanded $28 billion addressable market. If this market has been overestimated, or Dassault is unable to penetrate it successfully, this could affect the company’s future growth. The following could cause such a situation:

New product or Cloud revenue streams fail to establish. Dassault’s “Other PLM” revenue could grow at a lower rate than we estimate, or 3DEXPERIENCE could fail to see broad adoption. Dassault’s cloud products may also fail to penetrate the SME markets, as it hopes.

Competition in new industries. As Dassault tries to extend its presence in new sectors, such as life sciences, natural resources and architecture & construction, it may face competition from experienced firms that specialize in these industries. Dassault may struggle to compete with longstanding competitors.

Acquisitions fail to integrate or prove expensive. As Dassault penetrates its addressable market, it will likely make acquisitions. However, there is a risk that such acquisitions fail to prove good value for money. Furthermore, difficulties could arise in integration of acquired companies, or the acquired companies could struggle to achieve group margins over the mid-term.

Unfavourable mix changes. If Dassault’s service revenues begin to grow faster than its software revenue, this could prove an unfavorable trend in mix, seeing as the margins from software are substantially higher than those from services.

The competitive environment remains full of both long-standing and experienced vendors, as well as new vendors offering more niche solutions.

Telia (Overweight; Price Target: Skr47.00)

Investment Thesis

We believe Telia’s equity story will be driven by its dividend, where we forecast a 6% CAGR in the next 4 years; company compiled consensus models 2%. DPS growth is underpinned by organic FCF, highly accretive M&A and a large buyback programme. We estimate Telia will return 27% of its mkt cap in the next 3 years in dividends and buyback alone. Consensus has also been stubbornly reluctant to recognise the strong organic FCF, the evidence of which has already been apparent for some time. We believe that over the next 6 months consensus will come to recognise and will begin to model attractive medium term growth in DPS and FCF, driving the share price up.

Valuation

Our Dec-19 price target of SEK47 per share is DCF based. We use WACC of 6.8%-8.1% for Telia's various operations and terminal year growth rates of 0-1%.

Risks to Rating and Price Target

Downside risks: Increased competition across its core European footprint (especially Swedish mobile and fixed broadband); inability to drive synergies from the announced M&A deals; Turkcell not paying dividends, which may lower Telia’s dividend cover ratio; Tele2 / Com Hem merger may create a stronger competitor which is better able to take market share from Telia; potential Swedish state stake sale (currently at 37%) which will put temporarily pressure on the shares.

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

EDF (Overweight; Price Target: €20.00)

Investment Thesis

We rate EDF shares Overweight. We see material upside to consensus on a mark to market basis over the next couple of years as hedges roll-off and allow for the higher power prices to feed through EDF’s P&L and cash flows. Yet EDF’s investment case is in our view one of political support: Macron successfully lobbied for a reform of the ETS market last year; something that has already materially improved EDF’s financial outlook. Yet we expect more to come, with a recognition of life extensions for the nuclear fleet, the removal of intra-year arbitrages on the ARENH by the year end. Further out, a potential larger restructuring of EDF and a re-regulation of the French nuclear activity (which may be separated) could unlock some of the deep value we see embedded in the stock.

Valuation

Our TP of €20 is set at the bottom of our nuclear re-regulated valuation range, and at a material discount to our marked to market SOTP. Our SOTP is a combination of divisional DCF models, regulated asset values, book values and multiples (of earnings, capacity, or invested capital).

Risks to Rating and Price Target

The key risks to our Overweight recommendation are: 1) a government proving unexpectedly unsupportive of nuclear, 2) a decrease of French power prices, but still very high capex obligations; 3) lower nuclear output in France and/or shorter nuclear lifetimes, due to technical and/or political issues; 4) cost overruns/delays in new nuclear build in the UK; 5) French cost inflation over and above what we already assume; 6) an unfavorable opening of French hydro concessions, 7) a forced ending to the French regulated tariffs combined with a low power price environment, and 8) more aggressive market share loss than we currently assume.

Leonardo (Neutral; Price Target: €10.50)

Investment Thesis Positives:

1) From 2018-22 LDO targets a sales CAGR of 5-6% and EBITA CAGR of 8-10%. Our own estimates are slightly below this. 2) c.70% of sales from defence. We estimate about half of these defence sales come from markets where defence spending is rising (US, Asia, some M. East markets) and about half from markets where defence spending is under pressure (e.g. UK, Italy). 3) Net debt has dropped from c€4bn in 2014 to c€2.6bn in 2017.

Concerns

1) In January 2018 LDO guided to relatively weak 2018-19 EBITA and very weak 2018-19 FCF. 2) In 2018, we estimate c50% of LDO’s net income will come from associates, where LDO does not provide detailed financial guidance (ATR turboprops; MBDA missiles; satellites); this reduces visibility for investors. 3) Accounting is “less conservative” than most defence peers: the LDO defined Adjusted EBITA excludes restructuring charges and non-recurring items every year and benefits from capitalised R&D. 4) Italy is now governed by a coalition govt with the Five Star Movement as the leady party; Five Star has a long standing commitment to lower defence spending. We rate the stock Neutral.

Valuation

Our GR2ADE framework (analysing Growth, Risk, Returns for Aerospace & Defence companies) suggests that LDO deserves to trade at a 10% discount to the European Defence long-term average valuation multiples. This means we apply a target 2020E P/E of 11x to both the LDO-def. underlying EPS and the JPM-defined clean EPS, and a target 2020E EV/EBITA multiple of 10.5x to our JPM-def. Economic EBITA forecast. The avg of these three methodologies gives us a Dec-19 PT of €10.5.

Risks to Rating and Price Target

1) Risks related to Italian political environment, Italian economy, or the Italian stock market in general. 2) Stronger/weaker GDP growth and/or commodity prices could impact the civil businesses (helicopters, aircraft) positively or negatively. 3) Weaker $ and £ vs the euro would hurt EPS, and vice-versa. 4) Defence exports contracts could be stronger/weaker than expected in the current uncertain geo-political environment.

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

ElringKlinger (Underweight; Price Target: €6.00)

Investment Thesis

We are seeing improving organic growth at Elringklinger driven by a pickup in lightweighting business (sophisticated and higher margin products), driven by OEMs globally focusing more on vehicle weight. Ramp-up of fuel cell business in China is a mid-term positive but also entails higher R&D spend. However, the transition to an EV world has started to weigh on earnings. We see earnings pressure from NAFTA ramp-ups, raw materials in NAFTA and higher R&D costs. We also remain cautious of the traditional portfolio, which is heavily geared towards ICE and could see some pricing pressure. In addition, Elringklinger has not generated enough FCF to cover dividend payment over the past six years, and we don't expect them to generate it for another two years. We remain UW.

Valuation

Taking into account a continuously deteriorating profitability profile, limited visibility on cash generation in the future, high risk in a transition to EVs, and very high leverage ratios, we now assign a bigger discount on Elringklinger to our supplier coverage. We now value Elringklinger on 0.7x 1-year forward EV/Sales vs. our supplier coverage at 0.9x EV/Sales and 9x EV/Ebit. This gets us to our net Dec-19 ending TP of €6.

Risks to Rating and Price Target

Upside risks come from higher outperformance vs regional vehicle production and better-than-expected improvement in profitability of plants that are not able to generate margins in line with group average. Faster-than-expected implementation of cost savings measures or greater clarity on acceptance and scope of products relevant in an EV world could change our stance. Lower-than-budgeted ramp-up costs in NAFTA could lead to an earnings surprise in 2018.

Handelsbanken (Underweight; Price Target: Skr105)

Investment Thesis

At a 20% PE premium to European Banks, we see risk-reward as unattractive for Handelsbanken. We admire the group’s risk management in the Nordic region historically; however, in a stable asset quality environment in Nordics, the group’s defensive attractions are unlikely to warrant a valuation premium. We also argue that Handelsbanken’s valuation premium is reflective of expectations of similar robust risk management outside of Nordics and where we believe the downside risks are undiscounted. We remain UW on valuation grounds.

Valuation

We use a SOTP methodology to value Handelsbanken by applying P/Es of 10-11.5x, reflecting earnings volatility, growth prospects, RoNAV and the nature of the business.

Handelsbanken SOTP, Dec20E

SEK million

SOTP	Adj Profit	% of			RoNAV %	Value	Value per
SEK m	2020E	group	P/E	P/NAV	2020E	SEK m	share
Sweden	11,702	62%	11.0 x	1.5 x	13.4 %	128,724	65
UK	2,588	14%	10.0 x	1.6 x	15.7 %	25,882	13
Denmark	663	4%	10 5 x	1.1 x	10.0 %	6,967	4
Finland	547	3%	10 5 x	0.9 x	8.4 %	5,745	3
Norway	2,087	11%	11.0 x	1.2 x	11 3 %	22,954	12
Netherlands	261	1%	10 5 x	1.2 x	11 5 %	2,739	1
Capital Mkts and AM	1,970	11%	11 5 x	5.2 x	44 9 %	22,656	11
Other ops & eliminations	-1,091	-6%	11.0 x			-11,997	-6
Excess capital				0.5 x		4,874	2
Total	18,728	100%	11.1 x	1.4 x	13.1%	208,545	105

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

The key upside risks to our rating and PT include the following:

Stronger-than-expected NII developments and Swedish banking trends.

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

Stronger-than-expected earnings delivery from the growing UK and international businesses.

Relative outperformance on asset quality within and outside Nordic region.

A lower-than-expected impact from Basel 4.

SIG PLC (Underweight; Price Target: 110p)

Investment Thesis

We are Underweight on SIG for the following reasons:

While we subscribe to the group's new strategy, we see execution risk, given that the group has been underinvested for some time, while competitors have improved their offering and gained scale advantage.

We see risk to the assumption that revenues can be flat in a no-growth market,

We see risk to the group’s UK end-market exposure.

Given the necessary capex as part of the turnaround plan, we expect the group to remain relatively highly leveraged for some time

Valuation

We value SIG at 10x 2019E P/E, in line with its closest peers and at a c.10% discount to long-run average. While by 2019 the group is not all the way thorough its recovery plan (we forecast a 4% EBIT margin vs. its medium-term target of 5%), we see ongoing risk to the group's end-markets, competitive position and some execution risk, given that previous turnaround plans (albeit under previous management) have failed.

Risks to Rating and Price Target

Risks to our Underweight rating on SIG include:

A materially better UK construction market recovery than we forecast. We would expect the stock to re-rate meaningfully on improved Brexit newsflow, or greater levels of economic certainty in the UK.

Faster progress than we expect on the turnaround plan.

Earnings upgrades driven by a stronger underlying European market.

Further deleveraging achieved through material disposals.

Bureau Veritas (Underweight; Price Target: €20.00)

Investment Thesis

We believe the testing sector has strong structural growth drivers, including regulation, outsourcing, globalisation and consolidation. We have an Underweight rating on Bureau Veritas, which is currently our least preferred stock among the testing companies, given its recent track record of incurring exceptional charges, weaker free cash flow conversion and risk to achievement of 2020 ambitions.

Valuation

Our price target is the average of our DCF and multiples-based valuations, rounded to the nearest €1.Our DCF valuation is €21.66. This uses a WACC of 7.4%, RFR of 1.57%, equity beta of 0.95 and TGR of 3.0%.

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

DCF valuation

€ in millions

Explicit cash flows	4,585
Terminal cash flows	7,069
Firm value	11,654
Less net debt	(2,076)
Equity value	9,578
Shares	442.2
Value per share	21.66

Source: J.P. Morgan.

Our €18.84 multiples-based valuation applies a 10.9x EBITDA multiple to FY19E EBITDA. This represents a 5% discount to the average of the peer group (Applus, Eurofins, Intertek, SGS) of 11.4x . We apply a discount to reflect Bureau Veritas' relative track record and earnings volatility.

Multiples-based valuation

€ in millions

FY19E EBITDA	958
Peer multiple	11.4x
Premium/(discount) to peers	-5%
Applied multiple	10.9x
Implied EV	10,406
Net debt	(2,076)
Equity value	8,330
Per share	18.84

Source: J.P. Morgan.

Risks to Rating and Price Target

Upside risks to our Underweight recommendation include:

A strong global recovery leading to a better performance in the more cyclical divisions, such as minerals, oil & gas capex, marine and construction.

Upside risk to estimates from higher than expected organic growth or material acquisitions.

Increased FCF generation.

Kone Corporation (Underweight; Price Target: €33.50)

Investment Thesis

We rate Kone Underweight as we believe that premium valuation for the stock means it is more susceptible to a de-rating if new equipment order growth slows materially – particularly, due to slowing demand in China. With sales from China representing ~30% of the group, Kone has the highest direct exposure in our coverage to the Chinese construction market. While growth remains supported by the affordable housing market in recent quarters, we believe visibility on orders in 2018 and beyond remains limited.

Valuation

Our target price is based on our 2020 estimates and a forward EV/EBIT multiple of 12x. This multiple is broadly in line with the long-term historical average.

Risks to Rating and Price Target

Upside risks to our target price include: tighter regulation, which may stimulate the high margin service/renovation segment of the business; a strong bounce in order inflow, which would be likely to boost near-term sentiment; and the possibility that margins may rise if the rise in raw material and labor costs were passed on to customers.

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

Evonik (Underweight; Price Target: €24.50)

Investment Thesis

Evonik management is taking encouraging steps to structurally improve the cost efficiency and the margin profile. The planned sale of commodity MMA/PMMA businesses is also consistent with the strategy to focus on target specialty growth segments with a higher margin. However, the current weaker FCF generation profile than peers, combined with the downside to m/t consensus leaves the current premium valuation unjustified, in our opinion. Further, the planned sale of MMA/PMMA business, with a much higher FCF conversion, will reduce the cash conversion profile of the company further, in our opinion.

Valuation

Our SOTP-based PT is €24.5 due to lower ’19 estimates and recent derating of the sector.

Evonik’s SOTP-based EV

	2019E	EV/EBITD
€m	EBITDA	A multiple	Implied EV	Comments
				Assumed 10% premium to peer median due to relatively higher quality
Resource Efficiency	1,273	8.0	10,184	business
				Assumed 5% discount to peer median due to weaker mid-term pricing
				outlook from substantial new supply estimated to come every year from
Nutrition & Care	791	6.8	5,350	2019-22E
Performance Materials ex. MMA/PMMA	306	7.2	2,204	In line with peer multiple
				Using an optimistic sale multiple of 10x on our normalized 2019E EBITDA
MMA/PMMA business sale pre tax	213	10.0	2,128	for this business
Services+Common corporate costs	-153	7.5	-1,144
Total from above	2,430	7.7	18,723

Source: J.P. Morgan estimates, Company data

Evonik’s SOTP-based PT based on EV in the above table

€m

Implied EV from above	18,723
2019E net debt	3,014
2019E pension provisions	3,877
Potential tax on MMA business sale	319
Minority interests	88
Implied market cap	11,424
Share count (m)	466
Implied share price (€)	24.5

Source: J.P. Morgan estimates, Company data.

Risks to Rating and Price Target

The risks to our rating and price target include: 1) if the current favorable supply/demand environment in the MMA/PMMA markets persists for longer than our expectations, it will result in upside to our estimates; 2) a substantial recovery or slower than expected decline in methionine prices; 3) structural and attractive portfolio pruning and/or attractive M&A; 4) unforeseen competitor outage or capacity reduction; and 5) material weakening of EUR vs. USD.

Unilever NV (Neutral; Price Target: €46.00)

Investment Thesis

We rate Unilever Neutral. We welcome management’s initiatives to modernize the company with a focus on nurturing growth opportunities (in the 3-5% range) while at the same time accelerating value through higher margins, consistent EPS growth and higher cash returns (with a target of 2x Net debt to EBITDA). We expect the company to be exposed to a volatile growth environment, along with an internal focus which could pose risks to ST performance on the top line. C4G and ZBB should fuel margin expansion over the next few years as Unilever guided to reach 20% by FY20.

Valuation

Our Dec-19 Target Price is €46/£40 - we continue to value Unilever in-line with the European Food/HPC peers (at 19.2x PE 19E). We remain Neutral.

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

Risks to Rating and Price Target

Risks to our rating, estimates and price target include a material deterioration in trading conditions in Europe and the US and worse-than-expected acceleration in LFL sales growth in emerging markets and/or cost savings programs. Additionally, Unilever is exposed to multiple currency movements, which could affect sales and earnings. Upside risks include improvement in trading conditions in its key mature and emerging markets along with potential disposal of its underperforming assets and/or accretive acquisitions.

DIA (Underweight; Price Target: €0.60)

Investment Thesis

DIA is a company operating what we see as the most attractive food retail format (convenience, discount, low cost, food only, relatively immune to the internet). However, the company is underperforming local peers such as Mercadona, Carrefour, Lidl, Pingo Doce and Sonae. We separately note an inconsistent trend between the top line and margins, which we regard as unsustainable. Our forecasts are significantly below the market for sales, EBIT and FCF. We rate the stock Underweight.

Valuation

Our PT of €0.60/share is based on 2019e SOTP. We now value Brazil and Argentina on a 50% and 30% EV/Sales multiples, respectively. We believe an SOTP approach increasingly makes sense in the context of DIA’s ongoing hefty margin rebasing in Iberia and the presence of a significant shareholder (L1, 15% direct stake with optionality to go to 25% via financial instruments), who is clearly out of the money from a financial investment standpoint and has ‘deep pockets’.

Risk to Rating and Price Target

The main upside risk is an improvement in Iberian trading, which would mitigate the margin pressure we anticipate. There are also some currency upside and downside risks, particularly in Argentina and Brazil.

Marks & Spencer (Underweight; Price Target: 250p)

Investment Thesis

While M&S has updated its ambitions, the group’s strategy to achieve these (and indeed the cost involved) is unclear, with many questions remaining unanswered. We believe that investments in the business (both into price and digital) could yield slower and lower than hoped for benefits. In the Food division, we are concerned that changes are being made too slowly in the context of deteriorating market share and structural pressure that looks set to continue. We sit below consensus and therefore believe that the risk is to the downside. We remain Underweight.

Valuation

Our multiples-based price target is 250p (end date Sep-19). Our TP is set at c.10x multiple, a 20% discount to the LR average to reflect structural pressure in the sector, applied to FY 1 EPS forecasts.

Risks to Rating and Price Target

Upside risks include: 1) Initiatives in the Clothing & Home business (such as showcasing greater value) and sales transference benefits driving higher-than-expected LFL growth in the Clothing & Home division; 2) a return to market share growth in Food more quickly than expected; and (3) greater-than-expected cost savings guidance with a clear plan of how these can be achieved.

Sodexo (Underweight; Price Target: €79.00)

Investment Thesis

We find it difficult to be more constructive on Sodexo. The shares have recently re-rated and Sodexo’s new plan is not exempt from execution risk. The risk-reward remains unappealing to us, especially in the early days of the turnaround and at a time of increasing margin pressure (i.e. labor cost inflation in the US/UK, which together represent about two-thirds of EBIT).

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