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Europe Equity Research
03 August 2017
Neutral
Siemens SIEGn.F, SIE GR
Price: 112.92
2018 EPS cut to 7.2, hard for stock to work until
Price Target: 128.00
consensus settles but valuation now more supportive Previous: 130.00
The investment case for Siemens for us has been challenged for some time by European Capital Goods
our view on Power Generation and below consensus view on 2018 earnings. Andreas Willi
AC
The more cautious language of the company in recent months, including with (44-20) 7134-4569
the Q3 results, may rebase investor expectations. While Euro/$ closing in on andreas.p.willi@jpmorgan.com
1.20 is a headwind for an exporter, we note it is easier to buy Siemens here Bloomberg JPMA WILLI <GO>
than when it was when the Euro was the low end of its long term trading Akash Gupta
range. Given negative consensus earnings momentum, portfolio is the key (44-20) 7742-7978
focus where the announced HC IPO vs earlier preference for a reverse merger akash.z.gupta@jpmorgan.com
reduces the near term upside but potentially also risks. The stock has valuation Glen Liddy
(44-20) 7134-4570
support but we need to get comfortable that the negative revision momentum
glen.liddy@jpmorgan.com
is done. Our 2018 EPS falls 6% to 7.2 vs standing consensus of 7.84
Andrew Wilson
(Bloomberg). We roll forward our TP to Dec 2018, now 128 (130 Dec (44-20) 7742-6332
2017). Our 2017 EPS remains largely unchanged as a provision release in andrew.j.wilson@jpmorgan.com
CMPA and a gain on a tax audit offset the lower operating earnings. William Ashman
2018 consensus in focus more cuts to come: 2018 reported EPS (44-20) 7742-5777
william.h.ashman@jpmorgan.com
consensus stood at 8.15 post the Q2 results but had declined to 7.85 ahead
J.P. Morgan Securities plc
of the results. Our prior estimate stood at 7.67. Updated FX and our
lowered SGRE estimates among others take this down to 7.2. For 2017, we For Specialist Sales advice, please
contact
expect 7.54, largely unchanged as operating cuts are offset by lower tax
and the Q3 CMPA gain. Siemens focuses on reported GAAP EPS in its Timm Schulze-Melander, CFA
(44 20) 7134-1331
guidance, refreshing in a world of "operating EPS focused companies but timm.schulze-melander@jpmorgan.com
we adjust for valuation purposes the drag from acquisition PPA which is
Antonia C Millard
about 90c per share for 2018. On adj. EPS, we look for 7.82 in 2017, (44-20) 7134-2652
growing by 4% to 8.13 in 2018. antonia.c.millard@jpmorgan.com
Siemens Gamesa (SGRE): The answers given by Siemens management Price Performance
today, somewhat distancing itself and putting the burden on the SGRE 135
now mostly run by Siemens managers (top 3 management team of Gamesa 115
had departed within 4 months of closure). The standards that investors 105
See page 15 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
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Andreas Willi Europe Equity Research
(44-20) 7134-4569 03 August 2017
andreas.p.willi@jpmorgan.com
next 6-9 month an updated plan for the remaining years of the CEO's tenure.
We would expect this to include measures to make the organization more
flexible, faster and customer focused with a further opportunity to reduce
complexity and support function costs. We expect a more flexible approach
with less of a one size fits all set up on structure and processes given the
diverse nature of its business. Portfolio also remains a focus, given the
planned listing of the Healthcare IPO and the discussions about rail
consolidation. Having made progress in turning around some of the
underperformers, we also look for an update on their future given that some
of them, while having improved margins, still lack the characteristics we
would like to see in a Siemens asset (leading market position, healthy
industry profit pool, sustainable long term competitive advantage).
2018E EPS cut by 6% to 7.2: The 45c reduction in EPS breaks down into
25c for Siemens-Gamesa (based on our earlier published forecasts), around
20c for FX (translation and transaction) with other changes mostly offset
each other (upside in DF and BT, downside in PG, EM and PD).
Target price of 128: At this time of the year, we roll forward our target
price which now stands at 128 set for Dec 2018 vs 130 from Dec 2017
before. The additional year of cash flow/earnings growth and lower pension
deficit is more than offset by the lower valuation of the stake in Gamesa (3
per share), the lower earnings (mostly FX related) and weaker cash flow.
Our target price is based on an SOP and implies ~12x cal. 2018E EV/EBIT
and 15x adj. P/E. We apply a 10% discount to the SOP to account for the
conglomerate nature but also the weaker cash conversion vs peers.
Relative stock preference: At the current share price, Siemens trades on
11x EV/EBIT and 14x adj. P/E 2018E which appears attractive vs ABB on
12.8x/17.7x and Schneider at 11.5x and 15x. We continue to prefer
Schneider over Siemens and ABB, which had delivered among the best
Q2/H1 results in the sector and in our view has a stronger set of assets with
less exposure to structurally challenged end-markets in terms of demand or
pricing. We also continue to prefer Philips to Siemens with Philips trading at
11.5x 2018 EV/EBIT vs our valuation of Siemens Healthcare in our SOP of
14x on 2019E.
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Valuation
At this time of the year, we roll forward our target price which now stands at 128
set for Dec 2018 vs 130 from Dec 2017 before. The additional year of cash
flow/earnings growth and lower pension deficit is more than offset by the lower
valuation of the stake in Gamesa (3 per share), the lower earnings (mostly FX
related) and weaker cash flow. The target price is based on an SOP and implies ~12x
cal. 2018E EV/EBIT and 15x adj. P/E. We apply a 10% discount to the SOP to
account for the conglomerate nature but also the weaker cash conversion vs peers. At
the current share price, Siemens trades on 11x EV/EBIT and 14x adj. P/E 2018E
which appears attractive vs ABB on 12.8x/17.7x and Schneider at 11.5x and 15x. We
continue to prefer Schneider, which delivered among the best Q2/H1 results in the
sector and in our view has a stronger set of assets with less exposure to structurally
challenged end-markets in terms of demand or pricing.
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Summary of Q3 results
We see the Q3 of Siemens as a mixed quarter overall. Headline numbers missed,
mainly driven by the already reported poor results of Siemens-Gamesa (SGRE).
Excluding the impact of SGRE, orders and sales missed by 1% and Industrial Profits
missed by 2-3% vs consensus. Like-for-like orders were down 9% but the company
said that excluding SGRE and swings in large orders, base orders rose significantly.
EPS beat due to a CMPA gain and a lower tax rate, which more than offset the
SGRE miss. On an underlying basis vs our estimates, excluding charges, gains and
MindSphere investments and excluding Gamesa, Q3 was a touch above our estimates
operationally. Operating free cash flow (post interest and tax) at 0.7bn missed our
estimate of 1.9bn with the outflow at SGRE 0.7bn explaining the majority of the
miss. Digital Factory had an outstanding performance (underlying). Power & Gas
orders missed consensus by 25% with a 4q rolling book to bill of 0.8x, indicative of
material revenue pressure to come with orders weak in gas turbines and
compression/Dresser Rand. Healthcare results were in-line with 3% order growth.
The full year guidance was maintained in all aspects and the company expects a
strong order intake in Q4.
Q3 results
Sales at 21.4bn were 3% short of JPM and 2% below consensus with organic
revenue growth of +3% compared to our estimate of +1%. The Industrial Profit at
2,250mn was 8% short of JPM and 5% below consensus. Excluding Siemens
Gamesa, which reported weak results last week, Industrial profit was 4%/3% below
JPMe/consensus. The quarter included 157mn of charges, MindSphere investments
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and integration costs (19c on EPS) and 94mn of restructuring charges (consensus
116mn). On an underlying basis, industrial profits were 2,501mn or 3% short of
JPM (or 2% ahead ex SGRE). Below the line items a 34c tailwind to EPS compared
to consensus, mainly driven by gains in CMPA (17c) and lower taxes (18c).
Operating free cash flow (post interest expense, which Siemens excludes from
operating cash flow despite including interest income) was +705mn. This compares
to our estimate of 1,846mn, and reflects the weak results of SGRE which had a
0.7bn outflow on Siemens definition. This brings 9m operating free cash flow to
1.73bn vs 1.27bn last year.
Financial Services (SFS) 161 140 15% 146 10% 139 16%
Centrally managed portfolio activities 120 30 NM (21) -671% (107) -212%
Siemens Real Estate (SRE) 6 40 -85% 46 -87% 107 -94%
Corporate items and pensions (325) (220) 48% (252) 29% (169) 92%
PPA (339) (320) 6% (306) 11% (178) 90%
Treasury & other (22) (90) (102) -78% (130) -83%
PBT 1,852 2,037 -9% 1,885 -2% 1,853 0%
Income tax expenses (373) (550) -32% (516) -28%
Tax rate 20% 27% 28%
Income from continuing operations 1,479 1,487 -1% 1,363 9% 1,337 11%
Disc ops (15) 0 NM 35 NM
Net income 1,464 1,487 -2% 1,367 7% 1,372 7%
Minorities (51) (129) -60% (43) 19%
Net attributable income 1,413 1,359 4% 1,281 10% 1,329 6%
Source: Company reports and J.P. Morgan estimates. Consensus from Siemens
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Summary financials
Table 6: Siemens - summary income statement
million, year-end September 30
2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
Orders 81,163 85,582 76,913 82,345 78,350 82,338 86,478 84,785 87,588 89,059
Growth 3% 5% -10% 7% -5% 5% 5% -2% 3% 2%
Net sales 75,978 73,515 78,296 75,874 71,920 75,636 79,644 83,448 86,136 88,287
Growth -0.9% -3.2% 6.5% -3.1% -5.2% 5.2% 5.3% 4.8% 3.2% 2.5%
Gross profit 21,647 22,127 22,204 20,821 20,755 21,847 23,818 25,425 25,946 28,175
Gross margin 28.5% 30.1% 28.4% 27.4% 28.9% 28.9% 29.9% 30.5% 30.1% 31.9%
R&D expense (3,846) (3,925) (4,238) (4,291) (4,065) (4,483) (4,733) (5,174) (5,340) (5,474)
% of sales 5.1% 5.3% 5.4% 5.7% 5.7% 5.9% 5.9% 6.2% 6.2% 6.2%
SG&A expense (11,130) (10,297) (11,162) (11,286) (10,424) (11,409) (11,669) (12,267) (12,576) (12,890)
% of sales 14.6% 14.0% 14.3% 14.9% 14.5% 15.1% 14.7% 14.7% 14.6% 14.6%
Other operating income/(expense) (755) 53 516 76 461 476 (99) 164 0 0
Income from investments in other companies (40) 147 (266) 510 582 (389) 134 100 100 100
EBIT 5,877 8,105 6,778 5,838 7,310 7,276 7,452 7,885 7,929 9,712
EBIT margin 7.7% 11.0% 8.7% 7.7% 10.2% 9.6% 9.4% 11.0% 11.0% 11.0%
Underlying operating margin ex charges 13.3% 13.1% 11.3% 11.6% 11.3% 10.8% 11.1% 12.0% 12.3% 12.6%
Interest (expense) income 271 491 506 159 294 442 325 450 430 460
Pre-tax income 5,812 9,242 7,279 5,843 7,427 7,218 7,404 8,509 8,359 9,262
Income taxes (1,699) (2,231) (2,094) (1,630) (2,028) (1,869) (2,008) (2,317) (2,257) (2,501)
Effective tax rate 29.2% 24.1% 28.8% 27.9% 27.3% 25.9% 27.1% 27.2% 27.0% 27.0%
Minority interest (169) (176) (132) (126) (134) (98) (134) (90) (231) (314)
Net income from continued ops 3,944 6,835 5,053 4,087 5,265 5,251 5,262 6,102 5,870 6,447
Change 75.1% 73.3% -26.1% -19.1% 28.8% -0.3% 0.2% 16.0% -3.8% 9.8%
Source: Company reports and J.P. Morgan estimates.
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Capex incl. Intangibles (2,336) (2,171) (2,206) (1,869) (1,831) (1,897) (2,136) (2,426) (2,366) (2,418)
Free cash flow post tax and interest 7,013 5,410 4,287 4,995 4,652 4,119 4,315 5,309 6,381 6,492
Capital issuance/(share repurchase) 147 (764) (1,424) (1,409) (1,066) (2,700) (463) 218 0 0
Dividends (1,388) (2,356) (2,629) (2,528) (2,533) (2,728) (2,827) (2,914) (3,056) (3,138)
Dividends paid to minorities (199) (158) (155) (152) (125) (145) (236) (200) (300) (315)
Foreign exchange effect on cash 167 5 68 (108) 214 83 (98) (270) 0 0
Balancing item (inc. currency, accounting changes) (1,479) (899) (1,472) 847 45 (1,414) 352 (392) 0 0
Cash inflow/(outflow) 3,750 564 (4,296) (1,371) (1,346) (6,521) (541) (2,046) 3,024 3,039
Net debt/(cash) - beginning 9,309 5,559 4,995 9,291 10,662 12,008 18,529 19,070 21,116 18,092
Net debt/(cash) - ending 5,559 4,995 9,291 10,662 12,008 18,529 19,070 21,116 18,092 15,052
Cash inflow/(outflow) 3,750 564 (2,957) (1,371) (1,346) (6,521) (541) (2,046) 3,024 3,039
Source: Company reports and J.P. Morgan estimates.
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Valuation
Our SOTP-based Dec 2018 target price is 128. Overall, we value Siemens at ~12x
EV/EBIT for the operations, which results in a target price of 130 per share post a
10% conglomerate discount. We assume normalized restructuring and project
charges of 400mn per year or 50bp of sales.
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Other Companies Discussed in This Report (all prices in this report as of market close on 03 August 2017)
Philips (PHG.AS/32.11/Overweight), Schneider Electric (SCHN.PA/67.37/Overweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
securities issued by Siemens, Philips, Schneider Electric.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Siemens,
Philips, Schneider Electric within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Siemens, Philips, Schneider
Electric.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment
banking clients: Siemens, Philips, Schneider Electric.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Siemens, Philips, Schneider Electric.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and
the services provided were non-securities-related: Siemens, Philips, Schneider Electric.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services
from Siemens, Philips, Schneider Electric.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Siemens, Philips, Schneider Electric.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Siemens, Philips, Schneider Electric.
Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Siemens,
Philips, Schneider Electric.
J.P. Morgan Securities LLC and/or its affiliates is acting as financial advisor to The Spectranetics Corporation (NASDAQ: SPNC) in
connection with proposed acquisition by Royal Philips (NYSE: PHG; AEX: PHIA) as announced on June 28, 2017. The transaction is
structured as a cash tender offer by Philips for all of the issued and outstanding shares of Spectranetics, to be followed by a merger in
which each share of Spectranetics not tendered in the tender offer will be converted into the USD 38.50 per share price paid in the tender
offer. Pursuant to the merger agreement, the transaction is subject to customary closing conditions, including certain regulatory clearances
in the U.S. and in certain non-U.S. jurisdictions. The tender offer is not subject to any financing conditions.
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The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
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the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Willi, Andreas: ABB (ABBN.S), Andritz (ANDR.VI), Assa Abloy (ASSAb.ST), Electrolux (ELUXb.ST), Legrand
(LEGD.PA), Nexans (NEXS.PA), OSRAM (OSRn.DE), Philips (PHG.AS), Philips Lighting (LIGHT.AS), Prysmian (PRY.MI), Rexel
(RXL.PA), Schneider Electric (SCHN.PA), Siemens (SIEGn.F), Zumtobel (ZUMV.VI)
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