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CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
Global Small Cap Update Small Cap Growth Strategies
23th April 2015 Eugène Klerk
+44 207 883 4678
Catherine Tillson
+44 20 7888 6052
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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.
Why Credit Suisse Research? High impact research that spans across asset classes, sectors, and regions
Eugène Klerk
2
Why Credit Suisse Analytics? Access to innovative tools, models, and capabilities at your fingertips
Eugène Klerk
3
Slide 4
Contents page
Company Name Ticker Slide Number
Sm
all
cap
China DEHL DL.N 5
Kaveri Seeds KVRI.NS 7
Kforce Inc KFRC.OQ 9
PT PP PTPP.JK 11
Sthree STHR.L 13
Sumitomo Osaka Cement 5232.T 15
Va Tech Wabag VATE.BO 17
Mid
Cap
China Resources Gas 1193.HK 19
Dialog Semiconductor DLGS.DE 21
Dunkin' Brands Group DNKN.OQ 23
Eicher Motors EICH.BO 25
Global Payments, Inc GPN.N 27
Marico Ltd MRCO.BO 29
Rentokil RTO.L 31
Shenzhen Salubris Pharmaceuticals Co Ltd 002294.SZ 33
Spectris SXS.L 35
Start Today 3092.T 37
Slide 5 Jialong Shi| +852 2101 7437 | [email protected]
Long term investment thesis
Online education stil l at a nascent stage: Online education is
becoming a promising trend in China’s education market. However,
migration to online is likely a gradual and long-lasting process given the
time needed for users to adapt to a new learning experience.
A solid FY15 outlook. We believe that healthcare and construction test-
prep will continue to be the two drivers for its accelerating growth. The
management appeared confident of delivering its guided 27-32% topline
growth target in FY15.
Continued margin expansion. CDEL’s online model allows a high
student-to-lecturer ratio, which increased from 6,979 in FY13 to 9,359 in
FY14. CDEL does not need to invest significantly in physical classrooms.
Its capex/sales ratio has been maintained at 3-4% of its total revenue.
This pure model allows CDEL to scale its business efficiently and add or
update courses with relatively low incremental costs. In view of the cost
leverage, we model a 70 bp expansion in FY15E operating margin.
Big, untapped market potential. IDC estimates that China's finance
and accounting training market is likely to grow 9% from 2013-17E to
Rmb5 bn, of which CDEL's market share could reach 9%. CDEL
maintained a 33% revenue CAGR from FY11-14 driven by 26%
enrolment growth. It may continue to drive growth by increasing
enrolments of existing courses, and expanding course offerings.
Valuation:
We maintain our OUTPERFORM rating with target price of US$21, based
on 25x FY15E P/E, implying 22x CY15E P/E. CDEL’s business is strong
cash-flow generative. The company has a generous dividend policy,
returning most of the FCF to its shareholders annual.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
RATING: OUTPERFROM
PRICE: US$19.3 (20th APRIL 2015)
TARGET: US$21
Mkt Cap: 0.70 bln USD
Key Financials
China CDEL (DL.N)
Consumer Discretionary – Education Services
Key chart
35 41
49 58
70 84
102
126
158
205
5%
10%
15%
20%
25%
30%
35%
-
50
100
150
200
250
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
Online educaiton YoY%(RHS)Rmb bn
Source:China Education online, Credit Suisse estimate
China Distance Education Holdings Limited (CDEL) offers a range of online education and test preparation courses and other related services and
products in China.
TP Upside vs Share Price 8.8% In USD mn, unless otherwise stated
Key financials 09/14A 09/15E 09/16E 09/17E
Sales revenue [USD mn] 97.2 125.5 151.9 184.9
EBITDA [USD mn] 26.4 34.5 43.0 52.8
EPS (Normalised) [c] 67.3 84.8 105.7 128.3
EPS Growth [%] 61.5 26.1 24.7 21.3
EBITDA Margin [%] 27.1 27.5 28.3 28.6
DPS [c] 80.0 97.2 114.6 139.6
Payout [%] 118.9 114.6 108.4 108.8
Free CFPS [c] 116.0 124.6 128.9 178.3
P/E 28.7 22.7 18.3 15.0
EV/EBITDA 21.7 16.8 13.4 10.6
Dividend Yield 4.1 5.0 5.9 7.2
Slide 6
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Although a relatively young company, China CDEL’s CFROI© profile has remained largely above the cost of capital and has
trended upwards since 2010. Sales growth has remained high y-o-y, with margins ticking up from recent lows in 2010. Consensus
estimates are currently pricing in c100% upside as the young company’s CFROI© profile is expected to stabilise at CFROI© of
20%. The market is pricing in similar margins but more conservative sales growth of 7.5% vs. consensus at c20% from 2017
onwards.
Economic profit has grown substantially year on year since
2011. Driven largely by spread (CFROI over cost of capital)
until recently in 2014, when the growth in asset base
dominated.
China CDEL (DL.N)
Market implied scenario
Slide 7 Anantha Narayan | +91 22 6777 3730 | [email protected]
Key Financials
Kaveri Seeds (KVRI.BO)
Consumer staples – Agricultural products
Key chart: India accounts for just 4% of the global seed industry, despite
accounting for 11% of global arable land
RATING: OUTPERFROM
PRICE: 954.1 Rs (20th APRIL 2015)
TARGET: 1100.0 Rs
Mkt Cap: 1.06 bln USD
Kaveri Seed Company is a seed company engaged in the production and distribution of high quality hybrid seeds of field and vegetable crops but
also micro nutrients and bio-products.The Company operates in two segments: seed division and microtek division
27%
22%
6% 6%5% 4%
3% 3% 2% 2%
11%
8%
1%
5%3%
11%
0% 1%
3%1%
0%
5%
10%
15%
20%
25%
30%
US
A
Chi
na
Fra
nce
Bra
zil
Can
ada
Indi
a
Japa
n
Ger
man
y
Arg
entin
a
Italy
Contribution to seed industry (%) Contribution to global arable land (%)
Source: International Seed Federation (Jun'13), World Bank (2012),
Long term investment thesis
Largest pure-play seed company in India with significant market share in
cotton (No. 2 player), corn (No. 4 player) and among top 3-5 players in
millets, paddy, sorghum and sunflower.
The Indian seed industry is estimated to be a US$2bn market or 4% of
the global seed market despite it having 11% of the global arable area.
Increasing hybrid seed penetration driven by food demand-supply
mismatch may correct this somewhat. The Indian seed industry is
estimated to be growing at 12% while the global industry growth is c5%.
Low hybrid seed penetration in corn, paddy and vegetables can drive the
next leg of growth. Despite high penetration, high-density planting can be
a driver for cotton seeds.
Why buy now?
Growth over the next 2–3 years will be driven by the existing portfolio of
seeds and we expect 20%+ earnings CAGR over FY15-17E.
The company is launching new hybrids across cotton and paddy for
medium term growth. Approval of BG2RRF (the next generation GM trait
from Monsanto) expected by June-16 can aid medium term growth.
The founders’ plans to sell significant stake in the company to venture into
food processing business are off the table for now removing a key
overhang on the stock.
Valuation:
While valuations have re-rated over the past year, we do not view them as
excessive given the large market opportunity, likely strong earnings
growth and strong financial metrics - net cash company, with strong
operating cash generation, low working capital requirement (30 days of
working capital at end-FY14), high EBITDA margins (~25%) and high
return ratios (ROE and ROCE of 45%+). We have an Outperform rating
on the stock with a target price of Rs1100 based on 17x FY17 EPS. Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 15.3% In INR mn, unless otherwise stated
Key financials 03/14A 03/15E 03/16E 03/17E
Sales revenue [INR mn] 10,111.1 11,678.6 14,004.5 16,790.4
EBITDA [INR mn] 2,212.4 3,021.1 3,533.9 4,255.2
EPS (Normalised) [c] 3,039.7 4,398.3 5,241.4 6,404.5
EPS Growth [%] 64.3 44.7 19.2 22.2
EBITDA Margin [%] 21.9 25.9 25.2 25.3
DPS [c] 480.5 750.0 1,050.0 1,500.0
Payout [%] 15.8 17.1 20.0 23.4
Free CFPS [c] 2,442.3 3,676.2 4,335.9 5,381.8
P/E 31.4 21.7 18.2 14.9
EV/EBITDA 28.5 20.2 16.6 13.1
Dividend Yield 0.5 0.8 1.1 1.6
Slide 8
CFROI© Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Kaveri Seeds scores as Best in Class within the HOLT framework. It has seen significant CFROI© growth since 2009 to 2013,
12.5% and 33.5% respectively. This has been largely driven by improved asset turns and high sales growth. Consensus is
currently pricing in 84% upside due to high sales growth forecasts – reducing these to a more moderate 7% by 2017 produces
the market implied scenario.
Economic profit has more than doubled over the past three
years largely driven by growth.
Kaveri Seeds (KVRI.BO)
Market implied scenario
Historic high margins
Asset efficiency
improved
significantly from
2009
Slide 9 Anjaneya Singh| +212 325 7306| [email protected]
Key Financials
Kforce Inc (KFRC.OQ)
Industrials – Human Resource & Emplyment services
Key chart: Technology segment growth
RATING: OUTPERFROM
PRICE: 22.5 USD (20th APRIL 2015)
TARGET: 27.0 USD
Mkt Cap: 0.66 bln USD
Kforce Inc. provides professional and technical specialty staffing services and solutions in the United States and internationally. The company
operates through Technology (Tech), Finance and Accounting (FA), and Government Solutions (GS) segments.
0%
5%
10%
15%
20%
25%
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
CAGR: ~11.7%
Long term investment thesis
We believe that skill shortages in information technology, combined with
higher staffing needs on the project side make KFRC’s business grow faster
than industrial / clerical staffing. IT staffing is the largest staffing end market
by ~2-3x, and is among the fastest growing end markets as well.
We think that the street is not giving full credit to sales force tenure
ramping up. Moreover, recent realignment initiatives are likely to result in
better margins vs. the prior cycle.
KFRC's balance sheet remains under-levered at a Net Debt / EBITDA
ratio of ~1.5x and at ~40% net debt/total cap. Over the medium term, we
expect management to become more aggressive in using the balance sheet
to pursue M&A or return more cash back through buybacks.
Why buy now?
KFRC’s stock has come under pressure recently, underperforming peers
and the S&P 500 since slightly missing 4Q estimates due to gross margin
pressures from product mix (less permanent placement fees) and client mix
(largest 25 clients are lower margin).
We believe investors are underestimating KFRC’s operating leverage as a
result, and expect to see operating margins to expand ~120bps to 5.5% in
2016. As a result, our 2016 EPS estimate is ~4% higher than consensus.
Valuation:
Our target price of $27 for KFRC is based on our normalized EBITDA
estimate of $95mm at a target multiple of 9.5x, discounted back slightly.
KFRC has traded at average NTM and LTM EV / EBITDA multiples of
~9.8x and ~10.8x since 2005.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 20.1% In USD mn, unless otherw ise stated
Key financials 12/14A 12/15E 12/16E
Sales revenue [USD mn] 1,217.3 1,342.6 1,467.3
EBITDA [USD mn] 61.7 75.4 93.9
EPS (Normalised) [c] 97.5 131.2 167.3
EPS Growth [%] 44.7 34.7 27.5
EBITDA Margin [%] 5.1 5.6 6.4
DPS [c] 0.0 0.0 0.0
Payout [%] 0.0 0.0 0.0
Free CFPS [c] -99.6 109.1 76.2
P/E 23.1 17.1 13.4
EV/EBITDA 12.3 9.8 7.8
Dividend Yield 0.0 0.0 0.0
Slide 10
CFROI© Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Kforce’s CFROI© has varied significantly year on year, unable to reach back up to the historic highs in 2007 and 2008. Margins
have improved over the last five years although did marginally drop back down in 2013. Additionally, asset turns have declined
since 2008. Consensus estimates see a 30% upside, while our CS Analyst estimates produce 14% upside in the HOLT model.
Economic profit has varied over the past ten years helping
to explain the relatively flat TSR profile. Changes have been
largely due to spread (falls in cfroi relative to the discount
rate).
Kforce Inc (KFRC.OQ)
Market implied scenario
Slide 11 Danny Goh| +60 3 2723 2083 | [email protected]
Key Financials
PT PP Persero (PTPP.JK)
Industrials – Construction & Engineering
Key chart
RATING: OUTPERFROM
PRICE: 4015 Rp (20th APRIL 2015)
TARGET: 4800 Rp
Mkt Cap: 1.51 bln USD
PTPP is an SOE construction company that specialises in building construction. Besides construction, the company also has a property unit and
manufactures pre-cast concrete.
110.7140.5 153.9 174.9 189.3
255.6 261.53.5
5.02.0
3.02.0
25.5 28.8
114.2
145.5 155.9177.9
191.3
281.1 290.3
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
2011 2012 2013 2014budget
Old 2015budget
Proposedrevised2015
budget
Approvedrevised2015
budget
Rp'tn
Indonesia revised 2015 infrastructure budget
Infra budget Equity injection
Infra budget +63% vs 2014
Long term investment thesis
Indonesia’s new government (under President Jokowi) is embarking on a
5-year infrastructure development plan with an estimated total
infrastructure spending of Rp5,500 tn. The four largest segment of
infrastructure spending is electricity (power plants) Rp980tn, sea ports
(develop the maritime logistics and transportation) Rp900tn, roads
Rp805tn and housing Rp528tn.
In the approved revised 2015 budget, Jokowi raised the infrastructure
budget by 63% to Rp290tn (highest level) and set aside Rp28tn for equity
injection into infrastructure-related SOE companies. The large amount
allocated for equity injection (a first for Indonesia) may encourage private
funding; via rights issue (for listed companies) and secondly through debt
funding with the enlarged equity base.
We believe PTPP is poised to benefit from a multi-year infrastructure
boom in Indonesia. PTPP overtook WIKA’s position as the largest
contractor in FY14 with a total outstanding orderbook of Rp42.5tn vs
WIKA’s Rp41.4tn. New orderbook target for FY15 is Rp27tn (+33%YoY).
Having bagged 2 of the 6 main ports in Indonesia; Tanjung Priok, the
largest seaport in Indonesia and New Makassar, Sulawesi, PTPP is well
positioned to secure future seaport projects, riding on Jokowi’s maritime
ambitions. Management expects the award of at least 2 sea port projects
in FY2015 with orderbook of more than Rp1.4tn.
Why buy now?
We believe Indonesia is undergoing a multi-year infrastructure boom and
2015 is the first of the 5-year infrastructure development plant.
Key potential catalyst are 1) government expediting the roll-out of
infrastructure projects; 2) listing of property and precast subsidiaries; and
3) potential equity injection by the government in 2016.
Valuation:
PTPP trades at a FY2016E PE of 19x vs sector average of 21x. Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 19.6% In IDR mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [IDR mn] 12,427,371.3 17,471,988.0 22,777,280.7 28,627,742.5
EBITDA [IDR mn] 1,241,411.9 1,608,557.7 2,124,007.6 2,692,338.9
EPS (Normalised) [c] 10,989.9 14,550.2 20,646.7 27,957.9
EPS Growth [%] 26.5 32.4 41.9 35.4
EBITDA Margin [%] 10.0 9.2 9.3 9.4
DPS [c] 3,295.6 4,363.7 6,192.6 8,386.0
Payout [%] 30.0 30.0 30.0 30.0
Free CFPS [c] 5,830.7 5,471.4 13,706.0 20,016.8
P/E 36.5 27.6 19.4 14.4
EV/EBITDA 16.2 13.3 10.3 8.0
Dividend Yield 0.8 1.1 1.5 2.1
Slide 12
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
PPTP scores as Quality at any price in the HOLT scorecard framwork. CFROI has picked up to historic highs in 2014 due to an
acceleration in margins from 8% to above 10%. Consensus estimates forecast c70% upside driven by continuing strong
margins and sales growth. Assuming these margins are sustainable the market is currently implying a fall in sales growth to
12.5% by 2019 – still substanitally higher than the sector median of 4.6%
Economic profit more than doubled in 2014 driven by a
combination of growth and spread (CFROI above the cost
of capital). The market cap tracks the economic profit
closely.
PT PP Persero (PTPP.JK)
Market implied scenario
Slide 13 Andrew Grobler| +44 20 7883 5943 | [email protected]
Long term investment thesis
SThree is a leading professional recruitment industry that will benefit from
structurally growing end markets given underpenetrated end markets and
on-going shortages of skilled labour. In the shorter term most end markets
are benefitting from cyclical tailwinds that will support double digit gross
profit growth over the next 3 years and positive operational leverage.
Innately cash generative business through the cycle, which supports a
sustainable dividend (currently 4.1%). On-going ownership by founders of
the business cement this policy
Why buy now?
SThree is a structurally growing cyclical business with recovering end
markets. Demand is growing across most end markets with the
emergence of rising wages which drives incremental operational leverage
for the business. Conversion margins (EBITA/GP currently at 13.6%
(FY14E) vs a peak of 30.3% (FY06) providing amply scope for
improvement in the short and medium term. Additionally, it currently trades
at a discount to its peer group
Valuation:
Trades at 13.1x CY16E PE vs peer group at 17.4x. On an EV/EBITA
basis trades at 9.2x vs peer group at 11.6x. Dividend yield of 4.1%
Key Financials
Sthree (STHR.L)
Industrials – Human Resource & Emplyment services
Key chart
RATING: OUTPERFROM
PRICE: 362.8p (20th APRIL 2015)
TARGET: 360p
Mkt Cap: 0.68 bln USD
Source: Company data, Thomson Reuters,
SThree plc is a UK-based company engaged in the permanent & contract staffing business. Its recruitment areas include banking & finance,
accountancy, energy & natural resources, telecommunications, healthcare, etc.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price -0.8% In GBP mn, unless otherwise stated
Key financials 11/14A 11/15E 11/16E 11/17E
Sales revenue [GBP mn] 746.9 841.5 984.9 1,156.8
EBITDA [GBP mn] 35.0 48.7 59.5 72.3
EPS (Normalised) [c] 16.3 21.4 25.6 31.0
EPS Growth [%] 78.7 30.9 20.0 20.9
EBITDA Margin [%] 4.7 5.8 6.0 6.2
DPS [c] 14.0 14.0 14.0 14.5
Payout [%] 85.8 65.5 54.6 46.8
Free CFPS [c] 0.0 7.0 14.4 18.7
P/E 22.2 17.0 14.1 11.7
EV/EBITDA 13.5 9.9 8.2 6.7
Dividend Yield 3.9 3.9 3.9 4.0
Slide 14
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Sthree’s CFROI profile fell off a cliff in 2009 driven by margins almost halving. However, as the CFROI profile has continually
earned well above the cost of capital it is classified as an eCAP within the HOLT frame work. Asset efficiency has improved to
historic highs over the past three years. Consensus estimates forecast a potential upside of greater than 100% driven largely by
high growth, while CS analyst estimates forecast a potential upside of 42%.
The economic profit fell substantially in 2009 and has not
recovered to the historic highs realised in 2006.
Sthree (STHR.L)
Market implied scenario
Slide 15 Jun Yamaguchi| +81 3 4550 9789| [email protected]
Long term investment thesis:
We expect Sumitomo Osaka Cement to see steady profit growth over the
next several years, driven by: (1) Japanese cement demand bottoming out
and returning to growth (spurred by aging infrastructure replacement,
Tokyo Olympics, Tohoku region recovery demand), (2) lower fuel costs
(e.g. coal and oil), and (3) cement price increases. With strong FCF
generation and an already-improved balance sheet, we believe the
company has scope to enhance shareholder returns in the future.
Why buy now?
Japanese cement demand YoY comparisons should begin to bottom out
and improve as we head towards the summer months. The stock is
currently trading at 12x forward P/E and 0.9x P/B and attractive on both
metrics.
Valuation:
We derive our ¥440 TP by assigning a fair-value P/E of 13.2x (15%
discount to the average 12-month forward P/E of 15.5x since 2005) to our
FY3/16 EPS forecast of ¥33.4.
Key Financials
Sumitomo Osaka Cement (5232.T)
Materials – Construction materials
Key chart
RATING: OUTPERFROM
PRICE: 399 YEN (20th APRIL 2015)
TARGET: 440 YEN
Mkt Cap: 1.39 bln USD
Sumitomo Osaka Cement Co., Ltd. is a Japan-based company that is primarily engaged in the cement business. It operates in five business
segments: Cement; Mineral; Construction Material; Photoelectric and New Materials; and Real Estate and Others.
Avg of Net debt reduction: 8.1
(20)
(15)
(10)
(5)
0
5
10(10)
(5)
0
5
10
15
20
05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3CS
16/3CS
17/3CS
ND YoY⊿(¥bn)FCF (¥bn) Annual FCF vs Net debt YoY value change
FCF (LHS) Net debt YoY⊿(RHS / Inverse)
Avg of Net debt YoY⊿(10/3-)
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 10.3% In JPY mn, unless otherwise stated
Key financials 03/14A 03/15E 03/16E 03/17E
Sales revenue [JPY mn] 235,078.0 231,000.0 232,000.0 236,000.0
EBITDA [JPY mn] 38,103.0 37,800.0 39,200.0 40,600.0
EPS (Normalised) [c] 3,203.0 3,004.3 3,340.7 3,581.1
EPS Growth [%] 78.7 -6.2 11.2 7.2
EBITDA Margin [%] 16.2 16.4 16.9 17.2
DPS [c] 500.0 600.0 700.0 700.0
Payout [%] 15.6 20.0 21.0 19.5
Free CFPS [c] 3,562.2 2,595.2 3,470.5 3,710.9
P/E 12.5 13.3 11.9 11.1
EV/EBITDA 6.1 5.9 5.4 4.9
Dividend Yield 1.3 1.5 1.8 1.8
Slide 16
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
SOC has an interesting CFROI profile. It has continually remained below cost of capital, but with above average sales growth
and the second highest margins vs. peers in Japanese Construction materials. CS analyst forecasts in HOLT suggest a 56%
upside, Consensus estimates forcast an upside of 60%. The market is forcasting a drop off in margins to 8% by 2018,
significantly lower than the company’s 10 Year median of 14.4%.
SOC’s economic profit has remained in negative teritory
since 1993. Driven largely by the bias as it remains below
the cost of capital.
Sumitomo Osaka Cement (5235.T)
Market implied scenario
Slide 17
India (19.5%, 3.4%)
ChinaUS
Arab World
Sub-Saharan Africa
Indonesia
Japan
Russia
Brazil
Canada
Germany
UK
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0.0% 5.0% 10.0% 15.0% 20.0%
(% o
f wor
ld w
ater
res
ourc
es)
(% of world water withdrawals)
Anantha Narayan | +91 22 6777 3730 | [email protected]
Key Financials
Va Tech Wabag (VATE.BO)
Utilities – Water Utilities
Key chart: While India accounts for a mere 3% of the world's fresh water
resources, it accounts for nearly 20% of freshwater withdrawals
RATING: OUTPERFROM
PRICE: 746.80 Rs (20th APRIL 2015)
TARGET: 1012.5 Rs
Mkt Cap: 0.64 bln USD
Source: World Bank (2011), Credit Suisse estimates
Long term investment thesis
Adverse water supply situation: India's per capita availability of 1,200 m3
of water compares to the global average of 6,000 m3. And the withdrawal-
to-resource ratio is 53% (in 2011, and has worsened from 35% in 1997)
versus the global average of 9%. Moreover, the quality of water is a key
challenge with 21 states having poor water quality.
VATW is one of the larger players in the Indian water treatment market
with about 2% market share (15% in its currently addressable market).
We believe its presence across the entire value chain, superior project
management skills, the strength of the WABAG brand (with 90 years of
history), a strong reference list, and access to superior technology have
been the key drivers for the company's success over the past few years.
The international business can supplement growth: The international
division (including exports from India), with presence across about 25
countries, accounted for over 60% of the company's FY14 revenue, 44%
of the FY14 order book and about half of the new order flows in FY14.
Why buy now?
Weak domestic business performance and no significant allocations to
water treatment during the Union Budget has led to flat stock
performance over the last 6 months which we believe provides a good
entry point.
There is significant focus from municipal corporations to improve drinking
water quality and to treat wastewater. Stringent pollution control norms
will drive industrial requirement for effluent treatment.
Valuation:
Leader in a segment with multi-year growth potential can likely sustain rich
valuations. While the stock trades at 25x FY16 PE, the underlying industry
can witness secular growth of 15%+ for many years and VA Tech can
potentially gain market share and improve on margins, leading to 20%+
EBITDA growth.
VA Tech Wabag is one of India's largest players in the water and wasterwater treatment market.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 35.6% In INR mn, unless otherwise stated
Key financials 03/14A 03/15E 03/16E 03/17E
Sales revenue [INR mn] 22,386.0 25,640.8 31,257.8 37,437.7
EBITDA [INR mn] 2,090.0 2,153.8 2,969.5 3,706.3
EPS (Normalised) [c] 2,035.5 2,171.0 3,124.9 3,990.7
EPS Growth [%] 19.6 6.7 43.9 27.7
EBITDA Margin [%] 9.3 8.4 9.5 9.9
DPS [c] 400.0 450.0 525.0 600.0
Payout [%] 19.7 20.7 16.8 15.0
Free CFPS [c] -359.8 -968.8 484.0 1,085.0
P/E 36.7 34.4 23.9 18.7
EV/EBITDA 17.9 17.7 12.8 10.2
Dividend Yield 0.5 0.6 0.7 0.8
Slide 18
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
VATE has consistently earned above the cost of capital since inception, driven by high asset turns relative to peers. Our analyst
estimates within HOLT forecast an 80% upside potential. The market however is pricing in increasing asset efficiency and
margins but also a fall in sales growth to below peer average by 2017.
Economic profit has remained largely flat over the past six
years but ticked up marginally in 2013, driven by growth.
Va Tech Wabag (VATE.BO)
Market implied scenario
Slide 19 Dave Dai| +852 2101 7358| [email protected]
Long term investment thesis (5 years investment horizon):
We expect increasing supply of natural gas in China over the next five
years, mainly from LNG imports and the new West-East III pipeline
carrying imported gas from Central Asia (2015-16E), as well as Russian
gas imports (2018E). More supply should drive more consumption, but at
lower gas prices. As a result, we expect accelerating gas sales volume for
China Resources Gas (20% CARG for 2015-20E). Dollar margin should
remain stable given the strong track record. We see a multi-year growth
story for the company and value-accretive M&A could serve as an
additional catalyst.
Why buy now?
The recent gas price cut (5% on blended basis) was consistent with our
expectation since November 2014. More importantly, further cut is likely
within the next 12 months if oil price remains weak, which should help
stimulate demand growth. The worst seems over for its Tianjin JV project,
which registered a small profit of HK$3 mn in 2H14 following the pass-
through of the gas price hike (significant improvement vs the HK$92 mn
loss recorded in 1H14), and management believes it should turn profitable
starting 2015. Recently, the company has made good progress in M&A,
including acquisitions of two large prefecture-level projects, i.e. Qingdao
and Qinhuangdao.
Valuation:
Trading at 14x FY15E P/E (in line with past-five-year average) on the back
of 21% FY15-17E CAGR, the stock seems attractive and is one of the
cheapest in the sector.
RATING: OUTPERFROM
PRICE: HK$25.75 (20th APRIL 2015)
TARGET: HK$27.0
Mkt Cap: 7.23 bln USD
Key Financials
China Resources Gas (1193.HK)
Utilities – Gas Utilities
Key chart
China Resources Gas Group Limited (“CR Gas”) is principally engaged in the city gas distribution business, including piped natural or petroleum
gas distribution and operating CNG (compressed natural gas) filling stations in the PRC.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 4.9% In HKD mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [HKD mn] 28,717.0 34,000.3 41,573.0 48,338.5
EBITDA [HKD mn] 5,413.3 6,292.7 7,339.8 8,228.4
EPS (Normalised) [c] 114.2 139.4 175.8 204.3
EPS Growth [%] 14.7 22.1 26.1 16.2
EBITDA Margin [%] 18.9 18.5 17.7 17.0
DPS [c] 25.0 30.7 38.7 44.9
Payout [%] 21.9 22.0 22.0 22.0
Free CFPS [c] 21.1 22.9 108.2 183.7
P/E 22.5 18.5 14.6 12.6
EV/EBITDA 11.5 10.0 8.3 7.1
Dividend Yield 1.0 1.2 1.5 1.7
Slide 20
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
China Resources Gas scores very highly (91st percentile) on operational quality. Its CFROI profile moved above the cost of
capital in 2009 and has steadily increased since then. This has been led by high asset efficiency (above peer group average)
and stable margins. Consensus estimates currently arrive at the market implied scenario.
Economic profit turned positive in 2010 and has since
climbed dramatically, driven largely by growth. The market
cap has closely followed the economic profit trend.
China Resources Gas (1193.HK)
Market implied scenario
Slide 21 Achal Sultania| +44 20 7883 6884| [email protected]
Source: Company data, Credit Suisse estimates, IDC, TechInsights, 20TH April 2015
Key Financials
Dialog Semiconductor (DLGS.DE)
Information technology- Semiconductors
Key chart: Volume breakdown of iPhone models over time and PMIC ASP
trends
RATING: OUTPERFROM
PRICE: 43.3 EUR (20th APRIL 2015)
TARGET: 50.0 EUR
Mkt Cap: 3.11 bln USD
Dialog Semiconductor is a fabless semi company that designs power management and audio chips for devices such as smartphones and tablet
computers.
Long term investment thesis
We believe iPhone volume outlook is set to increase over the long term,
for which DLG plays an integral role as the sole provider of the power
management chips (PMIC). Apple accounts for c80% of Dialog’s group
revenues. Our proprietary analysis around iPhone/iPad volume
breakdown by model, along with PMIC ASP trends, over time, suggest
that DLG’s Apple-linked sales will continue to grow 21%/9% in
2015E/2016E. Additionally, with the Connectivity segment (c10% of
sales) also likely to see an inflection in 2015 driven by traction in low-
energy Bluetooth, we see potential for a long term growth story. We
forecast top-line growth of 21%/12% in 2015/2016.
In addition, we see upside risk from the potential introduction of a bigger
screen iPad from Apple this year which would require higher ASP PMIC
chips. We estimate this has scope to drive 2%/6% upside to our
published sales/EBIT estimates for 2016.
Why buy now?
Recent evidence of near term strength in iPhone volumes based on
positive feedback from Asia supply chain commentary, potential for Apple
to launch a bigger screen iPad during 2H15 and our expectations for
chip ASP to continue to rise in the next generation of Apple devices
suggest that our 2016 EBIT estimates are c15% above consensus.
Additionally, long term efforts to diversify the company’s portfolio away
from Apple such as sub-PMIC chips for MediaTek and low-energy
Bluetooth chips both look interesting.
Valuation:
We value DLG on 14x P/E on our 2016EPS estimate of $3.60 plus $4.0
of current net cash/share (incl. converts, we assume dilution in our share
count). This drives our TP of $54.5 or €50. Further, our scenario analysis
suggests scope for EPS of $3.80 in 2016, which on the historic average
multiple of 15x implies FV of €56.
TP Upside vs Share Price 15.4% In USD mn, unless otherw ise stated
Key financials 12/14A 12/15E 12/16E
Sales revenue [USD mn] 1,156.1 1,400.4 1,565.9
EBITDA [USD mn] 282.8 358.6 409.2
EPS (Normalised) [c] 223.9 305.3 360.1
EPS Growth [%] 55.3 36.3 17.9
EBITDA Margin [%] 24.5 25.6 26.1
DPS [c] 0.0 0.0 0.0
Payout [%] 0.0 0.0 0.0
Free CFPS [c] 320.8 327.8 395.0
P/E 20.7 15.2 12.9
EV/EBITDA 11.1 7.6 5.9
Dividend Yield 0.0 0.0 0.0
Slide 22
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Dialog screens as Best in Class in HOLT. Since 2008, Dialog's CFROI level improved rapidly from negative levels as it became
the dominant power chip supplier to Apple. Returns continue to improve on the back of smartphone volumes. CFROI is forecast
by IBES to improve further in the next 2 years via double digit growth, with re-deployment of excess cash providing additional
scope for CFROI improvement.
Economic profit turned postive in 2008 after seven years of
negativity. It has climbed steadily to historic peak values in
2013. This has not been fully replicated by the market cap
movements but has been factpred into TSR.
Dialog Semiconductor (DLGS.DE)
Market implied scenario
Slide 23
Long term investment thesis:
Despite the disappointing 2014 comps, we believe DNKN’s domestic unit
expansion story remains on track. The key to the DNKN investment case
is that franchisees will remain bullish on the brand and continue to build
stores across the US. Our franchisee checks point to very strong demand
for westward expansion, with plenty of room to grow. West of the
Mississippi, Dunkin’ US has a penetration rate of 1 store per 460k people,
compared to 1 store per 13.5k in its “core” and “established” markets.
We expect DNKN’s ROIC (see chart) to continue to improve, and
perhaps accelerate, as DNKN EBITDA grows off a larger basis, while
capex remains relatively flat.
Why buy now?
Most seem skeptical on the name and worried about the weather impact
for Q1. DNKN trading at a rare discount to the sector whereas the stock
has historically traded at a premium.
Investors are also concerned about recent SSS weakness. However, we
see better days ahead, driven by improving macro conditions for low-
income consumers, menu pricing, and continued adoption of mobile pay
and loyalty.
Valuation:
Our $56 TP is primarily derived from our 15-year DCF model, which
builds out the LT store growth opportunity for Dunkin’ US. We assume
~5% LT revenue and 6% EBIT growth, 7% WACC, and 12x terminal
EBITDA multiple.
Our $56 TP also embeds a multiple of 29x NTM EPS, a slight premium to
the industry to reflect DNKN’s long runway for growth and low-risk
franchised model.
Key Financials
Dunkin’ Brands Group (DNKN.OQ)
Consumer Discretionary - Restaurants
Key chart
Jason West| +617 556 5745 | [email protected]
RATING: OUTPERFROM
PRICE: 47.7 USD (20th APRIL 2015)
TARGET: 56.0 USD
Mkt Cap: 4.99 bln USD
Dunkin’ Brands Group, Inc. (DBGI) is a franchisor of quick service restaurants (QSRs) serving hot and cold coffee and baked
goods, as well as hard serve ice cream. The Company franchises restaurants under its Dunkin' Donuts and Baskin-Robbins
brands.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 17.4% In USD mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [USD mn] 748.7 784.4 832.8 879.8
EBITDA [USD mn] 384.3 403.7 436.8 470.1
EPS (Normalised) [c] 174.4 187.3 219.2 246.3
EPS Growth [%] 13.9 7.4 17.0 12.3
EBITDA Margin [%] 51.3 51.5 52.4 53.4
DPS [c] 92.0 106.0 121.9 140.2
Payout [%] 52.7 56.6 55.6 56.9
Free CFPS [c] 164.6 190.6 224.5 252.4
P/E 27.4 25.5 21.8 19.4
EV/EBITDA 16.2 16.9 15.8 14.6
Dividend Yield 1.9 2.2 2.6 2.9
Slide 24
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Dunkin’ Brands’ CFROI profile has hovered around 30% since inception and therefore classifies as an eCAP . This is driven by
high operating margins of over 50% and increasing asset efficiency. However IBES consensus estimates currently forecast
c-37% downside. The market is pricing in continued sales growth to historic highs by 2021 and for them to continue until 2024.
Economic profit has remained realtively stable year on year,
with marginal growth recently due to growth in the CFROI
level over the cost of capital.
Dunkin’ Brands Group (DNKN.OQ)
Market implied scenario
Slide 25 Akshay Saxena| +91 22 6777 3825| [email protected]
Key Financials
Eicher Motors (EICH.BO)
Industrials – Construction machinery & heavy trucks
Key chart Given the aspirational value of owning an RE bike and lower
ownership costs, its addressable customer base has significantly
increased
RATING: OUTPERFROM
PRICE: 14320.6 Rs (20th APRIL 2015)
TARGET: 18500 Rs
Mkt Cap: 6.42 bln USD
Eicher Motors is the maker of the iconic Royal Enfield motorcycle in India. It is also the third-largest M&HCV manufacturer in India.
0%
5%
10%
15%
By Age By Income (% of middleclass and rich)
First Time Buyers
Traditional Customer Base Enhanched
Long term investment thesis:
The 2W business (Royal Enfield) has been in a sweet spot for some time with
demand always running ahead of supply despite continuous capacity
expansion. RE bikes have always had strong aspirational values; over the past
few years, the firm has significantly improved product quality and broadened
its customer base (both in terms of age and income). With a significant
growth in India's youth population and their rising aspiration and growing
income levels, it should see a continued influx of newer buyers.
Even with the recent strong growth, the lifestyle/ cruiser biking segment
(where RE operates) is still at a nascent stage with very low penetration in its
addressable customer base, leaving large headroom for continued high
growth. RE is also positioned uniquely as an entry level cruiser bike at a huge
discount to global brands like Harley Davidson hence can grow unhindered.
The key driver of next growth phase will be product range expansion as RE
greatly lags peers like Harley on a no. of platforms and models. It is
developing two new platforms with 4-5 bikes on each, with different looks and
usage, which will also be used for exports. This also gives existing RE
customers an option to upgrade (which will be an important segment in the
future) – currently just ~7% are repeat customers for RE vs. 60% for Harley
Why buy now?
RE continues to enjoy strong demand, with waiting period of over five months,
despite the gradual increase in production. Other near term growth driver is
expansion of distribution network and growth in high margin spares business.
In the 2W business we expect ~400 bp margin expansion in three years
driven by operating leverage. The CV’s business is also at an inflection point
as the CV cycle recovers and Eicher launches new range of Pro series which
will lead to market share gains in heavy trucks.
Valuation:
The stock is trading at ~24x FY17 earnings - While valuations look stretched,
we believe, given the high growth phase of the company, it is justified. On
PEG basis Eicher is trading at discount to other 2W stocks Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 29.2% In INR mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [INR mn] 87,383 120,564 155,228 188,478
EBITDA [INR mn] 11,148 19,567 27,878 35,722
EPS (Normalised) [c] 22,707 42,393 60,606 78,652
EPS Growth [%] 55.9 86.7 43.0 29.8
EBITDA Margin [%] 12.8 16.2 18.0 19.0
DPS [c] 5,000 9,000 14,000 18,000
Payout [%] 22.0 21.2 23.1 22.9
Free CFPS [c] 15,155.6 33,860.5 65,188.5 93,414.8
P/E 63.1 33.8 23.6 18.2
EV/EBITDA 33.6 18.9 12.8 9.5
Dividend Yield 0.3 0.6 1.0 1.3
Slide 26
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Eicher scores as quality at any price within the HOLT scorecard; due to strong operational quality (88th percentile) and
momentum (97th percentile). The company’s CFROI profile has trended upwards since 2009, rising above the cost of capital,
due to increasing margins. However, consensus estimates currently price in a potential downside risk of c-40%. Our analyst
estimates on the otherhand a potential upside of 12%.
Economic profit turned positive in 2010 to reach historic
highs in 2014. This has been driven by both growth and
spread changes (CFROI over the cost of capital). TSR and
market cap have followed this trend.
Eicher Motors (EICH.BO)
Market implied scenario
Slide 27
Long term investment thesis
Within our acquirer universe GPN is uniquely positioned given its above
average exposure to the higher growth VAR channel in the US as well as
its significant international footprint which is unique among public
merchant acquirers. Given the continued migration from paper to plastic,
especially Internationally where 85% of transactions are cash, GPN is
poised to outgrow its domestic only peers for the foreseeable future, with
high-single digit top-line growth and mid-teens EPS growth including
buybacks/M&A. GPN boasts a best-in class management team.
Why buy now?
Despite running ~50% in the trailing twelve months, numerous catalysts
are still in front of the company. Interchange rates (fees earned by banks
on card transactions) in both Europe and Canada are due to decline in
2015 given regulatory pressure. Declining interchange rates typically
create pricing opportunities for merchant acquirers such as GPN. We
note GPN is the only public acquirer with meaningful exposure to Europe
and Canada. In the US, GPN is the #2 player in the integrated payments
(iPOS) channel, a market which is growing in the high-teens vs. a mid-
single digit overall rate of growth in US acquiring. With the migration to
EMV just underway in the US, we believe the growth rate is sustainable
over the intermediate-term. Lastly, we see ample opportunities for M&A
and new JVs in Int’l market – especially Europe.
Valuation:
Our $104 target price is 18x our CY16 EPS, which is at a slight discount
to its peer group.
RATING: OUTPERFROM
PRICE: 100.3 USD (20TH APRIL 2015)
TARGET: 104.0 USD
Mkt Cap: 6.91 bln USD
Key Financials
Global Payments Inc. (GPN.N)
Information tech – Data processing & outsourced services
Key chart
Georgios Mihalos| +212 325 1749| [email protected]
Global Payments Inc. provides electronic transaction processing services for merchants, independent sales organizations (ISO),
financial institutions, government agencies, and multi-national corporations
0%
5%
10%
15%
20%
25%
2012 2013 2014 2015 2016 2017
Ad
j. O
pe
rati
ng
In
co
me
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 10.7% In USD mn, unless otherwise stated
Key financials 05/14A 05/15E 05/16E 05/17E
Sales revenue [USD mn] 2,554 2,727 2,960 3,151
EBITDA [USD mn] 521 600 652 709
EPS (Normalised) [c] 412 482 544 603
EPS Growth [%] 13.0 17.1 12.8 10.8
EBITDA Margin [%] 20.4 22.0 22.0 22.5
DPS [c] 0 0 0 0
Payout [%] 0.0 0.0 0.0 0.0
Free CFPS [c] 155.0 469.5 562.8 0.0
P/E 24.3 20.8 18.4 16.6
EV/EBITDA 15.2 13.2 11.6 9.4
Dividend Yield 0 0 0 0
Slide 28
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Global payments scores highly on both operation and momentum, 71st and 85th percentile respectively. It also classifies as an
eCAP due to sustained high CFROI over the cost of capital. However, margins have been declining since 2005 and now fall
below the peer average. Consensus estimates forecast a c-14% downside despite high sales growth and margins forecasted
to 2023.
Economic profit has grown continuously from inception in
1998. This has been largely due to growth in the asset base
rather than spread change. Economic profit due to goodwill
has also started to increase.
Global Payments Inc. (GPN.N)
Market implied scenario
The market is pricing in strong sales growth,
however this is only marginally above the peer
average
Slide 29
Long term investment thesis
In the coconut oil category there have been concerns on category
reaching maturity. However , the gap in conversion of loose oil to branded
and the headroom for Marico to gain share within branded is large enough
to sustain 6-8% volume growth for a decade before growth tapers off.
Marico is consciously focusing on shifting its portfolio towards value-added
oils, youth products and foods which should see growth ahead of coconut
oils over the next five years and also structural expansion in margins
We expect Marico's international business to sustain 15-20% organic
constant currency revenue growth over the next 3-5 years, with
acquisitions only being top-ups to the business wherever needed. The
cross pollination of products and an organic entry into new markets should
be the key drivers of the growth.
Why buy now?
We expect EBITDA margins to improve ~200 bps in FY16 as it has multiple
tailwinds from lower prices of crude derivatives such as liquid paraffin and
plastic packaging like HPDE. Also, copra (which is another key raw
material) prices are down about 10% from peak levels
In most of the new segments, Marico has not reached maturity in margins
as they are in an investment phase. As the business matures, we do not
see any reason why margins at the contribution level be similar or higher
than core business. Profitability will improve as theses business achieve
scale in 2-3 years as items like as ad spends form a huge part of the cost
structure, and will gain from scale.
Valuation:
Marico is currently trading at ~29x FY17 earnings. While valuations look
rich, Marico is amongst the cheapest mid-cap consumer stocks in India
and the re-rating in last year or so is in line with the broader market re-
rating.
Key Financials
Marico (MRCO.BO)
Consumer Staples – Personal products
Key chart: Marico investing in non-coconut oil segments which will drive growth
Arnab Mitra| +91 22 6777 3806 | [email protected]
RATING: OUTPERFROM
PRICE: 396.80 Rs (20TH APRIL 2015)
TARGET: 420.0 Rs
Mkt Cap: 4.09 bln USD
Marico is a leading fast moving consumer goods company in India with market leadership in hair oils and edible oils. The
company also draws over 30% of revenues from international markets.
CategoryRevenue share in
domesticGrowth drivers
Value added hair oil ~24%
Populate new need segments,
gradually raise prices in Amla once
market share stabilises
Post-w ash serum ~2% Market development w ith new products
Oats ~2%
Marico has over 50% share of savoury
oats, to grow it outside breakfast to
part day meals
Hair gels ~2%Penetration through single use small
packs
Deodorants ~2%Hold market share, no major
investments likely
Body Lotion ~2% Gain share in a grow ing market
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 5.8% In INR mn, unless otherwise stated
Key financials 03/14A 03/15E 03/16E 03/17E
Sales revenue [INR mn] 46,865 58,320 64,523 73,180
EBITDA [INR mn] 7,480 8,630 10,949 12,613
EPS (Normalised) [c] 753 914 1,194 1,404
EPS Growth [%] 33.4 21.4 30.7 17.6
EBITDA Margin [%] 16.0 14.8 17.0 17.2
DPS [c] 350 385 424 466
Payout [%] 46.5 42.1 35.5 33.2
Free CFPS [c] 1,211.4 790.9 1,160.3 1,349.6
P/E 52.7 43.4 33.2 28.3
EV/EBITDA 34.6 29.7 23.1 19.6
Dividend Yield 0.9 1.0 1.1 1.2
Slide 30
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Marico classifies as an eCAP due to its high stable CFROI profile. This has been driven by steadily improving margins.
Additionally, although asset efficiency has been declining since 2006 it still sits significantly above the peer average. IBES
consensus estimates are currently forecasting the market price.
Economic profit initially grew slowly over the past 20 years.
However, from 2011 the rate of growth has increased.
Marico (MRCO.BO)
Market implied scenario
Slide 31
Long term investment thesis
Rentokil has emerged from 10 years of restructuring as a more focused
business (3 main divisions), materially improved cash generation and a re-
vitalised M&A pipeline. This gives it the opportunity to compound value for
the foreseeable future as excess cash is rotated into Pest Control as it
further builds out its network. Pest Control will move from 22% of
revenues in 2012A to 50% by 2016/17 on our estimates. This will create
an increasingly focused operation based around a stable, high return,
cash generative business. Potential opportunity for a transformational deal
over time if it can sell its lower return textiles division and use the
proceeds to consolidate the Pest market.
Why buy now?
It is still in the early stages of its move to being a more cash generative
and focused business and the market has yet to give it credit for its ability
to compound value creative growth. Trades at 15x 2016E PE compared
to Bunzl at 20x.
Valuation:
On a PE basis trades at 15x 2016E PE. EV/EBITDA of 7x compared to
Bunzl at 14.2x. Dividend yield of 2.3% for 2016E
Key Financials
Rentokil (RTO.L)
Industrials – Environmental & facilities services
Key chart
Andrew Grobler| +44 20 7883 5943 | [email protected]
RATING: OUTPERFROM
PRICE: 138p (20TH APRIL 2015)
TARGET: 141p
Mkt Cap: 3.74 bln USD
Rentokil Initial plc is the holding company. The Company, through its subsidiaries, operating businesses in some 50 countries
provides a range of business to business support services, operating in six segments overall.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 2.2% In GBP mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [GBP mn] 1,740.8 1,791.1 1,840.1 1,894.9
EBITDA [GBP mn] 420.9 429.3 434.2 450.6
EPS (Normalised) [c] 8.2 8.7 9.1 9.6
EPS Growth [%] -2.8 5.9 4.7 6.0
EBITDA Margin [%] 24.2 24.0 23.6 23.8
DPS [c] 2.6 2.8 3.1 3.4
Payout [%] 31.6 32.9 34.5 35.8
Free CFPS [c] 5.2 7.3 7.0 7.7
P/E 16.9 15.9 15.2 14.3
EV/EBITDA 7.6 7.3 7.0 6.6
Dividend Yield 1.9 2.1 2.3 2.5
Slide 32
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Rentokil’s CFROI profile has changed dramatically over the past 20 years. Despite it almost halving, it still qualifies as an eCAP
as although CFROI levels have dropped they still remain realtively high versus the market. The falling returns have been largely
due to declining margins, which more recently have started to pick up again. Consensus estimates currently forecast c-31%
downside risk.
Rentokil’s economic profit fell significantly between 1999
and 2008, however more recently this trend has reversed
and economic profit has started to improve over the past
three years. The large falls in economic profit have been
mostly due to decreasing CFROI over cost of capital.
Rentokil (RTO.L)
Market implied scenario
Sales growth is expected
to converge to sector
median of c5%
The market is forecasting
historic EBITDA margins
Slide 33 Zen Zhou| +852 2101 7640| [email protected]
Long term investment thesis:
Salubris is the leader in the niche Percutaneous Coronary Intervention
(PCI) related drug segment. Its blockbuster Taijia (泰嘉, Clopidogrel)
recorded sales of Rmb1.5 bn in 2013 with 36% market share. We believe
Taijia will grow 20%/20%/25% YoY in 2015/16/17, driven by: 1) the
likelihood of PCI surgery registering a 10% CAGR due to increasing
penetration rate, and 2) the possibility of Salubris's Taijia cornering market
share from Sanofi's Plavix due to better cost performance ratio.
In 2012, Salubris acquired Allisartan Isoproxil, an innovative anti-
hypertension drug with patent protection until 2026. We believe the
product has the potential to become an Rmb1 bn worth blockbuster and
turn into a new growth driver. 1) The company targets an Rmb20 bn
market with five billion-worth blockbusters, 2) As per clinical data, the new
drug shows better efficacy compared with Losartan Potassium (氯沙坦钾),
3) The product can leverage on Salubris' strong academic promotion team
in the cardiovascular space.
Why buy now?
We have seen evidence of accelerating drug tenders in 1H15. We believe
the company's Taijia would benefit from this round of drug tender by
taking market share from MNCs, while its potential blockbuster, Allisartan,
is likely to benefit from the upcoming adjustment of national
reimbursement drug list.
Valuation:
Our target price of Rmb55 is based on 28x 2015E P/E, ~20% discount
the chemical drug sector average, which can be seen as a safety margin
for investors. Salubris has also been registering a decent growth rate and
high ROE, with plenty of cash in hand.
Key Financials
Shenzhen Salubris Pharmaceuticals Co. (002294.SZ)
Health care – pharmaceuticals
Key chart
RATING: OUTPERFROM
PRICE: 52.3 Rmb (20TH APRIL 2015)
TARGET: 60.0 Rmb
Mkt Cap: 5.01 bln USD
Shenzhen Salubris Pharmaceuticals Co., Ltd. develops, manufactures, and distributes anti-infective and cardiovascular
medicine as well as pharmaceutical ingredients.
Increasing market share of Taijia Figure 1: Increasing market sha
18% 21% 27% 30%36% 37%
82% 79% 73% 70%64% 62%
2009 2010 2011 2012 2013 2014
Taijia (Salubris) Plavix (Sanofi)
Clopidogrel domestic market share (in terms of sales)
18% 21%27% 30%
36%
82% 79%73% 70%
64%
2009 2010 2011 2012 2013
Taijia (Salubris) Plavix (Sanofi)
Clopidogrel domestic market share (in terms of sales)
Source: Menet, Credit Suisse research Source: Menet, Company data, Credit Suisse research
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 14.8% In CNY mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [CNY mn] 2,883 3,527 4,205 5,172
EBITDA [CNY mn] 1,282 1,594 1,923 2,306
EPS (Normalised) [c] 159 197 241 301
EPS Growth [%] 25.5 23.7 22.0 25.1
EBITDA Margin [%] 44.5 45.2 45.7 44.6
DPS [c] 70 79 96 120
Payout [%] 43.9 40.0 40.0 40.0
Free CFPS [c] 111.4 106.1 231.4 154.8
P/E 32.8 26.5 21.7 17.4
EV/EBITDA 26.0 20.7 16.7 13.8
Dividend Yield 1.3 1.5 1.8 2.3
Slide 34
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
This company scores extremely high on operational quality and valuation, 94th and 75th percentile respectively. Its CFROI profile
has grown quickly since inception, due to improving margins and asset efficiency. IBES consensus estimates currently forecast
a potential upside of 89%, while CS analyst forecasts in HOLT produce over 100% upside.
Economic profit has tripped since 2010 due to growth and
more recently improving CFROI over the cost of capital
(spread). This has largely correlated with increasing market
cap and TSR.
Shenzhen Salubris Pharmaceuticals Co. (002294.SZ)
Market implied scenario
The market is pricing in a
significant delcine in sales
growth
Stable but high margins
are expected
Slide 35
94%
94%
93%
89%
87%
78%
69%
68%
67%
67%
66%
65%
49%
45%
37%
30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Seni
or
Spec
tris
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ma
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cote
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ork
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x
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s
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isha
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Laird
Mor
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nced
…
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GKN
Average Cum. Cash Conversion from 2004 Sector Average
Jonathan Hurn | +44 20 7883 4532 | [email protected]
Long term investment thesis (5 years):
Upper sector quartile cash conversion combined with healthy Credit
Suisse adjusted ROIC. We see this trend continuing.
c.28% of group sales come from automation (on our estimates) making
Spectris one of the most attractive ways to gain exposure to this ongoing
secular growth theme.
Balance Sheet optionality with FY15E net debt / EBITDA of 0.2x. Allows
scope for a large acquisition (c£400m+) providing another potential leg to
the equity story.
Potential group margin upside underpinned by a recovery in the Material
Analysis division. We believe operating margins over the medium to long
term can approach c25%
Why buy now?
We see two positive trends benefiting group EBITA in FY15.
First is improving profitability at Material Analysis where margins are
currently 280bp below peak and we believe over the medium term they
can exceed the previous high of 18.1%. Part of this will come from
growth in markets (ex-mining) and associated operational gearing, but
also the payback on R&D spend (including customer specific), which has
been taken above the line and equates to c8-9% of divisional sales. We
expect this payback to start in H2 2015 and help push Material Analysis
FY15 margins to 17.6% vs. 15.3% in FY14.
Second is improving mix at In-line Instrumentation which will also benefit
FY15 margin (particularly H2) as consumables in Pulp & Paper are
expected to move back in favour of coated blades vs. lower margin rods.
For FY15 our Group EBITA margin forecast is 17.9% vs. 16.9% in FY14
and FY15 consensus of 17.0% (pre results).
M&A: Spectris could be a target for a US multinational (e.g. Danaher)
Valuation:
15.7x PE vs. UK sector average of 16.6x. At 2164p, Spectris is trading at
a 26% discount to its global SOTP, vs. c15%+ historically.
RATING: OUTPERFORM
PRICE: 2287p (20TH APRIL 2015)
TARGET: 2310p
Mkt Cap: 3.98 bln USD
Key Financials
Spectris Plc (SXS.L)
Capital Goods – Electrical Equipment
Key chart
Spectris plc designs, develops and markets instrumentation and controls. The company operates in four segments: Materials Analysis, Test and Measurement, In-line
Instrumentation, and Industrial Controls.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price 1.0% In GBP mn, unless otherwise stated
Key financials 12/14A 12/15E 12/16E 12/17E
Sales revenue [GBP mn] 1,174 1,251 1,299 1,354
EBITDA [GBP mn] 216 242 256 268
EPS (Normalised) [c] 139 139 148 155
EPS Growth [%] 4.5 -0.1 6.5 5.3
EBITDA Margin [%] 18.4 19.3 19.7 19.8
DPS [c] 47 51 56 62
Payout [%] 33.5 36.9 38.1 39.8
Free CFPS [c] 104.0 119.7 139.6 146.3
P/E 16.5 16.5 15.5 14.7
EV/EBITDA 13.2 11.4 10.3 9.3
Dividend Yield 2.0 2.2 2.5 2.7
Slide 36
Spectris Plc (SXS.L)
Market implied scenario
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Consensus estimates and Credit Suisse Analyst Estimates (EARL) price in 14% and 10% upside respectively. The stock saw a
significant jump in CFROI in 2010 and remained substantially above its cost of capital due to increasing asset efficiency. The
market is currently pricing in a fall in sales but sustained high margins. Spectris is also an eCap.
Economic profit has trended upwards since 2009, but did
suffer a marginal decline in 2013 due to declining CFROI.
Slide 37
< FY3/14 >
* Including guest purchaser
< Mid to long term outlook (in 4-5 years) >
¥100,000-¥150,000 40-50% ¥0.4-0.5bn per year
× × ×
Avg annual spending per customer ZOZOTOWN's market share Average sales per shop
approx. ¥44,000 approx. 50% ¥0.21bn per year
Transaction value
¥300bn - ¥350bn
Active members* Average shops in operationE-commerce accounts for over 15% of Japan’s
apparel market (est.total market value of ¥4.5tn)3.0-3.5mn 800
× × ×
Avg annual spending per customer ZOZOTOWN's market share Average sales per shop
Transaction value
¥115.0bn
Active members* Average shops in operationE-commerce accounts for over 4% of Japan’s
apparel market (est.total market value of ¥5tn)2.03mn 580
Long term investment thesis
Start Today operates ZOZOTOWN, an e-commerce site that specializes
in Japanese fashion. The business model involves commissioned sales
(product delivery and promotion) of products from around 700 fashion
brands in exchange for sales commission fees. The site had 2.23mn
active users in 3Q FY14 and user numbers and merchandise transaction
value continue to grow today at 10–15% YoY. Operating margin is high at
11% and Start Today has the financial reserves to develop new services.
One new service started in fall 2014 is free, same-day delivery in the
Tokyo and Osaka metropolitan areas. The company is also building up its
ZOZOUSED business that buys second-hand brand clothing and takes
on inventory risk for clothing sales. In 2013, Start Today launched the
social networking site WEAR that allows users to share fashion
information; this service now has over 4mn users. The long-term strategy
is to generate earnings through increased customer traffic on
ZOZOTOWN via WEAR or affiliated e-commerce sites operated by other
companies. We expect Start Today’s merchandise transaction value to
increase over the next four or five years to around ¥300bn (we estimate
around ¥130bn in FY3/15).
Why buy now?
We expect personal consumption in Japan to improve in 2015 due to
higher employment in younger age brackets and higher wages as
corporate earnings recover. There may be a particularly strong recovery in
consumption by consumers in their 20s and 30s (Start Today’s main
customer segment), which could boost Start Today’s earnings.
Valuation:
We calculate our ¥3,000 target price by applying a P/E of 30x
(referencing the average for Internet stocks including Rakuten,
Kakaku.com, and Askul; equates to 1.5x PEG) to FY3/15E EPS and then
adding WEAR's business value (¥330/share by our estimate).
Key Financials
Start Today (3092.T)
Consumer Discretionary – Internet Retail
Key chart : 5 years outlook of ZOZOTOWN transaction value
Taketo Yamate| +81 3 4550 9963 | [email protected]
RATING: OUTPERFROM
PRICE: 3010 YEN (20TH APRIL 2015)
TARGET: 3000 YEN
Mkt Cap: 2.71 bln USD
START TODAY CO., LTD. is a Japan-based company engaged in the E-commerce (EC) business which operates Internet
shopping site under the name of ZOZORESORT, as well as the provision of other related services.
Source: Company data, Credit Suisse estimates, pricing of close 20th April 2015
TP Upside vs Share Price -0.3% In JPY mn, unless otherwise stated
Key financials 03/14A 03/15E 03/16E 03/17E
Sales revenue [JPY mn] 38,581 41,060 48,750 56,650
EBITDA [JPY mn] 13,218 15,830 19,180 22,650
EPS (Normalised) [c] 7,293 8,909 10,879 12,905
EPS Growth [%] 46.4 22.2 22.1 18.6
EBITDA Margin [%] 34.3 38.6 39.3 40.0
DPS [c] 2,500 3,000 4,200 4,800
Payout [%] 34.3 33.7 38.6 37.2
Free CFPS [c] 7,450.0 9,693.1 9,833.2 10,739.0
P/E 41.3 33.8 27.7 23.3
EV/EBITDA 23.7 19.3 15.6 12.9
Dividend Yield 0.8 1.0 1.4 1.6
Slide 38
CFROI Sales Growth
EBITDA Margins
Asset Turns
Economic Profit
Start Today’s CFROI profile reached peak levels in 2012 at c43%. Margins have improved continuously since inceptions, while
asset efficiency has remained stable. Consensus estiamates currently price in c-38% downside. The market is currently pricing
in increasing margins (to all time highs), and high sales growth.
Economic profit has doubled since 2011 driven largely by
substantial asset growth.
Start Today (3092.T)
Market implied scenario
Companies Mentioned (Price as of 20-Apr-2015)
ASKUL (2678.T, ¥2,800) Bunzl (BNZL.L, 1850.0p) China Distance Education Holdings Limited (DL.N, $19.3) China Resources Gas (1193.HK, HK$25.2) Danaher Corporation (DHR.N, $84.92) Dialog Semiconductor (DLGS.DE, €42.25) Dunkin' Brands Group (DNKN.OQ, $47.72) Eicher Motors (EICH.BO, Rs14762.5) Global Payments, Inc. (GPN.N, $100.29) Kaveri Seed (KVRI.NS, Rs959.15) Kforce Inc. (KFRC.OQ, $22.49) Marico Ltd (MRCO.BO, Rs393.2) PT PP (Persero) (PTPP.JK, Rp4,000) Rentokil (RTO.L, 137.6p) SThree (STHR.L, 356.75p) Shenzhen Salubris Pharmaceuticals Co Ltd (002294.SZ, Rmb47.52) Spectris (SXS.L, 2233.0p) Start Today (3092.T, ¥2,992) Sumitomo Osaka Cement (5232.T, ¥397) VA Tech Wabag (VATE.BO, Rs746.45)
Disclosure Appendix
Important Global Disclosures
I, Eugene Klerk, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For La tin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating defin ition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Underperform/Sell* 16% (44% banking clients)
Restricted 3%
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See the Companies Mentioned section for full company names
The subject company (KFRC.OQ, GPN.N, PTPP.JK, RTO.L, 3092.T, DL.N, DHR.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (PTPP.JK, 3092.T, DL.N, DHR.N) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (PTPP.JK) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (PTPP.JK, 3092.T, DL.N, DHR.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (KFRC.OQ, GPN.N, VATE.BO, PTPP.JK, DNKN.OQ, 3092.T, SXS.L, 1193.HK, 5232.T, DL.N, DHR.N) within the next 3 months.
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Important Regional Disclosures
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Credit Suisse Securities (Europe) Limited............................................................................................................ Eugene Klerk ; Catherine Tillson
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only