Friday, November 5, 2010

Industrials : Event - Expected development of credit profile/rating - Recommendation

On the back of strong 9M10 results, Linde confirmed its outlook for 2010, saying that it expects 2010 operating results to beat those in the record year 2008. Group operating profit for the period under review improved 23% to EUR 2.1bn on sales of EUR 9.4bn, up 13% yoy. While sales in Engineering sales remained stable yoy at EUR 1.7bn, turnover rose 15% to EUR 7.6bn in Gases, thanks to the recovery in the economic climate and further helped by the company's global footprint and strong position in emerging markets.

Against this background, operating profit margins improved strongly by 90bp yoy to 22.8% (adjusted for restructuring charges), further helped by its ongoing pursuit of efficiency gains under its HPO program. In Engineering, the operating margins jumped to 11.0%, well above Linde's 8% target, as a result of the completion of various projects.

Expected development of credit
The company confirmed the outlook for 2010. In Gases, Linde will benefit from a further rampup of tonnage businesses as a well as the overall economic recovery in emerging markets. Sales and earnings should exceed the record levels of 2008. In Engineering, the company's operating performance should benefit from its healthy order book of EUR 4.1bn, which was however, slightly lower than in 1H10 (EUR 4.3bn), but will provide for a solid outlook for the following two years. The margin target of the division was raised to at least 10% from the previous target of 8%.

Recommendation We stick to our marketweight recommendation for the name, given the expected continuation of the strong operating performance. However, we continue to overweight the hybrids LINGR 2013 and 2066, which feature moderate extension risk.

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