CFA France -­‐ Investment Research Challenge January 3rd, 2012 Team K
SEB Group
January 3rd, 2012
Ticker: SK.FP
Price: € 58.86
Recommendation: Buy
Target Price: €71.20
Earning per share
2008A
2009A
2010A
2011E
2012E
for the first
semester
1.1
0.59
1.89
1.96
2.03
for the second
semester
2.1
2.55
2.76
2.86
2.97
End-Year Closing
Price
21.46
39.7
77.73
58.12
71.20
P/E Ratio
6.71
12.64
16.72
15.72
14.24
Highlights
Market Profile
52 Week Price Range of 2011
€52.840 (22/11/2011)
€81.670 (12/01/2011)
Average Daily Volume of 2011
132,522.6938
Beta estimated
Dividend per share 2011 estimated 1
Dividend yield 2011 estimated 1
0.73
1.32
2.27%
Shares Outstanding
952,000
Market Capitalization (2011)
49,
Institutional Holdings
Insider Holdings
17%
83%
Book Value per Share (2010)
Debt to Total Capital (2010)
Return on Equity (2010)
€29.15
8.34%
18%
€2,948 bn
Key Information (2010)
World leader on the market of:
ü
ü
ü
for the
year
3.2
3.14
4.65
4.82
5.00
Cookware
Kitchen electric
Home and personal care
•
A strong international presence: the group is currently present in about 150
countries. Its strategy is to expand into new countries rather than expand into new
industries. SEB is international, not global. The main difference consists in offering
products tailored for each country. According to Thierry de la Tour d’Artaise, CEO of
SEB, products must be produced where they are sold: hence the preference of tactical
acquisitions over the exportations. The group makes 45% of its turnover in the
emerging countries, and is maintaining a strong external growth (since 2005 SEB has
acquired six companies abroad). Therefore, the group benefits from the high growth
of those developing countries, which allows the company to offset the slowdown in
mature economies.
•
Innovation as a competitive advantage: to maintain leading position and
stimulate demand in developed countries, the group relies on innovation, with a high
R&D spending of 2% of sales. A paying strategy in emerging markets too. SEB
recently created a fund to invest in high potential technological start-ups, in order to
anticipate the evolution of the small domestic appliance market. The company Key
Ingredients, which specializes in digital storage
•
A healthy financial management ensures a stable response to the current
economic crisis. The group’s recent bond issue’s success and the Debt to EBITDA
ratio, which reflects the firm’s capacity to reduce its debt, is historically low and in
S12011 reached 0,54. SEB’s high level of cash, €1 billion dedicated to new
acquisition projects according to the CEO, ensures the continued implementation of
its strategy.
•
Current share price is attractive: our target price is €70.05, while the stock
is currently traded at €58.86. In our view SEB’ share price is undervalued, and the
long term prospects of the firm are very interesting, that’s why we estimated the value
the company using a DCF method with forecasts over 20 years.
Evolution of SEB’s stock compared to SBF 120
Revenue
EBITDA
EBIT
Net income
€3.652 Billions
€468 Millions
€351 Millions
€220 Millions
Chairman: Thierry de La Tour d’Artaise
23,058 employees
63 commercial agencies
24 production sites
150 countries
1 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Business Description
breakdown of the small household
equipment market by product family in
2010
19%
Founded in 1857 by Antoine Lescure, the SEB group is the worldwide leader in the
small domestic appliances (SDA) industry with a revenue of €3.6 bn in 2010 (+15%
from 2009). Its business is divided in three sub-industries: cookware, kitchen electrics,
and home and personal care. It is notably the global leader on more than ten specific
lines of products.
23%
5%
15%
7%
12%
9%
10%
Managed by Thierry de la Tour d’Artaise since 2000, SEB has started under his
direction a rapid internationalization; it is now present in more than 150 countries and is
a regional leader in Western Europe, Columbia, Brazil, and other markets. The group
employs 23,058 professionals through 63 commercial agencies and 24 production sites
worldwide.
Product segments
Home care
Food preparation
Personal care
Electric cooking
Linen care
Beverage preparation
Home confort
Cookware
19%
Cookware
31%
Kitchen electric
Cookware
This line of products engulfs all non-electrical cooking equipment. The group has a
broad offering from low value to high value brands and from regional to global brands.
The group is the global leader for this product segment, which averaged more or less a
10% organic growth in 2010.
breakdown by main product families in
2010
50%
As mentioned previously, SEB’s product range is divided into three categories:
Kitchen Electrics
Home & Personal care
This line is the largest SEB offers, with an extremely large range of products. It is
divided into two types of products: Electric cooking (around 15% organic growth in
2010) and preparation machines for food and beverages (around16 % organic growth in
2010). The group is the worldwide leader for deep fryers, electric kettles, bread
machines, steam cookers…and holds various number two and three positions globally.
Repartition of sales of 2010 by
geographic locations
Home and Personal Care
We can find here products for personal care, linen care and home care which ranges
from electric epilator, to hairstyling devices, from irons to semi-automatic washing
machines, and from vacuum cleaners to fans and heaters. The home care line is growing
fast, with a 30% organic growth rate in 2010, while the personal care line stagnates with
barely a 2% organic growth rate in 2010.
25%
20%
15%
10%
21%
9% 14%
5%
19% 22%
11%
0%
4%
Worldwide presence
Emerging markets 44%
Mature Markets 56%
Repartition of the production in 2010
2%
20%
Apart from this world market, the group uses internationalization in its production
apparel too. Indeed, SEB has several local plants in each of their regions enabling
reduction in production costs, transportation costs and currency adverse movements
(transactions effect). Most of the outputs are sold in the regions where they were
produced even if China’s factories export around 16% of their production.
30%
8%
40%
Sourced
Europe
Latine America
The group is present in over 150 countries through a portfolio of global and regional
brands (see appendix 2). Their global presence is unique in the industry and is a
tremendous advantage on which the group is capitalizing. They have divided the world
in five regions: North America (11% of sales in 2010), Latin America (9%), Western
Europe (41%), Asia Pacific (21%), and the “Rest” (18%). Their main focuses are Asia,
Latin America and the “Rest” as they have the highest growth potential.
United States
China
2 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Industry Overview and Competitive Positioning
An attractive industry
Evolution of the growths of sales at
constant exchange rate
Whereas most industries’ sales volume decreased significantly during the economic
downturn, the small domestic appliances (SDA) industry remained partially protected
and benefits since 2010 from a quickly paced pickup of sales worldwide. For this
industry, the 2007 recession seems definitely over.
20,00%
The main regions contributing to this increase of sales are Asia, where growth in value
of the SDA industry reached 22% in the first ten month of 2010, and Eastern Europe
with 25% growth in the first six months of 2011. The three fast growing markets are
Asia, Eastern and Central Europe and Latin America.
15,00%
10,00%
5,00%
0,00%
2007
-5,00%
2008
2009
2010
SEB group has an attractive position compared to competitors as it is the only one
present worldwide and can benefit from all of these tremendous growth rates.
When studying the demand drivers in this industry, we can conclude that its potential
for growth is still high and the entrance into the maturity stage is not yet foreseeable.
-10,00%
-15,00%
In developed markets, consumers are coming back towards homemade food and
cooking is increasingly seen as a hobby or passion. People are also ready to renew their
appliances if they perceive new products as being more ecological and energy efficient
or if they enable more timesaving.
France
OtherEuropeanUnioncountries
NorthAmerica
In developing markets, growth is fully pulled by demand as purchasing power and
standards of living increase. There is a need for basic cookware products but at the
same time, the demand is shifting towards higher value products and broader range of
products (desire vs. needs).
SouthAmerica
Asia-Pacific
CentralEurope,CIScountriesandotherterritories
CentralEurope,CIScountries,Asiaandotherterritories
Furthermore, overall, on the 2010-2011 period, the industry managed to increase selling
prices without compromising sales. This resulted in increased average margins even
though the pressure from clients to widely use promotional offers in developed
countries counter balanced to some extent this trend.
The returns possible in this industry may attract new actors to enter, mainly large
Japanese or Korean corporations who possess the technical knowhow and the brand
recognition to do so. However, SEB’s various local leadership may discourage them to
enter the SDA industry.
Competition
List of Seb’s peers
North
America
Latin
America
Western
Europe
Eastern
Europe
Helen de
Troy
JardenCorp
De'Longhi
Zelmer
Philips
Philips
Philips
JardenCorp
Deer
Consumer
JardenCorp
Spectrum
Brands
Holding
CTI
Spectrum
Brands
Holding
Newell
Rubbermaid
Deer
Consumer
Electrolux
Amica
Gorenje
Velenje
Spectru
m
Brands
Holding
Philips
Asia
Pacific
Deer
Consume
r
Philips
SEB group benefits from a special position on the SDA industry. SEB does not have
competitors who compete on all its markets and product lines since the industry is
highly fragmented. It is, however, possible to identify regional peers who have at least
one product line in common with SEB as the table in margin shows it.
To be eligible as peers, the common product segment must be at least 30 % of
revenue. Regionally, SEB competes with Helen of Troy (Personal care segment,
63% of revenue, 2011), Philips (Personal care, kitchen electrics and house care
segments, 35% of revenue, 2010), Jarden Corporation (Kitchen electrics and house
care segment, 31% of revenue, 2010), Newell Rubbermaid (Kitchen electrics
segment through their brand Calphalon, 41% of revenue, 2010), Deer consumers
(kitchen electrics segment, 100% of revenue, 2010), Spectrum Brand Holding
(Kitchen electrics and hair care segments through their brands Russel Hobbs,
Toastmaster, Breadman…, 70 % of revenue, 2011), CTI (Kitchen electrics and
home care segments through their brands Somela and Fensa, no data), Electrolux
(home care segment, announced as competitors by Electrolux only on the Latin
America market, no data), De’Longhi (Kitchen electrics segment, 78% of revenue,
2010), Zelmer (personal and house care, cookware and kitchen electrics segment,
3 CFA France -­‐ Investment Research Challenge January 3rd, 2012 100% of revenue, 2009), Amica (House care and kitchen electrics segment, 49% of revenue, 2009), GorenjeVelenje
(Cookware and kitchen electrics segments, 60% of revenue, 2010).
Each of these peers competes on one or two markets SEB is present in, except for Philips, which is present worldwide.
Moreover, there are numerous unlisted small competitors breaking prices in mature markets mainly thanks to products
made in China.
Clients and retail network
The group is evolving in an increasingly competitive industry with a hard pressure on prices emanating from large retailers.
The biggest clients from the group have a certain bargaining power over prices as they represent a very large portion of the
firm’s worldwide sales. Indeed, SEB’s first client (Metro) represents 5.5 % of sales, while the second client (Carrefour)
represents 5%. All in all, the first 10 clients of the company represented more than 29 % of consolidated sales in 2010(*).
This resulted in a lowered margin in 2010, as distributors did a lot of promotional activities to satisfy their customers
(Between 2009 and 2010, sales increased by 15% while margin in percentage of sales increased only by 0.8%)
Recognizing this dependence, SEB is working on the diversification of its retail network. It is looking in alternative
distribution networks like e-commerce, which is a growing trend in developed markets, such South Korea where online
sales accounted for 9% of the industry sales in 2010, Germany, and the United States.
Another key distribution network to free the firm from its dependence is self-owned retail shop that the group is developing
rapidly. The objective of this development is dual: in developing countries, where distribution networks are unorganized, it
offers the group the possibility to manage their own retail while in developed countries it allows the group to create a
customer experience, thereby reinforcing the brands’ image.
Strategy
The group’s strategy focuses on three axes: global presence through external growth, brand recognition and innovation.
By achieving local leadership positions, SEB discourages potential competitors to enter the SDA market. To create these
entry barriers and diversify the risk linked to one country or region, SEB uses extensively external growth and has a rapid
acquisition rhythm (See appendix 3). Since 2004 the group acquires one or two company per year and is currently
negotiating the buyout of the Indian SDA number two, Maharaja Whiteline.
SEB has a premium positioning as marketing strategy: SEB has a suitable image and providing a range of high prices
means for SEB a higher quality. Consequently, higher prices enable SEB to earn more on prices and on margins.
To achieve a high level of brand recognition both locally and globally, SEB spend 3,9% of sales in advertising worldwide,
in 2010. Having strong brands is a true asset for the group and helps maintain leading positions.
With the same objective of keeping local leadership position, the group focuses on innovation. The R&D budget of SEB
reached €70 million in 2010, and enables them to launch approximately 250 new products a year. Sometimes, innovating is
just taking a product, which works well in one market and bringing it into a new one, but mostly SEB comes up with
revolutionary products allowing them to achieve monopoly position. That’s how they can afford to sell the Actifry product
three times above the regular price for deep fryers. The group holds more than a thousand active patents.
Swot analysis
Strengths
•
•
•
•
•
•
•
Worldwide presence of the group with local leadership positions
Well known brands (global and local)
Low cost resources (factories in China, Vietnam, Latin America)
Complete range of products from entry range to high value products
Substantial cash and low leverage easing potential acquisitions
High economies of scale (production and knowledge) and few worldwide competitors
Patents and R&D: technological products
Weaknesses
4 CFA France -­‐ Investment Research Challenge January 3rd, 2012 •
•
•
•
Short visibility on the customer order book (12 days)
Exposed to variability of raw material prices: variability of margin
Strong dependence on International Key Accounts (high bargaining power of customers)
Fragmented market leading to a possible price war
Opportunities
• Tendency to return towards homemade food in developed markets
• Low level of household equipment in developing countries
• Development of alternative distribution network (only 10% of the groups revenue in 2009)
Threats
•
•
•
•
•
•
Salary inflation in developing countries resulting in squeezed margins
Exchange rate risks due to the group’s international presence
Worldwide growth stagnation
Counterfeit of SEB’s products in Asia and Middle East
Increasing competitive pressure globally
New entrants (highly diversified Asian corporations)
Investment Summary
The target price of €71.2 reflects our belief that the market currently undervalues SEB’s stock. As the current price is
€58.86, the potential growth of the stock is 18.79%, therefore we recommend to buy the share. The current risk
related to the stock is the debt crisis that may generate volatility in the share’s price; however we believe that the
stock will come out with a positive return after this crisis.
To find our target price, we used a DCF (Discounted Cash Flow) method, as it was the most appropriated method
four our long term forecasts. We forecasted the free cash flows to the firm over 20 years in our DCF method, as we
believe that long-term prospects have to be taken in account when estimating the share’s value of SEB.
We recommend SEB as a long-term investment, because we have the conviction that the company will overcome the
debt crisis, and keep an important rhythm of growth in the long run, mainly thanks to its level of acquisitions. The
group is the worldwide leader in the Small Domestic Appliances industry, and benefits from a large portfolio of wellknown brands. Moreover, the increasing exposition to emerging countries (45% of sales in 2010) allows the group to
diversify its risk and resist to the debt crisis that is mainly affecting Europe.
The EBIT margin level in mature countries remains a weakness for SEB as the low-cost competitors are putting
pressure on the prices. However the group can count on the reputation of its brands to resist to this threat.
Additionally, the group’s high innovation capacity is a strong asset, and allows the company to increase significantly
its profitability.
Valuation
To compute the SEB’s target price, we use a DCF method using forecasts over 20 years. In December 2011, the
Discounted Cash Flow method valued SEB’s stock at €71.2.
Summary of forecasts
Growth
After reaching a high growth rate of 15% in 2010, we believe SEB’s growth will slow down over the next years.
Primarily, the group said that the 2010 growth rate was exceptional. Secondly, the debt crisis, which started to impact
economies this year, is likely to affect severely SEB’s growth for a long time (at least several years), especially its
kitchen electric activity. Thirdly, the group’s own forecasts for 2011 are low (6,2% of organic growth), and we do not
believe that SEB will reach this target, as the end-of-year festivities may loose of their enthusiasm, because of
customer’s worries regarding their future purchasing power. For these reasons, we forecast a total growth of 7% in
2011.
5 CFA France -­‐ Investment Research Challenge January 3rd, 2012 EBIT margin
For the same reasons as growth, we forecast a decrease of the EBIT margin in the coming years. We anticipate an
EBIT margin of 10% in 2011 against 10,6% in 2010. The debt crisis will have a negative impact on prices, as the
demand will be lower because of a decrease in purchasing power. Therefore price wars may appear among
competitors. Moreover, the increase of salaries in some developing countries, especially China, will continue to affect
SEB’s profitability. In the long run, we believe that the high innovation capacity of the group will allow the EBIT
margin of SEB to remain correct.
CAPEX, D&A and Change in net working capital
We expect the CAPEX to follow revenue trends in 2011, before slowing down during the debt crisis. The
depreciations and amortizations are expected to follow the CAPEX trend. We expect the change in net working
capital to increase approximately four times less rapidly than the revenue, as SEB has been particularly careful in its
management of the net working capital in the past years. Moreover, the group globally manufactures its products
close to its markets, reducing the time in selling process.
Please find more forecasts and explanations in appendixes.
Risk to our target price
We see 3 major risks to our valuation. Firstly, acquisitions could affect margin target
and increase NwC requirements. Secondly, the additional costs related to infringement
are very hard to estimate, as legal action is limited in some countries. Thirdly, as SEB
keeps increasing its exposure to emerging markets, the volatility of currencies is a risk
that could affect the margin of the group, and is also hard to predict.
Financial Analysis
Evolution of Organic growth and Total
growth
2010 2009 2008 2007 0,00% 5,00% 10,00% Pourcentage of variation n/(n-1)
15,00% Total growth
Organic Growth
Evolutions of the EBITDA and EBIT
compared to total sales
The organic growth with constant exchange rates has decreased from 2007 to 2009, but
reached a high growth in 2010 compared to 2009 (a growth of 9.60% in 2010
compared to a 0.03 % growth in2009). It is due to the financial crisis that created
resistance in the Small Domestic Appliances industry (sales volumes decreased in
2008, 2009) and to the negative impact of exchange rate linked to the Stock Exchange
collapse of 2009.
In 2010, SEB met a higher growth than former ones thanks to the low demand period
in 2009 for the Small Household Appliances industry. In addition, the volatility of the
monetary market was still important in 2010, but the appreciation of most of the other
currencies against the euro enabled SEB to increase its sales. Furthermore, SEB
readjusted its prices in the countries where they were too high due to financial crisis in
2009 to keep its competitiveness.
The total growth throughout time is not really higher than organic growth, which shows
that the main results of SEB are not due to its acquisitions but to its own activity.
Earnings
15,00%
The EBIT has globally increased from2007 to 2011: it was equal to €241M in 2007 and
to €352M in December 2010 (+ 46%). It decreased in 2009 because of an important
amount of other incomes and charges equal to €74 million, which is three times the
2007’s amount. Other incomes and charges take into account restructuring charges
(especially for France that cost half of this amount), and asset impairments equal to €30
million in 2009.
10,00%
5,00%
0,00%
2007
2008
EBIT/Total Sales
2009
2010 30/06/11
EBITDA/Total Sales
6 CFA France -­‐ Investment Research Challenge January 3rd, 2012 The ROE of SEB is quite constant from 2007 to the last filing* of 2011 (17.52% in
2007 – 16.80% in 2011), and is higher than the last filing* of the industry (12.03%).
Having a higher ROE than the industry underlines the good management of SEB.
Net
Net
Income
Income
ROE =
x
=
Equity
Total
Sales
Total
Sales
Total
Assets
x
Total
Assets
Equity
ROE = Profit Margin x Total Assets x Leverage
turnover
ROA =
Net Income
Total
Assets
ROE =
=
Profit
Margin
ROA
x
x Total Assets
turnover
Leverage
2009 is the only year SEB’s ROE decreased and this can be explained by a decrease in
the Asset to Equity leverage, as the two other main components of the Dupont analysis
remain more or less constant. The decrease in leverage is due to a sharp increase of
Equity value. Even though SEB bought out and cancelled shares in March 2009, the
value of derivative hedging instruments impacted positively the Equity value (by €42
M). These were sharply increased by the rising prices of raw material.
The Dupont analysis is a way to decompose the ROE and to explain its fluctuation. The
Dupont system is explained in margin.
The Dupont analysis reveals that the ROA and leverage ratio (Asset/Equity) remained
constant throughout time. Besides, they are quite similar to the industry’s ones (ROA:
7.34% in 2010 for SEB and 6.66% for the industry for the last filing*; Leverage: 2,037
for SEB and 2.4 for the industry for the last filings*). The profit margins from 2007 to
2009 are lower than the last filing* of the industry and remained constant. The total
asset turnover remains constant from 2007 to 2010, always better than the industry.
Concerning the last filing* of 2011, SEB does not record all its sales yet, which can
explain some results.
Liquidity
The quick ratio, which
measures a company’s
ability to meet its shortterm obligations, increases from 2007 to 2011. However, it is still under the industry’s
ratio, but not too different. For the last filing*, SEB has a quick ratio of 1.1 and the
industry of 1.35. On the short run, SEB has a good capacity to convert its current assets
to pay its current liabilities. Even if the one of the industry is higher, a quick ratio close
to 1 represents the best way to manage current assets and liabilities.
*The last filingsEvolution
represent the
results
given byCapital
Bloomberg in November, meaning the half-semester results of Seb and its competitors.
of the
Working
compared to total assets
40,00%
30,00%
20,00%
10,00%
0,00%
2007
2008
2009
2010 30/06/11
Working Capital/total assets
The working capital of SEB compared to the total assets increased from 2007 to 2010. It
is due to a higher working capital in 2008 (249,6M) than in 2007(6,3M) because of the
consolidation of SUPOR in SEB’s balance sheet, and of the reduction of the financial
debt. SEB kept acquiring (or consolidating its previous acquisitions) and reducing
external debts, which explain the rise in working capital through time. However, the last
filing* working capital of SEB is almost twice higher than the one of the industry. It is
due to the opportunities of acquisitions made by SEB, and of its auto financing thanks to
its corporate issue.
Balance Sheet & Financing
Evolution of the net debt in €Millions
1 000,00
500,00
The total debt compared to total asset of SEB fell in 2009 from 31% to 20.51%. It is
explained by the increase of the net debt due to the acquisition of Supor in 2007
(payments due for S2Y2007 and for the S1Y2008 for the minority interests). In 2009,
the debt highly decreases (decreasing from 649 M€ in 2008 to 243 M€ in 2009). It is
linked to the management of the working capital, which significantly increased on this
period. In fact, SEB reduced its debt by generating more cash to have a better working
capital.
Moreover, the inventories felt in 2009 because of SEB’s choice of management (a better
quality and rotation), and SEB did not acquire anything in 2009.
0,00
2007
2008
2009
2010
Net Debt
7 CFA France -­‐ Investment Research Challenge January 3rd, 2012 In 2010, the total debt to total asset keeps decreasing and is equal to 12.41%. It is in
mainly due to the high reduction in charges of interests, and to the issuing of equity.
However, the last filing* is higher than the average last filing* of the industry.
The gearing ratio is decreasing since 2007, thereby underlining these results. It fell from
76.16% in 2007 to 8.34% in 2010.
Efficiency
The collection period of receivable accounts remained constant from 2007 to 2010, and
was higher than the last one filed for the industry. It could be seen as a weakness
compared to competitors because it reduces their short-term liquidities. However, their
collection period of payable accounts increased from 2007 to 2010, which enables them
to have more short-term liquidities. The last result of 2010 is higher than the industry:
SEB deals better with its suppliers than average competitors. The last filing* time sell of
SEB is higher than the one of the industry, which means that SEB sells its inventories
less quickly than competitors.
Breakdown of capital on the December, 31st
2010 in %
6%
4%
44%
21%
17%
3% 5%
Founder Group
Employees
Foreign investors
Treasury stock
FFP
French institutional investors
Individuals Shareholders
Other Headings Relevant to Company
The two major shareholders are Federactive (24%) and Venelle Investments (20%), two
family holdings, which separated in 2005. These two holdings are divided on two main
points, the major one being the authorization of non-familial investors. Federactive
favors this opening of capital while Venelle Investment is against. The former
holding’s point of view is largely centered on ethics in production, management and
communication.
The group SEB holds 4% (Treasury stock) of its shares while the vast majority of other
shareholders are institutional holders. In addition, there are only 5% of individual
shareholders.
On another note, SEB received in 2011 for the second time the award of best financial
direction from the Association of Financial Directors.
Investment Risks
Currency Exchange Rates
SEB shows a broad and strong international presence; hence the group is exposed to risks related to the fluctuation of currencies.
Actually, SEB faces conversion risks linked to the conversion of external profits in other currencies to euros. Due to the current
economic situation on a global scale, this risk is particularly elevated. Even if the currency impact can be positive, it remains a risk
for SEB as it brings uncertainty. This is why the firm uses derivative financial products to counter this risk, even though it didn’t
prevent SEB from losing €17m to currency impact for the 3rd quarter of 2011.
Quality
Despite innovation being very profitable for the group, it generates a risk related to the products’ quality and reliability. The case of
the Actifry frying device, launched in 2007, comes to mind. The device stopped working for a significant number of customers due to
a ventilation problem that created flames, hazardous to the consumer. The fact that SEB did not solve this problem properly shocked
numerous consumers. Indeed, they only took back the devices charging customers rather than exchanging the defective products. A
new model has since been released and corrected the flaw, however we see clearly that the quality risk stained SEB’s image that
remains one of its principal asset.
Economic slowdown
8 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Since H2 2011, the debt crisis has strongly impacted economies, especially in Europe, but also in the US. Many countries suffer from
this crisis, and some of them even entered in recession. SEB is present in Greece, Portugal, Spain and Italy, countries that are highly
exposed to this global economic crisis. This risk has to be balanced by the fact that the group does a large part of its turnover in
emerging countries, which are slowing down but still showing real growth potential.
Raw Material Prices
It is important to consider the risk due to the rise of prices regarding raw materials. This criterion definitely has an impact on SEB’s
production costs, and thus margins. Moreover, the recent trend shows that raw material do soar and impact production costs
(aluminum +30% in 2010, nickel +43% in 2010). The main raw materials used by SEB are petroleum for plastic (19% of raw
material spending in 2010), aluminum (12%), nickel for steel (7%), cooper for electric wiring and paper.
Politics
SEB is present worldwide and is therefore subject to some risk of political instability. This is especially true for Latin America, some
Asian countries and recently Arabic countries. Furthermore, some countries control imports of small domestic appliances across their
borders through duties, like Turkey for example. Others control their currency exchange rates. Finally, some countries do not offer
sufficient patent protection and SEB faces infringement without much room for legal action (especially in Asia and Middle East).
9 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Appendixes
Appendix 2: list of SEB’s Brands
Appendix 3: Evolution of Seb’s stock throughout time with the different acquisitions
Acquisitions Acquisitions Acquisitions Announced date: 2/17/2011 Announced date: 12/16/2011 Target: Zhejiang Supor Cookware Co ltd Target: Maharaja Whiteline Industries Pvt Announced date: 5/3/2005 Acquisitions Target: Panex SA Announced date: 12/21/2010 Acquisitions Target: Industrias Metalurgicas Unidas SA Announced date: 4/27/2005 Target: Lagostina SpA Acquisitions Acquisitions Acquisitions Announced date: 8/15/2006 Announced date: 8/15/2006 Announced date: 5/16/2011 Target: Zhejiang Supor Cookware Co Ltd Target: Zhejiang Supor Cookware Co Ltd Target: Asia Fan Appendix 4:
Valuation
10 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Discounted cash flow method
Cost of Equity = rf + βi (E(Rm) - rf)
Fed Market Risk Premium =
8.4166 %
(10 years French government bond) Risk-free rate =
3.012 %
Bottom-Up Beta for SEB according geographical zone =
0.7326
Therefore the cost of equity = risk free rate + beta * country risk premium =
9.1781 %
Cost of Debt = rf + f(Rating)
Yield to maturity of SKFP 4 1/2 06/03/16 Corp Bond (Estimating the average
borrowing rate) =
3.969
WACC = cost of debt * (1-T) * (D/(D+E)) + cost of equity * (E/(D+E))
Weight of Debt:
14.1364 %
Weight of Equity:
85.8636 %
Cost of Debt:
3.969 %
Effective tax rate
26.2103 %
Cost of Equity:
9.1781 %
WACC:
8.1815 %
For the whole analysis, our calculations will be held in euro.
According to an international expansion and active acquisition strategy, Free Cash Flow to the Firm seems to be the most
relevant future cash flow to consider in our model. Therefore, we will go through the assumptions made during the discount
rate this is to say the weighted average cost of capital. In the second part, we will explain how we computed the free cash
flow to the firm. Then, in a third part, we will talk about the growth prospects.
Discount rate
Cost of equity
Risk free rate
The main assumption we make is that government bonds are “risk-free” asset. Indeed, governments have always as a last
resort the possibility to print money so as to reimburse their bonds. Lately it has been proved that a government can have
difficulties to print (so create) that money of nowhere when it belongs to a currency zone such as the euro. The example of
Greece could jeopardize this assumption but we did not take it into account in our calculations.
As SEB is a stable firm, its cash flows maturity should match a long-term government bond. So a 10 years French
government bond should best proxy the accurate risk free rate.
Market risk premium
We believe a market risk premium will be more accurate if it is determined basing itself on present data as we assume present
has a higher influence on what the premium is going to look like.
The implied market risk premium was based on the reverse (this is to say 1 divided by)PE (12 month forward, estimated by
analysts’ consensus) of CAC40 because CAC40 firms are suffering from the same exposure as SEB this is why this index
best proxy the market here.
We then subtracted the French risk free rate (as we took the CAC40 it was logical to take a risk free rate from France) to get
the Fed market risk premium.
11 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Beta
As SEB is present in a 5 regions which each a different level of risk we chose to use a bottom up method to compute the beta;
which consists in calculating the average unlevered beta of the industry (peers) for each zone, then SEB’s unlevered beta as
the average of the industries’ beta weighted by the weight of each zone in SEB’s revenue. Finally, we re-levered it with
SEB’s own capital structure
Step of the bottom-up beta:
1)
Peers’ unlevered beta for Deer Consumer (for example) = Equity Raw Beta from Deer Consumer / (1 +(1 –
effective tax rate of Deer)*debt to equity ratio of Deer)
2)
Average peers’ beta from Asia/Pacific = Average of peer’s unlevered beta
3)
Global unlevered beta = average peers’ beta from Asia/Pacific * percentage of SEB revenue made in Asia/Pacific
+ average peers’ beta from Western Europe * percentage of SEB revenue made in Western Europe
+ average peers’ beta from Eastern Europe * percentage of SEB revenue made in Eastern Europe
+ average peers’ beta from Latin America * percentage of SEB revenue made in Latin America
+ average peers’ beta from North America * percentage of SEB revenue made in North America
4)
Bottom- up beta = global unlevered beta * (1+ (1-effective tax rate)* debt weight)
Cost of debt
Borrowing rate
In absence of ratings and with a last recorded debt maturing in 2016, and according to the stability of SEB, we assumed that
we had to compute its cost of debt and that it was approximately equal to the yield to maturity of the bond.
Indeed, what costs a bond currently in circulation should reflect the cost of bank debt for SEB.
To compute the WACC, we assume SEB’s present capital structure is equal to the one published in the latest filings, i.e.
S1Y2011. Equity at the end of June 2011 was 1 561 million Euros and debt amounted to 257 million Euros. Even though
acquisitions are planned in 2012, as Thierry de la Tour d’Artaise, CEO of SEB, explained on BFM, on December the 22th,
the strike force for new acquisitions are about 1 billion Euros of cash. Moreover, its debt recorded until 2010 mature in 2016.
This is why we plan the capital structure of SEB to be constant and keep its low debt weight.
Free cash flow to the firm
Based upon the importance of cash retained by SEB, the free cash flow to the firm was computed with the following formula:
FCFF = EBIT x (1-T) – CAPEX + DA - ΔWC
Indeed, we justified the choice of not taking into account the cash hold by SEB (as Bloomberg calculations does) because we
believe it will soon be overwrite during an acquisition or an investment as explained by Thierry de la Tour d’Artaise, CEO of
SEB.
Forecasts
2011
Even though 2010 was an impressive year for the group with a growth rate of 15%, we believe that the debt crisis in the
developed world and its aggravation in the fourth quarter, especially impacting end-of-year festivities, will prevent this from
occurring again.
Moreover, SEB regularly reduced its organic growth forecasts in 2011, a really bad sign in our view, and the last estimation
is 6,2%. We believe that the group may even not reach this target, as the high margin products, which are the main growth
driver during the end-of-year festivities, will suffer from the fears of customers regarding their future buying power. Those
customers may buy low-cost products instead, to Chinese competitors notably, which are breaking the prices in developed
countries.
12 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Consequently, we forecast a growth rate of 7% in 2011, taking in account the impact of external growth.
2012
With the aggravation of the debt crisis in the developed world, and the spreading of its negative impact among emerging
countries, we anticipate a lower growth rate for 2012. SEB announced a sales’ organic growth rate of 3,8%, in line with our
anticipations.
With the announced acquisition of Maharaja Whiteline in India, and the continuation of the strong external growth strategy,
we expect the sales growth rate to reach 6% in 2012, thereby encompassing both organic and external growth.
Mid-term and long term growth
With the full consolidation of its acquisition in India, SEB will be present in all the BRIC countries which offer the highest
potential for growth. Moreover, SEB maintains its quick expansion in new economies, which have a high growth rate.
Currently the group makes 45% of its revenue in emerging markets, and this exposition to those markets will continue to
grow in our view, meaning that SEB has very good prospects regarding its organic and external growth.
This high exposition to the emerging countries will in our view allow SEB to resist better to the crisis than its main
competitors, in first line Phillips and De’ Longhi. Moreover, SEB is less exposed to cyclical products (TV, cameras, audio
players…) which are likely to suffer in terms of sales.
For these reasons, and as we believe that the crisis will have its highest impact on economies worldwide during the next 3
years, we forecast a low, but reasonable for a crisis time, rate of growth of 6% in 2012, 6,5% in 2013 and 7% in 2014.
Then, we expect SEB to renew progressively with a high growth rate, reaching around 12% between 2017 and 2020, before
decreasing progressively during the next 10 years, to reach a long-term growth of 2%, reflecting the maturity stage of SEB’s
development.
We made forecasts over 20 years as we believe that SEB will maintain an important rate of growth during this period. The
ambition of the group, which is to be “everywhere” and with a “strong position”, and its ability to reach this objective thanks
to a high amount of cash and a good management of its own finances, confirm our view about SEB’s long term growth.
Moreover, the high innovation capacity of the group, which spend about 2% of its sales in R&D, has been proved to be a
successful strategy in the past, and may be another important growth driver in the long run.
EBIT
We anticipate a decrease of the margin for several reasons. In 2011, SEB suffered from added costs linked to high prices of
raw materials, unfavorable currency effect (€-17M in Q3 2011) and promotions campaigns among several distributors,
mainly in the kitchen electric sector, the one where SEB makes its highest margins.
More generally, the decreases in prices caused by the debt crisis, and therefore the lower demand, are going to strongly affect
SEB’s margin, in 2011 but also in the mid-term. As well as salaries’ inflation in the emerging countries, especially in China,
a long run phenomenon that will affect SEB.
Consequently, we forecast an EBIT margin of 10% of the sales in 2011, a decrease of 5,76% compared to the high 10,61% of
2010. We expect an EBIT margin of 9,6% in 2012 and of 9,4% in 2013, despite the effects of currencies and raw materials
which may be positive in our view. Indeed, the tough period faced by the Eurozone might weaken the Euro, and therefore
have a positive impact on SEB’s margin, as the group mainly manufactures its products in Europe. About the raw materials,
their price should decrease as the global economy is slowing down, as well as China, the world’s highest consumer of raw
materials. Moreover, the recession is likely to reach an important part of the Eurozone, which may keep the raw material
prices’ low.
After 2013, we expect the EBIT margin to slightly increase until 2016, before remaining stable at 10,1% of the sales. This
good margin is in our view due to the strong innovation capacity of the group, allowing SEB to sell products with high
margins, but also to the increasing profitability of the sales in emerging countries, where customers are more and more
exigent regarding the quality of the products. Those markets are going to be the most important ones of SEB in the future,
that’s why we remain optimistic regarding SEB’s margin.
13 CFA France -­‐ Investment Research Challenge January 3rd, 2012 Appendix 5: Computations for the financial analysis
To compute our different ratios, we used the results below given by SEB’s publications and by Bloomberg.
Extract of our Excel files with computations
14 CFA France -­‐ Investment Research Challenge January 3rd, 2012 The “ROE SEB” are the ROE announced by SEB in its financial reports, “ROE” are the ROE computed thanks to the Dupont
System and finally, “ROE Bloomberg” are the ROE computed by Bloomberg.
Concerning the “average last filing”, we have gathered the different competitors announced previously as the main peers of
SEB, and we used Bloomberg to have the ratios of the industry composed by these competitors. (Function RV).
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