CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Team H – Student research
Domestic appliances industry
Groupe SEB
This report is published for educational purposes only by
students competing in the CFA Institute Research Challenge.
January 3rd, 2012
Ticker: SK.FP – SEBF.PA
Price: EUR 58.12 (31/12/2011)
Recommendation: BUY
Price Target: €66
Forecast Summary
2009
2010
2011E
2012E
2013E
Revenues (€mn)
3176,3
3651,8
3956,7
4241,7
4570,2
EBIT Margin
10,1%
10,6%
11,4%
12,3%
13,1%
Net Income (€mn)
144,7
220,3
282,3
291,0
245,9
EPS (€)
3,09
4,59
5,65
5,83
4,92
DPS (€)
1,04
1,17
1,26
1,36
1,47
Highlights
Market Profile
52-week Price Range
€52.84 - €81.67
Average Daily Volume (€ mn)
5,8
Beta
0,92
Net Dividend Yield
2,21%
Shares Outstanding (mn)
49,952
M arket Capitalization (€ mn)
Main shareholders
Fédéractive
Venelle Investissement
Société financière et foncière
Free float
Voting rights
Target price of €66, a BUY recommendation. Our target price of €66 by the end of 2012 offers
a 13,5% upside from current stock price, which, given market conditions realise significant
potential. SEB is the world leader in small household equipment. It operates in two sectors:
small domestic appliances and cookware. Through the fame of its flagship product, the
“Moulinette”, the firm has become an international player with a robust leadership. The main
drivers of growth are its innovation policy (more than 200 products launched each year) and its
exposure to emerging markets (48% of sales - mainly due to a powerful presence in China)

SEB will keep growing due to its strong position in emerging markets. Emerging markets will
continue to deliver double-digit growth in the coming years, due to favorable market dynamics,
fast growing urbanization, a successful innovation strategy, and new demand from upwardly
mobile inhabitants.
A structured cost management policy and strong pricing power allow the firm to preserve
healthy margins.

A solid financial position. Operating Cash Flow is expected to increase and OCF/Sales ratio
will rise from 11,5% in 2011 to 13,7% in 2013. These results will be supported by top line
growth (revenues up 16% over the period) and a growing Operating margin, which is expected
to rise from 11,4% to 13,1% in 2013. Coupled with successful liquidity management, a
moderate debt level and good credit conditions, SEB is well positioned to face competition in
this uncertain economic backdrop.

Valuation. Through our valuation process, we have set a target price of €66 which is driven by
innovation and growth in emerging markets. We believe SEBs strategy of growth will be
successful due to Asia. More precisely, the strategy in China and India, due to growing
purchasing power and the increasing urbanization rate. In addition, we expect China to reach a
home appliance ownership equivalent to France by 2020.

Main risks to our target price. Some competitors in mature and emerging markets have a
strategy of large R&D investments to create new product types rather than incremental
development and aggressive pricing by SEB. Slower growth in emerging markets could have a
significant impact on our target price. Other risks could arise from high volatility in currencies
as well as increases in commodities prices.
3.479,62
23,67%
19,05%
11,66%
41,20%
Fédéractive
30,74%
Venelle Investissement
26,73%
Key Ratios
ROE
15,60%
EBIT margin
11,40%
Net Debt / EBIT
1,04x
Market performance vs S BF 120
Perf 1m
Perf 3m
Perf 12m

-3,02%
-9,81%
-11,12%
 Investor Fear. In august SEB’s stock fell from €75 to €58 and has maintained this level. This
drop is mainly explained by investor’s flight to safe assets. Nevertheless, we remain confident
on SEB’s fundamentals.
Groupe SEB
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Figure 1: SEB Stock Price, Seb Volatility and SBF 120 2011 Value
€88
€83
€78
€73
€68
50
3320
45
3120
40
2920
35
2720
30
€63
25
€58
20
€53
2520
2320
2120
15
€48
1920
SK FP Volatility
SK FP
SBF120 Index
Source: Bloomberg Data
The graph illustrates the downturn that recently occurred for SEB, following the global decline of
European stock markets. In August 2011 there was a significant increase in SEB’s volatility, from
the drop in the stock price. However, we maintain our BUY recommendation, founded on SEB’s
fundamentals
Business Description
Company overview
Created in 1857 and initially regional, SEB has become a worldwide company, which operates
within two main sectors: small domestic appliances and cookware. This enables the firm to offer a
broad range of products to its customers. SEB now operates in more than 150 countries. With more
than 20000 employees worldwide, the French based company manages to sell an average of 200
millions products per year.
SEB built its success on the well-known “super-cocotte” launched in France in 1953 has maintained
its leadership and competitiveness due to a dynamic innovation policy. This well-balanced and
diversified portfolio in terms of products, brands, geographical implantations and sales networks,
makes SEB the world leader in small household equipment.
Business segmentation
The firm has classified its business operations under two segments: small domestic appliances (70%
of its activities) and cookware (30%). The global small domestic appliances market represents
around 26,5 billion Euros, of which SEB holds 10% of the market share.
In the second, the cookware market is worth close to 6,5 billion Euros and the firm holds 16% of
the market share. SEB commercializes six international brands, namely: Tefal, Rowenta, Moulinex,
Krups, All-Clad and Lagostina. Besides, the firm owns 17 local brands, which are sold in France
and Belgium (Calor and SEB), North America (AirBake, Mirro, T-Fal, Regal and WearEver), South
America (Arno, Samurai, Panex, Rochedo, Clock and Penedo) and Asia (Supor). The multibrand
strategy allows the firm to cover all segments of the market and ensure an international presence.
Geographical presence:
With 82,4% of sales outside France, SEB has opted for an international development strategy in
both developed and emerging markets, through both organic and acquired growth. The firm obtains
48% of sales from emerging markets and a significant portion of its sales growth. China is the
second largest market for SEB. The company recently obtained authorization from the Chinese
Securities Regulatory Commission to increase its stake in Supor, from 51,3% to 71,3%. For all
regions, the sales breakdown is as follows: France 17,6% of FY11e sales, 20,6% in the rest of the
Euro zone, 10% in North America, 11% in South America, East Europe 17.6 and Asia 23%
Source: Team Estimates
Groupe SEB
Global strategy:
SEB’s strategy is focused on product and industrial process innovation. To these goals, the firm
invests 5% to 6% of sales per year in both in R&D and advertising. Carrying out several
acquisitions has played a key role in the international expansion of the group. Also, for FY2011,
SEB stands to benefit from the relaunch of Moulinex in nine European countries.
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Industry Overview and Competitive Positioning
Through this section, we will review the two markets in which SEB operates: small domestic
appliances (70% of sales) and cookware (30% of sales).
With the dynamism and innovation in the Small Domestic Appliances industry, coupled with a
sustained favorable economic condition, the good performance of the Small Domestic Appliances
industry in 2010 is expected to continue throughout 2011 and 2012. The Small Domestic
Appliances (SDA) industry grows at a double-digit rate of 22% in value in the first ten months of
this year.
Geographical diversification
This industry is clearly divided into 2 areas: on one hand mature markets representing 52% of sales
and on the other hand emerging ones 48% of sales (Source: Team’s projections). In order to capture
growth, companies like SEB must focus on emerging markets as, according to a GIFAM study,
mature market report an equipment rate above 70%, which does not let so much opportunities for
further growth. Although consumers in developed countries are pursuing more sophisticated
appliance models and brands, those in developing countries are going beyond the basic domestic
device to explore other equipment’s that promote greater convenience.
New needs, new trends
Over the last decade, the small domestic appliances market has become much more fashion-driven.
In the developed markets, main reason for replacement of equipment is consumer attraction to the
style of new products rather than replacing items because of their age or state. Design plays a
fundamental role in the decision making process well as technical performance and value for money.
In mature markets, specifically where the equipment ownership rate is high, the competition is
tough and the supply is standardized. As a consequence, SEB has had no choice but to differentiate
its offer through innovation.
Innovation: the sinews of war
Innovation is the heart of SEB’s growth. SEB launches, on average, 200 new products launched
every year, more than 1000 active patents and 73 million Euros invested in R&D. In 2010, the firm
received the prize of “Best Innovator” and the award “Hermes for Innovation”. Thanks to its strong
portfolio of brands and its strength in innovation, the Group can apply a pricing premium to
products.
While many competitors have decided to relocate their production sites in low costs countries, SEB
made the choice to preserve a strong industrial presence in Europe, and more particularly in France.
This innovation strength was enabled via the acquisition of other companies. Furthermore, the firm
has created an investment fund, SEB Alliance, which invests in firms with technology content and
high growth potential that are possible acquisitions or partners.
PLM deployment: a great model.
An important factor in Group SEB’s growth has been its ability to absorb different acquisitions,
while retaining their innovation potential. With this in mind, in 2003, Groupe SEB redirected its
business model. It shifted from a brand-oriented strategy to a product line-based strategy. The goal
was to enable its project teams to work on different brands in a knowledge-driven manner and the
overall restructuring initiative required a unifying Product Lifecycle Management (PLM) solution.
Thanks to Siemens’s product, SEB has considerably improved its operating efficiency:
Source: Seb Finanacials
Structured Innovation Process
SEB has considerably improved its operating efficiency and the intragroup knowledge sharing
through the implementation of Siemens’s PLM software technology. The improvements have been
as follows:
- Increased new product introduction from 140 to 200 new products yearly
- Enabled enterprise-wide cross-site collaboration, while sustaining autonomous data access
- Increased process reliability and standardization of corporate-wide policies
- Capitalized on project know-how by making PLM tools accessible across entire workforce
Local adaptation as a priority
Another aspect of the innovation strategy is the ability of the Group to develop adapt products to
local needs and meet local demand. This approach enables SEB to generate a new source of growth
and to increase its revenue, mostly in emerging markets. For instance, in the Middle East, SEB has
equipped its “Moulinette” with a special blade for chopping spices, a soy milk extractor in China
and anti-mosquito fan for some South-America countries.
Groupe SEB
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Economies of scale: a great competitive advantage
A strength of the group is the ability to cover the entire market from entry-level to premium ranges.
SEB enjoys of a good household image and is associated with quality. An additional competitive
advantage of the firm it is theirs economies of scale. With their leadership position in numerous
markets SEB can more efficiently spread its costs across those markets and then to realize better
margins than its competitors.. SEB also creates barriers to entry with its patents, further improving
margins (as shown in Financial Analysis part)
Threat of new entrants
Inside mature markets, retail distributors often play an increasing role in this very competitive
environment. Thanks to its powerful brand portfolio (23 brands), and extensive offer (200 new
product per year), SEB is able to gain access, in developed markets, to many different segments and
diversify its revenues. In emerging markets, access to distribution is extremely difficult, and the
principal risk comes from the “no brand” competitors that compete solely on price. Groupe SEB
therefore strives to limit the risk of competition by through R&D to lead the market (+10 €mn of
additional expenses in R&D each year, since 2008)
Which competitors?
We have identified six main competitors, namely: Philips, DeLonghi, Electrolux, Indesit, GD
Midea Hld and Whirlpool.
Figure 2: Peers’ characteristics
Business Segment
Sales
Matures Emerging
- Small Household Appliances
- Cookwares
52%
48%
- Healthcare
- Household appliances
- Lifestyle entertainement
70%
30%
- Consumer durables
- Professional products
65%
35%
- Household appliances
- Small Household Appliances
30%
70%
Indesit
- Household appliances
70%
30%
DeLonghi
- Household appliances
80%
20%
Whirlpool
- Household appliances
85%
15%
SEB
Philips
Electrolux
GD Midea Hld.
Innovation
Promotion
Advertising
N/D
N/D
Corporate
Responsibility
Source: Companies Financial Statements, Bloomberg data
R&D % Sales
7%
6%
5%
4%
3%
2%
1%
0%
Source: Companies’ Statements
Groupe SEB
Philips employs approximately 128 000 employees in more than 60 countries. Philips is mainly
operating in three areas: Consumer lifestyle, Lighting and Health Care segments. Between 2010
and 2011, the share of Consumer Lifestyle segment within overall group sales, has decreased by
37% to finally account for approximately 25% of Philips sales.
Electrolux employs roughly 60 000 employees worldwide and is the global number two
manufacturer, by volume, of both consumer and professional appliances. From 2010 to 2011 the
group’s share of small appliances is expected to decrease by 2% to fall to 8% of global sales in
2011.
With over 40 years of history, Midea Group is a leading manufacturer and exporter in China,
covering an extensive line of home appliances and more recently, has diversified into logistics
and real estate business. This company, employing more than 180 000 employees, expects to raise
its global income by 35% by the end of 2011.
Indesit, which employs more than 16 000 employees over its 14 production facilities, is a
European leader in manufacturing and distributing major appliances. According to consensus
estimates, the company should deliver a small increase of 1,5% YoY sales in 2011.
DeLonghi, which employs more than 7 500 employees worldwide, produces high-end household
appliances with a particular focus on espresso makers and kitchen robots, categories where the
group is a world leader. Overall, group sales are expected to grow by approximately 9% YoY in
2011.
Whirlpool is a global manufacturer of home appliances across all major categories such as
cooking, refrigerators or even dishwashers. Overall, the group employs more than 70 000 people
worldwide in 67 manufacturing and technology research centers. Year on Year, the company is
expected to report a 1,5% increase in sales at the end of 2011.
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Investment Summary
Figure 3: SEB’s Shares price and news flows 2011
Source: Bloomberg Data, Seb Quarter reports
 We initiate our coverage of SEB SA with a BUY rating and a 12-month target price of €66,
which offers a 13,5% upside from the current stock price. SEB is the world leader in small
household equipment. Barely impacted by the current world economic crisis, the small domestic
appliances market is expected to have good performance over the next months and into 2012.
 Innovation and emerging markets: the drivers of growth. The small domestic appliances
industry is divided into two markets: mature markets, which are set to remain sluggish, and
emerging markets that should allow greater opportunities. With 48% of sales in emerging markets,
SEB takes full advantage of the dynamism that such markets offer. Furthermore, SEB recently
entered the Indian market, operation that should reinforce the firm’s presence in Asia. The Group
invests massively in R&D, with a resulting leadership in innovation and the market accepting
higher product prices.
 A solid financial position. SEB’s top line growth of 16% between 2011 and 2013 is due to both
organic growth through innovation and external growth through acquisitions and is expected to be
worth €4,7bn by the end of 2013. EBIT margin has been constant and is expected to reach 13,1%
in 2013. These two factors are crucial and lead to expectations in terms of OCF/Sales ratio rising
from 11,5% in 2011 to 13,7% in 2013. In terms of liquidity, SEB’s management has demonstrated
prudent policies, as the current ratio over the last 4 years is 1,33, the best among its peers.
Furthermore, the company maintains a low debt level, as over the last 4 years, its gearing ratio has
dramatically decreased from 92% to 23%. Last but not least, SEB has issued a bond to finance
acquisitions and has managed to renew its mid-term credit facilities. We are confident of SEB’s
ability to remain a strong worldwide leader within this very uncertain economic backdrop.
 Our 12-month target price of €66 is based on three valuation methods: Discounted Cash
Flow, Multiples Analysis and Sum of the Parts. In our DCF model, we split our sales forecast by
geographical areas where SEB operates. As regards to our Multiples Analysis, we consider two
types of multiples: Enterprise Value based multiples and Pricing based multiples. Our target price
for this method is the weighted average of each multiple. Finally, using a Sum of the Parts valuation
allow us to come up with a more accurate target price, showing that Asia brings the biggest
contribution to the overall Enterprise Value.
 Main risks to our target price
- Risks related to products: SEB must meet customer’s needs and requirements in order to sell its
products and archeive sales targets. Although SEB makes quality a priority, some quality events can
happen as the case for some of Supor’s products in China.
- Risks related to distributors: The distribution network significantly changes whether the
company operates in emerging or mature markets. Indeed, mature markets will offer a broader
network with very powerful distributors while emerging ones are highly fragmented with an
unorganized distribution network.
- Multiple forms of competition: Whether SEB is facing a global or local player, it has to adapt its
strategy as a global player. Their strategy is to use expensive Research & Development in order to
gain market share whereas local players are playing an aggressive pricing strategy with “no brand”
products.
- Market risks: These risks represent a threat especially if we were to see high volatility in
Currencies and commodities prices.
Groupe SEB
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Valuation
Three valuation methods were used to support our buy recommendation: Discounted Cash Flow,
Multiples Analysis and Sum of the Parts. We use a weighted average of the methods to arrive at
the final expected price.
Discounted Cash Flow
Source: Team Estimates
Risk Free Rate
Risk Premium
Beta
Equity Cost
Debt Cost
Market Cap
Short Term Debt
Long Term Debt
Wacc
3,14%
7,33%
0,92
9,88%
4,18%
3479,42
198,1
536,6
8,89%
Growth rate ∞
Terminal Value
Disc. Terminal Value
Discounted FCF
Enterprise Value
- Net Debt
- Minority Interests
Value
Diluited Shares
Target Price
3%
7.180
2814,27
1.973
4.787
513
417
3.857
52,985
€ 73
In our DCF model, we split our sales forecast by geographical areas where the firm operates. For
the last quarter we integrate a “Santa Claus” effect, as this period is usually very important for SEB.
Starting from Q1-Q3 real data we extrapolated 2010 Q4 pattern, adapting it for 2011's growth and
adjusting it by the 2011's economic slowdown. These adjustments rely on global GDP revisions in
Q4. Euro dollar exchange rate impact on 2011 forecasts can be neglected due to very similar trends.
Our 2012-2013 sales forecasts rely on 2 models: regressive for mature economies and parametric
for high growth economies (see appendix 4). These models are based on historical GDP, consumer
spending in Household appliances and GDP consensus. Then we assume a long term growth rate for
each geographic market:
France: we expect a 1% growth per year since France has entered a slow growth cycle.
Sovereign stress is expected to drive Europe into a slow growth for the next few years, with a
significant risk that the downturn could be deep. According a GIFAM survey the equipment
ownership rate for the main products of SEB is close to 75%. France is a mature market for SEB.
As a result, sales should be flat for the next few years, and the demand should mostly come from
innovation in the new products.
Eastern europe: we expect a 3% terminal growth per year. The region market is undervalued,
but geo-political risk and instability still exist. Further economic weakness in the Eurozone could
lead to harsher austerity measures paralyzing potential growth in demand from Eastern Europe as
well.
Asia: In China, we expect growing purchasing power and an increasing urbanization rate. Our
core assumption is that China should reach the same equipment rate than France by 2020. Over the
next few years, we put our bet on Asia, especially on China and India, with low debt (30% net
gearing at end-2011e).
South America: This region should witness the emergence of new consumer trends, and a greater
access to consumption for the Middle Class.
North America: The group does not show a sharp interest in this area.
NB: WACC, minority interest and terminal values’ assumptions are detailed in Appendix 4 and 5.
Main conclusion:
Emerging markets are set to keep delivering double-digit growth in the coming years, due to
favorable market dynamics, fast growing urbanization, a smart innovation strategy, and new
consumption demands. A good cost management policy and strong pricing power should allow
SEB to maintain good EBIT margins. Downside risks are a lower growth in revenue due to the
incapacity to raise selling prices or because of a slowdown in emerging markets.
Multiple analyses
Multiples Analysis
SEB as a pure player
€ 80,38
€ 58,58
€ 50,40
EV/ EBIT
EV / SALES
Source: Team Estimates
Groupe SEB
€ 45,37
P/E
P/B
In order to build-up a relevant analysis through a market based valuation, it is essential to identify
accurately a set of direct and listed peers that can be taken as comparable. First of all, a market
capitalization of at least €450M was the first criteria. Then, to achieve this very first aim, among the
listed companies we have clearly defined 3 others criteria gathering 6 competitors:
3 Global players. We have chosen large corporations whose business is diversified but with an
important or very important part of their revenue coming from the small household appliances
segment (Philips €14bn, Electrolux €4bn, Whirlpool €3bn).
2 European players. We have selected slightly smaller competitors much more focused on
Europe (Delonghi €1,2bn, Indesit €450m) as SEB still have a large part of its revenue coming from
the old continent.
The Chinese leader. Finally, in order to analyse more accurately Supor in China that represents
a highly growing part of SEB’s turnover, we use the Chinese competitor (GD Midea Holdings
€5bn), which is the leader in China within the small household appliances market
A perfect comparison cannot be made. Although the peers chosen for the comparison with SEB are
rather close, it cannot be denied that there are differences in between in various aspects. Yet they
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
have several different characteristics such as size, market exposure, business diversification or
product lines which make them “imperfect” companies in this respect.
Why these multiples?
Two types of multiples: In order to calculate our target price through a peer’s comparison we have
considered two types of multiples, EV based multiples and Pricing based ones such as EV/EBIT,
EV/SALES, P/E, P/Book ratios.
We believe the EV/EBIT to be a very accurate ratio as it can be seen as a good proxy for cash flows.
Furthermore, this ratio does take into account effects of D&A, which enables a more healthy
comparison between companies. Then, the EV/SALES ratio gives a valuation of the company
through its sales using
(Enterprise Value = Market capitalization + Short-term Debt + Long-term Debt – Cash). Then, we
have also looked at P/E ratios such as P/E and Price to Book ratio.
A final target price of €58,68: this price represents the average of each multiple (EV/EBIT: €80,38
- EV/SALES: €50,40 - P/E: €58,58 - P/B: €45,37).
An historical undervaluation: €51,60 versus 5years historical price of €33,82. Over the last 5
years and according to our estimates, SEB was worth €51,60 with the multiple analysis whereas its
average price over the period is of €33,82.
Sum of the Parts
Enterprise Value
4167,45
(Net debt)*
-513
(Minority interests)
-417
Equity
3237,45
(Diluted shares)
52,985
Target Price
61,13 €
* Including pensions
Groupe SEB
To deliver a more complete analysis and give a more accurate target price, we have computed a
Sum of the parts.
This analysis involves segmentation by regions using the EV/EBIT ratio of each peers multiplied
by the 2011 EBIT expected for SEB per region.
As a result, we observe that Asia brings the biggest contribution to the overall Enterprise Value
with approximately 31% (€1290/€4154) when only France accounts for 18% (€761/€4167). To
continue, we have subtracted to the EV the net debt that takes into account pensions, and the
minority interests. We have divided the result by the number of diluted shares (including stock
options) to end up with a target price of €61,13.
Conclusion: Our target price is up to €66.
With regards to our estimates and valuation, our Target Price is of €66, representing a 13,5%
upside for the end of 2012. We obtain that price by weighting our three different methods of
valuation (DCF, Multiple analysis and Sum of the parts). Weights are respectively 50%, 30% and
20%. We have decided to lower the weights assigned to the multiple analysis as well as the Sum of
the parts because of the difficulty to select perfect peers to SEB.
That being said, we believe that SEB will offer further potential of growth, especially if they sustain
their aggressive strategy of innovation and expansion in emerging markets. This is not to forget
risks that could affect our target price in the medium and long term.
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Financial Analysis
EBIT margin %
60%
Income statement
40%
Revenues increasing at constant pace: sales up 38% between 2007-2011.
This increase has been driven by:
20%
0%
2011e
2012e
2013e
Emerging Markets
Developed Markets
Source: Team's estimates
Sales by region (€M)
SEB keeps operating efficiently: Operating margin ahead of competition (11,4% in 2011).
Since 2007, the group has an average EBIT margin of 10,17% and we expect this ratio to grow to
13% by the end of 2013.
SEB’s disciplined approach towards investments in R&D is clearly one of the main reasons for their
great organic growth, which leads to these healthy margins.
3000
2000
1000
0
07 08 09
Sales from EM's
10 11 12 13
Sales from DM's
Source: Team's estimates, Companies’ financials
EBIT margin
ROE
Current ratio
SEB
11,40%
15,60%
1,33
DeLonghi
10,30%
12,50%
1,02
Indesit
9,80%
4,60%
0,92
GD M idea
5%
27,60%
0,81
Whirlpool
3,50%
5,70%
1,13
Electrolux
3%
6,50%
1,28
-0,30%
-6%
1,27
Philips
Organic growth: every year more than 200 new products worldwide (more than 250 only in 2011),
gains of market share and strong development in emerging markets. Recently, this growth has been
driven by results in Europe ex France and especially through the relaunch of the Moulinex brand.
External growth: through various acquisitions in emerging markets (Imusa, Asian Fan, Supor…)
We forecast global sales to increase by 16% in 2013, led by innovation but also by the group ability
to manage its pricing position to attenuate negative impact of higher raw material prices on margin.
The group turns to be much more profitable than its peers: ROE of 15,6% in 2011.
- In 2011, according to our estimates, except from Midea, SEB will have an expected ROE
ahead of its competitors (see chart). In terms of return on assets, SEB is also ahead with an
average of 6% for the period versus 4,5% for Philips and 3% for Indesit.
- In addition, in 2011 SEB has a ROCE of 16,6% compared to Weighted Average Cost of
Capital of 8,3%, which provides good latitude to distribute dividends but also to pursue
growth.
Safety in dividends distribution: a payout ratio of 25% in 2011.
In average, since 2007 the group has a payout ratio of 28% without any major reduction and
according to our estimates, this ratio will be constant to reach 25,6% in 2013. Furthermore, this not
too high ratio involves a certain security, as rather small dividends are much easier to pay out than
large ones.
Geographical mix changes: Emerging markets account for 52% sales in 2011.
Growth momentum is globally moving from the West to the East and SEB does not want to miss
this opportunity 2011 is an inflexion point. The growth of sales in emerging markets comes with
accretive EBIT margins. Emerging markets account for approximately 52% of sales and 50% of
EBIT. Moreover, by the end of 2013 we expect this number to rise to 56% as the expansion strategy
of SEB is continuing. Over the period 2011-2013 we estimate that emerging markets will bring
approximately 6,4% of EBIT margin vs 5,5% for mature markets.
Source: Team's estimates, Companies’ financials
Balance Sheet
SEB's working capital
35%
120
30%
110
25%
100
20%
90
15%
80
10%
70
07 08 09 10 11 12 13
WC (% Sales)
WC in sales day
Source: Team's estimates, SEB financials
Groupe SEB
An enviable liquidity: a constant working capital and a current ratio of 1,33.
A great current ratio: Over the last 4 years, according to our estimates SEB has the best current ratio
among its peers (1,33 in average versus 1,27 for Philips or 1,13 for Whirlpool). This leading
position indicates a great efficiency when dealing with short-term assets & liabilities.
A constant working capital: Over the period 2007-2013, the WC in % of sales remains constant
while the WC expressed in sales day met a low point in 2009 to 80 days corresponding to the a
reduction in inventory because of the crisis. Since, this number came back to usual levels.
Acquisition strategy rhymes with good debt structure: a gearing ratio of 23% in 2010.
- Debt: In 2011, the overall net debt is expected to rise to €513m (vs 131 in 2010) due to the
funding of acquisitions. Nevertheless, over the period 2007-2010, SEB has dramatically
reduced its gearing ratio going from 92% to reach 23% in 2010. During the same period, the net
debt / EBIT ratio significantly decreased from 2,46 to 0,35.
- Borrowings:
1.SEB made a euro-bonds issue in May 2011 (€300m with a maturity on June, 3 rd 2016) to fund
Imusa’s acquisition and an additional 20% stake in Supor.
2.Schuldschein loans with no covenant (€206,9m with a maturity in 2015).
3.A €456m credit facility renegotiated into a new syndicated loan of €560m with a five-year
term.
8
CFA INSTITUTE RESEARCH CHALLENGE
Cash flows statement
Operating Cash Flow (€M)
500
15%
400
14%
13%
300
12%
200
11%
100
10%
0
9%
10
11E
OCF
12E
13E
Capex
3 January 2012
OCF/SALES
Source: Team's estimates, SEB financials
Sustainable growth of Operating Cash Flow: an OCF up to €317m in 2011
Sales growth and on-going expansion in emerging markets are key factors to raise the firm’s OCF.
Indeed, between 2010 and 2013 we expect the OCF to move up from €204m to reach €442m in
2013.
Furthermore we have illustrated our forecasts of OCF/Sales on a chart to illustrate this constant
growth over the years.
Leadership position comes from wise investments: a constant Capex number
According to our estimates, from 2007 to 2011 Capital Expenditure has grown by 48% (€92m to
€136m). This increase has been fed mainly by acquisition such as Imusa’s in 2010 when Capex
grew from €109m to €140m.
As the chart illustrates, the Capex is approximately growing at the same pace as the OCF
A strong cash flow generation: €180,9m in 2011 versus €63,6m in 2010
This increase in free cash flow is merely due to the change in net working capital that has been
significantly decreasing. Indeed, the NWC dropped from €179m to €115m due to a base effect as
during 2009 SEB mainly relied on its stocks to feed demand. Therefore, with regards to our
estimates, the FCF should not rise too high after 2011 to reach €277,4m by the end of 2013.
OCF vs FCF
500
400
300
200
SEB: An active player in Sustainable Development
100
0
10
11e
OCF
12e
13e
FCF
Source: Team's estimates, SEB financials
 Limiting the impact of the products on the environment: SEB has significantly reduced its
consumption of electricity, gas and water per finished product manufactured.
 Ensuring Group sites respect the environment: atmospheric emissions increased in absolute
terms but fell per finished product manufactured.
 Reducing CO2 emissions related to logistic: in order to limit the environmental impact of
transport.
 Managing end-of-life product: SEB has created an indicator of the recyclability of their
products, the goal being to achieve at least 70% of recyclability. Besides, more than 80% of the
firm’s products are repairable.
Use of resources
14
12
10
8
6
4
2
0
Electricity Gas (kWh)
(kWh)
2008
2009
Groupe SEB is carrying out a commitment to employ a responsible environmental policy. This
could enhance the potential of the firm and reinforce its leadership. This is through innovation that
the firm puts forward its sustainable policy, by reducing its energy consumption and improving
recycling of products. The firm is taking actions at four major levels:
Water
(Litres)
2010
Source: SEB financials, Bloomberg
Reducing the ecological footprint of products is an active part of the group’s global policy. In
response to the global warming and changes in customers’ behavior, the firm promotes sustainable
development by its purchasers and suppliers.
Furthermore, the firm signed in 2003 the Global Compact agreement, thus respecting ten
commitments related to environment, human rights and corruption.
Investment Risks
Risks related to products
Given the very fierce competition occurring in SEB’s industry, the Group is constantly seeking to
differentiate itself from competitors in order to maintain and grow market share. SEB’s strategy to
grow through product line expansion is very active and comes from investing into R&D to generate
innovations.
SEB makes consumer safety an absolute priority, there are still however risks with product
problems, aswas the case in china:
“More shaken than hurt”. Recently, Supor has met some criticisms about its inoxidable metal
products in the Chinese province of Heilongjiang in the Northeast of the country. Concretely, it was
demonstrated to Supor that the metal combination used to manufacture products was not part of the
list edited by the local authorities. The Group was able to convince Chinese authorities to
implement this metal combination within the list and then to close the case. Nevertheless, as this
case could appear very threatening from an extern prospective, it is essential to state that this metal
combination only accounts for 2% of total Supor sales and that competitors are also impacted as
they use the same metal in their manufacturing process.
Groupe SEB
9
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Risks related to distributors
One of the main concerns for SEB within its distribution network is its reliance on direct
distributors such as Carrefour or Metro. Indeed, the group’s sales highly rely on the ability of these
global players to distribute and sale its products. Recently, Carrefour released poor results due to
mismanagement, which led to a 40% collapse in profit. Furthermore, recent offers and promotion
made by Carrefour on cookware products have led to drop in revenues for the group.
Highly fragmented emerging markets. In addition, with its expansion strategy, SEB has a high
exposure to mainly unorganized distribution networks in emerging countries. Indeed, in China, the
majority of the market is fragmented and the network is “organized” between small shops and
distributors, which cannot insure real stability. Highly fragmented with low entry barriers, the
Indian small domestic equipment market is estimated at around EUR825m. It is divided into five
main segments, namely: stoves (7% of market shares), gas cookers (26%), grinder mixers (30%),
pressure cookers (16%) and other electrical appliances (21%). In terms of market players, the
market is split between, on the first hand, the national players, and the other hand, the regional ones.
Multiple forms of competition
In order not to be ripped off by competition and lose market share, SEB is constantly innovating to
maintain its leadership position, regardless the geographic area or even the type of competitor it is
facing. However, rivals are striving to gain market share…
Global players. For small electrical appliances, the industry’s ten biggest operators account for
between €1 to €3.6 billion in sales and represent over 40% of the global market. For the French
based company, the main risk coming from those big players it their ability to invest in Research &
Development or even in Advertising in order to gain market share (see Figure 2).
Local players. However, when it comes to local players SEB is facing a very different approach and
a different way a competing. Indeed, these players that do not have the same firepower than groups
like SEB are competing, according to their means, on costs. This is especially true when it comes to
emerging markets where consumers are less attracted by branding and quality rather than costs. In
these markets, SEB is competing “no brand” companies selling entry-level range of products,
aggressively priced, which can represent a significant threat over the short/mid-term as long as
consumer trend do not change to converge towards quality and branding.
Macro risks
Declining sales in mature economies and especially in Europe, where recession fears are still
consistent.
Drop in Chinese inflation from 6,5% in august to 4,2% in December would ordinarily be an
excellent news but falling exports and decreasing industrial production demonstrate that China
suffers from the European crisis. A further reduction in china’s growth would mean a fall in
domestic demand that could be a major risk for the group.
Stress Test Net Income
400
350
300
250
Hedged
200
Unhedged
150
-20
-10
0
10
20
Source: Team's estimates, Companies’ financials
Groupe SEB
Market risks
Commodities. The upcoming recession in Europe is negatively impacting on China’s growth, and
therefore the global demand for energy and other raw materials is significantly falling; so as prices.
Nevertheless, an economic recovery could rapidly reverse this trend.
Currencies. Overall, one of the main risks that SEB is facing is the euro-dollar exchange rate.
Indeed, although this risk can be diminished with hedging policies, it remains an important factor to
bear in mind. This is not to forget that a depreciation of the dollar against the euro would negatively
impact SEB’s results. As demonstrated in our stress test analysis a +/- 20% fluctuation, will amount
for +/- 12M€ with 2010 hedge strategy.
Short-term rates. Given the economic backdrop and the recent news from central banks around the
world, we can only expect short-term rates to rise further in the close future. As a consequence, and
with regards to our estimates, it will have a significant impact on the revenues of the firm.
In order to assess these external risks, we have performed a stress test analysis on the Net Income
for the company (see appendix 10)
External growth risks
Risky business synergies. Over the last 40 years, while pursuing its leadership strategy, Groupe
SEB has alternated its development through organic growth and acquisitions. Today, it continues to
play a key active role in consolidating the still- fragmented Small Household Equipment sector.
External growth requires an ability to induct new acquisitions effectively and generate synergies.
Groupe SEB has built up experience in integrating newly acquired companies; having integrated
Moulinex-Krups in 2001-2002, Panex in Brazil and Lagostina in Italy in 2005 and more recently
when it took majority control of the Chinese company Supor at the end of 2007. Nonetheless,
success is never guaranteed from the outset and may depend on external factors. Therefore, regular
monitoring of progress on projects and synergies implemented by an Integration Committee is a
way of limiting the risk of failure.
10
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 1: Financial Statement
Income Statement (€ Mn)
2009
2010
2011e
2012e
2013e
Total Revenue
3.176
3.652
3.957
4.242
4.570
France
685,3
711,7
696,5
717,9
744,3
Reported Growth
2,6%
3,9%
-2,1%
3,1%
3,7%
EU Country
728,3
786,9
817,0
847,6
881,2
Reported Growth
-0,9%
8,0%
3,8%
3,7%
4,0%
Eastern Europe
552,4
639,1
698,8
718,0
742,2
Reported Growth
-17,1%
15,7%
9,3%
2,8%
3,4%
North America
348,9
404,4
397,1
412,5
432,8
Reported Growth
-11,4%
15,9%
-1,8%
3,9%
4,9%
South America
261,5
345,7
438,0
484,3
537,0
Reported Growth
-2,8%
32,2%
26,7%
10,6%
10,9%
Asia
599,9
764,0
909,3
1.061,3
1.232,7
Geographical Area
Reported Growth
20,5%
27,4%
19,0%
16,7%
16,1%
(2.820,9)
(3.213,9)
(3.466,6)
(3.694,9)
(3.964,2)
(1.414,1)
(1.632,7)
(1.792,0)
(1.936,3)
(2.102,6)
Labour costs
(125,4)
(126,7)
(126,0)
(126,0)
(126,3)
Freight costs
(22,1)
(64,9)
(73,7)
(73,7)
(73,7)
Operating Expenses
Purchased raw materials and goods
Other production costs
(305,4)
(322,3)
(317,4)
(315,0)
(318,3)
(1.867,0)
(2.146,6)
(2.309,2)
(2.451,1)
(2.620,8)
(50,0)
(60,0)
(70,3)
(77,5)
(85,7)
(95,2)
(143,0)
(150,7)
(162,5)
(176,0)
(808,7)
(864,3)
(936,5)
(1.003,9)
(1.081,7)
Participation
(33,5)
(50,4)
(40,7)
(41,5)
(44,2)
321,9
387,5
449,3
505,2
561,8
% Sales
10,1%
10,6%
11,4%
11,9%
12,3%
Growth
6,1%
20,4%
16,0%
12,4%
11,2%
A&D
94,0
100,0
102,6
106,5
111,1
EBITDA
415,9
487,5
551,9
611,7
672,8
Finance costs
(22,6)
(12,0)
17,4
(23,6)
(139,5)
Other financial income and expense
(4,6)
(3,9)
0,0
0,0
0,0
Share of profits/losses of associates
0,0
0,0
0,0
0,0
0,0
(73,8)
(38,5)
(45,5)
(52,6)
(45,5)
Cost of sales
R&D costs
Advertising expense
Distribution and administrative
expenses
EBIT
Other products and charges
PROFIT BEFORE TAX
220,9
333,1
421,2
429,0
376,7
(59,4)
(89,6)
(113,3)
(115,4)
(101,3)
PROFIT FOR THE PERIOD
161,5
243,5
307,9
313,6
275,4
Non controlling interests
(16,8)
(23,2)
(25,6)
(22,6)
(29,5)
144,7
220,3
282,3
291,0
245,9
-7,5%
52,3%
28,2%
3,1%
-15,5%
Income tax expense
PROFIT ATTRIBUTABLE TO OWNERS
Profit YoY%
Groupe SEB
11
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 2: Balance Sheet
Balance Sheet (€ mn)
2009
2010
2011e
2012e
2013e
Cash & Near Cash Items
307,8
236,6
134,7
252,7
272,9
Accounts & Notes Receivable
627,1
733,9
834,1
894,2
963,4
Inventories
466,3
635,5
688,6
738,1
795,3
Other Current Assets
68,4
100,3
131,0
131,0
131,0
1.469,6
1.706,3
1.788,4
2.016,1
2.162,7
7,7
8,5
8,5
8,5
8,5
GoodWill
386,6
409,1
417,5
423,3
430,1
Net Fixed Assets
391,4
426,5
459,9
502,1
554,2
Assets
Total Current Assets
LT Investments & LT Receivables
415,3
445,6
552,0
552,0
552,2
Total Long-Term Assets
Other Long-Term Assets
1.201,0
1.289,7
1.437,9
1.485,9
1.544,9
Total Assets
2.670,6
2.996,0
3.226,0
3.502,0
3.708,0
Accounts Payable
398,0
494,4
488,2
523,3
563,9
Short-Term Borrowings
246,7
170,1
170,0
197,6
225,0
Other Short-Term Liabilities
311,7
361,0
282,0
312,0
392,9
956,4
1.025,5
940,2
1.032,9
1.181,7
Long-Term Borrowings
301,1
201,0
463,3
453,3
339,8
Other Long-Term Liabilities
193,0
199,0
141,0
116,0
82,0
494,1
400,0
604,3
569,3
421,8
138,8
173,1
120,8
126.8
133
(108,8)
(61,7)
(110,0)
(110,0)
(90,0)
Liabilities & Shareholders' Equity
Total Current Liabilities
Total Long-Term Liabilities
Minority Interest
Treasury stock
Share Capital & APIC
50,0
50,0
50,0
50,0
50,0
1.140,0
1.409,0
1.620,8
1.833,0
2.011,4
Total Equity
1.220,0
1.570,4
1.681,6
1.899,9
2.104,3
Total Liabilities & Equity
2.670,5
2.996,0
3.226,0
3.502,0
3.708,0
2009
2010
2011e
2012e
2013e
3.176,3
3.651,8
3.956,7
4.241,7
4.570,2
EBITDA
415,9
487,5
551,9
611,7
672,8
D&A
94,0
100,0
102,6
106,5
111,1
EBIT
321,9
387,5
449,3
505,2
561,8
Taxes
86,5
104,1
120,7
135,8
150,9
(200,0)
179,0
160,5
74,5
85,9
529,4
204,4
270,7
401,5
436,0
(109,3)
(140,8)
(136,0)
(148,7)
(163,1)
420,1
63,6
134,7
252,7
272,9
Reserve and retained earnings
Appendix 3: Cash Flow Statements
Cash Flow Statement (€ mn)
Sales
Change in NWC
Operating Cash Flow
Capex
Free Cash Flow
Groupe SEB
12
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 4: Focus On India
SEB recently acquired a majority interest (55%) of Mahajara Whiteline, which is a small to medium
sized firm operating in the Indian small domestic appliances market. This firm has had annual
growth of 15%.
Indian small domestic
equipment market
Stoves
7%
Other
electrica
l
applianc
es
21%
Gas
cookers
26%
The market: Looking at the 2005-2010 period, household’s consumption of goods in India has
risen by an average of 14% per year, leading to a sharp increase in the discretionary consumption.
We expect this trend to continue over the next decade.
The structure: Highly fragmented with low entry barriers, the Indian small domestic equipment
market is estimated at around EUR825m. It is divided into five main segments: stoves (7%), gas
cookers (26%), grinder mixers (30%), pressure cookers (16%) and other electrical appliances
(21%)
Pressure
cookers
16%
Trends: We are confident of market growth due to low equipment ownership rate of households
and the increasing household income of the middle class. A significant portion of the population
(30%) is classified as middle class.
Grinder
mixers
30%
Source: IMF
100%
Some specific local obstacles: The lack of retail networks makes the access to the Indian market
more difficult (organized retail represents only 5% of the retail market). Electricity infrastructure is
a huge challenge and constraint for the implantation of international group in India. To deal with
this issue, some firms innovate and market battery-operated appliances (for instance, refrigerators
that function with batteries). The appliance market in India is protected by an import tax of 15%,
which considerably limit the entry of foreign groups.
5%
80%
60%
95%
40%
20%
0%
Organised retail
Traditionnal retail
Source: World Bank
Share of the basic consumer goods of
the total consumption
60%
50%
40%
30%
20%
10%
0%
India
China
Brazil Russia
US
Source: IMF
Groupe SEB
13
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 5: Focus On China
Strong position in China
Urbanisation rate in China
(%)
60
40
20
0
Source: China statistics Bureasu
Small domestic appliances
(SDA) market in China
Culinary
items;
14%
Cooking
items;
7%
Cooking
SDA,
29%
Beverag
es and
food
preparat
ion; 17%
Non
cooking
SDA,
33%
A major component supporting China's rapid economic growth has been exports growth. Recently,
there have been some concerns about China as we have seen its GDP’s growth slow to 9,1% in Q3
from 9,5% in Q2. However, several economic indicators such as the total retail sales of consumer
goods or the per capita total income of urban households, both have delivered increased
(respectively +0,2% higher than that of the first half of 2011 and +1,3% higher for the income of
urban households). Furthermore, with the settlement of the Five Year Plan for 2011/2015,
investment will remain the main driver of growth
The small household appliances market in China: This industry is changing at a very fast pace
but through consolidation and growth. Supor (SEB partner) is confident in becoming an important
threat to Midea which is the leader on the SHA Chinese market by innovating and consequently
offering new products. Although this industry is rapidly growing, the distribution channel is not
well developed and it requires companies to create their own retail stores as well as work with
distributors. Supor owns about 22 000 selling points in China, mainly in big cities and a limited
number of “secondary” cities. The secondary cities account for just 25% to 35% of Supor sales. In
order to increase its presence in these areas and to avoid distribution network problems, Supor has
been developing its own store network called “the Supor Life Stores”. Currently there are about
1000 Supor Life Stores and the Group aims to raise this number by 20% by the end of 2012.
Main characteristics of the Small Domestic Appliances Chinese market:
Highly relying on commodities (Aluminum, copper, plastics)
Highly growing need in electrical components
The first 3 suppliers represent approximately 2% each of the total purchases
Industry is highly growing
Small players tend to disappear on the long term
Threat of Chinese low quality products that, somehow, grab market shares
Innovation is one of the main driver of growth on this market and a key to lead competition
Source: China statistics Bureau
Supor positioning
Supor Annual Sales, under
chinese accounting standards
(€M)
Kitchenware products. Supor is the undisputable leader on kitchenware products with an
approximated market share of 37% well ahead of ASD (second largest with 21% MS). The other
competitors have market shares of less than 10%. This market is worth RMB 10bn.
Small Household Appliances. Supor is number 2 on small household appliances market behind
Midea. This market is estimated to be worth more than RMB 23bn, which is twice bigger than the
kitchenware market
10M 2011
2010
2009
2008
2007
2006
2005
0
200
400
600
800
Source: Supor Financials
Development of on-line sales in
China (€ bn)
140
120
100
80
60
40
20
0
Winning synergies:
Entering the Chinese market is never something easy to achieve for western companies and this is
the reason why most of them go into joint venture or through acquisitions. For Seb, acquiring a very
close company in China has been clearly motivated by the aim of realizing business synergies in
order to save means and increase competitiveness, and it happened…Since the entrance of Seb into
Supor’s capital, the productivity of the Chinese group factories rose by 30%. (Seb Financial report)
Supor’s growth strategy:
In terms of communication, SEB is heavily investing into its Chinese brand with a budget of RMB
105m for 2011. The market push is for the small domestic appliances segment. , Supor is also
developing on-line selling in China, which is expected to grow by 40% annually between 2010 and
2012. Supor’s products are distributed over e-tailing platforms such as Taobao or Amazon and
generate a number close to 3% of domestic sales. This phenomenon brings China as the second
largest worldwide market in terms of e-tailing for SEB with global sales of approximately €60bn
in 2010. As illustrates the chart, this number is expected to reach more than €120bn by the end of
2012.
Source: China e-commerce research center
Groupe SEB
14
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 4: Valuation Assumption and Methodology
Sales Forecasts (€ mn)
2010
Asia Oceania (p*)
764,0
651,0
France (r*)
711,7
Eurozone (r*)
9 m 2011 2011 Q4e
2011e
YoY
2012e
YoY
2013e
YoY
258,3
909,3
19%
1061,3
17%
1232,7
16%
444,0
252,5
696,5
-2%
717,9
3%
744,3
4%
786,9
526,0
291,0
817,0
4%
847,6
4%
881,2
4%
Eastern Europe (p*)
639,1
461,0
237,8
698,8
9%
718,0
3%
742,2
3%
North America (r*)
404,4
271,0
126,1
397,1
-2%
412,5
4%
432,8
5%
South America (p*)
345,7
305,0
133,0
438,0
27%
484,3
11%
537,0
11%
Total
3651,8
2658,0
1298,7
3956,7
8,3%
4241,7
7,2%
4570,2
7,7%
(p*) Sales Forecasts based on Parametric Model
(r*) Sales Forecasts based on Regressive Model
Our model is based on the economic growth rate and the correlation with the household appliances and cookware market. For the fiscal
year 2011, we affect a “Santa Claus” effect, indeed 4th quarter is the most important for SEB. Based on this model we estimate future
growth rate in the different area. Our core assumption is the development in Asia and South America (Brazil in fact).
Euro dollar exchange rate impact on 2011 q4
forecasts can be neglected due to very similar trends
Q4 performances before/after economic
downturn forecasts affectation
Our mid-term sales forecasts (2012 – 2013) rely on 2 models
1.
Regressive model (suitable for Developed Markets, DM)
GDP (Historical) 1
Consumer spendings 2 (Historical)
Correlation
Correlation
GDP Consensus 3
2.
Company Sales
DM Sales Forecasts
Consumer spendings estimations
Parametric model (used for high Emerging Markets, EM)
GDP Historical 1
GDP Consensus 3
Consumer spendings 2
Weighted trend
Multiplicator
Company Sales
Overweighted
EM Sales Forecasts
1
Bloomberg data.
Source: Bloomberg data. Russia and Ukraine household appliances indicator doesn't exist. Our proxy for these countries is total
consumer spending.
3
Institutional consensus (mean), Bloomberg data.
2
Groupe SEB
15
CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 5: Sensitivity Analysis
WACC (step 0,5%)
Terminal Growth Rate
6,89%
Groupe SEB
7,39%
7,89%
8,39%
8,89%
9,39%
9,89%
10,39%
10,89%
1,50%
90
81
73
67
61
57
53
50
47
2,00%
97
87
78
71
65
60
55
51
48
2,50%
107
94
84
75
68
63
58
54
50
3,00%
118
103
90
81
73
66
61
56
52
3,50%
133
114
99
87
78
70
64
59
55
4,00%
154
128
110
95
84
75
68
62
57
4,50%
183
148
123
106
92
81
73
66
60
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 6: Sum of the Parts
SUM OF THE PARTS
France
Europe
Asia
North America
South America
Eastern Europe
SEB EBIT e11
Peers
EV / EBIT e11
79
93
103
45
50
79
PHILIPS
DELONGHI
MIDEA
ELECTROLUX
WHIRLPOOL
INDESIT
9,64
6,59
12,53
9,54
10,31
6,9
761,56
612,87
1290,59
429,3
515,5
545,1
Enterprise Value
4154,92
(Net debt)*
(Minority interests)
Equity
(Diluted shares)
-513
-417
3237,45
52,985
Target Price
61,73 €
* Including pensions
Appendix 7: Multiple Analysis
Multiple Analysis
EV/ EBIT EV / SALES
P/E
SEB
7,91
0,82
10,63
Philips
9,64
0,68
18,91
De Longhi
6,59
0,69
11,62
Electro Lux
9,54
0,37
10,97
GD Midea hld.
0,55
11,85
Whirpool
10,31
0,32
5,44
Indesit
6,9
0,33
6,8
Adjusted Mean
8,48
0,54
10,89
SEB Deviation
-7%
58%
2%
Seb Valuation
3634,39
2137,03
58,58
Equity (€)
€ 80,38
€ 50,40
€ 58,58
Target Price
2011 Price
Groupe SEB
58,68 €
59,94 €
Δ
2%
P/B
1,79
0,97
1,45
1,41
2,22
0,74
1,43
32%
45,37
€ 45,37
Multiple Analysis - 2005/2009
EV/ EBIT EV / SALES
SEB
8,28
0,74
Philips
68,92
0,92
De Longhi
8,58
0,57
Electro Lux
10,34
0,38
GD Midea hld.
21,51
1,07
Whirpool
8,41
0,42
Indesit
9,72
0,45
Adjusted Mean
11,14
0,65
SEB deviation
39%
-11%
Seb Valuation
2924,58
1869,10
Equity (€)
€ 74,37
€ 51,67
Target Price 51,60 €
Price 5Y Mean
33,82 €
P/E
19,17
25,58
13,74
25,87
20,98
10,66
15,23
18,75
24%
42,00
€ 42,00
P/B
1,77
1,37
0,72
2,16
4,23
1,90
1,79
1,99
13%
38,36
€ 38,36
Δ
-34%
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 8: Beta Test
In order to choose the most accurate beta, as it represents a fundamental element within the DCF valuation method, we
have conducted a beta test that varies with regards to time and frequency.
Beta
1,00
Beta
0,80
0,60
0,40
0,20
-
R²
1Y
2Y
3Y
0,70
0,60
0,50
0,40
0,30
0,20
0,10
1Y
2Y
3Y
Monthly
0,42
0,49
0,62
Weekly
0,70
0,74
0,87
Daily
0,92
0,85
0,89
Coefficient of determination - R²
Monthly
0,26
0,18
0,23
Weekly
0,50
0,42
0,43
Daily
0,59
0,45
0,40
 As a result we have selected a beta of 0,92 as it matches with the highest R².
Groupe SEB
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 9: Porter’s Five Forces Analysis
THREAT OF NEW ENTRANTS
Burst market
Mature market: Retail distributors often and increasingly play a catalyst role in competition. SEB is long established and
occupies strong front-rank positions in mature markets thanks in particular to its powerful brand portfolio and extensive
offer which allows it to cover all segments.
Emerging Market: Groupe SEB therefore strives to limit the risk of competition by boosting its R&D efforts in order to
stay ahead and lead the market (this area has seen growing budget allocations over the last three years in both skills and
investment).
Access to distribution, distribution process change with the area and the culture
Economies of scale
Bargaining power of suppliers
Materials: Metals, Plastics,
Paper/Cardboard packaging, subsystems, transport, information
level, logistic, travel.
Manage at Group level, centralized
organization.
In 2010: 330 suppliers representing
86% of global purchasing.
For non production purchase:
desire to integrate suppliers
upstream in the product
development process.
Intensity of competitive rivalry
2 main markets:
Cookware: 30% of sales : 6.5
Billions
o No international competitors.
o SEB’s market shares = 80%; the
number 2 is Meyer (China) with
8-9% market share.
SDA: 27 Billions, and 70% of sales
o Market share : 10%
o Main competitors: Phillips
Delonghi, Indesit… (For the
GEM)
52 Suppliers and the 26th first
represent 80% of global
purchasing.
Bargaining power of client
The variety and the number of the
Group’s retail distribution networks
limit risk and the probability of
major impact on a consolidated
level.
On a country level however, a
client bankruptcy (especially a
major client) may have significant
consequences on the trading
activity of the subsidiary in
question. Whatever the case, the
Group implements a cautious
policy towards its retailing clients,
based on the subscription of client
coverage insurance.
The Group’s international presence
and the wide diversity of the retail
distribution channels it uses around
the world help to guarantee some
level of dilution of customer risk.
Threat of substitute products or services
Private label
Chinese competitors
Groupe SEB
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 10: Profit before Tax’s Stress TEST
We have performed a stress test analysis on the main company’s external risks factors to draw a profitability study. Our scenario covers
fluctuations of +/- 20% where <0 means unfavourable scenario.
On available data, the main external risks taken into account are:
USD: Main currency upon the company is exposed
Raw materials: Steel, Aluminium and plastic (we omitted copper and nickel for insufficient data)
Monetary rate: Eonia (Range between 0 – 5%)
Our stress test impacts the profit before tax (PBT) estimated for 2011 (€421 M). We conducted 2 main tests:
Unhedged: Analysis of risk factors impact using 2010 cost structure 1
Hedged strategy: Analysis of risk factors impact using 2010 cost structure and 2010 Hedge policy
We can observe that in the worst scenario (+ 20% of raw materials costs, -20% USD depreciation and an Eonia rate at 5%) Seb is still
Profitable. On 2011 PBT the impact would be €-159M with net profit after taxes falling by €117M. On the contrary, a best scenario
could generate a positive impact on PBT of €151M with an increase in net result of €110 M.
1
Seb 2010 report
Groupe SEB
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CFA INSTITUTE RESEARCH CHALLENGE
3 January 2012
Appendix 11: Porter 5 Forces China
PORTER 5 FORCES China
Suppliers
Customers
Threat of new entrants
Threat of substitute
products
Competitive rivalry
Groupe SEB
Highly relying on commodities (Aluminium, copper, plastics)
Crucial need in electrical components
Chinese subcontractors (efficiently managed)
The first 3 suppliers represent around 2% each of the total purchases amount.
Distribution is organized within different segments:
Big retailers
Specialists
Own store network (Supor Life Stores)
On-line sales
Industry is highly growing and consolidating
Small players tend to disappear
Strong R&D requirements
Strong branding which avoid numerous new entrants
Chinese products that are often low quality but very cheap  somehow it grabs
market shares
Development of already prepared dishes.
 Innovation is the main driver of growth on this market and is the key to beat
competitors.
Supor owns leading positions on its two main segments:
Undisputable leader on kitchenware products with an approximated market
share of 37% well ahead of ASD (second largest with 21% MS). The other
competitors having market shares of less than 10%. This market is worth RMB
10bn.
Supor is number 2 on small household appliances market behind Midea. This
market is estimated to be worth more than RMB 23bn, which is twice bigger
than the kitchenware market.
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CFA INSTITUTE RESEARCH CHALLENGE
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Disclosures
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or
publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or
greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S &P 500, or any other
relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating
implies flat returns over the next twelve months.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable,
but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The i nformation is not intended
to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a
solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Team
H], CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
Groupe SEB
22