AIQUF - Linde: Positive News Ahead

Summary

• Supportive Q3 numbers, so we confirm our buy rating valuation.
• We view the company’s plans to delist from Frankfurt stock exchange as a positive.
• Lower mid-point in Q4 EPS, but $30+ billion new opportunity to price in.

After Air Liquide's ( AIQUF , AIQUY ) pre-Q3 2022 sales update and their full disclosure released on the 25th of October , we were already supportive of the specialty gas sector. Last week, Linde plc ( LIN ) announced its Q3 results, confirming our recent investment thesis. No buy case recap today, but it was based on four MACRO and three MICRO upsides, and you can have a look at Mare Evidence Lab's initiation of coverage called: Defensiveness At A Discount.

Before analyzing Linde's Q3 results, we should mention that the company is proposing a delisting from the Frankfort stock exchange . Linde’s structure is not very common, and there are many advantages that support this development such as 1) a lower cost structure, 2) P/E multiple in the US companies' are higher compared to the European one, 3) no limit cap in share ownership, 4) more comps in the sectors, 5) less relation to the Frankfort stock market (in which Linde's weighting is almost 10%) and moving to the US exchange, this should support a lower company Beta over the long term (with a consequence of lowering the company's WACC and therefore a higher valuation). Indeed, Linde's recommendation is to be listed only on the New York Stock Exchange with a pending process subject to shareholder approval. Here at the Lab, we view this development positively (even if we are not yet adjusting our numbers).

Source: Linde plc - Proposal to Delist from Frankfurt Stock Exchange

Q3 Results

Cross-checking analyst estimates, Linde outperformed the consensus expectation. Linde recorded an adjusted EPS of $3.10 against a forecast set at $2.94. Turnover stood at $8.8 billion in Q3, up by 15% versus last year-end quarter and also up versus Q2 2022. Global volumes also grew 3% on a yearly basis, and this was pretty supportive given the strong COVID-19 oxygen sales recorded a year ago. Numbers in hand, the healthcare division represents 15% of the total company sales.

Source: Linde Q3 results presentation

Going to the EBIT region highlights, we report the following:

1. America's adjusted operating profit stood at $974 million (slightly higher than the consensus expectation). Important to report is the new IRA incentives. The company disclosed potential new investments for more than $30 billion ($3 billion for decarbonization, $10+ billion opportunity to decarbonize Linde's clientele such as steel companies, petrochemicals, refining, etc. and an additional $20+ billion upside on new markets such as ammonia and green fuels) (Fig 1);
2. In the European region, the consolidated operating profit was down by 2% on a yearly basis. The pricing delta was negative mainly due to the ongoing energy pressure costs and Russia's deconsolidation. Despite that, Linde achieved a positive number supported by new investments in EU renewable energy;
3. APAC region was a clear outperformer. EBIT was up significantly thanks to higher sales and a good cost pass-through. Energy and electronics end markets were supportive of Linde's three-month account.

Fig. 1

Source: Linde Q3 results presentation

Conclusion and Valuation

Following the Q2 results, Linde once again raised its 2022 guidance. If we are rolling forward Linde's EBITDA, we should slightly upwardly adjust our 2024 projection. However, the Q4 EPS mid-point suggests more impact on FX development, so we decide to leave our target price unchanged at $330 per share, confirming our 2024 forecasted EBITDA of €12 billion and valuing Linde with an EV/EBITDA multiple of 15.0x.

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