CODGF - Saint-Gobain: New Construction Declines More Apparent In Comps

2023-12-10 07:50:54 ET

Summary

• Compagnie de Saint-Gobain continues to push sales on pricing action YoY despite tough comps and also declining volumes.
• Weakness in parts of the European Union, particularly Germany, due to trade disintegration with Russia and poor underlying macro in those regions.
• In all regions, however, renovation markets are doing well, with a particularly strong renovation market in the mix for Southern Europe.
• The bolt-ons are looking good and likely to add margin as integration programmes proceed, with record operating margins expected at year's end.
• The PE is probably around 10x, which takes into account some deceleration and oncoming risks, offering a decent earnings yield for those interested in this mostly specialty producer.

Compagnie de Saint-Gobain ( CODGF ) continues to achieve meaningful gains in pricing YoY despite increasingly tough comps across all geographies and volume hits in most areas. Recent portfolio rotations seem to be working as integrations are going well, and the company expects record operating margins at year's end. Despite the resilient performance, particularly in renovations, Gobain doesn't trade at a particularly high multiple. It does reveal general weakness in parts of the European Union, particularly Germany whose economy is a mess right now due to trade disintegration with Russia, and in general we see a lot of dependence on initiatives, particularly in Southern Europe to support green renovation.

Earnings

Let's have a look at the results for the Q3 .

Northern Europe was by far the weakest segment, including Germany and the Nordic countries. Sweden's property markets are really not doing well right now, already subject to a little bit of concerns before the Ukraine war and the Riksbank hiking regime. Other Nordic markets had weak new construction performance as well, but at least decent renovation markets, which are about 55% of the overall segment's sales. Volume declines were 15% in Germany overall in the first half, -9% in Q3, and this weakness persisted for the whole segment. Pricing was up in all geographies of Saint-Gobain, but volume declines were sharp enough here that NE was down around 7.6% on a LFL basis, with Eastern Europe being relatively strong within the segment but not a major contributor.

Southern Europe had pretty tough comps, with programmes like ECOBONUS in Italy and similar in France supported a pretty pronounced and very resilient renovation market in the region. Renovation is about 70% of sales here. Overall performance was flattish, but conditions are quite good in this region, although reliant on green housing programmes and renovation incentives that in some countries have been viewed as a source of fraud and failure. So these markets may not be possible to rely upon in the future. New construction is not going well in these markets.

Americas has been the region where quite a lot of portfolio rotation is happening. In general, the trends here are similar as everywhere else, there are volume hits being offset by price increases. However, Americas is likely going to be the region where we'll see the most incremental margin improvement and performance due to the benefits of synergies from their various acquisitions, including of GCP. LatAm is bringing down the overall segment, with NA actually achieving growth, and Mexico within LatAm doing decently as well.

APAC saw China actually doing pretty good thanks to some idiosyncratic capacity coming online in China, giving some growth despite overall pressures on that beleaguered market. Meanwhile, India performed in line with what you'd expect from a very solid and well-positioned secularly growing economy. Prices were actually down in this segment but volumes up.

The HPS segment has some global construction markets that saw substantial increases inorganically due to the addition of the GCP products to the stable. The automotive exposures continued to demonstrate growth, albeit in deceleration, mainly driven by Asia and the Americas. Industrial exposures were pretty resilient on the green angle. Same as the other segments, mostly price is supporting revenues in this segment. However, with the introduction of larger acquisition in this segment, integration efforts should contribute to incremental margin growth.

Bottom Line

Saint-Gobain isn't very expensive. It should see annualised net income such that PE ratios are going to be in the area of 10x, meaning a decent 10% earnings yield by investing the multiple. The management are making good decisions.

They are inorganically growing their presence in attractive and recurring markets, and the latitude to improve the acquired businesses to make the bolt-ons efficient at prevailing market prices is substantial enough to assure a decent degree of value creation.

Saint-Gobain is a specialty producer of building materials so it's going to have more pricing power and in general its economics are less cyclical and plenty diversified in order to withstand the majority of possible market environments. However, it should be mentioned that there are lawsuits and probes going on concerning price fixing of cement additives , targeting also Sika AG ( SXYAY ). This concerns products specifically in the HPS segment. The company is pretty confident that nothing will come from this, but it is pretty remarkable that in the broader construction industry, there is still so much inflation despite the come-down of a lot of input prices including transportation, and in the face of declines in certain types of activity. However, it should also be mentioned that the volume declines in HPS have been pretty limited YoY even on a 9m basis, so demand does seem to be there, and 9m price increases are rather in line with the general inflation we'd been seeing in 2023 before and after lapping the Ukraine war.

There's probably decent value here, but of course it is levered to the broader construction environment, which still has some room to fall if the economic scenario becomes less attractive.

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