2023-05-31 06:12:34 ET
Summary
- Linde plc's target price increased to $370 from $360 after better-than-expected 1Q earnings, with a 12-month outperform rating.
- Upside reflects better price/cost realization, with a supportive order backlog.
- Downside risks include foreign exchange fluctuations and a severe economic downturn causing a slowdown in industrial activity.
Here at the Lab, we already provided two follow-up notes on the specialty gas sector (Air Products and Chemicals (APD) and Air Liquide (AIQUF)). In detail, our main assumption is that energy costs are going down. Europe is in no danger of an increase in natural gas prices and this is supported by a well-stocked liquefied natural gas market, extra volumes from the United States, and low demand. However, there are concerns as we look ahead to next winter. Cold temperatures, Russian gas flow interruptions, and a Chinese recovery could push prices above €100 per MWh. Currently, European TTF prices stood on average at around €24.6 per MWh, the lowest level since August 2021, while since the beginning of the year, they have recorded a drop of around 70%. Europe is now in the summer season with gas stocks near all-time highs. If there are no major disruptions in the coming months, we are forecasting a flat nat gas price at this current level until Q3 2023. On an aggregate basis, industrial gas companies have greater pricing power and two-thirds of their commercial revenues are linked to nat gas prices. Therefore, we expect to see a significant increase in gross margins for Linde plc ( LIN ), following the fall in the cost of energy.
Why are we still supportive of Linde?
Since our initial buy rating with a publication called " Defensiveness At A Discount ", the company's stock price is up by more than 30%, outperforming the S&P 500 return and also its direct competitors (APD and AL). As a reminder, our buy case was supported by multiple MACRO and MICRO reasons. On the macro upside, there was a 1) supportive regulatory framework in the USA and in the EU on green opportunities and hydrogen, 2) the Ukraine invasion was also a key catalyst towards the energy transition, 3) the EU chip acts with €43 billion in supporting funds as well as the United States Chips and Science Act development for a value of approximately $52 billion, and 4) higher needs of specialty gas in EV car. Related to the micro upside, the company is more diversified on a GEO revenue basis and sells different product solutions starting from cylinders to bulk liquid. In addition with a follow-up note titled " Positive News Ahead ", we reported Linde's lower cost structure with the Frankfort delisting. Aside from removing the dual listing expenses, we positively view this development because US companies' P/E multiple are usually higher compared to the EU one.
Mare Evidence Lab's previous analysis
To support our MACRO buy case recap, in the second quarter, Linde announced two new projects with Evonik and Heidelberg Materials (both companies covered by our internal team). The company signed a long-term agreement to produce green hydrogen for Evonik in a 9-megawatt alkaline electrolyzer plant in Singapore. With Heidelberg, Linde will build a large-scale carbon capture close to the Lengfurt plant in Germany. As a reminder, cement production is estimated to be responsible for around 7% of global CO2.
Linde mega-projects
Source: Linde Q1 result presentation
Going back to the analysis, in 2022, APD's earnings per share were at $8.38, and Linde's earnings per share were fairly similar at $8.23. For 2023, Air Products and Chemical EPS guide a midpoint at $11.40 while Linde's EPS is forecasted at $13.65. Looking at the ROCE, in Q4 2022, APD stood at 11.7% and Linde at 13.4%. In the last quarter, APD’s ROCE was flat on the two-year comparison, while Linde’s after-tax ROCE reached 24.0%.
While there are some business & regional nuances between the two leading companies (for instance, APD is lacking U.S. packaged gas business), here at the Lab, we believe are more inclined toward Linde, particularly when organic growth has been fairly similar. Cross-checking APD and Linde's last quarter results, we should recall that on a comparable basis, the German player volumes were flat with an average selling price up by 8%. On the other hand, APD increased its volume by 6% with an increase in the average selling price of 8% too. APD adj EBITDA grew by 13% while Linde achieved a plus 11%. However, Linde's EU exposure is greater than APD. Therefore, this is supportive of Linde's bottom line. In numbers, excluding the Engineering divisional performance, Linde's EMEA sales reached $2,177 million and represented 29.72% of the company's total sales. Compared to Q1 2022 number, turnover grew by 10% and was driven by a 13% of cost pass-through increase.
Linde GEO op. margin
Linde EMEA Financials in a Snap
Conclusion and Valuation
The company is now guiding a Q2 EPS at $3.45 (midpoint). Therefore, as we already perform on APD, we decide to modestly increase better margin projections in the Americas region as well as in the European one. Rolling forward our valuation, we ended up with a cumulative EBITDA of $13.1 billion and applied an unchanged EBITDA multiple of approximately 15x, we derive a price target increase of $370 from $360 previously . Last time, we anticipated a DPS increase of 10% and the company announced a plus 9% hike . On the CAPEX, we continue to guide the company's high-end at $4 billion. Linde's backlog continues to be supportive, with 33% on electronics and 42% related to clean energy such as hydrogen. Our buy rating is then confirmed and risks are included in our initiation of coverage .
Linde higher guidance
For further details see:
Linde: Another Beat, Another Raise