DB European Building Construction 2019 Outlook_watermark

Key Changes

Company

Target Price

Rating

BZU.MI

25.50 to 21.00

-

CRH.I

34.80 to 28.00

-

CX.N

8.40 to 6.00

-

GEBN.S

443.00 to

-

430.00

HEIG.DE

75.00 to 72.00

Buy to Hold

KSP.I

46.50 to 45.00

Buy to Hold

LHN.S

48.00 to 54.00

Hold to Buy

SGOB.PA

55.80 to 43.00

-

SIKA.S

168.00 to

-

160.00

TKTT.PA

24.70 to 20.50

-

TTNr.AT

26.00 to 21.00

Buy to Hold

Source: Deutsche Bank

Top picks

LafargeHolcim (LHN.S),CHF44.82

Buy

Sika (SIKA.S),CHF121.30

Buy

Saint Gobain (SGOB.PA),EUR32.94

Buy

Source: Deutsche Bank

Deutsche

Key themes

Bank

■

Sector performance has been historically well correlated to European PMI evolution

AG/London

■

The US growth should show no sign of moderation in 2019

■

3-6% volume upside on US footprints in case of weather normalization

■

But concerns are mounting on the sustainability of US housing

■

Labour shortage could constrain US construction growth pattern

■

European residential new-build data have weakened through 2018

■

Europe renovation should be more resilient than residential new-build

■

Improving demand growth profile in 2019 in EM

■

More upside than downside on LafargeHolcim and Heidelberg EM footprints.

■

Exposure to DM renovation and EM could help mitigate a macro slowdown.

■

Price vs. cost to remain an issue in H1 19: self-help and op leverage to be key

■

LafargeHolcim to benefit from self-help in 2019.

■

Disconnection of stocks' P/E vs. PMI suggests a sharp slowdown is already priced in

Building European

2018 December 3 Materials Building

Construction &

4 Page

Top picks & key recommendation changes

Top picks

LafargeHolcim (upgrade to Buy) - EM improvement drives upside to consensus

While EM exposure has long been a worry for investors, our bottom-up analysis shows now more upside than downside potential on LafargeHolcim EM

portfolio. For the first time since 2012, we forecast a capacity utilization improvement in EM, driven by better demand growth (helped by a lag from higher

commodities prices) and the moderation of new supply (due to more normalized prices / margin conditions in EM). Reflecting this, we have factored in a

modest +3% lfl EBITDA improvement in EM in 2019 – however, this, combined with DM improvement and the benefit of the cost savings (CHF250m assumed,

i.e. c4% of FY 19E EBITDA assumed) is enough to bring our FY 19E EBITDA forecasts >2.5% above consensus. With easy comps for the next three sets

of results, we see potential for an earnings upgrade. Trading at 11.8x 2019E P/E, 4.5% dividend yield and 7% FCF yield, we believe there is value in the

stock. Upgrade to Buy.

Sika (Buy) - Sector-leading EBIT growth in 2019 and robust business model for any macro slowdown

Led by continued top-line growth, raw materials' costs moderation and high operational leverage, we forecast Sika to deliver the best top-line and EBIT growth

in 2019 across the sector (respectively, +5% and +15%). We also see Sika business model as very resilient to a potential downturn: it combines the lowest

exposure across the sector to the very cyclical new-build segment in DM, an increasing geographical diversification and a proven track record of market

outperformance through increased products penetration. Following recent macro concerns, Sika trades now at 13.9x 2019E EV/EBITDA and 4.6% FCF yield,

which is, in our view, a compelling entry point for a quality growth stock: Buy.

Saint Gobain (Buy) - Recession scenario already priced in

Since the start of the year, Saint Gobain's share price has declined by 27% as the stock has been hit by the rollover of new residential construction data

in Europe (especially in France) as well as the fade in European PMI. Yet, with its strong exposure to the more late-cycle and resilient renovation segment

and its increasing exposure to EM, we believe the stock should be less a ected than others by the slowdown in European new-build data. In addition, with

strong pricing momentum and easy comps in H1, we see limited risks to consensus. Saint Gobain trades at 8.9x 2019 P/E and 5.8x 2019E EV/EBITDA, levels

which have been seen historically only during the severe recession periods of 2008 and 2012. As such, we believe a recession scenario is already priced in

and see a favourable risk-reward. Buy.

Buzzi (Buy) - Self-help and markets restructuring to provide most of 2019E EBITDA growth

While since 2012, Buzzi’s EBITDA growth has been mainly driven by the US market recovery, we see now >80% of EBITDA growth excl. FX impact in 2019E

coming from Italy and Germany. With conservative volume assumptions in these two countries (respectively -3% and 0%), the improvement comes exclusively

from self-help and the positive impact from restructuring on prices. In the US, we include in our forecasts another year of margin decrease for 2019E - we

believe this could prove conservative as the Ash Grove acquisition by CRH should have a positive impact on the Mississippi region cement prices (>70% of

Buzzi US cement sales). In spite of these prudent assumptions, DB FY 19E EBITDA forecasts are in line with consensus. With potential upside to our forecasts

and consensus and attractive valuation (5.1x 2019E EV/EBITDA, e.g. 25-30% discount vs. cement peers), we see value in the stock. Buy.

AG/London Bank Deutsche

Building European

2018 December 3 Materials Building

Construction &

Deutsche

Other key recommendation changes

HeidelbergCement (downgrade to Hold) - Lack of short-term catalysts

Bank

While we have barely changed our EBITDA forecasts for2019, we downgrade Heidelberg to Hold as, in ourview, the stock lacks short-termcatalysts.

After a recent profit warning and a probable 7-10% EBITDA miss vs. initial guidance in 2018, 2019E guidance will be taken very cautiously. In addition, our

AG/London

detailed US weather analysis on the Heidelberg footprint suggests Q1 19 comps are not as easy as it seems and finally we believe evidence of improved

price vs. cost should not be seen before Q3 19. In the absence of short-term catalysts andin spite of attractive valuation (c10% FCF yield in 2019E, the

highest among large-cap European peers), we believe the stock will be vulnerable to any negative macro news. Downgrade to Hold.

Kingspan (downgrade to Hold) - Promising structural growth story but fairly valued

Kingspan has been YTD the best performed across the sector (+2% vs. -23% for sector average). This is due notably to a better pricing power vs. sectors’

other companies, positive M&A contribution as well as reassuring comments made during the course of the yearon the UK market. While the stockhas

since Brexit consistently traded at a 20-30% discount vs. sector’s peers (Geberit and Sika),after this year's strong performance, the discount has faded to

c10%, in line with pre Brexit levels. In our view, this could leave the stock vulnerable to any negative comment on the UK market. In addition, Kingspan has

the sector’s highest exposureto new-build construction activity (c70% of sales) which is more cyclical than the renovation segment at a time where

investors are increasingly cautious on the longevity of the construction cycle in Europe and North America. While we still like Kingspan proven track record

of structural growth ahead of construction markets, we believe the risk-reward profile is now more balanced. Downgrade to HOLD.

Titan Cement (downgrade to HOLD) - US macro risks + valuation premium

Since July 18, Titan has overperformed other cement stocks under our coverage by >12% - as a result the stock is now more expensive vs. other cement

stocks (7.7x 2019E EV/EBITDA vs. 5.1-7.0x for others). In addition, across ourcoverage, Titan is the most leveraged stock to the US(c75-80% of Titan

EBITDA growth in 2019E) while our analysis on US housing a ordability suggests now more downside than upside to residential forecasts. With increasing

risks on the US residential cycle and a more expensive valuation vs. the sector, we downgrade Titan to HOLD.

Building European

2018 December 3 Materials Building

Construction &

6Page

Summary of changes in DB estimates

■

Following disappointing Q3 results in the sector and more cautious volumes / margins assumptions for 2019, we have in general cut our 2019E

EBITDA forecasts by c3-4%

■

The cuts are the highest for Tarkett (Q3 below DB expectations, margin squeeze expected to persist in H1 19) and Titan Cement (Q3 below DB

expectations due to weather impact in the US, more cautious assumptions in Egypt and the US for 2019E).

■

LafargeHolcim modest Recurring EBITDA cut for 2019E (c1%) reflects the change in scope due to Holcim Indonesia divestment (c1.8% FY 19E EBITDA

impact)

■

Conversely, following a robust Q3 we have upgraded Kingspan 2019E EBITA forecasts by 2.5%.

■

In spite of the recent Swiss Franc appreciation vs. Euro we upgrade Sika EBIT forecasts by c3% in 2019 to reflect the stock's strong operational

leverage and expected improved gross margin.

Figure 1: Changes in forecasts, target prices and recommendations

2019E

2020E

Company

New DB

% change

New DB Rating

Key operating metric*

Key operating

% change

Adj. basic EPS

% change

Key operating

% change

Adj. basic EPS

% change

Target Price

metric*

metric*

Buzzi Unicem

21.0

-17.6%

Buy

Recurring EBITDA

617

-6.4%

1.8

1.0%

667

-7.1%

2.1

1.5%

Cemex

6.0

-28.6%

Buy

EBITDA

2,720

-5.1%

0.5

-14.9%

2,935

-5.3%

0.6

-12.1%

CRH

28.0

-19.5%

Hold

EBITDA

3,761

-2.2%

2.1

-4.4%

4,203

0.0%

2.5

-1.4%

Geberit

430.0

-2.9%

Hold

EBITDA

885

-3.1%

17.3

-3.6%

914

-2.8%

18.0

-3.3%

HeidelbergCement

72.0

-4.0%

Hold

EBITDA

3,218

1.1%

6.6

-4.9%

3,433

2.5%

6.6

-13.7%

Kingspan

45.0

-3.2%

Hold

EBITA

496

2.5%

2.1

3.5%

535

4.9%

2.3

6.0%

LafargeHolcim

54.0

12.5%

Buy

Recurring EBITDA

6,391

-1.3%

3.8

-0.3%

6,793

-1.4%

4.3

-1.6%

Saint Gobain

43.0

-22.9%

Buy

EBIT

3,353

-3.4%

3.7

-0.2%

3,604

-5.4%

4.1

-2.9%

Sika

160.0

-4.8%

Buy

EBIT

1,145

2.9%

5.9

4.3%

1,263

7.6%

6.5

9.2%

Tarkett

20.5

-17.0%

Hold

EBITDA

295

-11.6%

1.6

-19.6%

317

-11.7%

1.8

-18.8%

Titan Cement

21.0

-19.2%

Hold

EBITDA

299

-10.5%

1.2

-30.1%

332

-8.9%

1.6

-27.8%

Source: Deutsche Bank estimates, Companies data

Building European

2018 December 3 Materials Building

Construction &

Deutsche

What happened in 2018?

Bank

Sector has underperformed the market by 13% YTD

AG/London

■

Like most cyclical sectors, Building & Construction has underperformed the market in 2018 (-13% YTD). This is only the second time since the US

recovery in 2012.

■

However, the stocks in our sector with a more structural growth element (Geberit, Kingspan & Sika) which are characterized by a better pricing power

and a superior organic growth driven by the increase of penetration rate have once again outperformed the market in 2018.

■

In the rest of the report, 'structural growth stocks' refer to Geberit, Kingspan & Sika while 'cyclical growth stocks' refer to Buzzi, Cemex, CRH,

HeidelbergCement, LafargeHolcim, Titan, Saint Gobain and Tarkett.

Figure 2: Sector performance vs. STOXX 600 since 2006

Figure 3: Performance by sub-sector since 2016

30%

180

25%

24%

160

25%

20%

14%

14%

159

140

15%

12%

10%

113

10%

120

5%

2%

100

98

0%

-5%

80

-Mar16

-May16

-Jul16

-Sep16

-Nov16

-Jan17

-Mar17

-May17

-Jul17

-Sep17

-Nov17

-Jan18

-Mar18

-May18

-Jul18

-Sep18

-Nov18

-10%

-7%

-Jan16

-9%

-9%

-13%

-15%

-13%

-13%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

YTD

Sector vs. STOXX 600

Cyclical stocks vs. STOXX 600

Structural stocks vs. STOXX 600

Source: Deutsche Bank, Factset. YTD as of 28 Nov closing price.

Source: Deutsche Bank, Factset. Rebased to 100 on 1 Jan 2016. Data labels for 28 Nov closing price.

15%

12%

12%

9%

8%

10%

5%

4%

3%

5%

0%

-5%

-1%

-1%

-2%

-2%

-3%

-10%

-8%

-15%

-11%

-13%

-13%

-20%

-14%

Pharma

P&H goods

Utilities

Energy

Cons dur

Software

Insurance

Real estate

Cap goods

Chemicals

Food & bev

Telecoms

Mining

Airlines

Autos

Constr mat

Banks

Building European

2018 December 3 Materials Building

Construction &

8Page

Sector performance has been historically well correlated to European PMI evolution

■

Since the peak of European PMI seen in Feb. 18, the sector has underperformed by c13%

■

This is in the range of what we have observed in the past when European PMI has peaked.

■

The only occurrence since 2011 where a negative momentum in European PMI did not result into a sector underperformance was in H1 16. This can

however be explained by the low magnitude of the PMI decrease as well as by the discussions on US infra ahead of the elections.

Figure 5: Sector performance has been historically correlated to European PMI evolution

140

60

Nov 11

Sept 12 to June

Nov 14 to Dec

14: +27%

58

to Feb

15: +2%

130

12:

56

+36%

120

54

Aug 16 to Jan

52

110

18: +8%

50

100

48

90

46

44

80

Feb 11 to

July to Nov 14:

Dec 15 to Aug

Feb to Nov 18:

Oct 12:

Feb to Sept

42

-14%

16: +9%

-25%

12: -12%

-13%

70

Mar-11 May-11 Jul-11 Sep-11

Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12

Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

Mar-15 May-15 Jul-15 Sep-15

Nov-15 Jan-16 Mar-16 May-16 Jul-16

Nov-16 Jan-17 Mar-17 May-17 Jul-17

Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18

40

Jan-11

Jan-15

Sep-16

Sep-17

Nov-17

Jan-19

Mar-19

May-19

Sector performance vs. STOXX 600

European PMI

Building European

2018 December 3 Materials Building

Construction &

Deutsche

2018 - Another year of consensus downgrades

Bank

■

To the exception of Kingspan, all stocks are down YTD, driven by cuts in consensus EPS and / or PE derating

■

Once again, cyclical stocks have seen higher consensus downgrades vs. structural growth stocks (Kingspan, Geberit, Sika) - this mainly reflects a

AG/London

better pricing power and cost inflation management for the latter.

■

Saint Gobain YTD share price performance is however more attributable to the derating of the stock on negative macro indicators notably in France,

rather than consensus downgrades.

Figure 6: YTD share price performance by stock

Figure 7: Consensus EPS vs. P/E evolution since the start of the year

10%

2%

25%

0%

Titan

20%

-10%

-6%

15%

-10%

-20%

-14%

10%

-18%

-19%

-30%

downgrade

5%

-26%

-28%

0%

-40%

-34%

-36%

-39%

-30%

-25%

-20%

-15%

-10%

-5%

-5% 0%

5%

10%

-50%

LafargeHolcim

Geberit

Kingspan

-60%

EPS

-10%

Tarkett

Kingspan

Sika

Geberit

Titan

LafargeHolcim

CRH

Buzzi

GobainSaint

Heidelberg

Cemex

Tarkett

CRH

Implied P/E evolution

Buzzi

-15%

Sika

Cemex

Heidelberg

-20%

Saint Gobain

-25%

Source: Deutsche Bank, Factset. Note: YTD as of 28 Nov closing price.

Source: Deutsche Bank. Bloomberg Finance LP, Factset. Consensus and P/E as of 28 Nov.

Figure 8: EBITDA consensus evolution vs. share price evolution -

Figure 9: EBITDA consensus evolution vs. share price evolution -

Cyclical stocks

Structural stocks

105

110

108

100

106

95

90

104

90

102

101

85

100

80

98

96

75

71

94

70

92

93

65

Feb-18

Mar-18

Apr-18

May-18

Jul-18

Aug-18