DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
20 February 2018 Europe/Switzerland
Equity Research Engineering & Construction
Schindler-Holding AG (SCHP.S)
EARNINGS Rating OUTPERFORM Price (16 Feb 18, SFr) 226.60 Target price (SFr) (from 230.00) 240.00 Market Cap (SFr m) 23,970.1 Enterprise value (SFr m) 21,874.6 Target price is for 12 months.
Research Analysts Andre Kukhnin, CFA
44 20 7888 0350 andre.kukhnin@credit-suisse.com
Max Yates 44 20 7883 8501
max.yates@credit-suisse.com
iris.zheng@credit-suisse.com
leo.carrington@credit-suisse.com
artem.tokarenko@credit-suisse.com
andrew.bell@credit-suisse.com
Growth and M&A becoming increasingly critical for investment case Maintain Outperform, TP to CHF 240. We maintain our positive stance with
investment case based on healthy topline growth (China gradually inflecting, solid outlook elsewhere), margin improvement potential (2018 held back by raw materials but Modularity to kick in fully in 2019-2020) and balance sheet optionality. We increase our EPS estimates by c1.5% for 2018/19 as tax tailwind more than offsets FX and a small (c1%) underlying downgrade. We increase our TP to CHF 240 (vs CHF 230) to reflect our new DCF valuation.
What we are discounting now and which way is the risk. We forecast top-line growth of 4.5% for 2018, towards the upper end of management target range of 3-5%, supported by 5.5% order intake and 6.3% backlog ex- FX growth in 2017 (adjusted for lead time extension). We expect margin to expand 20bps in 2018, lowered by 10bps for further increased raw materials headwind, labour inflation and investment in digital. We expect margin progression rate to step back up in 2019 to +50bps yoy as 1) China pricing in orders improves from negative in 2017 to expected small positive in 2018 (consistent with our forecasts for peers and with management message at Q4 results) and 2) Modularity programme achieves full payback after global rollout in 2018. M&A remains the key optionality for Schindler as we currently do not discount new acquisitions while the company is seeing a step up in activity and as we continue to see increasing availability of targets in China.
Valuation. Schindler is trading on 2018E P/E of 26.1x and EV/EBITA of 18.7x, on average a c8% premium to its quality growth Buildings-exposed peers (c30% premium to Mechanicals). Although the multiples at these levels do not offer meaningful upside, we favour the cash earnings growth potential.
Catalysts. Q1 2018 results on 26 April. China market updates. Risks. Lack of pricing realisation in China; labour and further raw materials inflation.
Share price performance
SCH P.S SM I PRICE
Ju l - 1 6 Jan - 1 7 Ju l - 1 7 Jan - 1 8 1 5 0 1 7 0 1 9 0 2 1 0 2 3 0 2 5 0
The price relative chart measures performance against the SMI PRICE which closed at 8986.7 on 16/02/18 On 16/02/18 the spot exchange rate was SFr1.15/Eu 1.- Eu.81/US$1
Performance 1M 3M 12M Absolute (%) -6.3 -0.8 14.7 Relative (%) 0.1 3.7 10.0
Financial and valuation metrics Year 12/17A 12/18E 12/19E 12/20E Revenue (SFr m) 10,179.0 10,535.3 10,956.7 11,394.9 EBITDA (SFr m) 1,375.0 1,468.0 1,581.4 1,711.3 Adjusted net income (SFr m) 859.00 933.89 1,000.07 1,088.98 CS EPS (adj.) (SFr) 8.00 8.70 9.31 10.14 Prev. EPS (SFr) 7.85 8.52 9.21 - ROIC (%) 60.4 60.2 59.4 61.2 P/E (adj.) (x) 28.3 26.1 24.3 22.3 P/E rel. (%) 139.1 131.1 143.8 144.9 EV/EBITDA (x) 16.2 14.9 13.6 12.3
Dividend (12/18E, SFr) 4.50 Net debt/equity (12/18E,%) -55.3 Dividend yield (12/18E,%) 2.0 Net debt (12/18E, SFr m) -2,095.4 BV/share (12/18E, SFr) 33.5 IC (12/18E, SFr m) 1,691.6 Free float (%) 60.0 EV/IC (12/18E, (x) 12.9 Source: Company data, Thomson Reuters, Credit Suisse estimates
20 February 2018
Schindler-Holding AG (SCHP.S) 2
Schindler-Holding AG (SCHP.S) Price (16 Feb 2018): SFr226.6; Rating: OUTPERFORM; Target Price: (from 230.00) 240.00; Analyst: Andre Kukhnin Income statement (SFr m) 12/17A 12/18E 12/19E 12/20E Revenue 10,179 10,535 10,957 11,395 EBITDA 1,375 1,468 1,581 1,711 Depr. & amort. (153) (183) (190) (196) EBIT 1,222 1,285 1,391 1,516 Net interest exp. (15) (23) (23) (23) Associates (6) 0 5 5 PBT 1,201 1,262 1,373 1,497 Income taxes (282) (262) (300) (327) Profit after tax 919 1,000 1,073 1,170 Minorities (60) (66) (73) (81) Preferred dividends - - - - Associates & other 0 0 0 0 Net profit 859 934 1,000 1,089 Other NPAT adjustments (35) (25) (10) (10) Reported net income 824 909 990 1,079 Cash flow (SFr m) 12/17A 12/18E 12/19E 12/20E EBIT 1,222 1,285 1,391 1,516 Net interest (15) (23) (23) (23) Cash taxes paid - - - - Change in working capital (254) 24 20 52 Other cash and non-cash items (177) (154) (165) (186) Cash flow from operations 776 1,132 1,223 1,358 CAPEX (262) (250) (250) (250) Free cashflow to the firm 514 882 973 1,108 Acquisitions (237) (50) (50) (50) Divestments - - - - Other investment/(outflows) 63 0 0 0 Cash flow from investments (436) (300) (300) (300) Net share issue/(repurchase) (19) (25) (25) (25) Dividends paid (585) (431) (485) (539) Issuance (retirement) of debt (26) 0 0 0 Cashflow from financing (630) (456) (510) (564) Changes in net cash/debt (297) 375 413 494
Net debt at start (2,017) (1,720) (2,095) (2,508) Change in net debt 297 (375) (413) (494) Net debt at end (1,720) (2,095) (2,508) (3,002) Balance sheet (SFr m) 12/17A 12/18E 12/19E 12/20E Assets Total current assets 7,701 8,258 8,910 9,621 Total assets 10,847 11,522 12,283 13,099 Liabilities Total current liabilities 6,600 6,805 7,064 7,333 Total liabilities 7,579 7,734 7,943 8,162 Total equity and liabilities 10,847 11,522 12,283 13,099 Per share 12/17A 12/18E 12/19E 12/20E No. of shares (wtd avg.) (mn) 107 107 107 107 CS EPS (adj.) (SFr) 8.00 8.70 9.31 10.14 Prev. EPS (SFr) 7.85 8.52 9.21 - Dividend (SFr) 4.00 4.50 5.00 5.50 Free cash flow per share (SFr) 4.79 8.21 9.06 10.32 Key ratios and valuation 12/17A 12/18E 12/19E 12/20E Growth/Margin (%) Sales growth (%) 5.1 3.5 4.0 4.0 EBIT growth (%) 10.1 5.2 8.3 8.9 Net income growth (%) 15.9 8.7 7.1 8.9 EPS growth (%) 15.9 8.7 7.1 8.9 EBITDA margin (%) 13.5 13.9 14.4 15.0 EBIT margin (%) 12.0 12.2 12.7 13.3 Pretax profit margin (%) 11.8 12.0 12.5 13.1 Net income margin (%) 8.4 8.9 9.1 9.6 Valuation 12/17A 12/18E 12/19E 12/20E EV/Sales (x) 2.2 2.1 2.0 1.8 EV/EBITDA (x) 16.2 14.9 13.6 12.3 EV/EBIT (x) 18.2 17.0 15.4 13.8 Dividend yield (%) 1.77 1.99 2.21 2.43 P/E (x) 28.3 26.1 24.3 22.3 Credit ratios (%) 12/17A 12/18E 12/19E 12/20E Net debt/equity (%) (52.6) (55.3) (57.8) (60.8) Net debt to EBITDA (x) (1.3) (1.4) (1.6) (1.8) Interest coverage ratio (x) 81.5 55.6 60.2 65.6
Company Background Schindler Holding Ltd is a Switzerland-based holding Company that specializes in the production of escalators, elevators and moving walks. The Company operates globally in two main divisions: Elevators and Escalators, and ALSO
Blue/Grey Sky Scenario
Our Blue Sky Scenario (SFr) (from 245.00) 255.00 We discount a margin of 15% mid-term margin in our Blue Sky scenario, as compared to 16% target that KONE has. We believe this target is not unachievable in the longer term given the efficiency improvement from global product platform as well as digital initiatives for services such as the Internet of Elevators & Escalators.
Our Grey Sky Scenario (SFr) (from 185.00) 190.00 We discount a mid-term margin of 12% which implies no improvement from the margin level in 2009-2012 before the global production footprint revamp. We also assume a lower growth rate of 3% which implies no significant outperformance vs global GDP growth in our Grey Sky Scenario.
Share price performance
SCHP.S SMI PRICE
May- 16 Sep- 16 Jan- 17 May- 17 Sep- 17 Jan- 18 150
170
190
210
230
250
The price relative chart measures performance against the SMI PRICE which closed at 8986.7 on 16/02/18 On 16/02/18 the spot exchange rate was SFr1.15/Eu 1.- Eu.81/US$1
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
20 February 2018
Schindler-Holding AG (SCHP.S) 3
Key charts Figure 1: Order backlog/revenue growth Figure 2: Schindler revenue split estimate
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NI - Asia
NI - Europe
NI - Americas
Maintenance - Asia
Maintenance - Europe
Maintenance - Americas
Modernisation - Asia
Modernisation - Europe
Modernisation - Americas
NI 50%
Modernisation 10%
Maintenance 40%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: Schindler EV/EBIT vs High quality peers Figure 4: Schindler P/E vs High quality peers
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Schindler Index (Legrand, Geberit, Assa, KONE, Dorma+Kaba)
Source: : Thomson Reuters Datastream Source: : Thomson Reuters Datastream
Figure 5: Schindler EPS consensus move Figure 6: Schindler Price vs 1 year forward EPS
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20 February 2018
Construction markets update Figure 7: US Non-Resi: leading indicator positive for 2017
Figure 8: US Resi: multi-family continues to grow, though caution needed as previous peak exceeded
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18 ABI Billings 3MMA (12m leading) US Non-Resi Expenditure (%yoy, RHS)
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Starts 5-units+ 12MMA Starts 1 units 12MMA US Private Resi Exp. Multi US Private Resi Exp. Single
Source: Company data, Credit Suisse estimates. Source: Company data 2015
Figure 9: Europe: clearly off its pre-crisis peak Figure 10: China: continued recovery through 2016
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Permits (Index): Non-resi Permits (Index): Resi Index of Production 2QMA (RHS)
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Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
20 February 2018
Key peers benchmarking
Figure 11: Quarterly organic order growth Figure 12: Org. order index ('14) – 12m rolling avg
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Source: Company data Source: Company data
Figure 13: Revenue index (ex. FX) Figure 14: Rolling Average (12m) Operating Margin
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Schindler-H olding A
6
See below for a comparison of the OEMs' NI growth rates in the main global geographies
Figure 15: Global OEMs new equipment order growth in China CALENDAR Qs Q1 15 Q2 15 Q3 15 Q4 15 2015 Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017
KONE (units) >5% >5% 0% >1% <5% -12% -5% 5% > -5% -5% Flat c.-1.5% Flat Flat Flat
KONE (value) 5% 6% -2% -2% 3% -14% * -10% -7% > -15% -12% -10% c.-6% +2-3% +7% -2%
Schindler (units) double digit growth
double digit growth
double digit growth
double digit growth
double digit growth LSD growth 6% -2% double digit
growth 4% up HSD down slightly +DD +LSD +MSD
Schindler (value) - - - - - - -3% -11% positive -4% -4% -LSD +DD Flattish Flattish
Thyssen (units) 0% 0% 0% -5% Small decline +3-4% ex- Marohn
+5% ex- Marohn c1% slight growth
ex-Marohn +2.5% up double digit +1% t o +2% Flat +LSD +LSD
Thyssen (value) - - - - - -ve ex-Marohn v small -ve ex- Marohn
price pressure'
'competitive but
pressure' -1% to -2% -MSD -LSD -LSD
Otis (units) flat - - -8% - 2% 4% 2% 5% +3% 1% 7% 8% 1% 4%
Otis (value) -12% -10% -19% -14% -13% -7% -14% -10% 0% -8% -10% 3% Flat -7% -4%
Market (units) 0% -4% -4% -7% -5% -6-8% decline -5% -7% -6% -6% Flat c-1.5% Flat Flat Flattish Market (value) -4% -8% -9% -13% -10% >10% decline -12% -15% > -6% -11% -M/HSD -MSD -LSD -L/MSD -MSD
Source: Company data, Credit Suisse Research
Figure 16: Global OEMs new equipment market commentary in US CALENDAR Qs Q1 15 Q2 15 Q3 15 Q4 15 2015 Q1 16 Q2 16 Q3 16 Q416 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017
KONE (units) slight growth slight growth growth slight growth +LSD +LSD +LSD +LSD
KONE (value) positive development
Schindler (units) growth good growth 'no major change'
encouraging growth good growth good growth growth growth growth growth
Schindler (value) * - 'tough' - - - good - good* very good* growth
Thyssen (units) ** n/a 'higher demand'
'higher demand' 'growth' overall
decelerating growth 'up' 'up' 'up' 'up' 'up'
Thyssen (value) - - - - - - - - 'solid' - 'solid' 'up' 'up' 'up' 'up'
Otis (value) high single digit double digit - >+50% strong growth +21% +24% mid-teens,
'strong' +13% strong growth 'up LDD' 6% -24% +HDD +LSD
Market (units) - - - - -4% - - - - stable growth growth growth growth growth Market (value) - - - - - - - - - - - - - - -
Strong performancegrowthgrowth
growth'strong'
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Schindler-H olding A
7
Figure 17: Global OEMs growth in the Europe CALENDAR Qs Q1 15 Q2 15 Q3 15 Q4 15 2015 Q1 16 Q2 16 Q3 16 Q416 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017
KONE (units)
KONE (value)
Schindler (units) mixed flat to slight up
'no major change' slight growth low growth growth good growth modest
growth modest growth
Thyssen (value) - - - - - - - - - - - - Stable Stable Stable
Otis (value) +37% flat -1% +20% overall growth +6% mid-single
digit flat +7% mid single digit 'up HSD' -14% +25% +MSD +M/HSD
Market (units) slight decline flat slight growth slight growth flat - - - - flat some growth growth growth growth growth
Market (value) - - - - - - - - - - - - - -
positiveslight down flat to slight up low growth flat growth
growth
20 February 2018
Schindler-Holding AG (SCHP.S) 8
Summary of forecast changes
Figure 18: Schindler: Forecast changes Vara Research csus Old New 2018 Old New 2019E CHF M 2018E 2018E Change 2018E CS vs 2019E 2019E Change 2019E CS vs
F'cast F'cast to f'cast Cons'us Cons F'cast F'cast to f'cast Cons'us Cons Orders received 11,667 11,429 (2.0%) 11,525 (0.8%) 12,192 11,943 (2.0%) 12,009 (0.6%) Change yoy, % 6.5% 4.0% 5.4% 4.5% 4.5% 4.2% Change yoy (ex FX), % 5.0% 5.0% 4.1% 4.5% 4.5% 4.2%
Revenue 10,818 10,535 (2.6%) 10,736 (1.9%) 11,250 10,957 (2.6%) 11,214 (2.3%) Change yoy, % 6.0% 3.5% 5.8% 4.0% 4.0% 4.5% Change yoy (ex FX), % 4.5% 4.5% 4.6% 4.0% 4.0% 4.3%
Operating profit 1,331 1,285 (3.4%) 1,321 (2.7%) 1,440 1,391 (3.4%) 1,434 (2.9%) Margin, % 12.3% 12.2% 12.3% 12.8% 12.7% 12.8% Restructuring (25) (25) (10) (10)
Net interest (32) (23) (27) (18) Operating PBT 1,298 1,262 (2.8%) #DIV/0! 1,413 1,373 (2.8%) #DIV/0! Tax rate, % 25.0% 21.2% 25.0% 22.0%
CS operating EPS, CHF 8.52 8.70 2.0% 8.74 (0.5%) 9.21 9.31 1.2% 9.53 (2.3%) Change yoy, % 8.6% 8.7% 10.6% 8.0% 7.1% 9.0%
Reported EPS 8.29 8.47 2.1% 8.58 (1.3%) 9.12 9.22 1.2% 9.42 (2.1%) Change yoy, % 9.5% 10.3% 12.0% 9.9% 8.9% 9.8% Number of shares 107.4 107.4 0.0% 107.4 107.4 0.0%
Net debt / (cash) (2,528) (2,095) (17.1%) (3,134) (2,508) (20.0%) Free Cash Flow 919 882 (4.0%) 1,038 973 (6.3%)
Source: Company data, Credit Suisse estimates, Vara Research consensus
20 February 2018
Schindler-Holding AG (SCHP.S) 9
Q4 2017 Results Analysis Figure 19: Schindler : Q4 2017 Results summary
CHF M Q3 16 Q4 16 Q3 17 Q4 17 Q4 17 Q4 17 Act vs. Act. vs Change Actual Actual Actual F'cast Cons'us Actual F'cast Cons'us YoY
Orders received 2,592 2,699 2,737 2,872 2,853 2,906 1.2% 1.9% 7.7% Change yoy, % 8.7% 3.6% 5.6% 6.4% 5.7% 7.7% Change yoy (ex FX), % 7.3% 6.4% 4.8% 4.0% 3.7% 5.9%
Revenue 2,409 2,629 2,590 2,846 2,792 2,820 (0.9%) 1.0% 7.3% Change yoy, % 4.3% 1.5% 7.5% 8.3% 6.2% 7.3% Change yoy (ex FX), % 3.0% 3.7% 6.3% 6.8% 5.0% 6.0%
Operating profit 282 311 310 345 333 342 (0.8%) 2.7% 10.0% Margin, % 11.7% 11.8% 12.0% 12.1% 11.9% 12.1% Restructuring (5) 41 (8) (10) (15)
Net interest 7 (26) 1 (27) (6) -77% Operating PBT 289 285 311 318 336 5.8% #DIV/0! 17.9% Tax rate, % 24.6% 27.3% 24.4% 27.8% 26.5%
CS operating EPS, CHF 1.91 1.67 2.01 2.02 2.22 32.8% Change yoy, % 13.4% -6.3% 5.7% 20.9% 32.8%
Reported EPS 1.86 2.05 1.94 1.92 2.07 1.2% Change yoy, % 10.7% 27.3% 4.4% -6.1% -100.0% 1.2%
Source: Company data, Credit Suisse estimates, Vara Research consensus as of 9th February 2018
Q4 2017 Results Summary Bottom line. Schindler reported Q4 2017 clean operating profit c3% ahead of consensus (c-1% vs CS) on revenue 1% ahead (c-1% vs CS) with margin of 12.1%, 20bps ahead of market expectations (in-line with CS), and ex-FX revenue growth of 6% vs consensus at 5% (CS 6.8%). Orders were c2% ahead of consensus (c+1% vs CS) with an ex-FX growth of 5.9%. Management expect the global E&E market to grow along a similar pattern to 2017 (which saw 3% overall growth) – this compares to consensus 2018 lfl order growth of 4.1% (CS 5%) vs 5.5% delivered in 2017. Revenue is expected to grow 3-5% ex-FX in 2018, which compares to consensus at 4.6% (CS 4.5%) and is backed by 2017 backlog ex-FX growth of 6.3%. The company has traditionally been conservative with its guidance. As before, Schindler does not provide net income guidance at this point (will be at H1 results). Both, our estimates and consensus currently discount a c40bps yoy improvement in clean operating margin. Dividend was raised to CHF 4 per share, substantially ahead of our and market expectations of CHF 3.30 (+20%). In China, the company saw stabilisation in the New Installations market (residential driven while commercial remains tough) but pricing is seen as at continuous pressure. We see this as a very solid result and outlook for Schindler.
RESULTS SUMMARY
Orders of CHF 2.91bn, 1.9% above consensus of CHF 2.85bn (1.2% above CS estimate of CHF 2.87bn). Sales of CHF 2.82bn, 1% above consensus of CHF 2.79bn (- 0.9% below CS estimate of CHF 2.85bn). Orders grew 5.9% ex-FX (c'sus at 3.7%, CS at 4%) and ex-FX sales growth was 6% (c'sus 5%, CS at 6.8%).
Operating profit ex-restructuring charges came in at CHF 342m, 2.7% above consensus of CHF 333m -0.8% below CS estimate of CHF 345m. Clean operating margin was 12.1%, 20 bps above consensus of 11.9% and in line with CS estimates
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Schindler-Holding AG (SCHP.S) 10
Operating cashflow was CHF 266m with a conversion ratio of 78%.
REGIONAL RUN-THROUGH:
Asia-Pacific – Stablisation in China with overall growth elsewhere. In China, the new installations market stablised, with continued pricing pressure, in particular in large projects. However, Schindler outperformed the market and saw sustained growth in Service and Modernisation. Although India is still under pressure, there were signs of recovery in Q4, and Schindler grew across all product lines. South East Asia showed continued growth and Middle East also improved.
Americas – Robust marke. The US continued to show positive trends with accelerate demand from residential and improved demand from the commercial sector. Schindler achieved strong performance of all product lines. In Latin America, Brazil remains challenging, however, with signs of turnaround. Other Latin American markets showed good growth for Schindler.
Europe – Strong momentum. Northern Europe saw positive developments, in particular in Germany, with also good growth in most Eastern European countries. The UK was impacted by the Brexit uncertainties. In Southern Europe, market growth was robust, especially in residential markets in France and Spain. Schindler achieved strong growth in all business lines with market position strengthened by bolt-on acquisitions.
Q4 2017 call feedback: Solid; Encouraging China outlook; Some caution on margin progression Our incremental takeaways are:
2018 guidance
<50bps margin expansion for 2018 (vs CS and consensus estimates of +40bps) vs +50bps in 2017. This is because 1) lower margin from the order backlog by -40bps, and 2) heightened raw material cost inflation, from CHF 100m for 2018 as communicated at 9M17 to CHF 130m with a -30bps impact. However, Schindler is committed to offsetting the above with modularity and efficiency, but expect lower level of margin expansion in 2018 vs in 2017.
2017 profit bridge. 10bps positive effect from FX. Zero effect from M&A. Negative effect from raw material cost. Positive effect from efficiency, Service business, and operational leverage.
Market growth to be in similar pattern for 2018 as in 2017. China accounts for c60% of the global market and remains the major driver. Elsewhere, Schindler sees no major concerns and think the global market will grow 3% in 2018 as seen in 2017.
China
Price – Time to work on pricing. Despite the continued pricing pressure due to the over-capacity in the market, Schindler thinks ‘it is time to work on pricing’ and intends to increase price due to the raw material cost inflation. This is in-line with KONE’s commitment of continued price measures, and bodes well for an inflection of the market. The two ways for price increase for Schindler are: 1) through the general price increase, and 2) through the price increase differentiated region by region and customer segment by customer segment. The hope is to partly compensate the raw material cost inflation with the rest to be covered by cost efficiency.
Price – Stablisation in 2017. Pricing in China declined by 20-25% in the last three years. Schindler estimates the pricing trends improved and was down MSD in 2017. By sector, the pricing for the residential segment has flattened towards the end of 2017, but the pricing for large projects, especially commercial projects, continues to be under
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Schindler-Holding AG (SCHP.S) 11
pressure. So far, Schindler sees that the pricing has been stablising but has not yet gone up.
Units – Flat to a small up in 2018. Units in China stablised in 2017 and were up marginally. Schindler expects the market to have reached the bottom and the units should be stable to slightly up in 2018 (CS estimate +3% growth in 2018 in units).
Revenue. Revenue in China was slightly negative for 2017.
Conversion rate of Schindler in China reached 70% in 2017, an improvement of 5ppt yoy. This is close to the level in the developed markets at c80%. The improvement was driven by the New Installation business, and also Schindler’s approach of restricting the distributor model (<25% of sales).
New Installation margin. If a New Installation comes with a service contract, this could put some pressure on the NI margin.
Service margin in China is slightly lower than that of the rest of world. The competition in the market could pressure the margin, but Schindler works to compensate this by efficiency through 1) increasing service density and therefore reducing the travel time of the technicians (travel time accounts for 50% of a technician’s working hours), and 2) improving the maintenance quality by fixing problems at the first visits and reducing elevator break times.
Capacity and utilisation. Schindler does not suffer from over-capacity issues and all the production lines are fully utilized. It has reserved some lines with room for expansion in the new manufacturing factory in Shanghai China.
Other regions run-through
Europe and North America – Positive net price. Schindler has already raised price in Europe and North America and saw net positive impact from the price increase by mid-2017. If necessary, Schindler would further increase the price.
India. The market was very difficult in early 2017, but started to pick up in Q4 2017.
Brazil. Schindler believe the Brazilian market has bottomed out and expects a slight growth in 2018 with an acceleration in growth in 2019 and 2020.
Schindler Ahead Schindler Ahead was launched in H2 2017 in countries such as the US, Australia and
China, and have received positive feedback. Between January and July 2018, Schindler Ahead will be gradually launched in all the countries with all the New Installations to be equipped with the solution.
Modularity The impact from Modularity remains limited for 2018, but up yoy vs 2017 with 2019 and
2020 the likely sweet spot of the full impact.
Capital allocation Dividend payout ratio increase. Schindler increased the dividend payout ratio from
35-45% to 35-65% (52% in 2017), and sees the 50% as an appropriate level.
M&A. Schindler was active in small size acquisitions in 2017. Management indicates that they are looking at some middle-size acquisitions.
Housekeeping Receivables. The increase in receivables was due to the strong billings in Q4 in New
Installations and Modernisation, and the lower down payments from large projects.
Restructuring cost is guided to be around CHF 25m for 2018.
US tax reform is guided to have a positive CHF 20m impact for Schindler.
20 February 2018
Schindler-Holding AG (SCHP.S) 12
IFRS 15 Q1 2018 margin. The delayed revenue recognition could affect the seasonality and
negatively impact the margin in Q1 2018, but with limited impact for the full year.
Schindler will not restate 2017 numbers for IFRS 15, but will provide colour on the yoy comparative development in 2018.
20 February 2018
Schindler-Holding AG (SCHP.S) 13
Valuation: DCF We use a Discounted Cash Flow (DCF) valuation as our primary tool for determining Schindler’s fair value. Our DCF model is based on Schindler’s core business (Elevators and Escalators) and we add the value of the ALSO stake at the current market price.
We use a three-stage DCF with the following method:
Stage 1—Years 1 to 3. We use our explicit model forecasts for free cash flow for the first three years.
Stage 2—Years 4 to 10. We use broader assumptions for the next seven years (Figure 20 ).
Stage 3—Terminal value. We base our terminal value on a year-ten cash flow, a terminal growth rate of 2% and an invested capital growth rate of 2%.
Figure 20: Schindler: Key DCF Assumptions Grow th (years 4 to 10) 5.0% EBIT margin (years 4+) 14.0% NOPAT margin 10.8% NOPAT to FCF conversion 100% Invested capital 1,671 Terminal grow th rate 2.0% 10-year average FCF yield 10.4%
Source: Credit Suisse estimates
Our base-case DCF valuation for Schindler is CHF 240 per share based on a 14% through-cycle margin assumption and 5% mid-cycle growth. We find this valuation sensitive to these assumptions and therefore believe a useful application of this model is to show the DCF value sensitivity to these parameters (Figure 21).
Figure 21: Schindler: DCF sensitivity to EBIT margin and mid-term growth assumptions CHF, unless otherwise stated
Growth rate 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5%
12.0% 9.2% 186 191 195 200 205 210 215 220 226 231 237 12.5% 9.6% 193 197 202 207 212 217 223 228 234 240 246 13.0% 10.0% 199 204 209 214 219 225 230 236 242 248 254 13.5% 10.4% 205 210 216 221 226 232 238 244 250 256 263 14.0% 10.8% 212 217 222 228 234 240 245 252 258 264 271 14.5% 11.2% 218 224 229 235 241 247 253 259 266 273 280 15.0% 11.6% 224 230 236 242 248 254 261 267 274 281 288 15.5% 11.9% 231 237 243 249 255 262 268 275 282 289 297 16.0% 12.3% 237 243 249 256 262 269 276 283 290 298 305 16.5% 12.7% 244 250 256 263 269 276 283 291 298 306 314
EBITA margin
NOPAT margin
Schindler-Holding AG (SCHP.S) 14
Figure 22: Schindler: DCF sensitivity to EBIT margin and WACC assumptions CHF, unless otherwise stated
WACC 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 6.00% 312 321 330 339 348 358 368 378 388 399 410 6.50% 279 286 294 302 310 318 327 336 345 354 364 7.00% 252 258 265 272 279 287 294 302 310 318 327 7.50% 230 236 242 248 254 261 268 275 282 289 296 8.00% 212 217 222 228 234 240 245 252 258 264 271 8.50% 196 201 206 211 216 221 227 232 238 244 250 9.00% 183 187 192 196 201 206 211 216 221 226 232 9.50% 172 176 180 184 188 192 197 201 206 211 216
10.00% 162 165 169 173 177 181 185 189 193 198 202 10.50% 153 156 159 163 167 170 174 178 182 186 190
Source: Credit Suisse estimates
Schindler-Holding AG (SCHP.S) 15
Multiples In Figure 23, we show our calculation of enterprise value (EV) for Schindler Group.
Figure 23: Schindler: EV calculation CHF in millions, unless otherwise stated EV calculation 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Share price, CHF 68.0 64.2 96.0 103.2 113.7 132.1 133.0 155.2 176.7 201.6 227.0 227.0 227.0 Number of shares 120 119 120 119 116 116 112 110 107 107 107 107 107 Market capitalisation 8,136 7,646 11,471 12,236 13,240 15,263 14,891 17,082 18,967 21,644 24,372 24,372 24,372 Net debt / (cash) (1,036) (1,757) (2,158) (1,874) (1,872) (1,737) (2,094) (1,619) (2,017) (1,720) (2,095) (2,508) (3,002) Minority interest 251 284 422 410 528 700 826 1,399 1,510 1,512 1,731 1,788 1,818 Pension deficit 195 198 167 345 459 333 504 716 536 499 449 449 449 Securities 452 206 100 207 358 413 257 446 270 153 153 153 153 Value of ALSO, XJ, Hyundai stakes 138 87 127 664 578 513 517 451 331 248 248 248 248 CS Enterprise value 6,957 6,079 9,676 10,246 11,419 13,633 13,354 16,682 18,395 21,534 24,056 23,701 23,237
Source: Company data, Credit Suisse estimates
In Figure 24, we show historical and forward-looking valuation multiples for Schindler.
Figure 24: Schindler: Valuation multiples history and forecast CHF, unless otherwise stated MULTIPLES 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Average/Current 68.0 64.2 96.0 103.2 113.7 132.1 133.0 155.2 176.7 201.6 227.0 227.0 227.0 High 86.8 78.5 116.8 113.6 130.4 141.0 143.9 171.0 194.2 223.5 Low 45.4 47.1 77.7 81.0 104.6 123.5 119.8 127.2 149.2 177.5
P/E average 13.2 12.4 16.9 17.8 18.9 22.6 20.7 24.1 25.6 25.2 26.1 24.4 22.4 P/E high 16.9 15.1 20.6 19.6 21.6 24.1 22.3 26.6 28.1 27.9 P/E low 8.8 9.1 13.7 14.0 17.3 21.1 18.6 19.8 21.6 22.2 P/E ex-cash 11.8 9.9 14.4 15.7 16.9 20.8 18.6 22.6 23.8 23.9 24.7 22.8 20.5
EV:sales average 0.50 0.73 1.18 1.30 1.38 1.55 1.44 1.78 1.90 2.12 2.28 2.16 2.04 EV:sales high 0.68 0.95 1.49 1.53 1.68 1.73 1.60 1.98 2.10 2.34 EV:sales low 0.33 0.50 0.92 1.04 1.31 1.50 1.31 1.47 1.60 1.85 Group operating margin 6.3% 11.4% 11.9% 11.8% 11.2% 10.5% 10.4% 10.4% 11.5% 12.0% 12.2% 12.7% 13.3%
EV:EBITDA average 6.8 5.7 8.7 9.8 10.3 13.1 12.0 14.3 14.7 15.7 16.4 15.0 13.6 EV:EBITDA high 9.4 7.4 11.0 11.5 12.5 14.7 13.3 16.0 16.3 17.3 EV:EBITDA low 4.6 3.9 6.8 7.8 9.8 12.7 10.9 11.8 12.4 13.7
EV:EBIT average 7.8 6.5 9.9 11.1 11.5 14.8 14.0 16.3 16.6 17.6 18.7 17.0 15.3 EV:EBIT high 10.8 8.4 12.5 13.0 14.0 16.6 15.5 18.2 18.3 19.5 EV:EBIT low 5.2 4.4 7.7 8.8 10.9 14.4 12.7 13.5 14.0 15.4
FCF yield average 11.7% 11.9% 8.0% 4.6% 4.8% 3.8% 4.9% 5.2% 3.7% 2.5% 3.6% 4.0% 4.5% FCF yield high 9.1% 9.7% 6.5% 4.2% 4.2% 3.6% 4.5% 4.7% 3.4% 2.3% FCF yield low 17.4% 16.2% 9.8% 5.8% 5.2% 4.1% 5.4% 6.3% 4.4% 2.9%
Dividend yield average 2.9% 3.1% 3.1% 1.9% 1.9% 1.7% 2.4% 1.7% 2.8% 2.0% 2.0% 2.2% 2.4% Dividend yield high 2.3% 2.5% 2.6% 1.8% 1.7% 1.6% 2.2% 1.6% 2.6% 1.8% Dividend yield low 4.4% 4.3% 3.9% 2.5% 2.1% 1.8% 2.7% 2.1% 3.4% 2.3%
EV/IC average 3.7 3.4 7.0 5.1 5.3 7.7 6.4 8.4 8.7 8.0 8.7 8.3 8.0 P/BV average 4.03 3.03 4.07 4.34 4.71 6.04 4.97 7.25 6.66 6.62 6.44 5.62 4.94 ROIC 33.8% 38.3% 50.9% 33.9% 34.3% 34.4% 35.9% 39.0% 39.5% 34.6% 36.5% 37.9% 40.5% ROE 31.8% 26.8% 25.0% 23.9% 26.1% 24.1% 25.1% 33.0% 29.2% 28.3% 26.8% 25.0% 23.9% ROCE 65.4% 88.5% 106.8% 71.5% 78.1% 77.3% 83.3% 105.2% 100.3% 59.8% 59.9% 59.2% 61.1%
Source: Company data, Credit Suisse estimates (EV adjusted for CS estimates of net debt and pension deficit and therefore might different from the table in the front page)
20 February 2018
Schindler-Holding AG (SCHP.S) 16
Financials In Figure 25, we show a summary of Schindler orders, revenues and operating profit performance and our forecasts. Until 2010 Schindler used to consolidate ALSO performance in the group figures and we therefore show performance by division to illustrate the Elevators & Escalators. From 2013 onwards, Schindler no longer reports operating profit for E&E and overheads eliminations separately.
Figure 25: Schindler: Orders and order backlog CHF in millions, unless otherwise stated
DIVISIONAL ORDERS 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E ORDERS
Elevators & Escalators 8,418 8,778 8,249 8,967 9,456 9,979 9,967 10,374 10,989 11,429 11,943 12,421 Change yoy, % -9.1% 4.3% -6.0% 8.7% 5.5% 5.5% -0.1% 4.1% 5.9% 4.0% 4.5% 4.0% Change yoy (ex currency), % -5.6% 7.7% 4.8% 8.5% 7.2% 7.8% 4.6% 4.6% 5.5% 5.0% 4.5% 4.0%
Group Orders 8,418 8,778 8,249 8,967 9,456 9,979 9,967 10,374 10,989 11,429 11,943 12,421 Change yoy, % -9.1% 4.3% -6.0% 8.7% 5.5% 5.5% -0.1% 4.1% 5.9% 4.0% 4.5% 4.0% Change yoy (ex currency), % -5.6% 7.7% 4.8% 8.5% 7.2% 7.8% 4.6% 4.6% 5.5% 5.0% 4.5% 4.0%
Group Backlog 6,200 6,075 6,438 7,083 7,722 9,263 9,364 10,004 10,707 11,600 12,586 13,612 Change yoy, % -3.1% -2.0% 0.0% 10.0% 9.0% 0.0% 1.1% 6.8% 7.0% 8.3% 8.5% 8.1% Change yoy (ex currency), % -2.6% 7.8% 8.3% 12.4% 13.8% 15.4% 7.9% 7.3% 6.3% 9.3% 8.5% 8.1%
Source: Company data, Credit Suisse estimates
Figure 26: Schindler: Revenue and operating profit history and outlook CHF in millions, unless otherwise stated
DIVISIONAL SALES & OP. PROFIT 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E REVENUE
Elevators & Escalators 8,281 8,187 7,854 8,258 8,813 9,246 9,391 9,683 10,179 10,535 10,957 11,395 Change yoy, % -5.5% -1.1% -4.1% 5.1% 6.7% 4.9% 1.6% 3.1% 5.1% 3.5% 4.0% 4.0% Change yoy (ex currency), % -1.8% 2.4% 6.9% 5.0% 8.4% 7.3% 6.7% 3.6% 4.6% 4.5% 4.0% 4.0%
Group Revenue 8,281 8,187 7,854 8,258 8,813 9,246 9,391 9,683 10,179 10,535 10,957 11,395 Change yoy, % -5.5% -1.1% -4.1% 5.1% 6.7% 4.9% 1.6% 3.1% 5.1% 3.5% 4.0% 4.0% Change yoy (ex currency), % -5.9% 2.4% 6.9% 5.0% 8.4% 7.3% 6.7% 3.6% 4.6% 4.5% 4.0% 4.0%
Operating profit 940 975 925 990 921 957 1,021 1,110 1,222 1,285 1,391 1,516 Margin, % 11.4% 11.9% 11.8% 12.0% 10.5% 10.4% 10.9% 11.5% 12.0% 12.2% 12.7% 13.3%
Source: Company data, Credit Suisse estimates
20 February 2018
Schindler-Holding AG (SCHP.S) 17
In Figure 27, we show a summary of our forecasts and historical data for Schindler’s P&L.
Figure 27: Schindler: P& L summary CHF in millions, unless otherwise stated
PROFIT & LOSS 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Revenue 8,281 8,187 7,854 8,258 8,813 9,246 9,391 9,683 10,179 10,535 10,957 11,395 Growth, % -41.0% -1.1% -4.1% 5.1% 6.7% 4.9% 1.6% 3.1% 5.1% 3.5% 4.0% 4.0% Material Cost (2,250) (2,302) (2,329) (2,442) (2,736) (2,901) (2,900) (2,813) (2,935) (3,055) (3,166) (3,270) Personnel Cost (3,295) (3,162) (2,965) (3,074) (3,185) (3,293) (3,307) (3,503) (3,765) (3,740) (3,835) (3,988) Other Operating Cost (1,764) (1,641) (1,570) (1,557) (2,042) (1,783) (2,045) (2,093) (2,134) (2,297) (2,384) (2,435) Depreciation & Amortisation (120) (132) (119) (119) (120) (157) (144) (141) (153) (183) (190) (196) Change of Provisions - - (81) (76) (53) (14) 7 - (5) - - - Antitrust f ine - - - - - - - - - - - - Total Cost (7,429) (7,237) (7,064) (7,268) (8,136) (8,148) (8,389) (8,550) (8,992) (9,275) (9,575) (9,889) Reported EBIT 852 950 790 990 677 1,098 1,002 1,133 1,187 1,260 1,381 1,506 Reported EBIT margin, % 10.3% 11.6% 10.1% 12.0% 7.7% 11.9% 10.7% 11.7% 11.7% 12.0% 12.6% 13.2% Exceptionals / one-offs (6) (25) (135) - (244) 141 (19) 23 (35) (25) (10) (10) Operating profit 940 975 925 990 921 957 1,021 1,110 1,222 1,285 1,391 1,516 Operating profit margin, % 11.4% 11.9% 11.8% 12.0% 10.5% 10.4% 10.9% 11.5% 12.0% 12.2% 12.7% 13.3% Depreciation & Amortisation (120) (132) (119) (119) (120) (157) (144) (141) (153) (183) (190) (196) EBITDA 1,060 1,107 1,044 1,109 1,041 1,114 1,165 1,251 1,375 1,468 1,581 1,711 EBITDA margin, % 12.8% 13.5% 13.3% 13.4% 11.8% 12.0% 12.4% 12.9% 13.5% 13.9% 14.4% 15.0% Net inc/exp from investing & f inancing (50) (12) - (7) 23 51 (20) (36) (21) (23) (18) (18) Profit Before Tax 884 938 790 983 700 1,149 982 1,097 1,166 1,237 1,363 1,487 Underlying PBT 890 963 925 983 944 1,008 1,001 1,074 1,201 1,262 1,373 1,497 Tax (248) (259) (214) (253) (237) (247) (235) (274) (282) (262) (300) (327) Effective rate, % 28.1% 27.6% 27.1% 25.7% 33.9% 21.5% 23.9% 25.0% 24.2% 21.2% 22.0% 22.0% Reported profit after tax 636 679 576 730 463 902 747 823 884 975 1,063 1,160 Minority interest 23 25 23 28 31 40 58 59 60 66 73 81 Reported Net Income 625 677 588 702 432 862 689 764 824 909 990 1,079 Operating Net Income 619 679 688 702 676 721 708 741 859 934 1,000 1,089 Net income margin, % 7.5% 8.3% 8.8% 8.5% 7.7% 7.8% 7.5% 7.7% 8.4% 8.9% 9.1% 9.6%
CS operating EPS 5.2 5.7 5.8 6.0 5.9 6.4 6.4 6.9 8.0 8.7 9.3 10.1 EPS growth, % 1.1% 9.3% 2.1% 3.9% -3.0% 10.1% -0.2% 7.3% 15.9% 8.7% 7.1% 8.9% DPS, CHF 2.0 3.0 2.0 2.2 2.2 3.2 2.7 5.0 4.0 4.5 5.0 5.5 DPS growth, % 0.0% 50.0% -33.3% 10.0% 0.0% 45.5% -15.6% 85.2% -20.0% 12.5% 11.1% 10.0% Dividend Cover (X) 2.6 1.9 2.9 2.7 2.7 2.0 2.4 1.4 2.0 1.9 1.9 1.8 Shares & BPC in issue 120 120 120 118 117 113 112 108 108 108 108 108
Source: Company data, Credit Suisse estimates
Figure 28: Schindler: Summary of quarterly revenue and operating profit forecasts
CHF in millions, unless otherwise stated
2014 1Q 15 2Q 15 4Q 15 1Q 16 2015 1Q 16 2Q 16 3Q 16 4Q 16 2016 1Q 17 2Q 17 3Q 17 4Q 17 2017 2018E 2019E 2020E
ORDERS Orders 9,979 2,443 2,534 2,606 2,467 9,967 2,467 2,616 2,592 2,699 10,374 2,607 2,739 2,737 2,906 10,989 11,429 11,943 12,421
Change yoy, % 5.5% 0.0% 0.6% 1.4% 1.0% -0.1% 1.0% 3.2% 8.7% 3.6% 4.1% 5.7% 4.7% 5.6% 7.7% 5.9% 4.0% 4.5% 4.0% Change yoy (ex currency), % 7.8% 2.2% 5.2% 6.6% 2.0% 4.6% 2.0% 2.6% 7.3% 6.4% 4.6% 5.9% 5.4% 4.8% 5.9% 5.5% 5.0% 4.5% 4.0%
REVENUE Revenue 9,246 2,137 2,355 2,589 2,176 9,391 2,176 2,469 2,409 2,629 9,683 2,260 2,509 2,590 2,820 10,179 10,535 10,957 11,395
Change yoy, % 4.9% 4.4% 2.7% -0.2% 1.8% 1.6% 1.8% 4.8% 4.3% 1.5% 3.1% 3.9% 1.6% 7.5% 7.3% 5.1% 3.5% 4.0% 4.0% Change yoy (ex currency), % 7.3% 7.0% 7.9% 5.1% 3.3% 6.7% 3.3% 4.4% 3.0% 3.7% 3.6% 3.8% 2.2% 6.3% 6.0% 4.6% 4.5% 4.0% 4.0%
OPERATING PROFIT Operating profit 957 222 254 296 238 1,021 238 279 282 311 1,110 265 305 310 342 1,222 1,285 1,391 1,516
Margin, % 10.4% 10.4% 10.8% 11.4% 10.9% 10.9% 10.9% 11.3% 11.7% 11.8% 11.5% 11.7% 12.2% 12.0% 12.1% 12.0% 12.2% 12.7% 13.3%
Source: Company data, Credit Suisse estimates
20 February 2018
Figure 29: Schindler: Balance sheet summary
CHF in millions, unless otherwise stated BALANCE SHEET 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
PPE and Intangibles 1,335 1,224 1,325 1,326 1,397 1,787 1,718 1,879 2,164 2,231 2,291 2,346 Other f ixed assets 642 804 1221 1326 912 1011 1066 1004 982 1032 1082 1132 Fixed assets 1,977 2,028 2,546 2,652 2,309 2,798 2,784 2,883 3,146 3,263 3,373 3,478
Inventories 595 359 407 395 444 508 435 438 517 520 540 531 Production orders in progress 1,822 1,721 1,857 1,939 2,194 2,660 2,708 2,781 2,916 3,031 3,152 3,278 Advances against production orders (2,126) (2,157) (2,283) (2,436) (2,758) (3,248) (3,192) (3,304) (3,453) (3,579) (3,722) (3,871) Trade and other receivables 1,871 1,463 1,552 1,656 1,737 1,904 1,858 2,032 2,360 2,425 2,522 2,622 Trade and other payables (2,374) (2,027) (2,087) (2,063) (2,154) (2,530) (2,600) (2,723) (2,807) (2,886) (3,002) (3,122) Working capital (212) (641) (554) (509) (537) (706) (791) (776) (467) (491) (510) (562) Working capital days (9) (29) (26) (22) (22) (28) (31) (29) (17) (17) (17) (18) WC as % of sales -2.6% -7.8% -7.1% -6.2% -6.1% -7.6% -8.4% -8.0% -4.6% -4.7% -4.7% -4.9%
Cash and cash equivalents 2,176 2,435 2,662 2,626 2,744 3,043 2,532 2,326 1,900 2,275 2,688 3,182 Short-term debt (174) (145) (169) (133) (594) (409) (813) (254) (160) (160) (160) (160) Long-term debt (245) (132) (619) (621) (413) (540) (100) (55) (20) (20) (20) (20) Net debt / (cash) (1,757) (2,158) (1,874) (1,872) (1,737) (2,094) (1,619) (2,017) (1,720) (2,095) (2,508) (3,002)
Provisions (803) (788) (875) (1,092) (862) (1,089) (1,154) (1,169) (1,023) (973) (923) (873) Other liabilities (199) (164) (183) (124) (134) (107) (107) (115) (116) (116) (116) (116) Other assets 1 736 9 14 12 6 6 7 8 8 8 8 Net assets 2,521 3,329 2,817 2,813 2,525 2,996 2,357 2,847 3,268 3,787 4,340 4,937
Source: Company data, Credit Suisse estimates
Figure 30: Schindler: Cashflow summary
CHF in millions, unless otherwise stated CASH FLOW 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Operating Net Income 619 679 688 702 676 721 708 741 859 934 1,000 1,089 Minority interest 28 34 23 28 31 40 58 59 60 66 73 81 Exceptional costs (6) (25) (100) - (244) 141 (19) 23 (35) (25) (10) (10) Depreciation & amortisation 150 139 119 119 120 157 144 141 153 183 190 196 Change of provisions 10 11 81 (76) (53) (14) 7 22 (5) - - - Other non cash items 20 34 4 76 263 (136) 69 (3) 42 - - - Contributions to pension fund (26) (23) (47) (51) (54) (51) - - (44) (50) (50) (50) Gross cash flow 795 849 768 798 739 858 971 963 1,064 1,108 1,203 1,306 Working capital change 245 242 (78) (16) 69 44 105 (34) (254) 24 20 52 Operating cash flows 1,040 1,091 690 782 808 902 1,076 929 810 1,132 1,223 1,358 Operating cash / Operating profit 1.1 1.1 0.7 0.8 0.9 0.9 1.1 0.8 0.7 0.9 0.9 0.9 Net capex (130) (179) (131) (148) (223) (174) (191) (222) (262) (250) (250) (250) Free Cash Flow 910 912 559 634 585 728 885 707 548 882 973 1,108 FCF / Net income 1.5 1.3 0.8 0.9 0.9 1.0 1.3 1.0 0.6 0.9 1.0 1.0
Acquisitions/disposals (17) (167) (277) (38) (22) (6) (83) (102) (237) (50) (50) (50) Loans raised / paid back (362) (13) 509 (80) 215 (216) (50) (487) (26) - - - Shares issue / purchase 1 (59) (233) (124) (531) (76) (762) (32) (19) (25) (25) (25) Dividends Paid (263) (267) (378) (255) (268) (259) (408) (344) (585) (431) (485) (539) Investments 362 (15) (56) (346) 81 288 (306) 279 63 - - - Net Cash Flow 631 391 124 (209) 60 459 (724) 21 (256) 375 413 494
Source: Company data, Credit Suisse estimates
20 February 2018
Figure 31: Schindler: Returns and Balance Sheet analysis
in CHF millions, unless otherwise stated ANALYSIS 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
NOPAT 676 706 674 735 609 751 777 833 926 1,013 1,085 1,182 Invested Capital 1,765 1,387 1,992 2,143 1,772 2,092 1,993 2,107 2,679 2,773 2,863 2,916 ROIC 38.3% 50.9% 33.9% 34.3% 34.4% 35.9% 39.0% 39.5% 34.6% 36.5% 37.9% 40.5% ROIC (average) 36.9% 44.8% 39.9% 35.6% 31.1% 38.9% 38.0% 40.6% 38.7% 37.2% 38.5% 40.9%
Operating Net Income 676 706 674 735 609 751 777 833 926 1,013 1,085 1,182 Equity 2,521 2,819 2,817 2,813 2,525 2,996 2,357 2,847 3,268 3,787 4,340 4,937 ROE 26.8% 25.0% 23.9% 26.1% 24.1% 25.1% 33.0% 29.2% 28.3% 26.8% 25.0% 23.9% ROE (average) 29.8% 26.4% 23.9% 26.1% 22.8% 27.2% 29.0% 32.0% 30.3% 28.7% 26.7% 25.5%
EBITDA 1,060 1,107 1,044 1,109 1,041 1,114 1,165 1,251 1,375 1,468 1,581 1,711 Total debt 419 277 788 754 1,007 949 913 309 180 180 180 180 Net debt (1,757) (2,158) (1,874) (1,872) (1,737) (2,094) (1,619) (2,017) (1,720) (2,095) (2,508) (3,002) Total debt / EBITDA 0.4 0.3 0.8 0.7 1.0 0.9 0.8 0.2 0.1 0.1 0.1 0.1 Net debt / EBITDA (1.7) (1.9) (1.8) (1.7) (1.7) (1.9) (1.4) (1.6) (1.3) (1.4) (1.6) (1.8)
Source: Company data, Credit Suisse estimates
20 February 2018
Schindler-H olding A
Figure 32:Schindler Company summary
Order Backlog Geographic Mix
Management Chairman Alfred N. Schindler CEO Thomas Oetterli CFO Erich Ammann IR Marco Knuchel
Division Products End Markets / Channels Main Competitors Revenue Split by Geo Key Drivers/ Themes Product Example
Elevators & Escalators FY 2016 Sales CHF 9.68Bn 3.6% YoY Growth EX-FX
FY 2016 EBIT CHF 1.11 Bn 11.5% Margin
Elevators, Escalators, Moving walks, Destination technology
Residential Construction 60%, Commercial Construction 20% and
Government Construction 20% OTIS, ThyssenKrupp, Kone
Europe 39%, Americas 28%, APAC 25%
Urbanisation; Wealth creation in EM; Development in energy
efficiency; Demographic change
Shareholding Structure Free Float: 60% Top 5 shareholders Sun Life Financial 3.4%; Schindler Holding 3.4%; Fidelity Management & Research 2.9%; Baillie Gifford & Company 2.5%; UBS 2.5%; Ownership by country US 26%; Switzerland 24%; Luxembourg 17%, Britain 9%. Norway 5%; RoW 18%
SCHINDLER (SCHP.VX) - ANDRE KUKHNIN, CFA +44 20 7883 0350/ andre.kukhnin@credit-suisse.com End Market MixEmployee Mix
Europe 26% Americas
20 February 2018
Companies Mentioned (Price as of 16-Feb-2018) Assa Abloy (ASSAb.ST, Skr177.5) Geberit (GEBN.S, SFr428.0) Kone Corporation (KNEBV.HE, €45.38) Legrand SA (LEGD.PA, €62.88) Schindler-Holding AG (SCHP.S, SFr226.6, OUTPERFORM, TP SFr240.0) ThyssenKrupp (TKAG.DE, €22.85) United Technologies Corp (UTX.N, $129.26) dormakaba (DOKA.S, SFr862.0)
Disclosure Appendix Analyst Certification Andre Kukhnin, CFA, Max Yates and Leo Carrington each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Schindler-Holding AG (SCHP.S)
SCHP.S Closing Price Target Price Date (SFr) (SFr) Rating 17-Feb-15 150.50 160.00 O 25-Mar-15 163.90 180.00 05-Oct-15 144.00 160.00 16-Dec-15 167.90 185.00 10-Mar-16 173.90 200.00 18-Aug-16 187.90 205.00 15-Aug-17 209.10 225.00 25-Oct-17 223.50 230.00 * Asterisk signifies initiation or assumption of coverage.
Target Price Closing Price SCHP.S
01- Jan- 2016 01- Jan- 2017 01- Jan- 2018 100
150
200
250
300
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
20 February 2018
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 47% (62% banking clients) Neutral/Hold* 38% (57% banking clients) Underperform/Sell* 13% (52% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Schindler-Holding AG (SCHP.S)
Method: Our TP of CHF 240 is based on a DCF discounting a mid-cycle margin of 14%, mid-term growth of 5%, a WACC of 8% and a terminal growth of 2%. Our TP is backed by the company EV/EBIT and P/E multiples relative to peers and its own history as well as by EV/Sales multiples vs the company expected through-cycle profitability. We see a strong investment case in Schindler as it approaches the end of the heavy-lifting phase of the global manufacturing footprint reset programme while it continues to strengthen its presence in emerging markets which should facilitate growth. We rate the stock Outperform based on our investment case.
Risk: Longer and deeper than currently expected down-cycle in Europe or a sharp volume drop off in China. Adverse pricing behaviour of competitors in new equipment (China) and service segments (Europe and US). Execution on the LEAP programme, new products roll-out and new factories ramp up. These risks may alter our CHF 240 TP and Outperform rating.
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Schindler-Holding AG (SCHP.S) 24
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Summary of forecast changes
Q4 2017 Results Analysis
Q4 2017 Results Summary
Q4 2017 call feedback: Solid; Encouraging China outlook; Some caution on margin progression
Schindler Ahead