Quickview: SHW

Road transport contributes 20% of total CO2 emissions in Europe. EU legislation is progressively reducing average emissions allowed for new car fleets to 95g by 2020 (2011: 136g). SHW P&EC division will benefit from this secular trend as auto manufacturers implement technologies, co- developed with key suppliers, to meet these obligations. SHW Brake Discs is more cyclical in nature; however, management is changing the product mix to higher value composite discs. As a result, divisional EBITDA margins more than doubled to 7.9% in 2012. Following the sale of its stake in its Canadian oil pumps JV, STT Technologies, SHW will pay a special dividend of €3 per share this year. Management plans to re-enter the North American market, and cite balance sheet strength and superior European technology as key competitive advantages. There is also a demand from US OEMs for increased competition in the supplier market.

Comment On Full-Year Results
Preliminary results released on 12 February were broadly in line with expectations. Group sales grew by 2.5% to €325.4m and EBIT by 3.1% to €24.0m. Reported net income included an extraordinary gain of €31.9m related to the sale of its STT stake. Free cash flow (excluding STT proceeds) turned slightly negative in 2012, hampered by capex commitments and general working capital requirements.

Consensus Estimates: PBT A Touch High Near Term
Management has guided for revenues of €325-€340m in 2013, which is in line with consensus. Sales growth year-to-date suggests 2013 consensus sales will be met unless end markets soften considerably. Consensus has PBT margins expanding to 7.5% in 2013, which is unlikely given the higher rate of depreciation expected this year.

Valuation: Potential For Premium Valuation
The P/E and dividend yield for 2013 are 11.1x and 3.6% respectively, which is close to the average for the sector. A premium rating could certainly be achieved if the secular growth story driven by emissions regulation starts to be reflected in the company’s results.