EFTA01432866.pdf

Deutsche Bank Deutsche Bank Research: The Equity View: FRESH MONEY IDEAS #3 January 7th, 2018 Distributed on: 07/01/2018 21:00:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 083/04/2017 7T2se3r00t6kwoPa EFTA01432866 Table of Contents II The Equity View Overview IIConsumer — Page 5 B&M — Page 6 BAT — Page 7 Bovis Homes Page 8 Carrefour - SELL IIFinancials — Page 10 Aroundtown Properties — Page 11 AXA — Page 12 Banco Santander — Page 13 Credit Suisse Group Page 14 Prudential IIHealthcare — Page 16 AstraZeneca — Page 17 Fresenius Page 18 Shire IIEnergy, Materials & Industrials — Page 20 ABB — Page 21 ArcelorMittal — Page 22 BAE — Page 23 Continental IIEnergy, Materials & Industrials cont'dm.. — Page 24 DSM — Page 25 Glencore — Page 26 Kingspan — Page 27 Linde — Page 28 Renault — Page 29 Royal Dutch Shell — Page 30 RWE IITMT — Page 32 Eutelsat - SELL — Page 33 Infineon — Page 34 Informa — Page 35 KPN — Page 36 Sophos — Page 37 Vodafone IIBusiness Services, Leisure & Transport — Page 39 Deutsche Lufthansa — Page 40 Royal Mail - SELL — Page 41 SGS Page 42 Vinci II Risk Statements EFTA01432867 II DB Forecasts Editors: Mark Braley, Vivek-G Midha and Mairead Smith Deutsche Bank Research: European Equity Focus — January 2018 2 EFTA01432868 The Equity View — Fresh Money Ideas — Overview IIThe Equity View Overview IIThis is the third edition of this quarterly publication, where we present each of our teams' strongest investment ideas over the next twelve months. IIBelow are our European "Fresh Money Ideas". In this report, each idea is summarized and grouped together by sector (SELLs in RED): — Consumer: B&M, BAT, Bovis Homes, Carrefour — Financials: Aroundtown Properties, AXA, Banco Santander, Credit Suisse Group, Prudential — Healthcare: AstraZeneca, Fresenius, Shire — Energy, Materials & Industrials: ABB, ArcelorMittal, BAE, Continental, DSM, Glencore, Kingspan, Linde, Renault, Royal Dutch Shell, RWE — TMT: Eutelsat, Infineon, Informa, KPN, Sophos, Vodafone — Business Services, Leisure & Transport: Deutsche Lufthansa, Royal Mail, SGS, Vinci IIOne slide per stock, valuation and catalysts plus links to the latest research. IIThe prior iteration (04-Oct-17) [AB Foods, BAT, Bovis Homes, B&M, H&M, Imperial Brands, Ocado, Tesco, AXA, Credit Suisse, Deutsche Wohnen, Prudential, AstraZeneca, Coloplast, Shire, ArcelorMiittal, BP, Centrica, Covestro, GKN, HeidelbergCement, Linde, Renault, Rio Tinto, RWE, AccorHotels, ADP, Cineworld, Deutsche Post, IAG, Aixtron, Informa, Micro Focus, Telefonica, Telia, TF1] saw an average price gain to 04-Jan-18 of 4.2%, vs SXXP at 0.9% (Past performance is not a guarantee of future performance; This data does not include transaction costs; more information is available upon request) Deutsche Bank Research: European Equity Focus — January 2018 3 EFTA01432869 Consumer Deutsche Bank Research: European Equity Focus — January 2018 4 EFTA01432870 > Consumer 1 B&M — Warwick Okines, BUY, close 413p, 450p tgt, 9% upside IIOur preference is for value retailers. The UK macro environment looks similar to the austerity years of 2011/12. Both in groceries and in our apparel consumer survey we can see evidence of a shift to value. IIB&M is a price leader, with a robust 15-20% price gap to Tesco and Asda. IIValue retailers also offer structural growth opportunities. Multi-price discounters grew at a sales CAGR of 12% in 2006-16, illustrating their ability to progressively gain market share. IIB&M has ambitious store expansion plans with a UK target of 950 overall vs. existing 552 as of Sep-17, implying 40-50 openings p.a. over nine years. IIWe see attractive long-term growth opportunities: — Ja Woll — a German discount retailer: we forecast a sales CAGR of 13% to 2020E. — Heron Foods (a discounted convenience grocery retailer, purchased in Aug-17), from expanding its existing base of 257 stores. It would also make selling a greater range of non-ambient food products at B&M economically attractive. II in A strong balance sheet provides return optionality. At only 1.6x leverage Mar-18 we see potential for a 15p special dividend which would imply a 5.5% dividend yield. IIB&M trades on a CY18E P/E of 19.6x. This is only a 1.3x PEG. The valuation does not reflect B&M's growth trajectory. IICatalysts: Q3 results on 12-Jan. Related DB Research: B&M: Heron is flying (Okines) European Non-Food Retail: Christmas turkeys and crackers (Okines) Deutsche Bank Research: European Equity Focus — January 2018 The price gap vs. Tesco and Asda is widening — B&M is a price leader 10% -30% -25% -20% -15% -10% -5% 0% 5% Apr 14 Aug 14 Dec 14 Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Dec 16 Apr 17 Aug 17 vs Asda vs Poundland Source: Deutsche Bank (last data point: 10 November 17), company websites Q2 LFL better than 01, despite Easter effect in 01 EFTA01432871 -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% Source: Deutsche Bank estimates, company data 5 vs Tesco EFTA01432872 > Consumer 2 BAT — Gerry Gallagher, BUY, close 4914p, 6000p tgt, 22% upside IIBAT offers 50% TSR over the next two years, only 15ppts of which is from an EV re-rating. IIIts broad offering in next generation products (NGP), both in heat-notburn and vaping, puts BAT at a competitive advantage could fuel group organic growth of c5% organic growth FY18 and c6% FY19. IIBAT is one of the fastest growing large cap European staples yet it trades at a discount to the European sector and its international peers. 0% IIKey drivers: — Strong organic EBITDA growth and debt pay down (c28ppts). EBITDA growth could fuel 10% pa EPS growth, while debt pay-down further shifts the EV to equity. — Attractive dividend (c7ppts upside over next two years). — Re-rating to 13.1x 18E EV/EBITDA (c15ppts upside) and still at a discount to staples and international peers. Concerns regarding potential plans by the FDA to reduce cigarettes' nicotine content (announced in July 2017) have brought the multiple down to 12.4x. — The FDA regulatory process takes many years. By its conclusion, NGPs may already be well-established. IICatalysts: US tax reform (could add 5-8% to EPS); FY17 results end Feb; FDA comments through 2018 Related DB Research: What's going on (Gallagher) You can't have your cake and eat it (Gallagher) Deutsche Bank Research: European Equity Focus — January 2018 10% EBITDA (operational) growth Assoc. and mins. Incremental EPS at higher P/E multiple Source: Deutsche Bank estimates; assumes 10% EPS growth Operational drivers are key— we see substantial EBITDA growth to come 10 12 14 16 0 2 4 6 8 FY17 FY18 Source: Deutsche Bank estimates; assumes 10% EPS growth 6 EFTA01432873 FY19 FY20 EBITDA (GBPbn) (LHS) Growth (RHS) 0% 5% 10% 15% 20% 25% 30% 35% 40% 20% We see potential for 50% TSR over the next two years Operational drivers: 27.8% EV/EBITDA remains at 12.3x 21.5% 5.0% 1.3% 30% Debt paydown P/E expansion ex operational drivers DPS Re-rating: 14.8% 12.0% 2.9% 7.4% 40% 50% EFTA01432874 > Consumer 3 Bovis Homes — Glynis Johnson, BUY, close 1185p, 1368p tgt, 15% upside IIManagement's targets for 2020 are credible (EBIT margins >18% and ROCE >25%) and provide scope for upside. We see scope for expansion from the following sources: — Land bank intake margin is 26.4%, above the gross margin target of 23.5% — Contingency costs assumed in the current land bank and all new land intake should edge lower. These have increased from 2.5% to 4% of build cost, but the CEO has guided that these should fall. — We have not included any benefits from new housetypes from 2018. This could help bring cost savings and economies of scale. — Admin costs are targeted to be below 5% of sales. They are at the top of the peer group at present and so this target implies substantial cost savings, but we believe volume improvements could help too. II>9% dividend yield from special cash return of £180m over three years. IIPotential for higher dividends if Bovis constrains its land buying plans. Reducing land buying by half would increase cash available by £75m. The CEO is incentivised to pay out more than £180m in his LTIP. IIOrganic cash flow can support the dividend post 2020. The cash generation potential is impressive, with a 2018E FCF yield of 18.0%. IIStock is still cheap at 1.2x 2018E P/TNAV, despite 30% rise in last six months. IICatalysts: FY trading update on 12th January, FY results on 1st March. Related DB Research: Bovis: Benefits of strategy becoming evident (Johnson) UK Housebuilders: 2018 Outlook — Better for longer (Johnson) Deutsche Bank Research: European Equity Focus — January 2018 Bovis has the best yield in the sector, and one of the best in the market 0.0 0.5 1.0 1.5 2.0 2.5 3% Source: Deutsche Bank McCarthy Beltway Berkeley Persimmon Red row Crest Barratt Taylor Bovis EFTA01432875 4% 5% 6% 7% Dividend yield We see margin upside from the land bank, with land trailing house prices 100 110 120 20 30 40 50 60 70 80 90 Halifax HPI Greenfield land 8% 9% 10% Source: Deutsche Bank, Halifax. Land: Savills UK resi land dev index. Rebased: Dec 2007 = 100 7 Dividend cover by FCF (x) Mar-97 Nov-97 Jul-98 Mar-99 Nov-99 Jul-00 Mar-01 Nov-01 Jul-02 Mar-03 Nov-03 Jul-04 Mar-05 Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 EFTA01432876 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 EFTA01432877 > Consumer 4 Carrefour — Maxime Mallet, SELL, close €18.3, €15 tgt, 18% downside IIWe believe 2018 consensus is at risk. We are 13% below consensus 18E EPS (and 15% below 19E consensus). IICarrefour needs to invest given competitive pressures in France. Hypers (52% of French sales) suffers from a 5% price gap vs. Leclerc and underexposure to online grocery (with only 8% market share). IINovember's Kantar data showed a market share loss of 60bps to 20.5%. — This is not confined to Hypers (40bps share loss); Supers also lost 30bps of market share. IIRecent price and promotional investments have not delivered better customer perceptions. Price perceptions are broadly flat YoY for both Supers and Hypers. Therefore, more will be needed. IICarrefour's market position is already weak. French EBIT margin is at a historical low of 2.0% in 2017E. IIClosing the gap to peers would be expensive. Eliminating it would cost the entirety of French EBIT. IIThe strategic plan in January is likely to be underwhelming. The first measures taken by the new management do not address the main issues and it will be costly and take time to fix the group's positioning IICash flow generation is structurally weak. The meagre 2.6% FCF yield is linked to thin margins in a tough competitive environment and a high tax rate of 35%. IICarrefour still trades at a 11% premium to peers at 16x 18E EPS. IICatalysts: strategic plan on January 23rd. Related DB Research: French Food Retail: A stronger November and a weaker Carrefour (Mallet) Deutsche Bank Research: European Equity Focus — January 2018 French profitability is falling 33,000 33,500 34,000 34,500 35,000 35,500 36,000 36,500 Sales (in €m, LHS) EBIT margin (RHS) 1.5% 2.0% 2.5% EFTA01432878 3.0% 3.5% 4.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E Source: Company reports, Deutsche Bank estimates Narrowing the gap vs. Leclerc would be costly 1,000 1,200 200 400 600 800 -45 -200 0% 1% 2% 3% 4% 5% 6% EBIT (LHS) EBIT margin (RHS) 852 672 493 313 134 1,031 -1% 0% 1% 1% 2% 2% 3% 3% 4% Source: Deutsche Bank estimates (Carrefour Hypers vs. Leclerc on horizontal; France EBIT on LHS; France EBIT margin on RHS) 8 EFTA01432879 Financials Deutsche Bank Research: European Equity Focus — January 2018 9 EFTA01432880 > Financials 5 Aroundtown Properties — Markus Scheufler, BUY, close €6.5, €7.50 tgt, 15% upside IIWe like Aroundtown as a play on a stronger German economy. Its portfolio is primarily based in German cities (88% of portfolio) and is mostly geared towards commercial property (76% of assets). IIKey driver #1: Acquisitions keep beating expectations. Aroundtown has closed €3bn of acquisitions YTD at a 6.3% yield. IIWe believe that Aroundtown should be able to continue making acquisitions below replacement costs for the next two to three years. IIRefinancing could drive cash flow upside. — Re-gearing the portfolio from 35% LTV at a low 1.5% marginal cost of debt would lock in a 500bps spread IIKey driver #2: strong rental growth of >5% pa. We forecast a 23% FF0 CAGR to 2020E. This in turn is driven by: — Closing the 20% gap to market rents for c90% of the portfolio. Aroundtown's strategy is to acquire undermanaged assets, refurbish them and realise the market upside; — LFL rental growth of 4%; — A fall in vacancy rates to c5% from c7% IIKey driver #3: we expect a 12% NAV growth to 2020E, driven not just by rental growth but also by: — Revaluation — H1 revaluation to 5.5% yield was a positive surprise — Better portfolio quality and thus yield compression IIAroundtown currently trades on a discount to book value at 0.9x 2018E IIThe next catalyst is potential inclusion in the MDAX in March Related DB Research: 3017 results: Strong growth continues: BUY (Scheufler) Deutsche Bank Research: European Equity Focus — January 2018 Acquisition volume continues to surprise to the upside 1,000 1,500 2,000 2,500 3,000 3,500 500 0 2015 Source: Company data, Deutsche Bank estimates 20% upside to market rents drives LFL rental growth 100 % 88% 10 20 EFTA01432881 30 40 50 60 70 80 90 0 Below market rent Source: Company data, Deutsche Bank 10 At market rent 2016 2017 YTD Acquisition volume (in EURm) Acquisition yield (%, RHS) 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 12% EFTA01432882 > Financials 6 AXA — Oliver Steel, BUY, close €25.20, €28.50 tgt, 13% upside IIAXA is geared to rising bond yields, especially in the US, and the DB house view sees upside to bond yields from better macro. — The downside in any case is modest: US 10 year would need to fall to 1.5% before further reserving fears could be valid. IIThe solvency ratio is robust at 200%. IIWe see re-rating potential as M&A plans are executed. This cannot be risk free, but the scale of the plans is modest in the context of the group (planned disposals account for 13% of group earnings); yet the shares now trade 15% below the sector. IIWe see earnings upgrade potential on delivery of the five-year plan. — Management has recently reiterated its confidence in the group target of 5% pa EPS growth in 2015-2020 (despite FX headwinds). This implies c.7% pa growth over the course of 2018e-2020e. IIOur forecasts are in line with management's 5% p.a. base case, but are still conservative. For instance, we do not incorporate any revenue benefit from the 'simplify to accelerate' programme (focusing on only 16 principal countries, reducing management layers). IIThe simplification programme should deliver the equivalent of €0.3bn in cost savings within two years (c5% of 2016 net income). IIIn summary, AXA is far too cheap at a 15% discount to the sector — with the potential to re-rate in 2018. It currently trades on 9.5x 2019E, vs conglomerate peers at 11.7x and sector at 11.Ox IICatalysts: planned M&A during 2018; FY and 1H results. Related DB Research: AXA: A confident investor day update (Steel) European Insurers: 2018 - Safety and Optionality (Steel) Deutsche Bank Research: European Equity Focus — January 2018 Potential for significant EPS acceleration — and on delivery, re-rating 10% 12% -8% -6% -4% -2% 0% 2% 4% 6% 8% 2016 EFTA01432883 Bd ylds Growth Source: Company data, Deutsche Bank estimates 11 2017e Efficiency Equ mkts & FX 2018e 2019e Tech margin Total M&A 2020e Potential EPS growth based on AXA targets EFTA01432884 > Financials 7 Banco Santander — Ignacio Ulargui, BUY, close €5.6, €6.6 tgt, 17% upside IISantander is a very large cap stock (market cap > €90bn) with significant earnings momentum and an attractive valuation. IIWe expect high-single-digit growth in Brazil over the next two years driven by the economic recovery. — NII should rise at a c4% CAGR for 18-19E driven by stronger loan growth (we expect 10%/12% in 18E/19E). Santander has been the most active in increasing lending, being the only Brazilian bank posting both YoY and QoQ growth. — The economic recovery should help reduce cost of risk and hence provisions. We forecast a 59bps fall in the cost of risk through to 2019. IICosts and provisions should deliver profit growth in Spain. Popular's contribution could be bigger than expected driven by revenues and lower provisions (the company expects the acquisition of Popular to deliver €550m of synergies), and NPAs should fall over time to non-material levels. IIThe USA has revenue and cost tailwinds to come, starting 1H18. IIThe UK is becoming less of a drag. Competition necessitates management's margin caution, but the outlook on costs of risk and operations is more positive. IIClient loyalty focus should bring fee income outperformance. Realising the potential from the 131m customer base should deliver a 7% fee income CAGR in 2018-19E IISantander has a P/B of only 0.9x for an estimated 11.4% 18E RoTE. IICatalysts — UK & Brazil newsflow and quarterly results Related DB Research: Reaffirming targets. Buy reiterated (Ulargui) Deutsche Bank Research: European Equity Focus — January 2018 Santander Brasil is achieving market-leading loan growth 10% 6.4% -15% -10% -5% 0% 5% 4.2% -1.0% -6.8% 306 Santander Brazil 406 Bradesco Source: Deutsche Bank estimates and company data EFTA01432885 Spanish NPAs over loans have been materially reduced 10% 12% 14% 16% 18% 0% 2% 4% 6% 8% Pre Blackstone deal Source: Deutsche Bank estimates, company data 12 Post Blackstone deal 49% stake in Blackstone's vehicle 1017 Itau 2Q17 3Q17 Banco do Brazil 7.6% EFTA01432886 > Financials 8 Credit Suisse — Kinner Lakhani, BUY, close CHF17.8, CHF21 tgt, 18% upside IICS has superior Wealth Management operating momentum of 13% CAGR PBT over the next 3 years supported by its Relationship Manager investments, One Bank strategy and strong cost control IIIt has strong cost control with a targeted 2018 cost base of <CHF17bn, c20% down on 2015, with recent new guidance of CHF16.5-17bn over 2019-20. IIAttractive capital return based on c50% payout ratio through 2019 and 2020 — primarily through share buybacks and special dividends — implying a 'yield' of over 5-6% IIThere is upside potential to our forecasts. This comes from three sources: (i) Lower funding costs of CHF1.1bn by 2019E (Dec-17 Investor Day), improving by CHF0.5bn vs. Dec-16 Investor Day (ii) NII benefit from forward rate curves of CHF0.45bn over 2018-20; and (iii) Lower Group tax rate of c23%, from c28%, in the event of US tax reform. — Lower tax alone could drive an earnings upgrade of c7% while better NII trends could drive a c10% upgrade. This could increase our fair value of the stock from CHF21 to CHF24. IICS trades on only clOx adj. 19E P/E and 1.0x 19E P/TB, while offering a 10.5% 19E RoTE. IICatalysts: US tax reform passage, further delivery towards targets Related DB Research: Credit Suisse: From momentum to capital return (Lakhani) European Banks Strategy: Road to Recovery — Intrinsic Value (Lakhani) Deutsche Bank Research: European Equity Focus — January 2018 35 40 4.5 5.0 5.5 6.0 Quarterly adjusted cost trends show strong execution 2015 CHFbn 5.2 4.8 4.6 5.3 4.9 4.5 4.9 4.8 4.4 4.9 -4.5 EFTA01432887 2016 2017 5 8 10 20 3Q 40 Source: Deutsche Bank ests, company data. Note: based on adj total operating expenses at constant FX rates, 4017 is a company est 10% 12% 14% 16% 18% 3017-2020E CETI glide path: attractive capital return to come 3.3% (0.4%) 0% 2% 4% 6% 8% 13.2% 12.8% (1.7%) =4.5%/6.0% dividend yield in 19E/20E (2.5%) 11.9% 3017 CET1 capital ratio Net change, 4Q17-2018E 2018E CET1 captial ratio Earnings, Dividends, 2019-2020E 2019-2020E Regulation and others, 2019-2020E 2020E CET1 capital ratio Source: Deutsche Bank ests, company data. Note: based on adj total operating expenses at constant FX rates, 4017 is a company est 13 EFTA01432888 > Financials 9 Prudential — Oliver Steel, close 1898p, 2050p tgt, 8% upside IIValuation is simply too low at just 5% premium to the wider sector (PE 11.5x 2019e vs broad sector at 10.8x), despite a superior growth rate (EPS CAGR to 2020 at 10%). IILong-term growth in Asia is the heart of the investment case: insurance spend in Asia is only 2.5% of GDP vs 7.5% in the UK, and mutual fund FuM only 12% of GDP vs Europe at 75%. We forecast 13-14% pa growth in Asia. IIPru holds top 3 positions in 9 of its 11 Asian markets. Asia is 36% of IFRS profits and 66% of new business profit. IIIn the US (39% of profits), Pru is no. 1 in the variable annuity market by sales, with these accounting for only 12% of US retirement AuM. Consensus growth expectations are low following the DOL changes, with scope for positive surprise. Tax reform could also deliver further upside. IIThe UK — 15% of IFRS earnings — is less exciting, but offers potential capital release and 5% re-rating from its annuity and other closed books. IIShort-term headwinds have turned in Pru's favour: Asia sales are more robust (double-digit growth in most countries, thus less reliant on mainland Chinese purchases in HK); fund management inflows are positive again; US sales are bottoming out. A partial offset is £ recovery (80% of earnings are non-GBP). IICapital position offers optionality: group Solvency II capital ratio end 2016 at 201%, growing at 5pts p.a., with ability to remit up from each major unit. IICatalysts: sale of UK annuity book, US tax changes Related DB Research: Global Asset Managers: At a critical juncture (Lakhani & Steel) European Insurers: 2018 - Safety and Optionality (Steel) Deutsche Bank Research: European Equity Focus — January 2018 Asian sales growth, the key group driver, is broadening out again HK Non-HK 20% 40% 60% 80% -20% 0% Source: Deutsche Bank estimates, Company data Total Asia VNB growth -10% -5% 0% 5% EFTA01432889 10% 15% 20% 25% Source: Deutsche Bank estimates, DataStream consensus and share price 14 Upside to target based on weighted peer sum of the parts Implied Upside Typical range since 2012 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 EFTA01432890 Healthcare Deutsche Bank Research: European Equity Focus — January 2018 15 EFTA01432891 > Healthcare 10 AstraZeneca — Richard Parkes, BUY, close 5171p, 5700p tgt, 10% upside II2018 is a likely turning point for margin and EPS momentum. We believe EPS should grow at a c12% EPS CAGR to 2022 as it emerges from its patent cliff and margins grow. IIBest-in-class pipeline. Exceptional data on new oncology portfolio puts AZ in a strong position despite MYSTIC failure. — Expectations for the overall survival readout of MYSTIC in 1H18 are low, so this is close to a free option in our view. A positive would deliver >10% upside. — The new portfolio, plus other growth products, should add >$2bn in incremental sales in 18E. IISubstantial margin leverage momentum improvement. Several new launches leverage existing infrastructure and thus will have very high margins — We expect flat EPS in 2018, but substantial growth thereafter. The equity story should shift to one of delivering or beating on revenue and earnings expectations. IIThe best-in-class growth justifies a larger premium than at present. The shares trade on 17x 18E P/E vs. 16x for peers. IIMultiple catalysts from pipeline. Data on existing drugs Imfinzi and Lymparza in 1Q18, plus readouts on two potential blockbusters in roxadustat (anemia in chronic kidney disease) and anifrolumab (lupus) in the next 12 months. Related DB Research: Lynparza survey supports market leadership in potential >$7bn class; Buy (Parkes) Pharma: 2018 Outlook: Fundamentals solid but fewer debates than in prior years (Parkes) Deutsche Bank Research: European Equity Focus — January 2018 Bull/bear case: limited downside, substantial upside potential 1500p 2500p 3500p 4500p 5500p 6500p 7500p Current share price 1083p 4389p 228p 5700p 513p 285p EFTA01432892 513p 7011p Bear Pipeline -ve Mystic -ve Base Source: Deutsche Bank Tagrisso Bull Mystic +ve Pipeline success Substantial EPS acceleration from 2018 driven by top-line growth 10,000 15,000 20,000 25,000 30,000 35,000 5,000 0 2015A 2016A Source: Deutsche Bank, company data 16 2017E 2018E 2019E 2020E 2021E 2022E Total revenues ($m) Core EPS ($) 0 1 2 3 4 5 6 7 Bull EFTA01432893 > Healthcare 11 Fresenius — Gunnar Romer, BUY, close €65.4, €83 tgt, 27% upside IIStrong outlook — we expect defensive low-teens EPS growth to 2020, given sound end market dynamics, market leadership positions, and a strong management team. IIWeak sentiment means the negatives are priced in. The shares have been weak recently on concerns over IV generics pricing and the poor performance of Akorn. — We expect consensus estimates to trough on 4Q17 results and to drive further buying of the shares. — IV generics price pressure is not outside of expectation to reassure — 'Lowering the bar' on Akorn should remove a key overhang. II4Q17 results should be strong. We expect adj. NI up 22% CER, helped by a full contribution from Qironsalud and soft comps at Kabi. IIValuation is undemanding at 20x 18E P/E, in line with historical 12m forward range of 18-22x P/E II A number of positive catalysts to come. — New product launches at Kabi should surprise to the upside. — Qironsalud integration is progressing smoothly — Helios Capital Markets Day should be reassuring. Related DB Research: European MedTech & Services: 2018E Outlook: Significant Outperformance (Wang) Source: Factset, Deutsche Bank Deutsche Bank Research: European Equity Focus — January 2018 17 Fresenius has de-rated over 2017 closer to its historical average... 10 15 20 25 30 5 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Source: Factset ... driving underperformance relative to the market (here, STOXX 600) 20 40 60 80 -60 -40 —20 0 66 54 36 EFTA01432894 22 25 6 -9 -24 -43 11 10 -8 -20 25 7 11 12 14 46 Fresenius lyr fwd PE Average since 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 EFTA01432895 > Healthcare 12 Shire — Richard Parkes, BUY, close 3875p, 5000p tgt, 29% upside IIWe expect new long-term targets to help rebuild investor confidence. We expect these targets to reassure that Shire can continue to grow despite headwinds to haemophilia. Between this, execution on deleveraging and completion of the Neuroscience Review (at end-17), the share price should recover. IISynergies and deleveraging should offset headwinds in '18, delivering revenue growth. Growth of Immunology and from recent launches should drive top-line growth. IIMore long-term safety data needed before Shire could be displaced in haemophilia (24% of sales). Hemlibra is a competitive threat to Shire, but a majority of patients will need more evidence on safety given safety issues observed in its inhibitors trials. IIExpert feedback suggests Shire will emerge as dominant in HAE with Lanadelumab (launch expected in 2H18). IIShares are far too cheap at just 8x 19E PE and 9x EV/EBITDA. Shire is the cheapest stock in our coverage after '17 underperformance, driven by earnings downgrades. IIConsensus has overlooked new pipeline opportunities. We see positive surprise potential on these programmes, particularly if clinical data supports attractive pricing for SHP621 (est. 150k patients in the US alone, many of whom have few effective treatments). Related DB Research: Shire: Headline HAVEN 3 data incrementally better than anticipated (Parkes) Pharma: 2018 Outlook: Fundamentals solid but fewer debates than in prior years (Parkes) Deutsche Bank Research: European Equity Focus — January 2018 Bull/bear case: blue sky yields almost 45% upside 1500p 2000p 2500p 3000p 3500p 4000p 4500p 5000p 5500p 6000p Current share price 3112p 594p 817p 4523p EFTA01432896 258p 216p 4997p 380p 5377p Source: Deutsche Bank Shares are now very cheap on lyr PE vs. EU Pharma 0.4 0.8 1.2 1.6 Jan 10 Source: Deutsche Bank 18 Dec 11 Shire lyr fwd PE rel to EU Pharma Rel to EU Pharma 4yr Ave +1 s.d. -1 s.d. Dec 13 Dec 15 Dec 17 PE rel to sector (x), lY fwd EFTA01432897 Energy, Materials and Industrials Deutsche Bank Research: European Equity Focus — January 2018 19 EFTA01432898 > Energy, Materials & Industrials 13 ABB — Gael de Bray, BUY, close CHF26.7, CHF29 tgt, 9% upside IIABB has a late cycle profile (60% of sales - skewed towards process/hybrid industries). We expect the shares to track orders, rather than earnings in 2018. IIWe foresee a rebound in orders from a trough in 2017. 2017 was a transition year, with large orders falling to a ten-year low. Improved macro, favourable financing conditions and ageing assets should provide a supportive environment. IIIP growth has historically led capex growth by around one year, and from unsustainably low levels we believe a rebound in heavy and process industries is on the way. Previously-delayed, large projects in grid connections are also expected to move forward in the US and Europe over the next few years IIAcquisitions should deliver benefits. The costs of the expensive acquisitions of B&R and GE IS are now sunk, whereas the benefits of #2 positions in automation (behind Siemens) and electrification (behind Schneider) should be substantial. IIABB has market-leading offerings in areas such as robotics, EV fast chargers, energy storage and smart grid offerings. R&D expenses have increased by c.100bps since 2008, reinforcing the group's innovation capabilities. IIWe expect re-rating relative to the sector. Given favourable conditions, ABB's former premium to the market should return after a hiatus since 2009. ABB currently trades on 18.4x 18E P/E. IICatalysts: 4Q17 results on 08-Feb Related DB Research: ABB: Better late (cycle) than never (de Bray) Deutsche Bank Research: European Equity Focus — January 2018 ABB's large orders ($m) hit a low in 2017 — we expect improvement 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e Source: Deutsche Bank, ABB ABB 12m fwd P/E relative to sector average — premium has eroded postcrisis 06 0.7 0.8 EFTA01432899 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov Source: Factset 20 10-year average EFTA01432900 > Energy, Materials & Industrials 14 ArcelorMittal — Bastian Synagowitz, BUY, close €28.7, €33 tgt, 15% upside M Despite having performed well recently, we believe the stock is still priced for a "cautious" $7bn EBITDA scenario. This appears too bearish as spot conditions remain strong and three structural changes have removed part of the downside risk: IIFirstly, Europe is seeing the strongest consolidation dynamic since the creation of ArcelorMittal itself. IISecond, trade policy continues to become stricter in MT's US and European core markets. IIThird, China is aiming to cut capacity 10-20%. Our checks (and rising margins in China) support the view this is for real. IIAlthough we model a steel price correction from spot (suggests $10bn EBITDA), we believe the stock comes with three free options beyond our base case scenario (stronger developed market margins, Brazilian recovery, commodity price holding up better) which means it could almost double in a blue sky. IIMT should end 2017 with net debt of c.$10bn, vs Q4 run rate EBITDA of $8bn. Its strong 2018 FCF yield of 8-11% suggest high potential for attractive cash returns mid-term: $2.9bn of FCF, and just $0.3bn of divis in our model. II Valuation: MT trades at 5.0x 2018E EV/EBITDA, 14% discount to peers II in Catalysts: trade policy, steel margins holding up better, further rebound iron ore. Q4 results 9-Feb. Related DB Research: Notes from the road: US NDR (Synagowitz) Another round of upgrades and still room to go — BUY, PT to USD38 (Synagowitz) Deutsche Bank Research: European Equity Focus — January 2018 Expectations are sensible but the shares do not reflect the ongoing earnings recovery yet 100 120 20 40 60 80 0 Source: Datastream Sales by end-market (2016) Mining, Chemical & Water 1% Packaging 4% EFTA01432901 Other steel 11% Transformation 12% Construction 18% Auto 20% Source: Deutsche Bank 21 Other sales 8% AM - share price performance (EUR) (LHS) 1 yr rolling EBITDA consensus (USDm) (RHS) 2 yr rolling EBITDA consensus (USDm) (RHS) 4,000 6,000 8,000 10,000 12,000 14,000 Dec/09 Dec/10 Dec/11 Dec/12 Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 Distribution 26% EFTA01432902 > Energy, Materials & Industrials 15 BAE Systems — Jaime Rowbotham, BUY, close 574p, 730p tgt, 27% upside IIWe see scope for 63% TSR to 2020. With FCF forecast at £1.35bn in 2020, if the stock were to trade on a 5% yield then those buying now would make 18% TSR per year. Thus now is an attractive entry point into a multi-year defence spending up-cycle. IIFlat earnings are masking a compelling growth story. We forecast EBIT growth at 5% at the company level. IIUS strength (9% EBIT CAGR to 2020) should come from growth in Combat Vehicles & Ship Repair and Electronic Systems, and a profit recovery at Applied Intelligence in Cyber. IIIt should be possible to offset declining Typhoon profit contribution in Air. The key drivers of this are Missiles (MBDA, in which BAE has a 37.5% stake, is growing at a 12% pa EBIT CAGR), Aftermarket and the stake in the F-35. There is upside potential to this from potential new Typhoon orders, such as from Saudi Arabia. IIMaritime profitability is well-underpinned under this UK government, though there is risk from a change in government. IICash conversion is set to improve from here on lower outflows on working capital, provisions (as most are now non-operational) and pensions (post the triennial review). IIBAE trades on a discount to EU and US peers at c13.5x 19E P/E and c9x 19E EV/EBIT, versus 14.5x and 10.5x for EU peers, and 19x and 14x for US peers. IICatalysts: conversion of contract opportunities Related DB Research: BAE: Cashing in: >60% 3-year TSR potential (Rowbotham) Global Aerospace and Defence: Civil selective; Defence more effective (Kerner) Deutsche Bank Research: European Equity Focus — January 2018 PER premium/discount vs US defence Source: Deutsche Bank estimates 22 EV/EBIT premium/discount vs US def £1.35bn FCF by 2020, driven by EBIT growth and better cash conversion 1000 1200 1400 1600 200 400 600 800 598 EFTA01432903 115 110 90 282 127 840 93 (25) (40) 1350 Source: Deutsche Bank estimates BAE trades on a c30% discount relative to its US peers -80% -60% -40% -20% 0% 20% 40% 60% EFTA01432904 > Energy, Materials & Industrials 16 Continental — Tim Rokossa, BUY, close €232.3, €250 tgt, 8% upside II1) Automotive outperformance is at an inflection point. Continental has taken Valeo's mantle as the fastest-growing European supplier. Automotive organic growth was 9% in 03 (700bps above global production and 250bps above Valeo). II2) Continental is the best play on the autos 'mega trends.' Continental is a leader in all of: — Autonomous driving — indeed, the world's largest player. This segment grew 41% yoy in 9M17. This is not limited to Chassis & Safety but also includes software, consolidated in the Interior division. — Electrification. According to Continental, its content per car could be up to 3x higher for a full EV compared to a standard gasoline engine. — Digitalisation IIThe mix shift away from diesel helped turbochargers grow >50% in Q3. II3) Rubber should accelerate further. The margin was a slight beat in Q3. With a negative raw mat impact abating in coming quarters, and given our expectation that price increases (+2% in Q3) will prove sticky, we expect earnings momentum to accelerate. II4) Valuation: Continental has €20 upside just to reach a valuation in line with peers (current 18E P/E is only 11.2x), despite robust growth IICash generative (€2.4bn ex M&A this year). We see scope to increase pay-out, given CFO guidance of no major transactions in the short term. IICatalysts: FY results 09-Jan — talk around ADAS could offset cautious guidance Related DB Research: What Conti's CFO statements mean for our view on 2018 (Rokossa) Get ready for a good 2018 (Rokossa) Deutsche Bank Research: European Equity Focus — January 2018 Source: Company data, HIS (* (OE since 2014, OE+RT before) Order intake backs thesis of stronger growth ahead 10 15 20 25 30 35 40 0 5 2010 Source: Company data 23 2011 2012 EFTA01432905 2013 2014 2015 2016 2017 Continental was one of the fastest growing auto suppliers in Q3 10% 12% 14% 0% 2% 4% 6% 8% EFTA01432906 > Energy, Materials & Industrials 17 DSM — Virginie Boucher-Ferte, BUY, close €81.8, €100 tgt, 22% potential upside IIWe see Nutrition (68% of EBITDA) as a key growth driver. We forecast a 9% EBITDA 2018-20E CAGR driven by cost cutting, innovation and leverage of its broad portfolio. — A greater proportion of the Nutrition portfolio is in higher-value and faster-growing ingredients and 'solutions' rather than just vitamins. IIUp to 30% upside to 18E EBITDA forecast if vitamin price increases are sustained. — Prices are unlikely to revert fully: China's environmental policies are should give structural support in the long term. IIFull exit from Materials likely, driving portfolio shift towards becoming a ure play in higher-value ingredients. rIM&A should drive the next phase of development. DSM is likely to use its strong balance sheet (0.5x 17E net debt/EBITDA) to broaden its ingredients portfolio. — This would unlock >€20/share of value from EPS accretion and rerating. II Trades on 16x 19E P/E, in line with chems but a 33% discount to ingredients. We believe the portfolio shift should prompt re-rating. IIOur €100 tgt implies a 20x 19E P/E — still a 15% discount to ingredients. IICatalysts: Upside through higher value and fast growing ingredients and "solutions". Portfolio shift optionality. Related DB Research: DSM: The path to E100 (and potentially more): upgrade to BUY (Boucher-Ferte) Ingredients: 2018 Outlook: Recipe for success (Boucher-Ferte) Deutsche Bank Research: European Equity Focus — January 2018 DSM Nutrition organic growth now compares well to peers 10% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2009 2010 Source: Deutsche Bank, Company Data 1000 1500 EFTA01432907 2000 2500 3000 500 -500 0 2007 2009 Source: Deutsche Bank, Company Data 24 2011 2013 2015 2017E 2019E Lots of firepower for accretive M&A (DBe synergies 6% of sales) Net Debt (LHS) 2011 DSM Nutrition organic growth Food Ingredients organic growth average 2012 2013 2014 2015 2016 2017E Net Deb/EBITDA (RHS) -0.50 0.00 0.50 1.00 1.50 2.00 2.50 EFTA01432908 > Energy, Materials & Industrials 18 Glencore — Liam Fitzpatrick, BUY, close 391p, 430p tgt, 10% upside. IIStrong organic growth from return of suspended capacity. Group volume growth is c7% pa to 2020, vs. peers at 2-3%. Giving full value for suspended capacity yields a blue-sky valuation of >15/share. — Suspended zinc production stands at 500 Ktpa — we have c90/320/400kt of volume growth in 2018-20 in our numbers. — Also there is substantial suspended copper capacity. We have 8% YoY volume growth to 2020 in our numbers. — On copper, we are conservative given operational and country (DRC/Zambia) risks, so the risks to our estimates are to the upside. IIRight base metal exposure. We are structurally bullish on copper, zinc, nickel and cobalt. — We believe copper will remain in deficit in 2018, which should support the copper price increases. Our forecasts are 297c in 2018E and 315c in 2019E, putting us 10% ahead of consensus. — Glencore's copper business is well-positioned on scale, margins and growth. An EV play. Glencore is a longer-term structural winner of any shift to EVs given its strength in copper, cobalt and nickel. IIValuation is attractive at 2018 FCF yield of 14% at spot and 11% at our base case. IICatalysts: Copper prices/supply disruption, consensus upgrades, delivery against volume guidance Related DB Research: Glencore: Investor call — what did we learn? BUY case remains intact (Fitzpatrick) European Mining 2018 Outlook: Upside remains: a guide to 2018 (Fitzpatrick) Deutsche Bank Research: European Equity Focus — January 2018 We see the copper market moving further into deficit (kt) 200 400 600 800 Surplus/(Deficit) Surplus (Deficit) % of total demand -600 -400 -200 0 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e Source: Deutsche Bank, Industry data Substantial volume growth to 2020E in zinc (below) and copper (8% p.a.) (kt) 1000 EFTA01432909 1100 1200 1300 1400 1500 1600 600 700 800 900 2014 2015 Source: Deutsche Bank, Industry data 25 2016 2017F 2018F 2019F 2020F -2% -2% -1% -1% 0% 1% 1% 2% 2% 3% 3% 4% EFTA01432910 > Energy, Materials & Industrials 19 Kingspan — Priyal Mulji, BUY, close €38.5, €40 tgt, 4% upside IIKingspan is a global insulation producer, focusing on high-performance panels and boards. IIWe expect robust organic growth (5% p.a. to 20E). Kingspan should outperform its construction markets owing to its over-exposure to markets with low penetration rates (the USA, EM and Mainland Europe) and endusers' increasing focus on future-proofing buildings. IIWe see c4% upside to 2020E DBe forecasts if Kingspan meets its penetration targets. IIWe are already c2-3% ahead of consensus post-'17 on top line and trading profit. IIM&A could drive c30% upside to our price target. We expect robust FCF/sales of 5-8% in coming years. — Levering to 2x net debt/EBITDA to spend on acquisitions would raise our forecast 20E EPS by up to c20%. — Management has cited M&A as a likely growth driver IIKingspan trades at a 24% discount to high-growth cyclical stocks. Comparing Kingspan's operational strengths (organic growth, EBITDA progression, scale of deleveraging and predictability and earnings) and EV/EBITDA to similar stocks such as Geberit and Halma illustrates that Kingspan offers excellent value. IICatalysts: FY17 results on 23-Feb Related DB Research: Kingspan: Insulated growth; Initiating on BUY (Mulji) Building & Construction: 2018 Outlook: Still opportunity (Johnson) Deutsche Bank Research: European Equity Focus — January 2018 11 13 15 17 19 21 23 25 9 2% 3% Source: Deutsche Bank, company data 4% Renishaw Geberit Rotork Leg rand Polypipe EFTA01432911 5% 2018-20E average organic growth pa, % 26 6% 7% Givaudan Spirax-Sarco Assa Abloy Kingspan Halma We expect a step-up in organic growth... 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 500 0 Source: Deutsche Bank, company data m but the valuation does not reflect this Revenue, EUR m (lhs) % YoY organic (rhs) 0% 2% 4% 6% 8% 10% 12% 14% 2018E EV/EBITDA, x EFTA01432912 > Energy, Materials & Industrials 20 Linde — Tim Jones, BUY, close €186.1, €227 tgt, 22% upside. IIKey driver #1: improving gas industry fundamentals from cost efficiencies, investment discipline, consolidation and end-market stabilisation. Capex to sales has fallen from c14% in 2012/13 to c12% in 2016, and consolidation should drive price discipline and margin expansion. IIKey driver #2: macro tailwinds. Improvements in Europe and Asia (c60% of Linde Gas), and continued strength in the US, should provide support to a later-cycle business from 2018 onwards. Industry growth should improve from 2015-16's 2%. IIKey driver #3: Praxair merger will create a global leader in the gas industry. Our analysis of the combined firm suggests large synergies ($1.2bn — over 20% of pro-forma EBIT — of which $1bn is cost savings and $200m capex savings). — The key logic is diversification (geographical and end-user), given complementary regional and end-market exposures. IIAnti-trust risks should be manageable, with divestments of $2.5-3bn. Demand for these assets is likely high. IIWe forecast €4 3bn net income in 2020, implying a fair value of €245/share using peer multiples We discount this back, implying our €227 target. IITrades on 21.6x 2018E P/E, in line with peers. IICatalysts: greater visibility on merger execution and timing Related DB Research: Linde - Gases growth accelerating. Still on track to E245. BUY (Jones) Pan European Chemicals: 2018 Outlook: A "super" sector (Jones) Deutsche Bank Research: European Equity Focus — January 2018 Current Cost share price synergies Rerating to industry average Source: Deutsche Bank, Company Data 27 Price Mid term discipline target price Lower taxes Relating to industry leader EFTA01432913 Top line synergies Blue sky scenario 15 35 180 15 Linde-Praxair combination a clear market leader Others 18% TNS 4% Air Products 11% Praxair 13% Linde 24% Source: Deutsche Bank estimates, Spiritus Consulting. TNS = Taiyo Nippon Sanao. Data includes share of sales from associate participations and .]Vs. Note: Air Liquide includes Airgas acquisition Linde-Praxair price target bridge 25 245 10 20 300 Air Liquide 30% EFTA01432914 > Energy, Materials & Industrials 21 Renault — Gaetan Toulemonde. BUY, close €85.2, €115 tgt, 35% upside IIEmerging markets are the key drivers of the growth, such as: 1) Russia (delivering €500-700m operating profit growth); 2) Americas (mostly focused in Brazil and bringing €300-€350m earnings growth); 3) China; 4) Iran; 5) India. IIWe expect the profit contribution from Europe to remain stable, at a high level, in light of modest growth (with Brexit a further drag on the UK) and regulatory costs. IIEconomies of scale should drive €700m pa cost savings and thus increased operating profit. Renault has volumes of only 3.5m units, but in partnership with Nissan has access to a purchasing department (€120bn) and an R&D centre (€lObn) of 10m units. IIAcceleration of synergies with Nissan. It took 18 years (1999-2017) to have 20% of commonality between the two. It will take 4 years (2018-2021) to move it to 80%. IIRenault has an attractive profile in the sector's context, including low cost and ultra low cost line up, main sites in low cost countries, EV expertise, economies of scale and EM exposure IIRenault's core is far too cheap at the current share price. The current share price implies a share price of €25/share for Renault's core business. This is less than 2x P/E for a business still growing EPS at 5% p.a. to 2019E. IICata