| | | | | Sell (Price target SKr71.00) | | UBS Research THESIS MAP | a guide to our thinking and what's where in this report | | | Q: Are manufacturing innovations impairing Sandvik Machining Solutions' growth potential? Yes. We assume no organic growth and a flat EBIT margin (20%) for the forecast period at SMS. This factors in the penetration of new machine tool technologies but does not fully incorporate the potential competitive threat from incumbent and Chinese cutting tool players. more→ Q: Can the rest of the group offset the lack of growth at SMS? No. SMS accounts for two-thirds of our clean EBIT estimate for Sandvik. A flat revenue and EBIT line at SMS means the rest of Sandvik would need to raise clean EBIT by an improbable 40-50% in order to meet consensus expectations and management guidance (SKr12.7bn, or SKr11.8bn FX-adjusted). more→ Q: Can restructuring alone enable Sandvik to meet its earnings targets? We do not think so. To meet its targets Sandvik would need an extra >SKr1.0bn savings on top of the current restructuring measures (>SKr2bn cost savings, of which roughly SKr1.4-1.5bn should be delivered by end-2016), and that is assuming no further deterioration in end-markets. more→ | | The current valuation factors in too much growth. Consensus and management targets are both overly optimistic given the growth potential of Sandvik's end markets. Our differentiated analysis suggests SMS will likely underperform, making targets even more challenging. | | We forecast no growth for SMS (two-thirds of profits) and flat margins, as we think the penetration of new machine tool technologies will likely be negative for cutting tool demand. This indicates Sandvik would need a 40-50% increase in clean EBIT in the remaining units to meet consensus forecasts. | | Sandvik's current valuation appears to assign as much as 44% of the company's value to the terminal years, above the historical average of 25%, and the second-highest read since 2000. Current levels also imply terminal growth of 6.6%, above the historical median of 4.1%. more→ | | 
Value drivers | Volume growth | Transaction growth | Clean EBIT margin (%) | EPS 2017E | ROCE (%) | SKr 100 upside | 4% | 0% | 14% | SKr7 per share | 18% | SKr 71 base case | -1% | 0% | 13% | SKr4.7 p. share | 13% | SKr 50 downside | -5% | 0% | 9% | SKr3.5 p. share | 9% | Source: UBS | | | | | |
more→ | | Sandvik has three main business areas: tooling (c30% of group sales), mining and construction (c45%), and materials technology (c25%). In addition, Sandvik consolidates Seco Tools... more → |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Are manufacturing innovations impairing Sandvik Machining Solutions' growth potential? UBS VIEW Yes. We assume no organic growth and a flat EBIT margin (20%) for the forecast period at SMS. This factors in the penetration of new machine tool technologies but does not fully incorporate the potential competitive threat from incumbent and Chinese cutting tool players. EVIDENCE Organic growth at Sandvik Machining Solutions, demand for whose products has historically tracked industrial production, has been underperforming global industrial production growth by 100-300bps on average since 2015. The advent of lighter materials as well as new and more efficient technologies has now reached critical mass in some cases (we estimate that, for example, 5-axis machining now accounts for c10% of the machine tools market). These technologies materially increase metalworking productivity, reducing demand for insert consumables meaningfully (in some cases at a 1 to 4 ratio), which in turn impacts demand for cutting tools. Our analysis shows that the penetration of 5-axis machine tools, among other innovations, could result in flat to negative demand growth for inserts over the next decade as supply becomes even more competitive, especially in the mid-market segment. WHAT'S PRICED IN? Sandvik shares appear to be pricing in a sharp recovery in growth, supported by growth in its end-markets as well as its profitability, driven by new management restructuring actions. In our view, the 7% implied terminal growth implied by the shares at current levels overstates the group's growth potential. SMS, which represents over two-thirds of Sandvik's profits, is now ex-growth, in our opinion. |
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Machining Solutions' low growth explainedMachining Solutions has been underperforming global
industrial production Sandvik Machining Solutions (SMS), the group's largest division (c40% of revenues), is focused on cutting tools and tooling systems for metal cutting. Broadly a proxy for industrial production, we believe is now ex-growth, having meaningfully underperformed global industrial production over the last 5 years, and by as much as 3% on average since Q4 12. Before 2013, SMS had only underperformed industrial production during periods of negative industrial production growth (like the 2009 economic downturn), accompanied by heavy destocking. Lately, since global industrial production is actually growing, SMS's poor organic growth is relatively unrelated to weakness manufacturing output or in commodity end-markets (which represent only a minor proportion of its revenues). We believe this underperformance has been driven by the introduction of new and more efficient technologies (e.g. the use of lighter materials and multi-axis machining) reducing the demand for cutting tool insert consumables, as well as by increased market penetration of mid-market offerings which offer adequate performance at a lower price. Figure 1: SMS's organic growth underperforming global IP | | Figure 2: SMS's recent underperformance not driven by IP contraction | 
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| Source: Company data, UBS | | Source: Company data, UBS |
Innovation impacting demand for SMS's toolsThe widening adoption of new technologies is denting demand for cutting tools Machine tools transform raw pieces of steel into industrial components for almost any type of industrial or consumer product. The main consumables used in the process are cutting tools, which are used to remove excess material from the worked piece. Cutting tools must be made of a material harder than the material which is to be cut, and the tool must be able to withstand the heat generated in the metal-cutting process. The evolution of machine tooling technology: About 30 years ago, metalworking started to switch from manual milling to computer numerically controlled (CNC) milling and CAD/CAM applications. This technology increased levels of automation and began a process that saw multiple machine benches working in stages consolidate into 2-axis, 3-axis and currently 5- to 9-axis machining. In this section we focus on the impact on the cutting tools industry of the widening adoption of the 5-and-above-axis machining, which has been driven by the decreasing complexity and increasing affordability of the CAD/CAM packages over the last 10 years, as well as the lower industrial growth we are currently navigating. The term “5-axis” refers to the number of directions in which the cutting tool can move…
…allowing for greater efficiency in the manufacturing process, including improved tool life and cycle time 5-axis machining: 5-axis machining provides infinite possibilities in terms of part sizes and shapes that can be produced. The term “5-axis” refers to the number of directions in which the cutting tool can move. On a 5-axis machining centre, the cutting tool moves across the X, Y and Z linear axes and rotates about the A and B axes to approach the workpiece from any direction (the figure below depicts 6-axis machining). A good way to picture this is the analogy with the principal axes of an aircraft. An aircraft in flight is free to rotate in three dimensions: pitch, nose up or down about an axis running from wing to wing; yaw, nose left or right about an axis running up and down; and roll, rotation about an axis running from nose to tail Figure 3: 5 axis metalworking use 5 of the 6 axis below | | Figure 4: How to picture 5 machine tooling axis | 
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| Source: Hurco North America | | Source: UBS |
Why is 5-axis machining interesting from a manufacturing perspective? There are numerous reasons why this technology is been widely adopted. Its key advantages include: Figure 5: Deflection amount formula | 
| Source: MST, MMC |
• Fewer machines involved in the process (in a typical process from 4 to 1) • Fewer human operators involved in the process (one per machine) • Fewer programs per machine (from one or two per machine to just one) • Fewer set-ups (from multiple set-ups to just one) Shorter is better: Improved tool life and cycle time is a result of tilting the tool/table to maintain optimum cutting position, better access to part geometry and constant chip load. Better access to part geometry also means decreased tool size, avoiding deflection (this at least doubles tool life/efficiency): (1) Deflection caused by the length of the cutting tool: This is a direct exponential relationship to deflection. According to the deflection amount formula, halving the size of the tool can decrease deflection by 8 times. (1) Deflection caused by the load: This is a direct and linear relationship to deflection, and typically depends on the material being worked. It is important, since lighter and lighter materials (carbon fibres, aluminium) are increasingly being used in industrial manufacturing processes (1) Deflection caused by the diameter of the cutting tool: This is an indirect and exponential relationship to deflection: the larger the diameter, the lower deflection. • Increased accuracy limits the number of errors and waste material in the process, resulting in good micro-geometrical surface topography, lower surface roughness as well as shorter polishing time. • Expanded capabilities and greater access to geometry increase design freedom. In short, the return on investment from upgrading to 5-axis machines is clear (15-20% shorter cycle times on average, according to our channel checks, and very attractive profit improvement). Figure 6: Benefits of 5-axis machining | | Figure 7: 5-axis machine tool | 
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| Source: Mazak | | Source: Mazak | Figure 8: Example on how 5-axis decreases the number of setups | | Figure 9: Better access to part geometry allows cutting tool to be shorter, avoiding deflection and, keeping other factors constant, doubling the tool life (at least) | 
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| Source: Pudak | | Source: Yamaseiki | Figure 10: ROI calculator | 
| Source: Hurco |
The implications for demand for cutting toolsFigure 11: 5-axis machine market size | 
| Source: IEK |
Whilst 5-axis machinery is not a new technology, its wider adoption in the machine tool market is a recent phenomenon, and with a penetration of 10% relative to total machine tool demand, and achieving growth in a weak industry, its relevance for the industry and the demand for inserts is starting to be felt, in our view. Although there is very limited information about the penetration of 5-axis machinery in manufacturing processes, our channel checks indicate a growing penetration of c10% of the overall machine tool market during 2015. Figure 12: Machine tool and 5-axis markets in US$ billion | | Figure 13: 5-axis share of machine tool market | 
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| Source: IEK, Gardner | | Source: IEK, Gardner |
The relevance of 5-axis was limited to industry suppliers until recently, when its penetration of the machine tool markets reached a level sufficient to impact machine tool suppliers as well as cutting tool producers, in our view. Based on industry data and our own assumptions, the introduction of new machine tool technologies like 5-axis could result in a structural no-growth or negative growth market for cutting tools. Our channel checks indicate the impact will likely be meaningful. Our base case assumes the following factors: • Industrial output growth of 3% long term. • 5-axis machine toll efficiency: reducing the number of machines, programs and set-ups from 4 or above to just 1. • 5-axis machine tools' metalworking market penetration of just over 10%. • 5-axis machine tool demand growth of 5% (5-10 year CAGR). Figure 14: (UBS base case) 5-axis growth impact on cutting tool demand | | Figure 15: Cutting tool demand, 10-year CAGR assuming one 5-axis machine subs 4 traditional machine tools | Assumptions | Long Term Assumptions | Comment | Output growth | 3% | In line with IP / GDP | 5 Axis efficiency | 4 | from 4-5 machines to 1 from Channel checks | 5 Axis current penetration | 10% | Channel Checks | 5 Axis org. growth | 5% | From Channel Checks | Cutting tool industry ASP average | 2 | $ per unit | Machine tool useful life | 20 | years | Growth Outcome on Cutting Tools | 0.1% | No Growth in Cutting tools demand |
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| | Source: UBS estimates | | Source: UBS estimates |
Figure 16: Cutting tools demand, 10-year CAGR assuming one 5-axis machine subs 3 traditional machine tools | | Figure 17: Cutting tools demand, 10-year CAGR assuming one 5-axis machine subs 2 traditional machine tools | 
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| Source: UBS | | Source: UBS | Figure 18: Cutting tools as a percentage of "typical" manufacturing costs | 
| Source: Sandvik |
Machine tool makers' channel checks Figure 19: Questions we asked 5-axis machine makers | CHANNEL CHECKS | DMG Mori | Okuma | Mazak | Hurco | Goodway | Johnford | QUESTIONS | ANSWERS | ANSWERS | ANSWERS | ANSWERS | ANSWERS | ANSWERS | 1) What is the investment needed (in your local currency) for a new 5 axis machine and/or what is the investment needed to transform a current process into 5 axis? | 5-axis average price ~50-55mn JPY
non 5-axis average price ~20-25mn JPY | 5-axis average price ~400-500K USD
non 5-axis average price ~300K USD | no information | 5-axis 30% - 50% more expensive | 5-axis 30% more expensive | subject to configuration | 2) Do you know how much of the total global machining is now based on 5 axis technology? If you don’t have the answer for global, is there a proxy for your local market? | 5-axis -15% of global machine tools | 5-axis ~20% of annual production | no information | no information | 5-axis insignificant to company | Company total installed machines ~6000, of which ~100 are 5-axis | 3) What is the expected growth rate of 5 axis for the next few years let's say 3 or 5 years? How does that compare to traditional machining technologies (no 5 axis)? | 5 axis growth positive | 5 axis growth positive | no information | 5 axis growth positive | no clear growth trend | no information | 4) One of the clear advantages of the 5 axis technology is the decreased need for cutting tools (longer tool life). On any average process, could you quantify the savings in unit terms from lower cutting tool inputs coming from | best possible surface finish as well as better tool life | 5-Axis maximises the machine's performance, thereby increasing the productivity | The shorter the tool the less prone it is to vibrate and chatter - this reduction of vibration will increase tool life | 5-axis use preserves tool life | subject to specific process | subject to specific process | 5) Are the cutting tools used for 5 axis cheaper than the ones used for more traditional machining technologies? | no information | no information | Tool prices for 5 axis would probably more expensive. These type of tools are not used in more conventional machining | The tool price for a 3 axis and the 5 axis machine will generally be the same. | no information | 5-axis use the same cutting tool as traditional machine, specialized cutting tool more expensive |
| Source: Company data, UBS |
An increasingly competitive market Low demand growth likely to be coupled with increasing competition We believe Sandvik Machining Solutions is widely seen as one of the most attractive assets in the group and also among European industrials more generally. It enjoys a leading position globally in a high-tech niche market. However, we think the market is overlooking the increasing competitive threat from mid-market brands, especially Chinese players. A threat to the market balance in cemented carbides is emerging from innovation in the machine tool end, which we think will likely be accompanied by an increasingly competitive supply base, not only from Chinese companies gaining share since 2008 through acquisitions and organic growth, but also from the emergence of a very competitive mid-market as an area of growth (including in 5-axis machining), as well as a more aggressive approach from Japanese players. In fact, our analysis indicates Iscar is the only incumbent that has been able to maintain and gain market share in recent years. Figure 20: Market share changes | | Figure 21: 2015 market shares (total market SKr160bn) | 
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| Source: Company data | | Source: Company data |
SMS is still the market leader in cemented carbide and tungsten cutting tools and related products, but is losing share, according to our analysis. Other, niche mid-market brands and IMC (Iscar) owned by Berkshire Hathaway, have all gained market share consistently. Number three Kennametal (KMT) has consistently lost market share over the last 8 years, like SMS. The charts above provide a good overview of the market structure as well as recent market share changes. That said, the structure can vary depending on how the market is defined, and by whom. Using its own market definition (SKr160bn market for cutting tools) Sandvik has a c20% share of the global market, but has been losing market share. Although the feared competitive threat from China Tungsten has failed to materialise in monetary terms (mostly driven by Chinese tariffs as well as the fall in rare earth and precious metal prices) we nonetheless note that China Tungsten has gained market share in recent years, as have other players. Figure 22: Market share changes 2008-15 | | 
| | Source: UBS | |
Market incumbents' profitability set to remain challengedFigure 23: Industry incumbent EBIT margins | 
| Source: Company data |
The players in the cemented carbide industry generate healthy operating margins. Sandvik is the most profitable (together with IMC), with margins having ranged between 20-24% in recent years (excluding 2009). Mitsubishi and Sumitomo follow, with margins in the mid to high teens, while Kennametal has lagged the peer group with margins of 10-15% in recent years. In 2010, China Tungsten generated a 15.7% gross margin, but disclosure since has been limited. What does this mean for our estimates? Where is consensus?We have cut our estimates on SMS's growth (to a flat CAGR) and margins (by 100bps on average). Overall this means an 8% cut to our SMS revenue estimates and a 10% cut to our EBIT call for 2017-21. At a group level, these changes represent a 6% downgrade to our clean EBIT estimates. Following these changes, we are now 6-12% below consensus for SMS's clean EBIT, and 60-130 bps below on EBIT margin; at group level, we are 3-5% below. Figure 24: Impact of changes to our SMS estimates on a standalone basis | 
| Source: Company data, UBS estimates | Figure 25: Difference to SMS consensus estimates | 
| Source: SME Direkt, company data, UBS estimates |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can the rest of the group offset the lack of growth at SMS? UBS VIEW No. SMS accounts for two-thirds of our clean EBIT estimate for Sandvik. A flat revenue and EBIT line at SMS means the rest of Sandvik would need to raise clean EBIT by an improbable 40-50% in order to meet consensus expectations and management guidance (SKr12.7bn, or SKr11.8bn FX-adjusted). EVIDENCE If, as we estimate, SMS's profits are set to stall or decline slightly, the rest of the group would need to generate SKr5.0-5.5bn profit in other divisions, versus a 2016 consensus expectation of SKr3.6bn. This implies a 40-50% increase that will mostly have to come from Sandvik's commodity end-market exposure, which we regard as highly improbable in the context of declining activity levels in the commodity end-markets projected for 2017, albeit with degree of stabilisation in 2018. WHAT'S PRICED IN? Consensus is roughly in line with company guidance, and assumes clean EBIT of SKr11.8bn by 2018, with SMS's clean EBIT growing >5% CAGR to SKr7.4bn by 2018 and the rest of Sandvik posting SKr4.4bn clean EBIT by 2018 (vs SKr3.6bn in 2016, a 22% increase over the period, or >10% CAGR). As discussed above, the more difficult operating environment for Sandvik Machining Solutions puts these estimates at risk of disappointment. | |
An offset from the rest of Sandvik is unlikely, in our viewIn our view, weak commodity equipment demand (mining, oil and infrastructure related) are set to remain a headwind for orders, services and pricing. Although we think the decline should moderate in 2016 and 2017, downside risks remain as Chinese demand for commodities is still very much driven by residential and non-residential construction activity. With pressures coming from a stagnant or declining order intake, and toughening pricing conditions in some of Sandvik's commodity end-markets, we see only limited scope for improvement, and definitely not as much as consensus is implying (we are 5% below consensus across Sandvik's Mining, Construction and Venture divisions; we see Sandvik's actions on central costs resulting in a lower-than-consensus corporate line). As mentioned above, a flat revenue and EBIT line at SMS means the rest of Sandvik would need to raise clean EBIT by 40-50% in order to meet consensus expectations. Within the context of current capital goods growth drivers, not only in terms of commodities but across almost all industries (click here for our latest sector update), we see a potential improvement on this scale as unlikely; indeed, we see downside to consensus estimates at group and divisional level. Figure 26: Sandvik's end-market exposure | | Figure 27: Consensus EBIT 2016-18 (SKr mn) | 
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| Source: Company data | | Source: SME Direkt | Figure 28: Sandvik group – consensus EBIT growth expectation | | Figure 29: Sandvik ex-SMS – implied consensus EBIT growth if SMS is flat | 
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| Source: SME Direkt, UBS estimates | | Source: SME Direkt, UBS estimates |
Figure 30: Weak capex environment 2016-18, flat at best to 2018E | | Figure 31: Commodity end-market capex remaining weak; not likely to recover until 2018 | 
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| Source: UBS estimates | | Source: UBS estimates |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can restructuring alone enable Sandvik to meet its earnings targets? UBS VIEW We do not think so. To meet its targets Sandvik would need an extra >SKr1.0bn savings on top of the current restructuring measures (>SKr2bn cost savings, of which roughly SKr1.4-1.5bn should be delivered by end-2016), and that is assuming no further deterioration in end-markets. EVIDENCE Sandvik's track record on cost savings is weak. The more than SKr16bn in cost-cutting initiatives announced since 2008 has failed to arrest the group's drifting operating margin, which has contracted by 350 bps since 2008, or prevent operating profit falling more than 20% to c.SKr10bn between 2008 and 2016 (SME consensus estimate). In our view, new management's recently announced aspiration to reduce the degree of centralisation at Sandvik will likely only partially help (central costs c.SKr1bn). WHAT'S PRICED IN? Consensus expects clean EBIT to increase 15% over 2016-18, to SKr11.8bn. We believe this cannot be achieved without the help of Sandvik's end-markets, especially if, as we think, SMS has entered a long-term low-growth environment. Sandvik's 14-15x EV/EBIT valuation at the moment clearly overstates the group's ability to grow its profits, in our view. On normalised 12x EV/EBIT (using Atlas Copco's long-term average) Sandvik's implied valuation yields a SKr74 share price (assuming SKr25bn net debt after adjusting for the potential divestment of Hyperion and Process systems on 12x as well). | |
Restructuring and divestment potential appear limitedDespite areas of weakness, net end-market exposure looks positive Sandvik's new management has embarked on a new set of actions and potential divestments of the group's underperforming assets, with the aim of improving operating performance and driving growth with a decentralised organisation. Although we embrace management's initiatives, we remain concerned about lacklustre growth, a lack of pricing power, and cost inflation trends (headcount, R&D), in addition to our concerns on valuation. Sandvik's financial 2018 targets: Sandvik is aiming at ≥7% EBIT growth, a ≥3% percentage point improvement of ROCE, net debt/equity (including pension liabilities) of 0.8x, and a 50% dividend pay-out ratio, based off SKr10.4bn EBIT in 2015 (including SKr1.99bn positive FX), excluding material price effects as well as SKr558mn from other operations (Hyperion and Process Systems). The targeted improvement excludes potential nonrecurring items, the impact of FX (we estimate negative SKr0.9bn in 2016) as well as metal price effects at Sandvik Materials Technology (we estimate negative SKr100 for 2016). Net of FX and metal charges, Sandvik aims at SKr11.7bn EBIT by 2018, excluding Hyperion and Process systems. On these numbers, the CAGR equates to a little over 4%, which we think is already factored into consensus numbers at SKr11.8bn for 2018 and, in our view, overlooks the risks inherent in Sandvik's end-markets and the group's low likelihood of growing its top line over the period. Figure 32: Sandvik's quarterly savings are losing momentum (total program >SKr2bn by 2018) SKr mn | 
| Source: Company data, UBS estimates |
Figure 33: >SKr16bn saving initiatives announced thus fair have been unable to arrest -350 bps margin drift since 2008…. | | Figure 34: and unable to prevent operating profits sharply falling by over 20% to c.SKr10bn from 2008 until 2016 (SME consensus estimate) | 
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| Source: Company data, UBS | | Source: Company data, UBS |
| | | WHAT'S PRICED IN? | return ↑ | 
| Sandvik's share price seems to discount an (in our view unlikely) growth picture that given the stagnating nature of its addressable end-markets
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Sandvik's current valuation appears to assign as much as 44% of the company's value to terminal growth, above the historical average of 25%, and the second-highest reading since 2000. On this basis we derive an implied terminal growth rate of 6.6%, above the historical median of 4.1%, and only matched on a few occasions since 2000. Decomposing Sandvik's share price, we estimate cSKr49 is justified by capitalised current earnings, with the balance (over SKr45) reflecting future expectations. In our view, this is too aggressive, given the current global growth outlook, and specifically the stagnating context of Sandvik's main addressable markets. Figure 35: Sandvik's share price – implied terminal growth | | Figure 36: Share price broken down by constituent parts | 
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| Source: UBS estimates | | Source: UBS estimates |
At current levels, Sandvik trades at 15x 2017E EV/EBIT, versus a long-term average of 12x. Similarly, Sandvik trades at a small premium to the industry, whereas historically it has typically traded at a small discount. Figure 37: Sandvik EV/EBIT vs historical average | | Figure 38: Sandvik EV/revenues vs implied margins | 
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| Source: IBES, UBS estimates | | Source: IBES, UBS estimates |
We have cut our estimates for the group for the forecast period, with SMS mostly accountable for the changes. Our new estimates are below consensus for the next 3 years, and below company guidance for 2018. Figure 39: UBS estimates versus consensus | Sandvik | | 2016E | | | 2017E | | 2018E | SKr Mn | UBSe | Cons | Diff | UBSe | Cons | Diff | UBSe | Cons | Diff | Orders | 78,008 | 79,630 | -2% | 78,046 | 81,786 | -5% | 79,558 | 84,655 | -6% | Sales | 78,913 | 80,746 | -2% | 78,149 | 81,934 | -5% | 79,401 | 84,223 | -6% | Mining | 19,909 | 20,781 | -4% | 19,925 | 21,435 | -7% | 20,654 | 22,255 | -7% | Machining Solutions Sales | 31,336 | 31,828 | -2% | 31,327 | 32,663 | -4% | 31,317 | 33,566 | -7% | Materials Technology | 12,266 | 12,774 | -4% | 11,463 | 12,209 | -6% | 11,786 | 12,390 | -5% | Construction | 7,878 | 8,056 | -2% | 7,688 | 8,246 | -7% | 7,706 | 8,446 | -9% | Venture | 7,504 | 7,239 | 4% | 7,727 | 7,445 | 4% | 7,918 | 7,643 | 4% | Adj. EBIT | 9,780 | 10,203 | -4.1% | 10,199 | 10,878 | -6.2% | 10,858 | 11,756 | -7.6% | Margin (%) | 12.4% | 12.6% | -2% | 13.1% | 13.3% | -1.7% | 13.7% | 14.0% | -2.0% | Mining | 2,793 | 2,985 | -6% | 3,049 | 3,281 | -7% | 3,347 | 3,583 | -7% | Margin (%) | 14.0% | 14.4% | -2% | 15.3% | 15.3% | 0% | 16.2% | 16.1% | 1% | Machining Solutions EBIT | 6,404 | 6,621 | -3% | 6,391 | 7,020 | -9% | 6,319 | 7,381 | -14% | Margin (%) | 20.4% | 20.8% | -2% | 20.4% | 21.5% | -5% | 20.2% | 22.0% | -8% | Materials Technology | 892 | 906 | -1% | 661 | 683 | -3% | 722 | 733 | -1% | Margin (%) | 7.3% | 7.1% | 3% | 5.8% | 5.6% | 3% | 6.1% | 5.9% | 4% | Construction | 293 | 294 | 0% | 368 | 397 | -7% | 434 | 461 | -6% | Margin (%) | 3.7% | 3.6% | 2% | 4.8% | 4.8% | -1% | 5.6% | 5.5% | 3% | Venture | 400 | 394 | 2% | 481 | 491 | -2% | 589 | 607 | -3% | Margin (%) | 5.3% | 5.4% | -2% | 6.2% | 6.6% | -6% | 7.4% | 7.9% | -6% | Corporate Line | -1,002 | -996 | 1% | -751 | -994 | -24% | -553 | -1,008 | -45% | Net Profit | 4,927 | 5,265 | -6% | 5,956 | 6,773 | -12% | 6,457 | 7,550 | -14% | EPS | 3.93 | 4.20 | -6% | 4.75 | 5.40 | -12% | 5.15 | 6.02 | -14% | DPS | 2.50 | 2.63 | -5% | 2.80 | 2.84 | -12% | 3.00 | 3.18 | -6% |
| Source: SME Direkt, UBS estimates |
Valuation methodologyOur price target, which is derived from the average of our FCF and multiple valuation methodologies, is unchanged. Sandvik trades at close to 15x EV/EBIT on our 2017 estimates, which we think overstates the group's ability to grow its profits. At our price target, would Sandvik trade at 12x 2017E EV/EBIT (13x in 2016E). On normalised 12x EV/EBIT (using Atlas Copco's long-term average) Sandvik's implied valuation would be SKr74 share price (assuming SKr25bn net debt after adjusting for the potential divestment of Hyperion and Process systems at 12x as well). Figure 40: Changes to our estimates in detail | Estimates | Act | Act | New | New | Diff (%) | Old | New | Diff (%) | Old | New | Diff (%) | SKr | 2014 | 2015 | 2016 | 2016 | 2016 | 2017 | 2017 | 2017 | 2018 | 2018 | 2018 | Sales | 88,821 | 88,416 | 78,913 | 78,913 | 0% | 78,982 | 78,149 | -1% | 81,119 | 79,401 | -2% | Svk Machining Solutions | 30,856 | 32,652 | 31,336 | 31,336 | 0% | 31,797 | 31,327 | -1% | 32,741 | 31,317 | -4% | EBIT (pre-exceptional) | 10,128 | 10,593 | 9,708 | 9,780 | 0.7% | 10,437 | 10,199 | -2.3% | 11,368 | 10,858 | -4% | EBIT margin | 11% | 12% | 12% | 12% | 0% | 13% | 13% | -0.2% | 14% | 14% | 0% | Svk Machining Solutions | 6,159 | 6,579 | 6,404 | 6,404 | 0% | 6,604 | 6,391 | -3% | 6,836 | 6,319 | -8% | Margin (%) | 20% | 20% | 20% | 20% | 0% | 21% | 20% | -0.4% | 21% | 20% | -0.7% | Profit before Tax (PBT) | 8,264 | 5,308 | 7,008 | 7,080 | 1% | 8,568 | 8,330 | -3% | 9,538 | 9,030 | -5% | Net Income Reported | 5,973 | 2,382 | 4,876 | 4,927 | 1% | 6,126 | 5,956 | -3% | 6,820 | 6,457 | -5% | UBS EPS | 4.8 | 5.4 | 4.6 | 4.6 | 1% | 4.9 | 4.7 | -3% | 5.4 | 5.2 | -5% |
| Source: Company data, UBS estimates | Figure 41: Multiples valuation methodology | | Figure 42: FCF valuation methodology | Static Valuation Methodologies | 69 | PE implied 2016 | 68 | PE implied 2017 | 63 | PE implied 2018 | 63 | Long Term PE | 14 | PE Based | 64 | EV based on EBIT 2017 Adj. | 10199 | EV based on EBIT '16 -'17 Reported | 9199 | EV to Adjusted EBIT | 70 | EV to Reported EBIT | 53 | Industry EV/Sales | 74 |
| | FCF Valuation Methodologies | 73 | DCF Value | 73 | RI Value | 70 | DDM Value | 76 | Pre Tax CoD (%) | 5% | Risk Free Rate | 4% | Market Risk Premium | 4% | Beta | 1.2 | WACC | 8.0% | Implied g (%) | 1% | Implied Dividend Growth | 5% |
| Source: UBS estimates | | Source: UBS estimates |
Where could we be wrongPositive risks: Emerging markets (China) stimulating infrastructure or residential new starts cycle could result in positive revisions to our estimates. Internal restructuring efforts, if meaningful and pre-emptive rather than reactive, could also result in further positive reviews to our estimates. . Negative risks: Weakness in the oil and gas mid- and downstream chains, combined with further deflationary pressures across Sandvik's portfolio, could result in further negative revisions to our estimates.
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
Value drivers | Volume growth | Transaction growth | Clean EBIT margin (%) | EPS 2017E | ROCE (%) | SKr 100 upside | 4% | 0% | 14% | SKr7 per share | 18% | SKr 71 base case | -1% | 0% | 13% | SKr4.7 p. share | 13% | SKr 50 downside | -5% | 0% | 9% | SKr3.5 p. share | 9% | Source: UBS | | | | | |
| Sandvik is trading at cSKr94 per share |
Risk to the share price is heavily skewed (7:1) to the upside Upside scenario (SKr100): Our upside scenario implies a SKr100 per share fair value. This factors in slight growth in mining capex/equipment assumptions (4% CAGR), mining margins improving from trough levels (adding SKr27 to our base-case price target) and, more importantly in our opinion, the disposal of Sandvik’s underperforming divisions – Construction, segments belonging to surface Mining and SMT (an additional c.SKr3 per share). Mining capex grows 4% to 2015E: on this basis, mining orders and revenue grow at a 4% CAGR through the forecast period. Mining margins reach 20% by 2017E. This scenario analysis yields an EBIT margin of c14% and 25% upside to current share price. Base case (SKr71): Driven by poor end-market dynamics, we see declining revenues for 2016 and 2017, and a soft recovery thereafter (2%). We factor in a small improvement in the EBIT margin for 2016, to 12.4%, to 13.1% in 2017, and c14% thereafter. We see Sandvik becoming more focused on efficiencies and cash generation, and potentially additional restructuring and working capital efficiency initiatives to be announced as its end-markets prove lacklustre. Capital efficiency increases, but the process will take time. We see c10% average downside to consensus estimates for 2016-18. At our price target, Sandvik trades on 12x 2017E EV/EBIT. Downside scenario (SKr50): Our downside scenario assumes a mining capex cliff and no growth in Sandvik’s SMT division. Mining margins decrease and SMT margins go to low-single-digits, with the company failing to restructure/dispose of the SMT operations. Mining equipment orders deteriorate c40% (versus 25% in our base case). Due to increased competition and a lower value of orders, we see mining equipment and services margins declining from their current 17% (excluding Mining Systems) to 12% by 2017E. SMS growth of 1% underperforms its historical long-term average of 3.7%. SMT's organic growth averages -1%. This scenario implies a fair value of SKr50 per share (c.40% downside).
| | | COMPANY DESCRIPTION | return ↑ | Market Cap | SKr117.81bn | Shares Outstanding | 1.25bn (COM) | Industry | Industrial, Diversified | Region | Europe | Website | www.sandvik.com |
Sandvik has three main business areas: tooling (c30% of group sales), mining and construction (c45%), and materials technology (c25%). In addition, Sandvik consolidates Seco Tools (60% ownership), an independently listed tooling company that competes with Sandvik Tooling. Sandvik's main competitors are: in tooling, Kennametal, Iscar and a number of Japanese players; in mining and construction, Atlas Copco; in materials technology (stainless steel), Sandvik is a niche player, but competitors include Sumitomo, Salzgitter and Tubacex. By region, its greatest exposure is to Europe (c40%), NAFTA and Asia (c18% each). Industry outlook The industrial economy growth is subdued, with growth stagnation and lack of pricing power limiting the profitability upside of the sector. This, in our view, is only partially reflected on current valuations for the sector. Within this framework, industrial driven short cycle demand is expected to show a stagnant progression after a short lived bounce, although easier comps will make it for a better 2H16. We see commodity end market equipment demand continuing its decline through 2016 and 2017 amid slower decline rates, with overall capex budgets still under pressure, only recovering slightly by 2018. European construction equipment volumes have been and continue to be lacklustre. | Revenues by region (%) 
EBIT by product segment 
Source: Company data, UBSe |
| | | | Sandvik (SAND.ST) | | | | | | | | | | | Revenues | 87,328 | 88,821 | 88,416 | 78,913 | -10.7 | 78,149 | -1.0 | 79,401 | 80,659 | 81,961 | Gross profit | 31,028 | 31,066 | 33,112 | 30,939 | -6.6 | 31,031 | 0.3 | 31,528 | 31,781 | 32,033 | EBITDA (UBS) | 15,468 | 14,273 | 15,914 | 14,688 | -7.7 | 15,060 | 2.5 | 15,797 | 16,144 | 16,488 | Depreciation & amortisation | (4,690) | (4,145) | (5,321) | (4,908) | -7.8 | (4,861) | -1.0 | (4,939) | (5,016) | (5,097) | EBIT (UBS) | 10,778 | 10,128 | 10,593 | 9,780 | -7.7 | 10,199 | 4.3 | 10,858 | 11,128 | 11,391 | Associates & investment income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other non-operating income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net interest | (1,885) | (1,856) | (1,963) | (1,900) | 3.2 | (1,869) | 1.6 | (1,828) | (1,794) | (1,157) | Exceptionals (incl goodwill) | 0 | 0 | (3,321) | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 8,893 | 8,272 | 5,308 | 7,880 | 48.4 | 8,330 | 5.7 | 9,030 | 9,333 | 10,234 | Tax | (1,745) | (2,272) | (1,865) | (1,982) | -6.3 | (2,291) | -15.6 | (2,483) | (2,567) | (2,814) | Profit after tax | 7,148 | 6,000 | 3,443 | 5,897 | 71.3 | 6,039 | 2.4 | 6,547 | 6,767 | 7,420 | Preference dividends | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Minorities | (6) | (19) | (53) | (71) | -33.4 | (83) | -17.7 | (90) | (93) | (102) | Extraordinary items | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net earnings (local GAAP) | 7,142 | 5,981 | 3,390 | 5,827 | 71.9 | 5,956 | 2.2 | 6,457 | 6,673 | 7,318 | Net earnings (UBS) | 7,142 | 5,981 | 6,712 | 5,827 | -13.2 | 5,956 | 2.2 | 6,457 | 6,673 | 7,318 | Tax rate (%) | 19.6 | 27.5 | 35.1 | 25.2 | -28.4 | 27.5 | 9.3 | 27.5 | 27.5 | 27.5 |
| | | | | | | | | | | EPS (UBS, diluted) | 5.69 | 4.77 | 5.35 | 4.65 | -13.2 | 4.75 | 2.2 | 5.15 | 5.32 | 5.83 | EPS (local GAAP, diluted) | 5.69 | 4.77 | 2.70 | 4.65 | 71.9 | 4.75 | 2.2 | 5.15 | 5.32 | 5.83 | EPS (UBS, basic) | 5.73 | 4.77 | 5.35 | 4.65 | -13.2 | 4.75 | 2.2 | 5.15 | 5.32 | 5.83 | Net DPS (SKr) | 3.50 | 3.50 | 2.50 | 2.50 | 0.0 | 2.80 | 12.0 | 3.00 | 3.50 | 3.84 | Cash EPS (UBS, diluted) | 9.43 | 8.07 | 9.59 | 8.56 | -10.8 | 8.62 | 0.8 | 9.08 | 9.32 | 9.90 | Book value per share | 38.21 | 37.82 | 38.14 | 39.03 | 2.3 | 41.21 | 5.6 | 43.61 | 46.01 | 48.42 | Average shares (diluted) | 1,254.39 | 1,254.39 | 1,254.39 | 1,254.39 | 0.0 | 1,254.39 | 0.0 | 1,254.39 | 1,254.39 | 1,254.39 |
| | | | | | | | | | | Tangible fixed assets | 28,144 | 27,609 | 26,530 | 26,156 | -1.4 | 25,590 | -2.2 | 25,007 | 25,045 | 25,076 | Intangible fixed assets | 12,649 | 18,323 | 18,374 | 18,525 | 0.8 | 18,548 | 0.1 | 18,579 | 18,687 | 18,804 | Investments | 7,652 | 8,279 | 8,001 | 8,060 | 0.7 | 8,114 | 0.7 | 8,162 | 8,205 | 8,240 | Other assets | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total fixed assets | 48,446 | 54,211 | 52,904 | 52,741 | -0.3 | 52,253 | -0.9 | 51,748 | 51,937 | 52,119 | Net working capital | 34,869 | 36,020 | 32,966 | 31,385 | -4.8 | 30,768 | -2.0 | 31,201 | 31,721 | 32,263 | Cash | 9,993 | 6,327 | 6,376 | 9,504 | 49.1 | 13,611 | 43.2 | 16,952 | 19,485 | 22,009 | Short term debt | (2,698) | (2,679) | (1,683) | (1,683) | 0.0 | (1,683) | 0.0 | (1,683) | (1,683) | (1,683) | Long term debt | (26,797) | (30,370) | (26,386) | (26,386) | 0.0 | (26,386) | 0.0 | (26,386) | (26,386) | (26,386) | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (debt) / cash | (19,502) | (26,722) | (21,693) | (18,565) | 14.4 | (14,458) | 22.1 | (11,117) | (8,584) | (6,060) | Other debt-deemed liabilities | (12,681) | (12,841) | (13,055) | (13,254) | -1.5 | (13,437) | -1.4 | (13,601) | (13,743) | (13,861) | Provisions & non-debt deemed liabs | (1,799) | (1,799) | (1,799) | (1,799) | 0.0 | (1,799) | 0.0 | (1,799) | (1,799) | (1,799) | Total equity | 49,333 | 48,869 | 49,325 | 50,508 | 2.4 | 53,328 | 5.6 | 56,432 | 59,532 | 62,661 | Minority interests | (1,409) | (1,428) | (1,481) | (1,552) | -4.8 | (1,635) | -5.4 | (1,725) | (1,818) | (1,920) | Common s/h equity | 47,924 | 47,441 | 47,844 | 48,956 | 2.3 | 51,693 | 5.6 | 54,707 | 57,713 | 60,741 | Operating invested capital | 73,864 | 80,153 | 76,071 | 74,267 | -2.4 | 73,108 | -1.6 | 72,988 | 73,655 | 74,343 | Total capital employed | 81,516 | 88,432 | 84,072 | 82,327 | -2.1 | 81,222 | -1.3 | 81,150 | 81,859 | 82,583 |
| | | | | | | | | | | EBIT (UBS) | 10,778 | 10,128 | 10,593 | 9,780 | -7.7 | 10,199 | 4.3 | 10,858 | 11,128 | 11,391 | Depreciation & amortisation | 4,690 | 4,145 | 5,321 | 4,908 | -7.8 | 4,861 | -1.0 | 4,939 | 5,016 | 5,097 | Net change in working capital | 1,672 | 487 | 3,142 | 866 | -72.4 | 533 | -38.4 | (362) | (424) | (441) | Net interest | (1,885) | (1,856) | (1,963) | (1,900) | 3.2 | (1,869) | 1.6 | (1,828) | (1,794) | (1,157) | Tax paid | (1,745) | (1,899) | (1,865) | (1,982) | -6.3 | (2,291) | -15.6 | (2,483) | (2,567) | (2,814) | Other operating | (6) | (392) | (3,374) | (71) | 97.9 | (83) | -17.7 | (90) | (93) | (102) | Operating cash flow | 13,503 | 10,613 | 11,853 | 11,601 | -18.4 | 11,351 | 0.3 | 11,033 | 11,265 | 11,973 | Tangible capital expenditure | (4,185) | (4,797) | (4,095) | (4,086) | 0.2 | (4,319) | -5.7 | (4,386) | (5,163) | (5,244) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Equity free cash flow | 9,319 | 5,816 | 7,758 | 7,515 | -3.1 | 7,031 | -6.4 | 6,647 | 6,102 | 6,729 | Net (acquisitions) & disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Equity dividends paid | (4,392) | (4,390) | (3,136) | (3,136) | 0.0 | (3,512) | -12.0 | (3,763) | (4,390) | (4,814) | Share issues / (buybacks) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net other cash flows | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Cash flow (inc)/dec in net debt | 4,927 | 1,426 | 4,622 | 4,379 | -5.3 | 3,519 | -19.6 | 2,884 | 1,712 | 1,915 | FX / non cash items | (7,614) | (8,646) | 407 | (1,252) | - | 588 | - | 456 | 821 | 609 | Balance sheet (inc)/dec in net debt | (2,686) | (7,220) | 5,029 | 3,128 | -37.8 | 4,107 | 31.3 | 3,341 | 2,533 | 2,524 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.
Sandvik (SAND.ST) | | | | | | | | | P/E (local GAAP, diluted) | 16.3 | 18.2 | 32.3 | 20.2 | 19.7 | 18.2 | 17.6 | 16.0 | P/E (UBS, diluted) | 16.3 | 18.2 | 16.3 | 20.2 | 19.7 | 18.2 | 17.6 | 16.0 | P/CEPS | 9.8 | 10.8 | 9.1 | 10.9 | 10.9 | 10.3 | 10.0 | 9.5 | Equity FCF (UBS) yield % | 8.0 | 5.3 | 7.1 | 6.4 | 6.0 | 5.7 | 5.2 | 5.7 | Net dividend yield (%) | 3.8 | 4.0 | 2.9 | 2.7 | 3.0 | 3.2 | 3.7 | 4.1 | P/BV x | 2.4 | 2.3 | 2.3 | 2.4 | 2.3 | 2.1 | 2.0 | 1.9 | EV/revenues (core) | 1.7 | 1.7 | 1.7 | 1.9 | 1.9 | 1.8 | 1.8 | 1.7 | EV/EBITDA (core) | 9.8 | 10.3 | 9.3 | 10.4 | 9.9 | 9.2 | 8.9 | 8.5 | EV/EBIT (core) | 14.1 | 14.5 | 13.9 | 15.6 | 14.6 | 13.4 | 12.9 | 12.4 | EV/OpFCF (core) | 13.5 | 15.5 | 12.5 | 14.4 | 13.8 | 12.8 | 13.0 | 12.5 | EV/op. invested capital | 2.1 | 1.9 | 1.9 | 2.0 | 2.0 | 2.0 | 2.0 | 1.9 |
| | | | | | | | | Market cap. | 116,757 | 109,097 | 109,587 | 117,411 | 117,411 | 117,411 | 117,411 | 117,411 | Net debt (cash) | 25,989 | 30,306 | 28,114 | 24,986 | 20,879 | 17,538 | 15,005 | 12,481 | Buy out of minorities | 1,409 | 1,428 | 1,481 | 1,552 | 1,635 | 1,725 | 1,818 | 1,920 | Pension provisions/other | 8,053 | 6,391 | 8,424 | 8,589 | 8,737 | 8,866 | 8,974 | 9,058 | Total enterprise value | 152,208 | 147,222 | 147,606 | 152,537 | 148,661 | 145,540 | 143,209 | 140,870 | Non core assets | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Core enterprise value | 152,208 | 147,222 | 147,606 | 152,537 | 148,661 | 145,540 | 143,209 | 140,870 |
| | | | | | | | | Revenue | -11.4 | 1.7 | -0.5 | -10.7 | -1.0 | 1.6 | 1.6 | 1.6 | EBITDA (UBS) | -18.9 | -7.7 | 11.5 | -7.7 | 2.5 | 4.9 | 2.2 | 2.1 | EBIT (UBS) | -26.9 | -6.0 | 4.6 | -7.7 | 4.3 | 6.5 | 2.5 | 2.4 | EPS (UBS, diluted) | -23.7 | -16.3 | 12.2 | -13.2 | 2.2 | 8.4 | 3.4 | 9.7 | Net DPS | -45.8 | 0.0 | -28.6 | 0.0 | 12.0 | 7.1 | 16.7 | 9.7 |
| | | | | | | | | Gross profit margin | 35.5 | 35.0 | 37.4 | 39.2 | 39.7 | 39.7 | 39.4 | 39.1 | EBITDA margin | 17.7 | 16.1 | 18.0 | 18.6 | 19.3 | 19.9 | 20.0 | 20.1 | EBIT margin | 12.3 | 11.4 | 12.0 | 12.4 | 13.1 | 13.7 | 13.8 | 13.9 | Net earnings (UBS) margin | 8.2 | 6.7 | 7.6 | 7.4 | 7.6 | 8.1 | 8.3 | 8.9 | ROIC (EBIT) | 14.7 | 13.2 | 13.6 | 13.0 | 13.8 | 14.9 | 15.2 | 15.4 | ROIC post tax | 11.8 | 9.5 | 10.6 | 9.7 | 10.0 | 10.8 | 11.0 | 11.2 | ROE (UBS) | 14.9 | 12.5 | 14.1 | 12.0 | 11.8 | 12.1 | 11.9 | 12.4 |
| | | | | | | | | Net debt / EBITDA | 1.3 | 1.9 | 1.4 | 1.3 | 1.0 | 0.7 | 0.5 | 0.4 | Net debt / total equity % | 39.5 | 54.7 | 44.0 | 36.8 | 27.1 | 19.7 | 14.4 | 9.7 | Net debt / (net debt + total equity) % | 28.3 | 35.4 | 30.5 | 26.9 | 21.3 | 16.5 | 12.6 | 8.8 | Net debt/EV % | 12.8 | 18.2 | 14.7 | 12.2 | 9.7 | 7.6 | 6.0 | 4.3 | Capex / depreciation % | 89.2 | 128.4 | 83.3 | 90.8 | 97.0 | 96.8 | 112.0 | 111.8 | Capex / revenue % | 4.8 | 5.4 | 4.6 | 5.2 | 5.5 | 5.5 | 6.4 | 6.4 | EBIT / net interest | 5.7 | 5.5 | 5.4 | 5.1 | 5.5 | 5.9 | 6.2 | 9.8 | Dividend cover (UBS) | 1.6 | 1.4 | 2.1 | 1.9 | 1.7 | 1.7 | 1.5 | 1.5 | Div. payout ratio (UBS) % | 61.1 | 73.4 | 46.7 | 53.8 | 59.0 | 58.3 | 65.8 | 65.8 |
| | | | | | | | | Others | 87,328 | 88,821 | 88,416 | 78,913 | 78,149 | 79,401 | 80,659 | 81,961 | Total | 87,328 | 88,821 | 88,416 | 78,913 | 78,149 | 79,401 | 80,659 | 81,961 |
| | | | | | | | | Others | 10,778 | 10,128 | 10,593 | 9,780 | 10,199 | 10,858 | 11,128 | 11,391 | Total | 10,778 | 10,128 | 10,593 | 9,780 | 10,199 | 10,858 | 11,128 | 11,391 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation-24.1% | Forecast dividend yield2.7% | Forecast stock return-21.4% | Market return assumption4.4% | Forecast excess return-25.8% |
| UBS EPS and consensus EPS The UBS EPS is an adjusted diluted EPS metric. It is calculated using the UBS analyst's interpretation of earnings suitable for valuation purposes divided by the diluted number of shares. This may differ to the way the consensus EPS metric has been calculated. Valuation Method and Risk Statement Sandvik operates in cyclical markets and its financial performance is sensitive to changes in global industrial activity. The share price and our forecasts can be impacted by changes to expectations for economic indicators such as industrial production and GDP. In addition Sandvik is exposed to currency movements. Major currencies include the USD and the EUR.
Our price target is the average of our FCF (DCF, Residual Income, DCF) and multiples valuation methodologies (P/E, EV/EBIT, EV/Revenues).
Required Disclosures This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 07 September 2016 03:35 AM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, 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 by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 47% | 32% | Neutral | FSR is between -6% and 6% of the MRA. | 38% | 25% | Sell | FSR is > 6% below the MRA. | 15% | 21% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 30 June 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Limited: Guillermo Peigneux Lojo. UBS Ltd Stockholm branch: Magnus Kruber, CFA. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | Sandvik | SAND.ST | Sell | N/A | SKr93.40 | 06 Sep 2016 |
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Sandvik (SKr) 
Source: UBS; as of 06 Sep 2016 |
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