EUR 850.00 For Business Accounts Only

Morningstar | A focus on operating efficiencies should help Air Liquide improve its long-term operating margins.

The favorable structure of the industrial gas, or IG, industry and good growth potential in emerging markets should bode well for narrow-moat Air Liquide during the coming decades.Although IG represents a small portion of a customer's cost structure, a reliable supply is vital in many production processes. Its importance means that major customers are willing to sign long-term take-or-pay contracts (10-20 years) that offer attractive returns, in part by indexing selling prices to the main variable costs suppliers face (electricity and natural gas).Another attraction is the industry's broad reach. Industrial gases are prevalent throughout the economy, which can moderate the effects of an industry-specific downturn. Secular growth in healthcare spending and electronics are company-specific positives, as Air Liquide generated 18% and 9%, respectively, of its 2017 revenue from the sector.Air Liquide is investing to exploit significant growth in emerging markets. Within its dominant gas and services segment (which accounted for 96% of total 2016 sales) emerging-market projects represent more than 60% of its new business portfolio, up from around 40% five years ago. Additionally, Air Liquide estimates that its installed oxygen capacity increased to more than 900,000 tons per day in 2017, roughly a 9% compound annual growth rate over five years. As Chinese firms increasingly outsource their gas needs, we believe this will create new growth opportunities.However, emerging-market growth has also attracted new competition. In China, for example, large global players and several local firms both compete for business, which might pressure returns lower as each vies for scale and share amid a slower pace of growth. We believe global demand growth for IGs will continue to outpace GDP growth rates, owing to major energy and related infrastructure development globally, plus rising environmental standards in developed nations. Larger projects in turn could attract heightened competition. Overall, we judge that Air Liquide's prospects are bright, given its global positioning, strong technological capabilities, financial strength, and long experience operating in emerging markets.