Morningstar | Air Liquide Ends 2018 With a Solid 4Q; Modestly Raising FVE
We modestly raise our fair value estimate for Air Liquide to EUR 109 from EUR 108 after the narrow-moat industrial gas producer announced solid fourth-quarter results, growing sales in all geographies and end markets. The fair value increase is primarily due to time value of money since our last update. Nothing in the earnings release fundamentally alters our long-term outlook, and we remain optimistic about the company’s prospects.Full-year revenue grew roughly 3% year over year (6% on a comparable basis), with all segments contributing. The start-up of the world’s largest air separation unit in South Africa fueled impressive 15% growth in the Middle East and Africa region. Asia-Pacific also posted a notable 8% year-over-year revenue growth rate, while sales in the Americas and Europe grew 5% and 3%, respectively. Overall, Air Liquide continues to deliver consistent sales growth and solid margins.
Cumulative operating efficiency savings from the Airgas merger have reached management’s original $300 million target in early 2019, a full year ahead of schedule. The cost and revenue synergies are primarily due to vertical integration, site closures, elimination of redundancies, and cross-selling opportunities. Management announced an increase in its annual target for efficiencies (which includes Airgas synergies, procurement savings, and administrative efficiencies) from EUR 300 million to EUR 400 million, which we think will help Air Liquide improve its operating margin from 16.4% in 2018 to roughly 20% by 2020.
Air Liquide announced several acquisitions in the first quarter of 2019. We think the recent pair of acquisitions of Swiss-based companies, Sleep & Health SA and Megamed AG, will bolster Air Liquide’s strong position in European healthcare, while the acquisition of Tech Air will help further build out its distribution network in the U.S. We expect Air Liquide will continue to pursue smaller bolt-on acquisitions to supplement its portfolio.
L'Air Liquide is engaged in the market of gases for industry, health and the environment. Oxygen, nitrogen, hydrogen, and rare gases make up Co.'s core activities. Co. structures its activities in three segments: Gas and Services, Engineering and Technology, and Other activities. The Gas and Services segment comprises four business lines: Industrial Merchant, Large Industries, Healthcare and Electronics; Engineering and Technology designs, develops and builds industrial gas production plants for Co. and third parties; and the Other Activities segment develops welding and cutting edge technologies, and markets deep-sea diving and swimming equipment to professionals and privates individuals.
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