EUR 850.00 For Business Accounts Only

Morningstar | Legrand 1Q Posts a Slowdown as Expected; Shares Look Expensive

Narrow-moat Legrand posted slightly weaker results than consensus with shares trading lower. We were not surprised by the results, which included organic revenue growth of 2.7% year over year, slower than 2018's 4.9% growth, given the company's relatively large exposure to France. The French construction market has been slowing visibly since last year with the rate of new housing permits softening in the first few months of 2018. With nearly 20% of Legrand's revenue coming from France, the company was bound to see a slowdown in group revenue growth. We are maintaining our EUR 54 fair value estimate.

The company's revenue in France looks to have declined. France stands out against the backdrop of group revenue growth of 2.9% on an organic basis and 7.3% including currency and acquisitions. However, beyond France, we have been hearing of a softening in the broader European construction market since the end of last year from several companies in our universe. This was evident in Legrand's results, too, as well as Geberit's market commentary. Legrand's European revenue growth increased by 2.3% organically but that growth came from higher Eastern Europe growth of 5.7% "subsidizing" Western Europe's more lackluster 1.7% growth.

Margins were in line with expectations. Tariffs and raw-material price increases shrank the first-quarter EBIT margin by 30 basis points year over year to 19.8% before acquisitions.

Management maintained guidance of organic growth of 0%-4% and an EBIT margin change of negative 20 basis points to +50 basis points, both of which we view as achievable with factoring in the relatively higher exposure to France.