EUR 850.00 For Business Accounts Only

Morningstar | Legrand's 1H in Line; Shares Richly Valued

Legrand's first-half 2018 results are in line with expectations. The company looks on track to meet our full-year forecasts of 8% reported revenue growth and 60 basis points margin expansion to 20.6%--at the top end of management's implied guidance on both counts. As such, we see no reason to make changes to our EUR 54 fair value estimate and find the shares richly valued. We are also maintaining our narrow moat rating.

At first glance, the first-half 12%-14% reported growth in revenue and profits looks enviable; however, this includes multiple small acquisitions, with Legrand's underlying growth closer to the low-single digits on revenue and slightly higher on earnings due to margin expansion.

First-half revenue grew roughly 5% on an organic basis and nearly 12% on a reported basis. For the full year, management expects 1%-4% organic revenue growth. Currency headwinds and acquired revenue growth should add an additional 4% to reported revenue growth (based on current foreign exchange rates and acquisitions). However,  we expect underlying organic revenue growth to cool in the next couple of years due to a view that the construction cycle comes off its peak after booming for the last two years. Legrand's largest market, France, which contributes roughly 16% of revenue, has been growing organically at a slower clip in 2018, with sales in the second quarter up just over 1% following 3% growth in the full-year 2017. However, at the group level, organic growth is running around 5% with some help from Eastern Europe and Italy, with product launches boosting the latter market in particular.

The first-half 20.9% EBIT margin is trending in line with our expectations for the full year, where we expect the company to post a 60 basis point year-over-year expansion to 20.6%, just above the company's full-year guidance. With earnings in line, upside to our revenue and earnings forecast would come from signs of stable or better organic revenue growth in 2019 versus 2018.