EUR 850.00 For Business Accounts Only

Morningstar | Linde's Proposed Merger With Praxair Appears On Track; Maintaining FVE

Nothing in narrow-moat-rated Linde's first-half 2018 results alters our long-term view of the firm. As such, we are maintaining our fair value estimate of EUR 172. We continue to believe that sentiment regarding the anticipated merger with Praxair will still drive the stock's price going forward, but fundamentally, we still believe that the market price adequately accounts for Linde's future prospects. Year-over-year revenue decreased on a reported basis to EUR 8.6 billion, or 3.3%. That said, adjusted for foreign exchange (EUR 500 million headwind) and accounting changes (including an IFRS 15 impact of EUR 186 million), the firm's revenue rose by 4.7%.

Underlying revenue improvement was driven by both gases and engineering. Operating margins, furthermore, rose by 170 basis points to 25.6%, suggesting the firm benefited from operating leverage, but was also helped by cost savings and portfolio optimization--with one estimate stating that Linde's management has engineered 20 business exits for the year. On the call, management reiterated that the firm is willing to exit both businesses and geographies when it feels it has exhausted its internal optimization measures. That said, management hinted that there may be room for more exits.

The firm also provided an update on the call regarding the proposed merger with Praxair and stated it has received approvals from 16 jurisdictions, as well as cities. Last week, the firm announced an agreement to sell assets in the Americas to a consortium comprising companies of the Messer Group and CVC Capital Partners.

Turning to the firm's segments, engineering revenue was in line with expected project progress, and 200 basis points of margin improvement was also due to this project execution, as well as improved capacity utilization. The firm added some color commentary that it is not seeing any "gun jumping" in the form of increased orders in the segment due to the impending merger. As for its gases division, growth was broad-based across all product areas, but particularly in bulk due to growth in all geographies on the heels of price increases, and well as cylinder thanks to positive macroeconomic tailwinds in both the Americas and EMEA. That said, in the Americas, comparable growth driven by bulk and cylinder was offset by planned turnarounds and unplanned outages.