Saint-Gobain : A potential upgrade to BBB+

Publication date - Writing date 31/05/2017 15:16 - Equity data - Recommendation: Buy - Target: € 55.00 - Equity analyst: Virginie Rousseau - [email protected] - +33 (0)1 44 51 87 04 - ESG analyst: Nicolas Jacob - Corporate Governance : Moderate risk (3) - / - / - - / - - - At our credit lunch with Saint-Gobain, we resumed coverage with a Positive credit opinion, as credit ratios are now close to the criteria required for an upgrade to Baa1/BBB+ and are set to be boosted by bright 2017 earnings forecasts. However, the spreads of Saint-Gobain’s bonds on the secondary market seem to factor in this potential for an upgrade relative to peers with for example, ASW+45bp for the SGO 2025 bonds vs. ASW+57bp for the LafargeHolcim 2024 bonds (Baa2/BBB), ASW+59bp for the Imerys 2024 notes (Baa2/BBB), ASW+43bp for the Bouygues 2023 notes (Baa1/BBB) and ASW+48bp for the CRH 2023 notes (Baa1/BBB+). We, are, therefore, adopting a Neutral (Hold) market recommendation on the existing bonds. That said, given that the group is a regular issuer, any new issuance could provide a good opportunity to take positions on the issuer. - >Support factors - - Saint-Gobain is a global or European leader in each of its business segments, marked by diversified activities and markets and solid pricing power. As part of exposure to the building materials sector (76% of sales), the group has a strong foothold in the renovation segment (45% of sales) which is less cyclical than the new construction market (31% of sales).- The latest reported earnings (2016) and Q1 2017 sales reflect an improvement for all segments and regions, suggesting a solid FY 2017 (operating profit expected to be up 12.9% like for like, according to our equity research team).- The medium-term targets unveiled by management at its Investor Day on 17/05/17 pave the way for another outperformance and further improvement in margins.- A disciplined financial policy remains a priority for the group. We see the rating as close to an upgrade to 'Baa1/BBB+', and the integration of Sika could step up the move if it sees the light.- Saint-Gobain’s cash position is extremely strong with easy access to the bond market.Points to watch - - Exposure to a number of cyclical activities (e.g. new construction, industry, etc.).- Exposure to western Europe (67%, of which 25% in France), a region on an upturn but where the new construction market is unlikely to return to pre-crisis levels before 2025 (the renovation market is however set to offset such trend).- Slowdown in China (2% of sales) and Brazil (4% of sales).- Question marks still hang over the Sika acquisition.