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23 Sep 2021
An inflated concern
Compagnie de Saint-Gobain SA (SGO:PAR), 0 | Wienerberger AG (WIE:WBO), 0 | Sika AG (SIKA:SWX), 0 | Ferguson Plc (FERG:LON), 16,950 | Travis Perkins plc (TPK:LON), 740 | Geberit AG (GEBN:SWX), 0 | Kingspan Group Plc (KRX:DUB), 0 | ROCKWOOL A/S Class B (ROCK.B:CSE), 0 | Armstrong World Industries, Inc. (AWI:NYS), 0 | Trex Company, Inc. (TREX:NYS), 0 | Owens Corning (OC:NYS), 0 | Ibstock Plc (IBST:LON), 148 | Forterra Plc (FORT:LON), 158 | Armstrong World Industries Inc Shs Unsponsored Brazilian Depository Receipt Repr 1 Sh (AWII34:BSP), 0 | ROCKWOOL A/S Class B (0M0A:LON), 0 | Invesco US Treasury Bond 7-10 Year UCITS ETF (TREX:LON), 0 | Wienerberger AG (0MKZ:LON), 0
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An inflated concern
Compagnie de Saint-Gobain SA (SGO:PAR), 0 | Wienerberger AG (WIE:WBO), 0 | Sika AG (SIKA:SWX), 0 | Ferguson Plc (FERG:LON), 16,950 | Travis Perkins plc (TPK:LON), 740 | Geberit AG (GEBN:SWX), 0 | Kingspan Group Plc (KRX:DUB), 0 | ROCKWOOL A/S Class B (ROCK.B:CSE), 0 | Armstrong World Industries, Inc. (AWI:NYS), 0 | Trex Company, Inc. (TREX:NYS), 0 | Owens Corning (OC:NYS), 0 | Ibstock Plc (IBST:LON), 148 | Forterra Plc (FORT:LON), 158 | Armstrong World Industries Inc Shs Unsponsored Brazilian Depository Receipt Repr 1 Sh (AWII34:BSP), 0 | ROCKWOOL A/S Class B (0M0A:LON), 0 | Invesco US Treasury Bond 7-10 Year UCITS ETF (TREX:LON), 0 | Wienerberger AG (0MKZ:LON), 0
- Published:
23 Sep 2021 -
Author:
Bromehead Yves YB | Roger Paul PR | Speak George GS | Whitworth Robert RW -
Pages:
108
Investors fear surging costs could prompt a wave of earnings downgrades. We disagree. Our fresh, in-depth work on inflation sees the sector''s earnings rise on underappreciated pricing power. We favour SGO and Owens but see Geberit (= to -) and Rockwool (= to -) as likely inflation laggards.
Inflation... a booster or a drag to the sector''s earnings outlook?
In this note, we reassess inflationary pressures by product and energy cost exposure across our coverage. Whilst the market fears skyrocketing energy prices will bite the sector''s earnings and margin outlook, we take a contrarian view and expect inflation to lift EBITDA by +11% in 2022, driven by pricing power, cost hedging strategies and solid operational leverage.
Staying on the inflation ride, with a preference for US-exposed companies
We are positive overall on the impact of inflation on the sector''s earnings outlook, with Saint-Gobain and Owens Corning our preferred names to play the theme, driven by US margin expansion. However, if most will thrive, we see a bumpier road for Geberit (= to -) and Rockwool (= to -), who are at risk of inflation undercutting consensus expectations as early as this year.
A healthy underlying demand outlook...
The demand outlook is still positive despite tougher comparatives in upcoming quarters and signs of normalisation in some renovation markets. The positive surprise stems from household appetite for new housing in Europe and the continued rebound in non-residential markets.
...but expect a bumpy ride in Q321
Force majeure, shutdowns, outages, shortages... these disruptive forces have likely impacted the sector''s performance in Q321. We flag these headwinds and expect a challenging results season with risk of lower-than-expected volumes and earnings missing estimates.
MandA is a hot topic
The sector''s deep pockets and revived appetite for larger deals should spearhead a wave of MandA deals near-term, with transformative deals on the horizon. We...