After having reported Air Liquide’s Q4 and FY 2022 numbers and participated at Air Products and Chemicals Bank of America’s 2023 global conference, today it is time to deep-dive into Linde plc (NYSE:LIN). Since our initiation of coverage called Defensiveness At A Discount (Sept 2022), the company is up by almost 27%, outperforming the S&P 500. As a reminder, our buy case was supported by four MACRO upside and three MICRO reasons. In detail, we reported a positive view on 1) the EU legislation on the green, CO2, and hydrogen opportunities 2) the US IRA framework potential 3) the EU’s Chips Act 4) and the EV and BEV cars upside. On the bottom-down analysis, we emphasized how Linde 1) is more diversified in gases and applications versus its comps, 2) has more margin protection with profitability and volume guarantees, and 3) is also truly diversified at the GEO level (again versus ADP and AL)
In November, we also published an analysis called Positive News Ahead and double-checking our expectations, last time we positively reported Linde’s recommendation to be listed only on the New York Stock Exchange with a pending process subject to shareholder approval. On the 1st of March, the company announced that it has completed its intercompany reorganization and successfully delisted its shares from the Frankfurt Stock Exchange. Still related to this point, US P/E multiples are higher compared to the European one, so we are not surprised to see a positive stock price reaction. Secondly, we were assuming a dividend growth in line with EPS evolution, and according to our numbers, it was set for a 10% increase on a yearly basis. Again, at the end of February, the company declared a DPS increase for the 30th consecutive year from $1.275 to $1.170 per share (on a quarterly basis), signing a 9% increase from the prior dividend payment.
Briefly looking at the company’s Q4 results, all end markets grew with the exception of healthcare. America’s adj. core operating profit reached $944 million, growing by 12% on a yearly basis with flat output. Despite a volume decline of 7%, the EMEA region also increased its EBIT by 7% thanks to the Food & Beverage sub-sector. APAC sales and adj. EBIT outperformed Wall Street consensus, in detail, the company delivered a profit margin of $416 million versus estimates set at $388 million. Here at the Lab, we are confident that semiconductor clients largely have take-or-pay contracts and Linde’s strong exposure to electronics proved to be resilient in Asia. Regarding its aggregate level, the company generated a solid operating cash flow which reached $8.9 billion in 2022. Linde invested $3.2 billion in CAPEX and returned to shareholders almost $7.5 billion (including buyback), 11% above the prior year.
Why we are still positive?
Last time, we concluded our article with the following statement:
Going to the financials, our model indicates a 2024 forecasted EBITDA of almost €12 billion and valuing the company with its three-year average of EV/EBITDA multiple of 15.0x (adjusting for net debt consideration); hence, we derive a target price of $330 per share versus the current market price of $260. We do not add anything more, since we consider it to be a clear buy.
We already reached this target price. However, today we decided to modestly increase our estimates reflecting stronger-than-expected margin improvements. The company guided “no economic improvement“; but they recently announced a new world-scale blue hydrogen project in the US (Texas) to support an ammonia project. Therefore, Linde will invest an additional $1.8 billion to supply clean hydrogen and reach a project backlog of more than $9 billion. Here at the Lab, we recently update APD’s CAPEX plan and we arrived at $11 billion-plus in investments in mega-sustainable projects. Linde’s CAPEX proposition is still dedicated to APAC and the Americas region to support the area in which they will grow the most. Considering a $4 billion CAPEX this year, and an ongoing dividend increase (for an additional 10%), our adj. 2024 EPS is set at $14.4 (slightly higher than consensus as well as the company guidances). Q4 numbers expectation proved to be right with volume down and higher price. Here at the Lab, we used to value APD by using our NTM P/E multiple of ~25x and applying the same metrics to Linde, we derive a target price of $360. Downside risks include FX and a severe economic slowdown in industrial activity.
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