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Analysis Henkel update Aug. 13, 2019

Henkel is a mixture of a consumer goods company similar to P&G and an industrial supplier as Sika with  total revenues of about 20 bn €/yr.. Its main businesses are adhesives, about 1/2 of the revenues, detergent & cleaners about 30% of the revenues and cosmetics about 20% of the revenues. The consumer cosmetic seems to me the weakest business. 

The most popular Henkel share is the preferred share which is more liquid (6 -fold turnover) and hence bought by big investors. The commen share is less popular and significant less expensive. The reason is that Henkel is still controlled by the Henkel family and thus the voting right is of limited value. Hence for a private investor the commen share is the better choice. 

A motivation to buy Henkel is the steady business. It is a share for retirement. 

This is not a recommendation or proposal to do anything. The data written in this article is not guarranteed. It is my private personal opinion.  I`m not independing as I own a position of Henkel shares and I was working for Henkel for a couple of years several years ago. 

Chances & Risks

Henkel is compared to similar european companies 2.4 fold the book value (without intangibles), PE 16 (not adjusted)(commen share), 80 € share price (commen share) neither cheap nor expensive. 

The EBIT margin was quite high (17.6% 2018) and fell to 16 - 17% (2019). From my point of view the lemon was pressed the last couple of years. It would be better to increase the marketing expenses and sales support by application engineers (adhesives) to increase the market share and revenues and target an EBIT margin of 15%.  

Henkel is a company to stay in for retirement. The strong brands and cash flow gives the business a lot of stability. I assume that Henkel will grow organic in the next couple of years with 2 - 4% (actually 0 - 2%).  It gets stability as a marketing company of FMCG (as P&G) but it is not as stable as pure FMCG companies. 

The main risk is that the management tends to visions, perceived facts and numbers. This could lead to situations that the company will make false decisions and stick longer to it than it should.

Some observations 

The adhesive business is the biggest and most profitable business of Henkel. The adhesive business provides wide moats as adhesives are usually make up an ignorable share of the total costs of the customers products, on the other hand are critical for the functioning of products. Hence many adhesive applications are tested intensivly quite often certified. It is not comparable to commodities. The industrial business can be divided in the packaging adhesives that makes up for about 40% of the adhesive business. Henkel has a strong position. The automotive and electronics industry provide big volumes but low margins and the consumer business that provides very comfortable margins but has low volumes. The construction business is compared to Sika less developed as Henkel is organized more central than Sika and hence acts less agile in this field. 

The FMCG detergents, cleaners and cosmetics are marketing driven products. Margins are quite well in Western Europe and North America. Henkel has very strong brands as the Persil/Pril/General...Pattex business in Europe. 

The organic growth is high in Middle East, Africa, South America but negative in Western Europe & North America. In the developed countries usually the trade is strong and non-branded products are available in good quality and low costs. In these markets brands find a more difficult environment. It seems obvious that Henkel will become more and more decoupled from the German and Western European economy. That is a good thing as Western European economies will most probably will see a long recession due to green religion and destructive politics. 

The management style is rough and challenging. The business targets are sometimes ambitious. The management tends to perceived facts and numbers. It can be observed that if Henkel did not perform in a period acc. to expectations there are plenty of "adjusted numbers" in the reports. 

The geographical mix 1/3 revenues from Western Europe, about 1/5 from North America the remainder from growth regions will provide margin (Europe) and growth (ROW) is well balanced.

Intangibles makes up 16bn€ or 1/2 of the book value. 

Some Data

Method IFRS:                      Q2/2019           Q1/2019        Est. 2019      2018

Revenues:                            5.12 bn €         4.97 bn€           20 bn €    19.9 bn. €

Net Profit:                            555 mio. €       534 mio. €         2.2 bn €   2.311 bn €

Net Profit (Pref.)/share          1.28 €             1.23 €                5 €          5.31 €

Free Cash Flow:                   467 mio. €       523 mio. €                      1.917 bn €

Dividend 2018 €/share (commen):                1.83                  1.93

Capex 2019:                                                                    750 - 850 mio. €

Net financial position 07/19                          -2820 mio. €

Commen Shares 2018:                                259.795.875 (free float 100.796.860)

Preferred Shares 2018:                                 174.482.323

Total Shares 2018:                                      434 mio.

Book Value q1/19:                                      31.2 bn € incl. 16.9 bn € Intangibles!

Value at Stock Exchange may 7th 89 € Vz, 85 € St.  : 38 bn €   

The company is controlled by the Henkel family via the legal instrument of a KgAa.  8%! of the Henkel shares are owned by owners with domizile in Germany (I assume Henkel family not included) 

Consumer Good Companies

In boom times consumer good companies increase their revenues as more poeple buy branded products but earn less when raw materials, labour and nearly all costs are rising. In recessions it is the other way. Revenues are decreasing slightly but profits are increasing significantly. In the business figures these effects are straightened. For ex. when profits are not satisfying depreciations are done at a minimum. When profits are rising manager remember plants, molds..and other stuff to write it off. 

Henkel as mixture of a consumer goods company and the more cyclical industrial business of the adhesive business. Hence it is a very stable company.   

 

Some references

(8) 2019/08/13 https://www.henkel.de/resource/blob/973254/79a0199cb47bca58fb17cd61883bf62a/data/2019-q2-bericht.pdf

(7) 2019/05/16 https://seekingalpha.com/article/4264689-henkel-henky-investor-presentation-slideshow?dr=1

(6) 2019/05/07 https://www.henkel.de/resource/blob/937638/c9926c11848a45c496fefa3ad4883e10/data/2019-q1-mitteilung.pdf

(5)2019/02/21 https://www.henkel.de/resource/blob/912086/0f8b84ab9a28efa936e0fdf417146da3/2018-geschaeftsbericht-data.pdf

(4) 2019/01/21 https://www.xtb.com/de/Marktanalysen/Trading-News/de30-henkel-fallt-nach-kurzung-der-ergebnisprognose

(3) 2018/12/30 https://www.finanztrends.info/henkel-aktie-erwartungen-verfehlt/

(1) 2018/11/15 https://www.henkel.de/blob/891798/8f457ea7c66ef3a46321b792bd5ece21/data/2018-q3-mitteilung.pdf

(2) https://ch.marketscreener.com/HENKEL-436185/unternehmen/

https://seekingalpha.com/article/4208689-henkel-value-underfollowed-european-giant?app=1&dr=1

 

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