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March 7, 2013 5:39 pm
Oxygen is the stuff of life – and in the industrial world that is every bit as true for gases generally. Add the relatively concentrated nature of the industrial gases business – four producers account for about three-quarters of the global market – and the fact that deliveries are often made on long-term, cost pass-through contracts, and it is easy to see why this sector has become a safe haven. Forward earnings multiples for France’s Air Liquide, Germany’s Linde, and Praxair and Air Products in the US are all in the high teens.
Such ratings do not forgive slippage. But Linde’s 2012 results on Thursday were generally solid. True, the headline 11 per cent sales rise to €15bn was flattered by exchange rates and the impact of the pricey US Lincare acquisition midyear. The underlying increase was nearer 6 per cent.
Earnings before interest and tax, meanwhile, were up 4 per cent at €2bn, while operating margins narrowed slightly – notably outside the Americas on the core gases side. That, though, was attributed largely to planned stoppages and structural investments in Asia, including in China, where the gases market is forecast to almost triple to €16bn by 2020. Some €2.5bn-worth of projects should come on stream between 2013 and 2016, 70 per cent in “growth” markets. Guidance is for operating profit advances of 13 per cent-plus in 2013 and more than 40 per cent by 2016.
For investors, a bigger question may be where to place bets within this sector. That is a call on end-markets and relative valuations. The Lincare deal provided few synergies but has doubled Linde’s healthcare-related sales to almost one-fifth of the total. Less exposure to southern Europe and electronics helped narrow Linde’s traditional discount to Air Liquide in 2012, factors which may be fading. But Linde shares now trade on 16 times forward earnings, compared with 17 times at Air Liquide. They may have a little puff left.
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