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Cyclicality blows

1 Dec 2015 By John Foley

Gases like hydrogen are abundant. Profit from selling them isn’t always. German industrial gas supplier Linde cut its EBITDA forecast for 2017 by 5 percent on Nov. 30 after it got caught out by two deflating bubbles – emerging markets and oil. The warning knocked Linde’s share price hard. It will also blow cold air on others in the sector.

Industrial companies everywhere are suffering from slowing growth. The particular weak link in Linde’s pipeline is its engineering business, which designs plants that produce gases and industrial materials. Low oil prices have eaten into customers’ appetite for placing orders, which fell by more than half in the first nine months of 2015, versus the same period a year earlier. Already, EBITDA margins in that division were a third of what Linde gets in its other businesses.

Linde is getting hit elsewhere too. Healthcare providers want to pay less for medical gases, previously a big driver of growth. Asian economies, which make up over one-fifth of revenue, are set for industrial production growth of 3.7 percent in 2015 according to HSBC, the slowest rate since 2009.

While unpleasant, cyclical businesses have to live with such downdraughts. Investors seem to see decent value in the company regardless. Assume the new cut to EBITDA knocks 9 percent off Linde’s bottom line, as Deutsche Bank estimates. The 14 percent fall in the company’s share price by 1030 GMT on Dec. 1 would suggest the stock trades on a multiple of 18.5 times earnings, still above its five-year average of 16 times, according to Eikon.

At least Linde isn’t in the middle of a giant, generously priced acquisition. That unenviable position goes to Air Liquide, Linde’s French rival, whose stock has fallen by more than 10 percent since it launched a $13 billion, debt-financed bid for U.S. peer Airgas on Nov. 17. Increased leverage and acquisition risk tend to magnify changes in demand. At delicate points in the cycle, ambitious deals are best left in the can.


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