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Nitty gritty

28 January 2020 By Dasha Afanasieva

A deep spring clean is no substitute for the regular use of a vacuum cleaner. Selling or spinning out its domestic appliances business will allow Koninklijke Philips to focus on the latter. Frans van Houten, the Dutch group’s chief executive, may find catching up with rivals back-breaking work.

Philips on Tuesday admitted that its domestic appliances unit, which makes coffee machines and vacuum cleaners, has little in common with sophisticated scanners. Detangling the business, which brought in about 2.3 billion euros in revenue last year, will take more than 12 months.

Still, the process should reward the effort. Credit Suisse analysts expect the business to generate earnings before interest, tax and amortisation of 261 million euros this year. Assuming a multiple of around 10 times implies the division could be worth 2.7 billion euros.

Van Houten has already earned his stripes separating large businesses such as Philips’ lighting arm, which was spun off in 2016 as Signify. While a capricious European market for initial public offerings may make a listing tricky, private equity funds and rivals are likely to see a case for buying the asset, which Philips admits has underperformed.

Completing the company’s housekeeping will leave future performance dependent on results from its health divisions. Sales for the fourth quarter, released on Tuesday, fell short of analysts’ expectations. Philips also missed its target for boosting EBITA margins by 100 basis points, partly because of tariffs arising from the U.S-China trade war. Undeterred, van Houten promised a big boost to margin this year, and replaced the head of the underperforming connected-care business, which specialises in remote patient monitoring.

The 40 billion euro company will need to show consistent improvement to close the valuation gap with Siemens Healthineers. According to Refinitiv, Philips shares trade at an 18% discount to its German rival on a price-to-earnings basis. The company’s last big spring clean leaves it with no more excuses to avoid daily improvements in hygiene.


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