Linde (LIN.DE) - Quality german industrial company

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Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for information purposes only and should
not be construed as an offer or solicitation for investment.
Intelligent Investors.co.uk
Linde (LING.DE)
Quality German Industrial Company
Investment Thesis:
Linde is one of the 4 Industrial Gasses global players and arguably premier
German industrial stock with long-established trrack record of attractive return
in a consolidated indusry with long-term growth trajectory, attractive return
and rational competition.
Recent share price weakness follow a string of disappointing returns is offering
an attractive entry point, at EBITDA valuations near decade low.
Focus on healthcare is welcome with lower return intensity (7% of sales is
Capex vs 13% for the remainder of the business), long-term secular growth
(e.g. oxygen for elderly) and attractive bolt-on acquisition opportunities in
fragmented US home oxygen market. Pricing has been disappointing following
new bidding rules, however we expect pricing pressures to moderate.
Existing Industrial Gasses (IG) business is steady governed by long-term supply
contracts, upside offered through cylinder business (1% of volumes 25% of
sales value) and long-term trend of key large scale customers to outsource
industrial gas supply to 3rd
parties.
Adjusted EPS in 2015 of Eur7.47 give LIN PE multiple of 17.2, falling to 15.5 by
2018. Growth of new projects has moderated, however pipeline remains
healthy with €3bln of future projects vs €4.3bln peak. Industrial gasses
consumption is a function of industrial production, which remains subdued
especially in Europe. During the current down-cycle Linde is enjoying higher
levels of free cashflows as Capex requirements for new growths fall.
To be clear, we’are not calling for a turn-around in demand for IG volumes
and/or uptick in industial production, rather we’re pointing out a below-
average valuation of Linde with quality cash-generation and optionality for
additional growth as and when IG demand improves.
Key risks to the thesis
- Downside surprises in heathcare (Lincare): Continuation of string of profit
warnings and downgrades in US healthcare business due introduction of
Competitive Bidding process
- Recession: Fall in industrial production and IG demand hurting volumes
and pricing
Company Research
Germany
Industry – Industrial Gasses
3 Year Opinion Defensive
Competitive Adv. Narrow
Fair Value Potential €150.00
Price €128.80
Consider Buying at €125.0
Date 30 July 2016
Market Data
52 Week Range 113.50-178.95
Market Cap. €23.950bln
Shares Outstanding 185.6 mln
Volatility Low
Balance Sheet Data
Shareholder equity €14.578bln
Price/Book Value 1.7
Net Debt/(Cash) €7.2bln
Debt/EBITDA 1.8x
Forecast Earnings
Potential price appreciation 16%
Dividend Yield/Share rep. 0.0%
EPS / PE Cons.
Period EPS PE
Dec 2015 $7.47 17.2
Dec 2016 $7.11 18.1
Dec 2017 $7.65 16.8
Dec 2018 $8.28 15.5
5 Year Share Price Chart

DISCLAIMER
Linde (LING.DE)
- Irrational competition: Competition becoming undisciplined in new Capex allocation accepting below
par returns, hurting market pricing and leading to uncontrolled expansion in capacity
Economic Model and Competitive Position
The Gases Division makes up the heart of Linde, accounting for more than 80% of group revenues and
some 95% of EBITDA. The supply of industrial gases such as oxygen, nitrogen, argon and hydrogen is a
defensive play governed by long-term (take-or-pay) contracts, stable rental sales from the rental of
cylinders (cylinder gas supply) as well as growing, albeit challenged, healthcare business. Linde is one of the
top 4 players, which collectively account for around 75% the global IG market. The remainder remains
operated by the end-users themselves.
Linde EBITDA margins have increased from 25% before ‘09 to 27% today on account of the successful
efficiency program. However, the underlying growth has been low. Linde has achieved est. 3% annual
growth excl. acquisitions, compared to the historical >6% (double GDP average). Growth has primarily
been through new plant additions with existing assets stable.
Linde operates integrated gas model with large air sepration units (ASUs) or SunGas units typically built
next to the large IG end-users such as refinery, chemical plant or steel mill. Supply is governed by a long-
term supply take-or-pay agreements that typically provide the “base” offtake volume and serve as the
foundation of the investment decision for Linde to commit the capital. Large part of the economics of the
plant get locked in at the point of competitive tendering for IG supply prior to plant investment decision.
Growth areas of onsite tonnage business included China steel industry and fertilizer plants. Linde then
subsequently tries to improve economics by supplying IG volumes to surrounding end-users in smaller
quantities but at much higher unit price e.g. using cylinders or ISO tanks.
Capital discipline of the 4 key players is crucial for the overall health of the market pricing to avoid repeat
of earlier instances of market over-supply on the back of excessive ASU plant additions.
Sales and pricing
Linde has no.2 market position in IG volumes and controls est. 450 large ASU and Syngas units worldside.
Line has heavier exposure to emerging markets in Asia.
Tonnage business generates about 25% of revenues (and 90% of volumes) and is governed by long-term
supply agreements to lock-in customer demand for base 85% utilization of the plant capacity. Pricing tends
to be very competitive with market escalation mechanism for increases in energy prices i.e. in-built pricing
protection against inflation. Tonnage business is low-margin, but defensive in nature and allows Linde
recover the capital invested whilst helping to establish a dominant market position to upsell bulk/cylinders
in a given location detering other players from entering the location. Market are therefore regionally
dominated.

DISCLAIMER
Linde (LING.DE)
Bulk business make up about 25% of gas sales (15% of volumes) supplying various industries with IG using
ISO tanks (on the road or rail). Customers range from chemicals, energy, manufacturing or even food
industry. Pricing is competitive and contracts shorter term (5 years), however incumbent with existing ASU
plant in the area has a structural competitive advantage owning to additional cost of transporting supply
from locations far away locations.
Cylinders make up about 30% of the sales (1% of volumes) and tend to be the highest margin business with
stable income (gas and cylinder rentals), supplier pricing power, economies of scale and customer density
within the vicinity of the ASU plant. Linde is number one player in this space particularly in Europe.
Healthcare accounts for about 20% of sales with majority in the USA following Lincare acquisition. Primary
customers are hospitals and individual patient homes. Similarly to cylinder business, economies of scale
and customer density are key to profitability, although pricing power is being eroded through US healtcare
competitive bidding round process which pools demand and forces competitive pricing. Market is
reporting price reductions of 40% severely impacting profitability. Healthcare segment is expected to
growth volumes as population ages and smaller tuck-in acquisition of smaller suppliers help to build
market share and moat.
Financial Framework
Linde is subject to IG demand cyclicality which allow Linde to accumulate cash in the period of low growth
in demand and the associated low capital investment needs for new ASU plants. This is current period with
Linde expected to generate attractive free cash flows, divident payment and future optionality as and
when IG demand picks up.
Valuation Scenario analysis
Linde is trading at EV/EBITDA of 7.3 vs >10 EV/EBITDA for Air Products and Praxair, both US based. Eur150
target based on 8.2 2017 EBITDA multiple vs historical multiple of 8.8.

DISCLAIMER
Linde (LING.DE)
Scenario Price target Triggers
Bull case €165 Re-rateing based on faster 5% + growth, recovery
in Europe, less pricing pressure in Lincare
underpinned by volumes growth
Base case €150 Steady low single digit growth, maintain
profitability, Lincare continues to experience
pricing pressures, cash generation during period
of lower growth healthy
Bear case €120 Slow growth in emerging markets, further pricing
/ volume pressures in Lincare, Europe declines
Risk profile
Linde has relatively low risk profile. Linde is a premier industrial company with large legacy footprint of
ASU plants underpinned by long-term take-or-pay supply agreements and stable pricing. Existing plants
have structural location advantage. Management has been disciplined in new capital investment and we
expect the trend to continue. Linde is one out of only 4 global players and as world demands more
chemicals, steel and food, the demand for industrial gasses will growth at least in line with GDP.
Author’s opinion
Linde is a premier German industrial company in a consolidated industry with favourable long-term
economics and structurally advantaged existing assets. Linde share price has decline to warrant modest
authors to start modestly adding to Linde position starting from €125 level at no more than 1/3 of the
target purchase value and execute any additional purchases at €10 intervals i.e. at $115 and €105 in the
event of further decline.
€165.00 (+32%)
€120.00 (-20%)
€150.00 (+20%)

DISCLAIMER
Linde (LING.DE)
We put our money where our mouth is as the author(s) of the report may presently or in the future hold
a common stock investment in the securities mentioned in this report.
This report has been prepared by Intelligent Investors.co.uk.
DISCLAIMER
Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for
information purposes only and should not be construed as an offer or solicitation for investment.
All information used in the publication of this report has been compiled from publicly available
sources that are believed to be reliable; however we do not guarantee the accuracy or completeness
of this report. Opinions contained in this report represent those of the research department of
Intelligent Investors.co.uk at the time of publication. The author(s) of the report hold a common
stock investment in the securities mentioned in this report. The research in this document is not
intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or
underwrite securities or units. This document is provided for information purposes only and should
not be construed as an offer or solicitation for investment. Intelligent Investors.co.uk is NOT
regulated by the FSA. A marketing communication under FSA Rules, this document has NOT been
prepared in accordance with the legal requirements designed to promote the independence of
investment research and is not subject to any prohibition on dealing ahead of the dissemination of
investment research. The value of securities mentioned in this report can fall as well as rise and are
subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or
obtain accurate information about the value of securities mentioned in this report. Past
performance is not necessarily a guide to future performance.

Linde (LIN.DE) - Quality german industrial company

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