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8/4/2019 Nomura European Equity Strategy - August 21 2011 - Worse Than 08
1/16
Rating: See report end for details of Nomuras rating system.
European Strategy WeeklyEUROPEAN STRATEGY
EQUITY RESEARCH
Worse than 08? August 21, 2011
On some measures European stocks are now trading on similar
valuations to those that prevailed in early 2009, while others are fast
approaching that point.
We do not think the fundamentals are as severe as they were back then.
With European stocks now priced for a hit to earnings of approximately30%, we still believe the overall market is oversold at current levels.
That said, within the market, the most cyclical sectors still trade onabove normal multiples and are vulnerable to further underperformance.
Research analysts
European Strategy
Ian Scott - NIplc
+44 20 7102 2959
Inigo Fraser-Jenkins - NIplc
[email protected]+44 20 7102 4658
Shanthi Nair - NIplc
[email protected]+44 20 7102 4518
Mark Diver - NIplc
[email protected]+44 20 7102 2987
Saurabh Katiyar
[email protected]+44 20 7102 9135
Rohit Thombre
[email protected]+44 20 710 25461
Robertas Stancikas - NIplc
[email protected]+44 20 7102 3127
Maureen Hughes - NIplc
[email protected]+44 20 7102 4659
See Appendix A-1 for analystcertification and important
disclosures. Analysts employedby non US affiliates are notregistered or qualified asresearch analysts with FINRAin the US.
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To be a seller of European stocks at current prices one really has to think that the
fundamentals are at least as bad as they were in the aftermath of the collapse of
Lehman Brothers. We doubt that this is the case.
Fig. 1: Pan-European price/book multiple
Source: FTSE, Worldscope, Nomura Equity research
Fig. 2: Pan-European free cash-flow yield
Source: FTSE, Worldscope, Nomura Equity research
At the time of writing, European equities sell for 1.25 times their last reported book value,
compared with a nadir of 1.1 times in March 2009, and the non-financials have a free
cash-flow yield of 7.9% (which covers their dividends almost twice over) compared with
8.2% in March 2009. The forward PE of 9x sits 30% below the steady range seenbetween 2003 and 2007, a similar multiple to the one that prevailed in mid 2009 at the
trough of the earnings cycle. On this basis one might argue that a 30% cut to EPS
forecasts is already in the price.
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Ian Scott
+44 20 7102 4659
European equities trade on1.25x book value compared to
their nadir of 1.1x in March 2009
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Fig. 3: Pan-European 12-month forward PE
Source: FTSE, IBES, Nomura Equity research
In early 2009, not only was the global economy in the midst of the worst recession since
the 1930s, but the financial system was also close to collapse. Credit spreads were over
200 basis points at their widest point, and it was unclear whether the authorities would
not or could not stem the tide. Spreads are wide now but closer to their 2010 wide point
rather than the 2008/09 period.
Fig. 4: European credit spreads
Figure shows the Markit iTraxx Europe Index, which is composed of 125 investment grade entities. Source: Bloomberg
Similarly, with the financials, CDS, while inflated are closer to the 2010 wides than the
2008/09 period.
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Basis points
2009 saw not only the worstrecession since the 1930s, but
the financial system was alsoclose to collapse
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Fig. 5: European Financials CDS
*5-year CDS for individual companies are weighted together according to their stock market capitalisations.Source: Datastream, Nomura Strategy research
Where we continue to see a set of expectations out of step with the current economic
situation is among Europes cyclical companies. They continue to trade on a price/bookpremium to the norm compared with the non-cyclical part of the market (Figure 6).
Fig. 6: European cyclical versus non-cyclical sector valuations price/book
Weighted price/book multiple based on stocks in the Basic Industries, Capital Goods and Consumer Cyclical sectors,divided by Utilities, Healthcare and Consumer Staples. Source: Worldscope, Nomura Strategy research
Even on PE with the cyclical vulnerable to further downgrades they still do not yet
offer the value consistent with past historical lows such as 2001 and 2008.
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We continue to be surprised by
the high multiples demanded forcyclical companies
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Fig. 7: European cyclical versus non-cyclical sector valuations PE
Weighted PE multiple based on stocks in the Basic Industries, Capital Goods and Consumer Cyclical sectors, divided byUtilities, Healthcare and Consumer Staples. Source: Worldscope, Nomura Strategy research
So once again, while we find the overall market to be oversold and consistent with a
recessionary downgrade to current EPS forecasts in the region of 30%, at the sectorlevel the market still accords the cyclical sectors a set of valuations inconsistent with the
current risks to their earnings.
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European recommended portfolio
Price (LC) Mkt Cap
Calendarised EPS y/e
Dec1Price/
earnings Date
Rel Perf.
since
Rel Perf.
Ove r Analyst
Sector Stock Currency 18 Aug 11 US$m 2010a/e 2011e 2012e Dec 11 (x) Added Added week Rating2
Basic Industries RIO TINTO PLC GBP 34.95 86,338 7.2 10.8 12.3 3.2 11 Dec 09 22 1 Not Rated
Capital Goods GAMESA CORP TECNO EUR 3.90 1,378 0.3 0.3 0.5 13.0 13 Nov 09 -67 2 Not Rated
MEGGITT PLC GBP 3.23 4,133 0.3 0.3 0.4 10.5 3 Dec 10 3 -1 Buy
THALES SA EUR 24.55 2,798 -0.2 2.4 3.1 10.2 8 Oct 10 1 -2 Buy
Consumer Cyclicals COMPASS GROUP GBP 5.15 15,936 0.4 0.4 0.5 12.4 23 Oct 09 49 -2 Buy
INTERCONTINENTAL HOTELS PLC GBP 9.88 4,715 1.0 1.1 1.3 8.7 3 Dec 10 -5 -2 Buy
Energy AMEC PLC GBP 9.29 5,068 0.6 0.7 0.8 13.2 3 Dec 10 -4 6 Not Rated
BP PLC GBP 4.00 124,089 1.1 1.2 1.2 3.4 22 May 09 -30 3 Not Rated
REPSOL EUR 18.19 31,776 1.9 2.0 2.4 9.3 4 Oct 10 5 0 Not Rated
TULLOW GBP 9.94 14,479 0.1 0.9 1.1 10.7 4 Oct 10 -14 -3 Not Rated
Financials - Banks BNP PARIBAS EUR 34.21 51,055 6.3 8.0 9.0 4.3 16 Apr 10 -23 -3 Buy
CREDIT AGRICOLE EUR 6.23 8,566 0.5 1.7 2.2 3.7 12 Jun 11 -23 -2 Buy
LLOYDS GBP 0.30 19,709 0.0 0.0 0.1 NM 2 Jul 10 -47 -5 Buy
NATIONAL BANK OF GREECE EUR 3.75 5,129 0.5 0.6 1.0 6.2 11 Dec 09 -72 -4 Neutral
UBS AG CHF 10.65 51,081 2.0 2.0 2.5 5.5 17 Sep 10 -20 -6 Buy
UNICREDITO ITALIANO EUR 0.96 26,469 0.1 0.2 0.2 5.9 16 Apr 10 -44 -4 Buy
Financials - Insurance AEGON NV EUR 2.91 7,964 0.8 0.7 0.7 4.5 9 Jan 09 -65 3 Buy
AVIVA PLC GBP 3.22 15,177 0.6 0.6 0.7 5.3 31 Jul 09 -6 -4 Buy
AXA EUR 10.56 35,059 1.8 2.1 2.3 5.1 9 Jan 09 -42 2 Buy
LEGAL & GENERAL GROUP PLC GBP 0.95 9,206 0.1 0.1 0.2 6.7 11 Dec 09 42 -1 Buy
ZURICH FINANCIAL SERVICES AG CHF 166.10 30,967 24.6 20.9 23.3 8.0 11 Dec 09 17 1 Buy
Financials - Other 3I GROUP PLC GBP 2.04 3,241 0.2 0.3 0.4 6.3 8 Jul 11 -17 -2 Buy
GT PORTLAND ESTATES GBP 3.67 1,889 0.2 0.1 0.1 46.1 3 Dec 10 17 0 Not Rated
ICAP PLC GBP 4.02 4,394 0.5 0.5 0.5 7.7 3 Dec 10 -7 -1 Buy
LAND SECURITIES PLC GBP 7.63 9,781 0.4 0.4 0.4 20.7 3 Dec 10 31 -1 Not Rated
Healthcare MERCK KGAA EUR 63.51 5,873 2.9 4.3 4.6 14.6 4 Sep 09 3 1 Buy
NOBEL BIOCARE HLDG CHF 9.86 1,550 0.4 0.7 0.8 15.1 3 Dec 10 -18 -22 Buy
NOVARTIS AG CHF 43.96 138,043 4.3 4.8 4.9 9.1 9 Jan 09 2 3 Buy
Media PUBLICIS GROUPE EUR 31.07 6,341 2.4 2.6 2.8 12.0 3 Dec 10 1 -3 Buy
REED ELSEVIER GBP 4.61 9,235 0.4 0.5 0.5 10.1 4 Sep 09 10 1 Buy
WPP PLC GBP 6.01 12,453 0.6 0.6 0.7 9.6 3 Dec 10 -7 0 Buy
Technology AUTONOMY PLC GBP 14.29 5,708 1.1 1.3 1.6 11.2 3 Dec 10 18 -7 Buy
CAPGEMINI SA EUR 27.07 6,003 1.9 2.5 3.2 10.9 22 Jul 11 -17 -2 Buy
ILIAD S.A. EUR 80.09 2,510 5.9 5.4 5.2 14.9 23 Oct 09 9 -1 Buy
SAP AG EUR 34.26 45,092 2.3 2.7 3.1 12.6 23 Oct 09 4 -5 Buy
STMICROELECTRONICS EUR 4.28 4,185 0.7 0.9 1.2 4.8 9 Jan 09 -27 -10 Buy
Telecoms DEUTSCHE TELECOM EUR 9.17 42,937 1.0 1.0 1.2 9.3 4 Sep 09 10 0 Buy
TELENOR ASA NOK 82.35 12,471 8.7 8.1 9.3 10.2 8 May 09 90 -3 Buy
Utilities NATIONAL GRID PLC GBP 5.90 34,076 0.5 0.5 0.5 11.4 4 Sep 09 24 4 Neutral
Portfolio perf. (Euro Return, %)
3
1 W K 1 MTH YTD 12 MTH 2010 2009 2008
4
2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995Nomura Strategy Recommend Portfolio -2.5 -16.1 -21.9 -20.2 5.3 49.4 -20.7 -4.5 20.9 21.7 7.7 22.5 -34.0 -21.2 14.7 67.4 26.4 43.2 35.7 17.8
FTSE-World Europe Index -0.9 -13.4 -15.5 -9.1 11.7 33.2 -20.4 3.6 17.2 23.0 9.4 12.6 -31.7 -17.3 -2.9 25.4 18.6 40.5 24.7 11.2
1 EPS est imates are based on Nomura estimates (for stock s under coverage), IBES (for stock s not under coverage).2 Analyst rating refers to Nomura research department rating.3 Return history presented as price return in euro terms from before 2006. Returns from 2007 to present are on a total return basis.4 Ending 12 September 2008.
Please turn to the back cover for an explanation of Nomura's rating system. Past performance is not a guarantee of future results.
Past performance should not and c annot be viewed as an indicator of future performance. Complete record available upon request.
Source: IBES, IDC/Exshare, Factset, Nomura Strategy estimates
European recommended sector allocation
BenchmarkRecommended
WeightingRecommendation
Basic Industries 11 6 Underw eight -Capital Goods 7 9 Neutral
Consumer Cyclicals 1 9 2 Underw eight
Consumer Staples 14 0 Underw eight
Energy 11 19 Overw eight -Financials 20 35 Overw eight
of which: Banks 12 16 Overw eight
Insurance 5 11 Overw eight
Other 2 8 Overw eight -
Healthcare 11 6 Underw eight
Media 2 6 Overw eight
Technology 3 10 Overw eight -Telecoms 7 5 Underw eight
Utilities 5 3 Underw eight - We underweight the Utilities and Healthcare sectors.
- We have an underweight recommendation in Telecoms.1 Combination of Cyclical Consumer Goods and Cyclical Services excluding Media.
Source: Nomura Strategy research
We overweight Financials as asset price reflation should provide support.
Valuations discou nt further capital raising; we think these concerns will be
mitigated by rising asset values.
We also overweight the Tech and Media sectors, which s hould benefit from
increased business spending.
We recomme nd overweighting the Oil sector and underweig hting the BasicIndustries s ector; demand for non-oil commodities has become more s ensitive
to prices, while mining stocks a re also expensive relative to Oils.
We underweight sectors that are vulnerable to a rise in bond yields and prefer
sectors that should benefit from a reduction in the equity risk premium . We also
overweight sectors that should benefit from increased capital spending.
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European index targets
End 2011
Current Level* End 2011
Price Return
(%)**
FTSE Europe 137 162 19 -FTSE Europe ex UK 122 145 19
EURO STOXX 50 2331 2850 22 -FTSE 100 (UK) 5332 6200 16
Dax 30 5949 7500 26
CAC 40 3254 3950 21 -
SMI 5421 6200 14
AEX 293 355 21 -IBEX 8728 10300 18
OMX 958 1100 15
MIB 15951 19250 21
**Eur terms* As of 18-Aug-2011
We use the FTSE All World Developed index for Europe and Europe ex UK.
Source: Nomura Strategy research
We think 2011 will see companies reinvest in their businesses, either
through organic investment or through M&A.
We expect the European market to recover from current lows.
Equity valuations appear attractive to us, with embedded risk premiumsat high levels, and we expect the earnings recovery to continue, though
at a slower pace.
We think the market has overreacted to concerns of slowing growth, and
sentiment has moved to depressed levels.
European earnings growth forecasts
2010 2011 2012
Europe ex UK1 11% 11% 15% -
UK2 17% 10% 13%
Europe 13% 11% 15% -
* EPS growth
1 FTSE Europe ex UK
2 FTSE 100
Source: Nomura Strategy research
We have lowered our earnings growth forecast for 2011 for continental
Europe to take into account the lower growth in the first quarter.
We have lowered our earnings growth forecast for 2011 for Europe from
13% to 11%; our 2012 forecast is unchanged.
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Investible themes
Source: Bloomberg
For details of the investible products based on these themes and how to trade them please contact the Quantitative Solutions Group on +44 (0) 20
7103 9988 or [email protected]. Our investible themes and style portfolios are listed on Bloomberg at NMRA. Bloomberg codes are listed,
where applicable, with each theme below.
Our investible themes and style portfolios are listed on Bloomberg at NMRA. We show live tradable prices for these themes. Option 1 shows the
long/short return of our key style portfolios, option 2 shows the returns of the top and bottom quartiles of the full range of styles and allows access tothe constituents.
Investible themes are available under option 3 as shown below.
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Source: FTSE All World, Exshare, Nomura Strategy research
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Source: FTSE All World, Worldscope, Exshare, Nomura Strategy research
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Source: Nomura research, Bloomberg, FTSE All World, Exshare
Divestiture Basket
Within overall M&A activity we think divestitures deserve special
attention. We believe we could see divestitures and s pin-offs
increase during the rest of the year as companies seek to increase
value for their shareholders .
The basket consist of 19 European stocks that Nomura sector
analysts consider potential candidates for spin-offs and
divestitures.
See European Strategy Weekly, Unlocking the value in divestitures ,
10 April 2011.
Chart shows the performance of a basket of European stocks that are considered potential candidates for spin-offs and divestitures. The performance is shown on
an equal weighted USD total return basis relative to market.
Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account
valuation and the attractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World
Europe Index. The performance is shown on an equal weighted USD total return basis .
M&A Basket
We expect M&A activity to pick up in 2011. It has been at a low ebb
until recently yet corporates have large amounts of available cash.
We identify companies that we think are potential targets to be bid
for. For more details of the basket please see Can Companies
Provide the Catalyst? (III) 30 January 2011.
Organic Growth Basket II
Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account
valuation and the attractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World
Europe (ex financials) Index. The performance is shown on an equal weighted USD total return basis.
We expect the market to reward companies that can invest in
profitable internal growth opportunities.
We have refreshed the constituents of our original Organic
Growth basket, which we closed on 09/06/2011.
To derive the basket we look for European companies with
ROCE > 10%, where capex / depreciation (2010) ratio is greater
than 1.5 and where we expect capex to grow in the next few
years. We also looked for expected EPS growth in the next 3
years in excess of 10% pa, giving a total of 51 constituents.
80.0
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Jan-10 May-10 Sep-10 Jan-11 May-11
Index
93.0
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103.0
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113.0
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123.0128.0
Jan-10 May-10 Sep-10 Jan-11 May-11
Index
97.0
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105.0
Dec-10
Jan-11 Feb-11
Mar-11
Apr-11 May-11
Jun-11 Jul-11
Index
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-
-
-
-
Source: FTSE, Worldscope, IBES, Exshare, Nomura Strategy research
-
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Source: FTSE World, Worldscope, IDC/Exshare, Nomura Strategy research
Trade On Trade Off Return
Emerging Market Exposed Basket NMRAEQEM 20/02/2009 31/07/2009 27.60% Return relative to FTSE World European index in USD
Government Spending basket NMRAFISC 23/01/2009 15/01/2010 37.80% Return relative to FTSE World European index in USD
Organic Grow th Basket I 06/12/2010 09/06/2011 -0.30% Return relativ e to FTSE World European ex Financ ials index in USD
European Q-GAARP Basket 08/01/2010 03/12/2010 -5.33% Long/Short
Capital Structure Arbitrage Basket 09/10/2009 03/12/2010 -6.24%
Dividend Theme Basket 19/02/2010 03/12/2010 -6.63% Return relative to FTSE World European index in USD
Source: Nomura Strategy research
Closed trades
European Multifactor Model
Chart shows the relative performance of attractive relative to unattractive styles according to our style selector model with styles rebalanced each month.
A quant-driven model that selects attractive and unattractive stocks
each quarter.
Uses a broad range of factors with regressions used to assign
coefficients to factors bas ed on the efficacy of factors in each sector.
Incorporates a non-linear interaction term that captures the level of
agreement between value and mom entum.
European Style Selector
Chart shows the performance of our long-short European multifactor stock selection model. The performance is on a USD total return basis with a 5-day
implementation lag at each quarter end. Sectors are equally weighted and stocks equally weighted within sectors. The Portfolios have been rebalanced quarterly.
A quant-driven model that selects attractive and unattractive styles
each quarter.
Uses the valuation of style factors and the recent momentum of
style factors to rank s tyles each month.
See European Multifactor Model, 3 November 2008.
See European Style Selector, 5 June 2009.
92.0
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98.0
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102.0
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106.0
108.0
Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10 Jan-11Jul-11
Index
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Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11
Index
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European valuation and profitability12 month Forward P/E1
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 9.7 6.9 8.4 9.4 Basic Industries 12.9 12.0 12.5 11.1
Capital Goods 10.0 9.0 9.9 8.8 Capital Goods 15.7 11.7 14.3 7.8
Consumer Cyclicals 10.0 11.4 10.3 10.5 Consumer Cyclicals 15.4 12.6 14.0 9.0
Consumer Staples 14.3 12.5 13.5 14.9 Consumer Staples 16.9 12.8 14.7 10.9
Energy 7.2 7.5 7.3 4.4 Energy 13.9 14.3 14.1 7.6
Financials2 6.4 8.4 6.9 8.3 Financials2 13.1 12.3 12.8 9.0
of which: Banks 6.1 8.0 6.6 8.0 of which: Banks 11.7 11.5 11.5 9.2
Insurance 6.4 7.9 6.7 9.8 Insurance 16.5 15.1 15.7 8.6
Healthcare 10.7 9.5 10.3 8.5 Healthcare 18.2 17.2 17.8 18.9
Technology 11.8 15.9 12.3 14.3 Technology 21.7 18.6 20.8 13.9
Media 8.5 10.7 9.3 15.5 Media 18.0 18.8 18.2 41.6
Telecoms 9.0 9.7 9.3 9.4 Telecoms 19.8 16.1 17.0 14.2
Utilities 8.9 11.4 9.4 8.2 Utilities 14.5 10.2 11.8 11.6
Market 9.0 9.1 9.0 7.4 Market 14.3 12.7 13.6 9.7
Enterprise Value / Sales
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 1.1 1.8 1.2 2.2 Basic Industries 1.0 1.5 1.2 2.1
Capital Goods 0.9 0.8 0.9 0.7 Capital Goods 0.8 0.9 0.8 0.8
Consumer Cyclicals 0.9 0.9 0.9 0.8 Consumer Cyclicals 0.8 1.1 0.9 0.7
Consumer Staples 1.2 1.5 1.3 0.9 Consumer Staples 1.1 1.3 1.2 0.6
Energy 0.7 0.7 0.7 1.0 Energy 1.0 1.1 1.1 1.2
Financials2 NA NA NA NA Financials2 NA NA NA NA
of which: Banks NA NA NA NA of which: Banks NA NA NA NA
Insurance NA NA NA NA Insurance NA NA NA NA
Healthcare 2.4 2.5 2.4 2.4 Healthcare 3.1 3.6 3.3 4.1
Technology 0.8 2.0 0.9 2.2 Technology 1.9 1.7 1.9 1.9
Media 1.2 1.4 1.3 3.8 Media 1.7 2.2 1.9 1.8
Telecoms 1.8 2.1 1.9 1.7 Telecoms 2.5 2.6 2.4 2.8
Utilities 1.1 1.5 1.1 1.3 Utilities 1.8 1.7 1.7 1.8
Market ex Financials 1.1 1.2 1.1 1.3 Market ex Financials 1.1 1.4 1.2 1.3
Enterprise Value / EBITDA
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 6.7 5.3 6.2 7.3 Basic Industries 6.1 7.5 6.5 7.5
Capital Goods 6.4 5.9 6.4 5.5 Capital Goods 6.8 7.1 6.8 5.7
Consumer Cyclicals 6.4 7.9 6.6 8.0 Consumer Cyclicals 6.7 8.5 7.1 6.3
Consumer Staples 8.7 9.6 9.0 9.9 Consumer Staples 8.7 8.6 8.6 6.6
Energy 2.9 6.4 4.2 4.0 Energy 5.3 7.1 6.0 5.1
Financials
2
NA NA NA NA Financials2 NA NA NA NAof which: Banks NA NA NA NA of which: Banks NA NA NA NA
Insurance NA NA NA NA Insurance NA NA NA NA
Healthcare 7.9 5.3 6.9 8.0 Healthcare 11.4 12.0 11.6 16.2
Technology 5.4 11.9 6.0 12.0 Technology 12.0 11.5 11.7 11.1
Media 4.8 8.4 5.8 13.3 Media 8.1 10.6 8.9 8.7
Telecoms 4.8 5.6 5.0 4.7 Telecoms 5.5 6.9 5.9 7.6
Utilities 5.1 7.5 5.5 4.8 Utilities 7.0 6.5 6.7 6.5
Market ex Financials 5.9 6.6 6.1 5.5 Market ex Financials 6.9 7.7 7.1 6.3
1Ratios reflect earnings before goodwill amortisation
2Financials excluding Real Estate
5Post 2000 average for EEM EA region
Source: FTSE, Worldscope, IBES, Nomura Strategy research
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European valuation and profitabilityReturn on Capital Employed4 (ROE4 Financials)
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 7.3 15.8 9.9 11.3 Basic Industries 9.1 11.7 9.8 14.7
Capital Goods 9.0 15.2 9.7 7.9 Capital Goods 8.2 10.4 8.6 8.6
Consumer Cyclicals 6.8 13.2 7.8 14.1 Consumer Cyclicals 6.5 9.3 7.1 15.8
Consumer Staples 10.5 13.4 11.6 19.2 Consumer Staples 11.8 12.4 12.0 19.4
Energy 12.1 7.1 9.4 12.6 Energy 12.6 12.5 12.6 17.7
Financials1,2 8.7 9.7 9.0 15.7 Financials1,2 9.7 11.9 10.2 15.6
of which: Banks2 8.1 8.6 8.2 15.9 of which: Banks2 9.3 14.6 10.4 15.9
Insurance2 10.0 13.9 10.7 20.1 Insurance2 11.4 11.4 11.4 19.9
Healthcare 14.9 20.8 16.4 15.0 Healthcare 13.4 26.7 17.0 14.0
Technology 13.0 13.7 13.2 8.8 Technology 10.6 12.8 11.1 9.0
Media 14.8 13.4 13.9 14.4 Media 12.1 16.1 13.8 13.4
Telecoms 10.2 13.4 11.7 13.9 Telecoms 8.8 9.4 9.3 13.4
Utilities 7.4 10.2 7.9 4.6 Utilities 7.8 9.0 8.1 5.9
Market ex Financials 9.5 12.3 10.4 12.2 Market ex Financials 9.0 11.4 9.6 13.8
Enterprise Value / Capital Employed (P/BV Financials)
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 1.2 1.4 1.2 1.8 Basic Industries 1.3 1.6 1.4 1.9
Capital Goods 1.2 1.6 1.3 0.9 Capital Goods 1.3 1.5 1.3 1.0
Consumer Cyclicals 1.1 1.7 1.1 1.7 Consumer Cyclicals 1.2 1.6 1.2 1.7
Consumer Staples 1.7 2.1 1.9 3.1 Consumer Staples 2.1 2.0 2.0 2.2
Energy 1.0 1.2 1.1 0.9 Energy 1.6 2.0 1.8 1.3
Financials1,3 0.6 0.8 0.7 1.4 Financials1,3 1.8 1.8 1.8 1.9
of which: Banks3 0.6 0.8 0.6 1.5 of which: Banks3 1.6 2.0 1.7 2.1
Insurance3 0.8 1.0 0.8 1.4 Insurance3 2.7 2.0 2.5 1.5
Healthcare 1.8 2.7 2.0 1.4 Healthcare 2.6 5.5 3.4 2.9
Technology 1.2 2.3 1.3 1.4 Technology 3.0 14.4 2.9 1.7
Media 1.0 1.4 1.1 2.2 Media 2.1 2.8 2.4 1.8
Telecoms 1.1 1.0 1.1 1.5 Telecoms 1.4 1.5 1.4 2.3Utilities 0.8 1.4 0.9 0.8 Utilities 1.3 1.2 1.2 0.9
Market ex Financials 1.2 1.5 1.3 1.2 Market ex Financials 1.5 1.8 1.6 1.5
1Financials excluding Real Estate
2Return on equity used for Financials.
3Price to book value used for Financials.
4RO E and RoCE calculated pre goodwill and pre exceptionals.
5Post 2000 average for EEM EA region
Source: FTSE, Worldscope, IBES, Nomura Strategy research
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Appendix A-1
Analyst Certification
I, Ian Scott, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or
all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
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Important DisclosuresOnline availability of research and additional conflict-of-interest disclosuresNomura Japanese Equity Research is available electronically for cl ients in the US on NOMURA.COM, REUTERS, BLOOMBERG andTHOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS andBLOOMBERG.Important disclosures may be accessed through the left hand side of the Nomura Disclosure web pagehttp://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. If youhave any difficulties with the website, please email [email protected] for technical assistance.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities.Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts underFINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions oncommunications with covered companies, public appearances, and trading securities held by a research analyst account.Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for thesales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content ofresearch reports in which their names appear.Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarilyresponsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may alsocontribute to research reports in which their names appear and publish research on their sector.Distribution of ratings (US)The distribution of all ratings published by Nomura US Equity Research is as follows: 40% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 10% of companies with thisrating are investment banking clients of the Nomura Group*.53% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with thisrating are investment banking clients of the Nomura Group*.7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with thisrating are investment banking clients of the Nomura Group*.As at 30 June 2011.*The Nomura Group as defined in the Disclaimer section at the end of this report.Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with thisrating are investment banking clients of the Nomura Group*.40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies withthis rating are investment banking clients of the Nomura Group*.11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 14% of companies withthis rating are investment banking clients of the Nomura Group*.As at 30 June 2011.*The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America forratings published from 27 October 2008The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable
regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a mergeror strategic transaction involving the company.Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks(accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);GlobalEmerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI EmergingMarkets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from30 October 2008 and in Japan from 6 January 2009STOCKS
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Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.A 'Buy' recommendation indicates that potential upside is 15% or more.A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.A 'Reduce' recommendation indicates that potential downside is 5% or more.A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/orfirm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving thesubject company.Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entityidentified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/orcompanies.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation.A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutralabsolute recommendation.A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negativeabsolute recommendation.Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings inEurope, Middle East and Africa, US and Latin America published prior to 27 October 2008)STOCKSA rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next sixmonths.A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next
six months.A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% overthe next six months.A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% overthe next six months.A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additionalresearch reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or otherinformation contained herein.SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: BloombergWorld Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published priorto 30 October 2008STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value ofthe stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn'tthink the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from theintrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and ourestimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within thishorizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downsideimplied by the recommendation.A 'Strong buy' recommendation indicates that upside is more than 20%.A 'Buy' recommendation indicates that upside is between 10% and 20%.A 'Neutral' recommendation indicates that upside or downside is less than 10%.A 'Reduce' recommendation indicates that downside is between 10% and 20%.A 'Sell' recommendation indicates that downside is more than 20%.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation.A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutralabsolute recommendation.A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negativeabsolute recommendation.Target PriceA Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.
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DisclaimersThis publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or jointcontributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in thepublication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan;Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. (NIHK),Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (NFIK), Korea (Information on Nomura analysts registered with the Korea Financial InvestmentAssociation ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr ); Nomura Singapore Ltd. (NSL), Singapore (Registration number 197201440E,regulated by the Monetary Authority of Singapore); Capital Nomura Securities Public Company Limited (CNS), Thailand; Nomura Australia Ltd. (NAL), Australia(ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number246412; P.T. Nomura Indonesia (PTNI), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (NSM), Malaysia; Nomura International (Hong Kong) Ltd., TaipeiBranch (NITB), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (NFASL), Mumbai, India (Registered Address: Ceejay House, Level 11,Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034,INE 231299034); Banque Nomura France (BNF); NIplc, Dubai Branch (NIplc, Dubai); NIplc, Madrid Branch (NIplc, Madrid) and OOO Nomura, Moscow (OOO
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