(News Bulletin 247) – The Swiss bank has sold on the electrical infrastructure specialist because it only expects structural growth of 3% per year, whereas according to it the market expects 4.5% or even 5%.

In an amorphous CAC 40 this Tuesday, the Parisian index closing up 0.08%, one stock stood out somewhat: Legrand. Without collapsing, the title of the electrical infrastructure specialist lost 1.75% to 94.50 euros, the most pronounced decline in the CAC 40 at the close on Tuesday.

The value suffered from a downgrade from UBS, which lowered its buy to sell opinion on the stock by two notches, while reducing its price target to 82 euros compared to 108 euros previously. The bank perceives risks linked to the economic situation for the company and judges that the market overestimates its growth potential.

UBS therefore considers that the group could suffer from a slowdown in the economic cycle, to the extent that 45% of its revenues in Europe and 20% in the Americas region are exposed to residential buildings. As for exposure to non-residential, which represents 45% of turnover in Europe and 55% in the United States, it “is over-indexed on light commercial verticals such as offices and stores, which present a higher risk of cyclical downturn relative to its institutional, infrastructure and industrial exposures,” argues UBS.

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An overly optimistic market

Above all, the Swiss bank appears more skeptical than investors about the acceleration of Legrand’s growth. “We believe that the market overestimates the possibilities for improving structural growth, since it already discounts 4.5% to 5% per year, while we estimate that only a rate of 3% is viable,” writes UBS.

The Swiss bank notes that the group’s growth has averaged around 3% per year over the last ten years and even 2% over the longer term.

UBS conducted an in-depth analysis of Legrand’s various rapidly expanding segments, namely data centers, connected devices and even energy efficiency solutions. Legrand estimates that these segments currently represent a third of its revenues and UBS notes that their historical growth is currently around 6% per year.

The bank notes that several of them are underperforming their underlying markets and do not appear to be on track to catch up. For example, Legrand experienced annual growth of 13% in data centers between 2017-2022, according to UBS, an increase in line with that of the American Eaton, but far from the performance of Schneider Electric in this area. same segment (+22%) as well as the increase in construction spending in data centers in the United States (+21.6% on average each year).

Likewise, Legrand’s division dedicated to the Internet of Things, “Eliot” experienced growth of 16% per year, including the contribution of several acquisitions, between 2018-2022.

“We believe that (this division, Editor’s note) has not fully grasped the expansion trajectory of the smart home market, as shipments of smart home surveillance and security devices managed to increase by 18% per year. year on average during the same period, while the installed base of smart doorbells increased 5 times over the five years to 2022 in some developed markets, according to our estimates,” points out UBS.

A demanding valuation

Consequently, the establishment considers that the strongly expanding segments will not be able to accelerate their growth, the Swiss bank retaining a status quo on the progression of these segments, at 6% per year therefore. By applying an increase of 1% to the company’s other activities, UBS thus arrives at an average structural growth per year of 3%. The Swiss bank believes that the group is not sufficiently exposed to rapidly accelerating segments such as medium voltage electricity and industrial software.

Furthermore, Legrand’s valuation is not particularly cheap. UBS even considers it “demanding” because it is located at the upper limit of its historical range of 12.7 times to 15.4 times adjusted operating profit (Ebita), at 15.3 times currently. The Swiss establishment thus prefers other actions in the “capital goods” sector (capital goods, to simplify) in particular the elevator specialists Schindler (Switzerland) and Kone (Finnish) as well as the group of locks, interlocks and Swedish security solutions Assa Abloy.

Note that at the end of November, Royal Bank of Canada had already downgraded its opinion on Legrand to “underperformance”, the equivalent of “sell” for the Canadian bank. The establishment then considered that several of Legrand’s “core” markets are doomed to decline (such as office buildings in the United States, as well as residential real estate in France and the United States) in 2024, while strong winds on prices are fading.

“The organic evolution of Legrand’s sales in 2024 should be lower than that of approximately 85% of our coverage, with a drop of 1% contrasting with growth of 4% for the sector,” warned Royal Bank of Canada.