Air Liquide: Morgan Stanley warns that Air Liquide’s growth among traditional customers may suffer

(BFM Bourse) – The American bank lowered its opinion to “underperform” on the industrial gas specialist on Thursday, considering that the spending of its industrial clients risks slowing down while the group will only benefit from the growth of the energy transition in the medium term.

A value cherished by individuals, with around 34% of the capital held by individual shareholders in 2023, Air Liquide is swaying somewhat on the stock market this Thursday.

The CAC 40 member dropped 2.2% around 12:00, showing one of the most pronounced declines in the Paris index. The stock suffered from a downgrade by Morgan Stanley, which went from “in line weighting” to “underweighting”, which is equivalent to going from “neutral” to “sell”. The bank also adjusted its target for the stock price to 149 euros from 140.5 euros.

The bank acknowledges that Air Liquide has succeeded in implementing its strategy, operating at a “high level”. Air Liquide also doubled its operating margin growth target at the beginning of the year.

“Air Liquide executed on its plans, benefited from industry consolidation, won projects as part of the energy transition and achieved significant absolute and relative outperformance,” Morgan Stanley wrote.

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Towards a drop in investments from large customers?

However, the American bank warns that the potential for good surprises for the market is fading. This is while the company risks facing unfavorable sales in the “large industry” (28% of Air Liquide’s revenues), that is to say the large customers of Air Liquide who operate large gas production units for their needs. These customers belong to the refining, chemical, energy or metallurgy sectors.

Their volumes justify a dedicated factory or the development of a pipeline network.

Morgan Stanley warns that a slowdown in growth could occur in this segment, the bank expecting “capex” (investment spending) to fall by 1% over the next three years. This is due to the loss of momentum in the Chinese economy or the adoption of electric vehicles which risks limiting capacity increases in refining.

“This is a headwind to Air Liquide’s growth because newbuild spending, not maintenance, is key to new on-site order growth,” Morgan Stanley wrote.

In addition, the American bank argues that Air Liquide’s “pricing power”, or ability to set prices, may have reached its peak. The consolidation of players in the industrial gas sector has made it possible to increase this “pricing power” on the side of “merchant industrialists” (43% of Air Liquide’s revenues), i.e. small industrial customers (such as food and pharmaceuticals) as opposed to “large industry”. This effect has now fully played out, and Morgan Stanley considers that prices have potentially reached a ceiling.

In the face of these negative elements, the American establishment argues that Air Liquide’s opportunities in the energy transition and therefore hydrogen or carbon capture, will mainly begin to take off around 2027 and beyond.

In view of these elements, the American bank considers that the consensus forecast of a 7.8% increase in gross operating profit (EBITDA) is demanding and that the current valuation of the company ignores the difficulties previously mentioned.

Julien Marion – ©2024 BFM Bourse