Global

Special report

Spring 2009

VIEW
OBAL
A GL EUROPE
FR O M

Exploring 23 global sectors

SG Compass Go to Introduction

Go to Sectors

Beyond the crisis

Performance
Regulation
Leading indicators
Resilience
Consolidation
Key drivers
Competition
Leaders
Valuation
Margins
Glossary

Fabrice Theveneau
Head of Pan-European Research

Alain Galène
Deputy Head of Pan-European Research

Jérôme Paoli
Head of Quality

and SG’s analysts

IMPORTANT: PLEASE SEE
IMPORTANT DISCLAIMER
AND DISCLOSURES AT THE
END OF DOCUMENT
 SG COMPASS

Go to Front page

Beyond the crisis, or towards new horizons

In the middle of the most severe recession since World War II, and with hopes of recovery
from next year, we publish SG Compass. Focusing on fundamentals, major sector trends, and
analysing potential for a rebound in 23 global sectors, we believe the 2009 edition will
constitute a reference tool for investors and attract as much interest as the version released in
2005.

Sector per sector, SG equity analysts describe basics, size of the market, major players,
regulation and consolidation, as well as future profitability and valuation trends. Thanks to the
significant enhancement in our coverage to include non-European players, Americans and
Asians, achieved over the last 12 months, we provide global comparisons between
Volkswagen and Toyota, EADS and Boeing, Tesco and Wal Mart, and SAP and Oracle, for
example. Integrating companies covered with market capitalisations above 500 million euros,
this global view from Europe is specific and innovative. Moreover, normalised analysis, a
research tool we have been using internally for the last 10 years, gives an answer to the
current crucial question “where are margins likely to stand beyond the crisis?” Relying on
analysis of these 23 sectors, it appears that profitability will obviously recover from current
depressed levels, but will likely reach different levels than in the past, constituting new sector
horizons.

In the two next pages, we summarise our key conclusions per sector:

„ Due to different factors, environmental issues and attitudes that foster “consumer
protection” in particular, regulations tighten very frequently, even if new freedom has been
granted to some specific industries, such as airlines or utilities.

„ After a sharp decline over the last 12 months, M&A activity is expected to recover as soon
as corporates have more visibility and can boost profitability. Further mergers and acquisitions
are expected to be related to consolidation and restructuring moves within some specific
sectors, or could relate to external expansion in new markets or areas.

„ Resilience to crisis is expressed as the average sector cyclicality associated with the
company-specific data, such as products and geographical reach.

„ Regarding future profits, our 23 sector analyses show that EBIT margins should strongly
rebound when the economic recovery materialises for the most cyclical sectors. However,
normalised levels are expected to remain below the averages achieved during the 2004-2007
period, in Automobiles, Building Materials, Capital Goods, Software & IT Services, or Telecom
Equipment for instance.

„ Lastly, recent valuation levels combined with potential for a rebound in profitability
constitute positive factors for future stock performance, but, obviously, only if there are hopes
of an economic recovery from 2010, which is our scenario. In the most recent issues of his
Mind Matters publication, James Montier emphasised the deep undervaluation of a significant
number of stocks throughout the world.

In conclusion, we hope you enjoy reading our 2009 version of the SG Compass and trust you
will find it useful. However, please do not feel obliged to read the 600 pages in one sitting!

t
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Spring 2009
 SG COMPASS

Click on sector name

for full report Go to Front page

SG Compass: key reference points (1)

Sector Global leaders Regulatory environment Consolidation
Aerospace & Defence Boeing Highly regulated for parts certification, Expected to continue, but transactions likely to be
EADS 0 environmental issues and defence exports. “Open confined to smaller bolt-on acquisitions.
Skies” agreement, a net positive for aerospace
manufacturers.

Air Transport American Airlines Heavily restricted (local and international). But, Set to continue, but regulatory change required to
Air France-KLM “Open Skies” or “Freedoms of the air”, a big move. lower the barriers to foreign ownership.
Automobiles & Toyota Harmonisation of technical requirements across the Due to the current crisis, sector restructuring likely
Components General Motors EU and adoption of environmental standards

Banks JP Morgan Very highly regulated at each level (local, New consolidation phase likely beyond the crisis
continental, and global). Rising political input.
Accounting, solvency and code of conduct reforms
Capital goods Siemens Fairly limited, except in electricity production External growth set to pick up over the next few
GE years
ABB
Schneider
Chemicals BASF Heavily regulated, reflecting the nature of the sector, Likely restructuring phase within specialties,
products and diversity intermediates and vitamins
Construction, Motorways Vinci Tighter regulations in products/services and Building materials, set to continue
& Building Materials Lafarge environmental issues
Construction, expansion in concession to continue
Heidelberg-H
Food Products Nestlé Greater controls on food safety, obesity and public Likely small acquisitions in Europe. Larger
health policy restructuring in the US.
Food & Staples Retailing Wal-Mart Increasingly restrictive approach to authorisations Further potential restructuring in some countries
to open space in the major European countries. (France)
General retailers Schwarz Group Limited regulation Potential focused acquisitions
Home Depot
Hotels, Restaurants & Intercontinental Regulated at domestic and European level Hotels: high potential in the long term
Leisure TUI Travel
Restaurants: consolidation set to continue
Compass
Household & Personal Procter & Gamble Tightening regulations on substances and Still on the agenda for both personal care and
Products L’Oréal environmental issues household products

Insurance AIG Very highly regulated at the local level and Europe- Beyond the crisis, dynamic level of M&A activity in
AXA wide, with considerable political input( Solvency II) the medium term

Luxury Goods LVMH Tightening anti-counterfeiting regulations Industry still fragmented. Consolidation set to
continue
Media Time Warner Mainly domestic and particularly for TV From very active to relatively inactive, according to
Walt Disney specific activities

Metals & Mining ArcelorMittal Tightening environmental regulations Expected to resume when credit conditions improve
BHP Billiton
Oil & Gas Saudi Aramco Domestic and global regulation throughout the Consolidation expected to slow
exploration- production chain
Pharmaceuticals Pfizer-Wyeth Very complex rules and procedures for the different Foreseeable increasing amount of M&A activity (local
J&J health authorities worldwide players, biotech deals)

Real Estate Westfield Group Local market structures based on two lease Likely to see more players, with larger market cap for
frameworks, one liberal, the other regulated the sector
Software & IT Services Microsoft Assessed in light of Microsoft’s monopolistic Set to continue in both Software and IT Services
position industries
Telecom Equipment Cisco No universal regulatory environment, but a number Unlikely to see any major acquisitions in the
of standard-setting bodies near/medium term
Telecom Services AT&T High local and regional regulation Some cross-market consolidation, but with limited
synergy potential
Utilities E.ON
EDF
A combination of regional regulation and structural
deregulation
Electricity-gas integration expected to be a focus in
terms of consolidation t
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Source: SG Equity Research

Spring 2009
 SG COMPASS

Go to Front page

SG Compass: key reference points (2)

Sector Key drivers Resilience to crisis EBIT margin Potential Normalised
Normalised rebound in EPS payout
vs.2009e (normalised/09e)
Aerospace & Defence Airlines capex Good for defence, but much more exposed to the civil cycle. 9.1% vs 9.6% -8% 35%
Government spending
US dollar
Air Transport Passenger traffic volumes Limited 4.3% vs 1.8% ++ (nm) 15%
US Dollar
Fuel prices
Automobiles & Consumer confidence Very limited 7.0% vs 1.6% ++ (nm) 25%
Components Capex cycle
Raw material prices
Banks Loans and deposits Very low due to toxic assets, rising cost of risk, and required cost/income: ++ 36%
Capital markets activity higher levels of capital 59.5% vs 66.3%
Provision charge
Capital goods Economic growth According to engineers’ operating leverage. Thus, from good 12.0% vs 9.4% +12% 40%
Industrial capex to very limited.
End-market exposure
Chemicals Global GDP growth Higher resilience, thanks to reshaped downstream and 11.4% vs 10.0% +18% 38%
Growth in Asia, China in particular reduced commodity businesses
Construction, Economic growth Building materials heavily impacted 14.1% vs 11.5% +21% 36%
Motorways & Building Interest rates Construction and concessions more resilient
Materials Fiscal stimulus
Food Products Specific company strategies Good 13.7% vs 14.5% +5% 40%
Expansion in emerging countries
Food & Staples Consumer spending Relatively good, but rising share for hard-discounters 4.9% vs 4.5% +25% 35%
Retailing Specific network expansion
General retailers Consumer spending From medium to low, according to products sold 9.5% vs 7.8% +25% 45%
Interest rates
Hotels, Restaurants & Consumer spending Limited for hotel chains. More significant for restaurants 18.6% vs 13.3% +25% 50%
Leisure Corporate profitability
Air traffic
Household & Personal Consumer spending Resilience quite different according to products and pricing 16.0% vs 14.8% +9% 38%
Products Organic growth policies
Raw materials prices
Insurance Insurance penetration According to specific exposure to capital markets, real estate Combined ratio: +10% 35%
Interest rates and diversification 97.0% vs 95.5%
Value of assets
Luxury Goods Global economic growth Limited 20.0% vs 16.7% +42% 40%
Consumer confidence
Wealth effect
Media Economic growth Advertising: very low 16.0% vs 13.3% +1% 70%
Corporate profitability Non-advertising: relatively good
Consumer confidence
Metals & Mining Global economic growth Very limited 24.1% vs 11.2% ++ (nm) 30%
Commodity prices
Oil & Gas Macroeconomic performance Limited ROACE: +80% 50%
Oil price 18.8% vs 13.3%
US dollar
Pharmaceuticals Organic growth Good, but more difficult business environment 34.0% vs 34.3 -1% 51%
Blockbuster dependence
Acquisition strategy
Real Estate Economic growth Very limited 79% vs 76% Organic asset 81% of
Inflation and interest rates value growth: FFO
Investment yield 3.4%
Software & IT Services Economic growth Limited for IT Services, but relatively more for Software 16.8% vs 18.9% +8% 27%
Technological progress
Search for lower cost services
Telecom Equipment Global economic growth Limited due to severe pricing pressure 9.0% vs 8.7% nm 20%
Technological evolution
New markets penetration
Telecom Services Technological progress Mobile relatively more exposed to the business cycle 40% 3.4% 50%
New markets penetration
ARPU performance
Utilities Local economic growth Limited 16.2% vs 15.1% +5% 50%
Pricing regulation
Energy prices
Source: SG Equity Research

Spring 2009