Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Wolfgang Buechele knew he had a difficult task when he became Linde's CEO last year. It was never going to be easy taking over from a man who'd quadrupled the German industrial gas producer's share price during his 11 year stint at the top.

As can be the case when long-serving bosses step down, the legacy appears to contain a few nasties too. Under Wolfgang Reitzle, Linde sold non-core assets and refocused on industrial and medical gases, as well as building industrial plants.

So for investors it was a surprise to discover late on Monday that those three units are facing unexpected pressure at the same time. Petrochemical customers aren’t ordering new plants following the oil price slump, industrial gas demand is weaker than hoped for and the US medical gas business faces government-mandated price cuts.

Shares deflating

Linde's Ebitda will now be between 4.2 billion euros ($4.5 billion) and 4.5 billion euros in 2017, about 300 million euros less than forecast. Return on capital employed is therefore expected to remain essentially flat until 2017 at 9 to 10 percent and profits are likely to rise little before then. The stock fell 14 per cent on Tuesday, the most since 1999.

Multi-year take-or-pay contracts in industrial gases , guaranteeing returns, are meant to provide stable earnings growth and helped justify a premium valuation over the chemical sector. But falling demand counteracts this. The medical gas businesss -- enlarged following the $3.8 billion acquisition of Lincare Holdings in 2012 -- was also meant to provide a helpful balance in case of a slowdown in industrial plant demand. 

Linde's business model hasn't come unstuck overnight but the company does appear more exposed to cyclical and regulatory trends than Reitzle would have hoped. He also created a rod for his successor's back by setting overly ambitious targets, including a 13 per cent ROCE.

Investors like the presumed visibility of medium-term profit goals. But in view of the depressed oil price and huge volatility in emerging markets, one has to question their usefulness. BASF, the biggest chemical maker, quietly abandoned its 2020 profit and sales targets in September, saying they didn't "make sense anymore in this world."

After Tuesday's share price slump Linde trades at less than 17 times next year's earnings compared to 19.6 times at French rival Air Liquide. That company won't be immune to an industry-wide slowdown, but it has less exposure to medical gases and industrial plant demand, which may explain why it hasn't issued a similar profit warning.

For Linde, there are reasons for thinking the future might not be as bleak as today's shocker suggests. Engineering order intake should recover gradually in 2016, while an ageing population means supplying respiratory gases is no bad thing. Sector consolidation, including Air Liquide's $10.3 billion takeover of Airgas, usually supports prices. While investors will need to readjust after a period of reliable growth, the new boss has plenty to work with.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net