Stock Report | 7-January-2017 | Ticker: SKFB SS

SKF
Recommendation HOLD bbbbb Price
SEK 168.20 (as of 6-January-2017)
12-Mo. Target Price
SEK 150.00
Equity Analyst Firdaus Ibrahim, CFA
GICS Sector Industrials Summary SKF is a Swedish based industrial conglomerate with global activities in the bear-
Sub-Industry Industrial Machinery ings industry.

Key Stock Statistics (Source: S&P Capital IQ, company reports)

52 Wk Range SEK 122.40 - 175.60 S&P EPS 2016E SEK 10.00 Yield (%) 3.27
Trailing 12-Month EPS SEK 8.52 S&P EPS 2017E SEK 11.00 Dividend Rate/Share SEK 5.50
Trailing 12-Month P/E (x) 0.0 Common Shares Outstg. (M) 455.35 Beta 0.48
P/E on S&P EPS 2016E 16.8 Market Capitalisation (M) SEK 76,590.0

Price Performance Qualitative Risk Assessment

30-Week Mov. Avg. 12-Mo. Target Price Volume Above Avg. STARS
LOW MEDIUM HIGH
10-Week Mov. Avg. Below Avg.
Our risk assessment reflects SKF’s cyclical
nature but also its high quality management team
200
and strong global market positions in its core
Share Price

160
product base. Free cash flow generation is also
very good at the company.
140

120
Volume(Mil.)

6
4
2
Quantitative Evaluations
0
S&P Capital IQ Quality Ranking B+
5 3 3 3 3
2 2 2
D C B- B B+ A- A A+
1
FMAMJ J A S OND J FMAMJ J A S OND J FMAMJ J A S OND J FMAMJ J A S OND J FMAMJ J A S OND J F

2012 2013 2014 2015 2016 Revenues / Earnings Data

Past performance is not an indication of future performance and should not be relied upon as such.
Revenues (Million SEK)
Analysis prepared by Equity Analyst Firdaus Ibrahim, CFA on 27-Oct-2016.
1Q 2Q 3Q 4Q Year
Highlights Investment Rationale/Risk
2017 -- -- -- -- 73,363E
ffIn 1H 2016, SKF’s revenue fell by 8% year- ffOur recommendation is 3-STARS (Hold). SKF’s
2016 17,720 18,370 17,912 -- 72,182E
over-year as both Industrial (-10%) and downward revision of its financial targets
Automotive (-4.1%) segments reported lower in February 2016 confirms our view that its 2015 19,454 19,961 18,367 18,215 75,997
revenue. Overall, currency had a negative operating environment will remain challenging 2014 16,734 17,955 17,787 18,499 70,975
impact of -2% and structure contributed in the foreseeable future. Despite lowering
2013 15,152 16,392 15,623 16,430 63,597
-0.7% to the revenue decline. By region, only most of its targets, we think that SKF will have
Middle East & Africa reported higher organic difficulties in achieving them. For example, the 2012 16,931 17,174 15,486 14,984 64,575
sales (+1%), while other regions were lower, company’s organic sales growth target of 5%
Earnings Per Share (SEK)
notably North America (-12%) with lower (from 8% previously) is far-fetch given recent
demand from customers across all industries. reported organic sales growth (2013: -0.7%, 2017 -- -- -- -- 11.00E
Revenue continued to trend lower in 3Q 2016, 2014: 3.3%, 2015: -2.6%) and lower demand 2016 2.40 1.44 2.96 -- 10.00E
falling 3% but we see a pick-up in Automotive outlook in its key markets especially in Asia
customer segment (+5%). Looking to 4Q 2016, 2015 2.46 3.65 1.59 0.82 8.52
and North America, which in total contributed
we expect SKF’s topline to remain under around 50% of SKF’s revenue. On the positive 2014 2.72 2.54 3.01 1.83 10.10
pressure due to lower demand in Industrial side, we have seen encouraging signs at its 2013 1.74 2.36 2.47 -4.57 2.00
customer segments across all regions. Automotive division since the launch of its
2012 2.81 2.63 2.67 2.12 10.23
profit improvement program in 4Q 2015 with
ffOperating profit (excluding one-time items) EBIT margin up 3.5%-pts to 7.1% in 9M 2016. An
fell from EUR6.9 billion in 9M 2015 to EUR5.8 improvement in margins at Industrials will help Fiscal year ended 31 Dec.
billion in 9M 2016, equivalent to a drop of SKF to achieve its target, but slowing demand
16%, as its margin contracted 1.3%-pts to has been holding up the segment’s performance. Dividend Data
10.7% due to lower volume and general
cost inflation. Industrial’s operating profit ffKey downside risks include: (i) significant Ex-Div
Amount (SEK) Payment Date
dropped 10% and its margin contracted by deterioration in demand especially in Date
0.2%-pts to 12.7%. Automotive continued to Europe and emerging markets, (ii) failure 5.50 1-Apr 7-Apr-16
benefit from its profit improvement program, to effectively execute profit enhancement 5.50 27-Mar 2-Apr-15
evidenced by the 3.5%-pts margin expansion program at Automotive division, and (iii)
to 7.1%, which was also helped by its sales adverse movement in currencies that could 5.50 31-Mar 7-Apr-14
growth in 3Q 2016. We expect group margin negatively affect revenue and profit translation. 5.50 29-Apr 7-May-13
to contract in 2016, as the negative margin 5.50 26-Apr 4-May-12
development at Industrial will more than offset ffOur 12-month target price for SKF is SEK150,
5.00 29-Apr 6-May-11
the operational improvement at Automotive. reflecting 2017 P/E of 13.6x, broadly in line with Source: Company reports.
the company’s 5-year historical forward P/E
ffWe expect normalized EPS to trend lower of 12.9x. We believe the valuation is fair as
in 2016 from the lower revenue and margin we balance the potential positive outcome of
contraction. SKF completed the divestment of restructuring initiatives with the challenging Past performance is not an indication of future per-
Kaydon velocity control and fly-by-wire in June outlook. formance and should not be relied upon as such.
2016 for a proceed of SEK3.1 billion.
Share Prices as of the Market close (16.30) on the
price-date quoted, unless otherwise stated at the
top of this page.
Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA.
This document is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek independent financial
advice regarding the suitability and/or appropriateness of making an investment or implementing the investment strategies discussed in this document and should understand that statements regarding future prospects may not be realised. Investors should note that income from
such investments, if any, may fluctuate and that the value of such investments may rise or fall. Accordingly, investors may receive back less than they originally invested. Investors should seek advice concerning any impact this investment may have on their personal tax position
from their own tax advisor. Please note the publication date of this document. It may contain specific information that is no longer current and should not be used to make an investment decision. Unless otherwise indicated, there is no intention to update this document.
Stock Report | 7-January-2017 | Ticker: SKFB SS

SKF

Business Summary 25-August-2016 Corporate Information

COMPANY OVERVIEW: SKF is a leading global supplier of products, solutions and services within rolling Office
Hornsgatan 1
bearings, seals, mechatronics, services and lubrication systems. Its services include technical support,
Gothenburg
maintenance services, condition monitoring, asset efficiency optimization, engineering consultancy and
0
training. SKF is headquartered in Sweden and has 115 manufacturing units in 24 countries, with a c. 48,000 Sweden
strong workforce. In 2015, it generated most of its sales in Europe (41%), followed by North America (26%),
Asia Pacific (26%), Latin America (6%) and Middle East/Africa (6%).
Telephone
BUSINESS SEGMENTS: SKF organizes its business according to the three main customer segments that +46 3 13 37 10 00
it serves. (1) Industrial Market (60% of sales, 11.6% operating profit margin in 2015) serves the global
industrial market directly and indirectly through SKF’s worldwide distributor network. Key segments are Website
metals, mining, cement, pulp & paperer, automation, machine tools, industrial drives, railway, marine, www.skf.com
energy and off-highway. (2) Automotive market (26%, 2.5%) provides a range of products, solutions and
Domicile
services to manufacturers of cars, light trucks, heavy trucks, trailers, buses, two-wheelers and the vehicle
Sweden
aftermarket. (3) Specialty Business (14%, 8.2%) consists of five stand-alone businesses with different
customer-specific application solutions - SKF Linear & Actuation Technology, SKF Aerospace, Kaydon Founded
Corporation, PEER Bearing Company and General Bearing Corporation. 1907

MARKET PROFILE: SKF is the world leader on the bearings market with other major international
companies including the Schaeffler Group, Timken, NSK, NTN and JTEKT. SKF estimates that the top 6
bearing manufacturers represent about 60% of the global market.

The global bearings market is generally seen as the worldwide sales of rolling bearings, comprising ball
and roller bearing assemblies of various designs, including mounted bearing units. SKF estimates that the
global rolling bearing market size in 2015 grew by 0-1% year-over-year and reached a value of between
SEK330-340 billion. Europe accounts for 25% of the total world market with Germany alone accounting
for almost 10%. The Americas now represent slightly more than 20% of global demand, of which the U.S.,
Canada and Mexico together account for about 80%. Asia’s share of the world bearing market grew the
most year-over-year and accounted for more than 50% compared to less than 30% fifteen years ago.
China’s share of the total world bearing market grew heavily to about 30%.

CORPORATE STRATEGY: The company focuses on five strategic priorities: (1) creating and capturing
customer value, (2) application-driven innovation, (3) world-class manufacturing, (4) cost competitiveness, Employees
and (5) maximizing cash flow over time.

Its financial targets from 2016 are to achieve, over a business cycle, an organic growth of 5% in local
currencies, a reported operating margin of 12%, a return on capital employed of 16%, a net working capital
of 25% and a net debt/equity ratio of 80%.
NA
FINANCIAL TRENDS: In 2015, SKF’s reported revenue grew by 7% year-over-year, mainly due to currency
tailwinds (+10%) but organic sales saw a decline of 3%. By region, organic sales were higher in Middle Stockholders
East & Africa (+13%), Europe (+0.4%) and Latin America (+0.5%) but declines were observed in North NA
America (-8%) and Asia (-4%). The sales decline in North America was sharper than anticipated due Officers
to lower demand and destocking in the supply chain. By business segments, sales in Automotive
were slightly up by 0.3% organically, while Industrial and Specialty Business declined by 4% and 2%
respectively. We see a lower demand for SKF products and services in 2016 given the continuation of
macroeconomic uncertainty.

Operating margin (excluding one-time items) in 2015 declined 0.3%-pts year-over-year to 11.4%, as margin
fell in Industrial and Specialty Business. Automotive saw an improvement of 0.9%-pts in normalized
operating margin to 5.4%, reflecting its profit improvement program.

Net profit fell by 15% in 2015, due to higher expenses, asset write-downs and other one-off items. Despite
this, dividend was maintained at SEK5.5 per share, equivalent to a payout ratio of 65%. Net debt fell from Board of Directors
SEK18.6 billion to SEK15.3 billion. FCF improved significantly to SEK5.6 billion (2014: SEK76 million).

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Stock Report | 7-January-2017 | Ticker: SKFB SS

SKF
Quantitative Evaluations Key Growth Rates and Averages

Volatility LOW AVERAGE HIGH Past Growth Rate (%) 1Year 3Years 5Years
Sales 7.08 17.69 24.53
Net Income -15.65 -16.77 -24.48
Expanded Ratio Analysis
2017E 2016E 2015 2014 Ratio Analysis (Annual Avg.)
Net Margin (%) 5.11 4.34 5.88
EV/Sales NA NA 1.45 1.50
% LT Debt to Capitalization -27.25 -28.47 -24.16
EV/EBITDA NA NA 11.81 10.86
Return on Equity (%) 16.20 13.97 18.74
EV/EBIT NA NA 15.83 13.98
P/E Ratio 15.29 16.82 19.74 16.65
Avg. Diluted Shares Outstg. (M) 455.35 455.35 455.34 455.33
Figures based on current price.

Company Financials Fiscal Year ending 31-Dec

Per share data (SEK) 2017E 2016E 2015 2014 2013 2012
Tangible Book Value NA NA 7.90 2.71 2.91 25.73
Cash Flow NA NA 20.55 21.61 18.18 19.36
Earnings 11.00 10.00 8.52 10.10 2.00 10.23
Payout Ratio (%) 52.1 55.0 64.5 54.4 274.6 53.7
Prices - High NA NA 230.80 178.90 184.70 174.20
Prices - Low NA NA 135.60 138.40 149.10 128.10
P/E Ratio - High NA NA 27.1 17.7 92.4 17.0
P/E Ratio - Low NA NA 15.9 13.7 74.6 12.5
EV/EBIT NA NA 15.8 14.0 15.7 12.1
Income Statement Analysis (Million SEK)
Revenues 73,363 72,182 75,997 70,975 63,597 64,575
Operating Profit (EBIT) NA NA 6,985 7,642 6,430 7,096
Net Financials NA NA -532 -310 -331 -369
Pre-tax Profit NA NA 5,834 6,668 2,821 6,408
Net Income 5,009 4,554 3,880 4,600 912 4,662
EBIT Margin (%) NA NA 9.2 10.8 10.1 11.0
Interest Cover NA NA 10.9 16.9 14.6 14.7
Capex/Depreciation (%) NA NA 1.1 1.1 1.1 1.3
Net Margin (%) 6.8 6.3 5.1 6.5 1.4 7.2
Balance Sheet & Other Fin. Data (Million SEK)
Cash NA NA 8,500 7,441 6,201 9,057
Current Assets NA NA 38,153 38,807 34,582 34,848
Total Assets NA NA 79,733 81,639 70,991 60,757
Current Liabilities NA NA 15,331 16,102 16,741 13,903
Long Term Debt NA NA 22,383 24,077 19,698 12,730
Shareholder Funds 27,866 25,380 24,815 23,089 20,100 21,340
Capital Expenditure NA NA 2,063 1,845 1,741 1,954
Net Debt/(Cash) NA NA 15,325 18,664 15,143 6,673
Net Gearing (%) NA NA 61.8 80.8 75.3 31.3
Return on Assets (%) NA NA 4.8 6.0 1.4 7.8
Return on Equity (%) 18.8 18.1 16.2 21.3 4.4 21.8
Accounting Standard IFRS IFRS IFRS IFRS IFRS IFRS

NA- Not Available. NM- Not Meaningful. E- Estimated. Source: S&P Capital IQ Equity Research; Company Reports
Company financials data are based on figures as reported, except for EPS and EV/EBIT, which are S&P adjusted.
DPS and BVPS (and related ratios e.g. dividend yield and ROE) are based on consensus estimates.

Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA.

Stock Report | 7-January-2017 | Ticker: SKFB SS

SKF

Industry Outlook Stock Performance

We are neutral on European Industrials, reflecting
our mixed view on its diverse sub-sectors and our
expectation of a moderate but fragile economic
growth in the Eurozone in 2017. The Industrials
sector is highly cyclical due to its dependence on
the global economic cycle and exposure to the
business cycles of a diverse customer base. As a
result, our stock choices are heavily influenced
by company exposures to regional
investment rise, while taxes are cut. This will Month-end Price Performance as of 31-Oct-16
provide a boost to its economy, in our view. We
see companies with exposure to the U.S. will 150
benefit from expected increase in infrastructure
140
spending and currency tailwinds from USD
strength. 130
The stabilization of oil price and its potential 120
upward trajectory following OPEC’s decision to

%Change
macroeconomic factors. We also favor cut production in November 2016 will boost 110
companies that are undergoing or have recently activity for oil & gas players, and industrial
100
completed restructuring programs, where the companies related to the oil & gas value chain
reduced cost base will boost profitability via (e.g. equipment and machinery suppliers), in our
90
operational leverage in the event of a cyclical opinion. On the other hand, we think airlines will
upturn. see less benefit from fuel cost savings, and 80
together with industry overcapacity and negative
For the Eurozone, we see economic growth will sentiment from terrorist attacks underpin our 70
continue at a moderate pace in 2017, as recent negative view on the airline sub-sector. The
labor market gains and rising private consumption increase in oil price and other commodity prices 60
2011 2012 2013 2014 2015 2016
are being counterbalanced by a number of will also push up raw material costs for most
negative factors such as Brexit and uncertainty industrial companies, in our view.
SKF
from upcoming elections in France, Germany and
the Netherlands. Euro manufacturing PMI came The S&P Europe 350 Industrials Index was up S&P Europe 350 Index

in at 54.9% in December 2016, the strongest 8.8% in 2016, outperforming the S&P Europe 350 S&P Europe 350 - Industrials Index
expansion in factory activity since April 2011, Index which recorded a decline of 0.4% during
reflecting increase in output, new orders and the period. Past performance is not an indication of future per-
employment. Producers reported that orders formance and should not be relied upon as such.
were buoyed by increased competitiveness
resulting from the depreciation of the EUR.
Unemployment in the Eurozone fell to single digit
in November 2016, the first time in five years,
declining steadily from its peak in of 12.1% in 2013
to 9.8%.

We believe the U.S. will outperform in the

advanced economy. The new administration will
begin its policy priorities in 2017 and in this
context the fiscal stance is projected to become
more expansionary as public spending and

Peer Group: Industrial Machinery

Peer Group Exchange Currency Recent P/E 12-Mo. 30-Day 1-Year Yield Stk. Mkt. Ret. on Pretax LTD to
Stock Ratio Trailing Price Price Cap. Equity Margin Cap.
Price EPS Chg. Chg. (%) (%) (%)
(%) (%)

SKF Stockholm SEK 168.20 16.8 8.52 -2.8 27.7 3.3 76,590 (M) 14.4 8.3 44.3

Alfa Laval Stockholm SEK 153.20 20.1 8.65 9.4 4.6 2.8 64,261 (M) 14.1 10.4 35.8
Assa Abloy Stockholm SEK 167.20 20.8 7.26 0.7 -3.1 1.9 186,023 (M) 18.6 15.2 23.9
Atlas Copco Stockholm SEK 279.20 21.5 11.33 0.0 43.5 2.4 332,175 (M) 21.6 17.7 30.9
Cargotec Helsinki EUR 42.22 14.9 2.70 8.1 28.6 2.4 2,732 (M) 11.1 5.4 29.7
GEA Group Xetra EUR 38.15 19.1 1.37 6.8 8.7 2.4 7,344 (M) 12.7 8.2 4.2
Heidelberger Druckmaschinen Xetra EUR 2.59 11.1 0.11 9.8 23.9 Nil 667 (M) 6.7 0.6 58.1
Kone Helsinki EUR 43.23 21.9 1.96 4.8 14.7 3.7 22,746 (M) 47.5 16.2 1.8
Sandvik Stockholm SEK 113.50 19.3 5.14 2.4 59.9 2.5 142,373 (M) 13.0 8.4 47.8
Wartsila Helsinki EUR 42.81 18.4 2.10 6.0 8.2 3.0 8,444 (M) 16.4 9.4 18.4

NA- Not Available. NM- Not Meaningful. Source: S&P Capital IQ Equity Research.

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Stock Report | 7-January-2017 | Ticker: SKFB SS
SKF
Analyst Research Notes and other Company News
26-OCT-2016
S&P GLOBAL MAINTAINS HOLD ON SKF - SOME POSITIVES IN 3Q 2016 BUT
TOO EARLY FOR A CONFIRMATION OF A TURNAROUND (SKFB SS, CURRENT
PRICE: SEK149.90 AS OF 25-OCT-2016, ***)
We raise our target price for SKF to SEK150 (SEK140), reflecting a 2017 P/E of
13.6 x, broadly in line with its 3-year historical forward P/E of 12.9x, balancing
its restructuring potential with the challenging outlook. We cut our 2016 EPS
to SEK10 (SEK10.61) and 2017 EPS to SEK11 (SEK11.56). 3Q 2016 EPS of SEK2.96
came in higher than Capital IQ consensus estimate of SEK2.46. We believe
the beat was mainly due to one-off gain arising from its pension plan. We
see some positives in 3Q 2016: (i) sales only fell 3%, which is an improvement
over the 8% decline in 2Q, (ii) margin at Industrial improved by 1.9%-pts
after several quarters of contraction, and (iii) sales at Automotive rose 5%
on growth in Asia. However, we still expect its near-term outlook to remain
challenging as SKF did not highlight any expected improvement in demand for
4Q 2016. In addition, one good quarter is not enough for us to confirm that the
company is turning around. /F. Ibrahim, CFA
21-JUL-2016
S&P GLOBAL MAINTAINS HOLD ON SKF - 2Q 2016 EBIT DRAGGED BY
INDUSTRIAL DESPITE CONTINUED IMPROVEMENT AT AUTOMOTIVE (SKFB
SS, CURRENT PRICE: SEK132.00 AS OF 21-JUL-2016 13:30 BST, ***)
We cut our 12-month target price for SKF to SEK140 (SEK155), reflecting
2016 P/E of 13.2x, broadly in line with SKF’s 5-year historical forward P/E of
12.9x, balancing the restructuring potential with the challenging outlook. We
cut our 2016 EPS to SEK10.61 (SEK11.20) following SKF’s 2Q 2016 earnings
miss as its EBIT (excluding one-offs) of SEK2.0 billion missed Capital IQ
consensus estimate of SEK2.1 billion. Net sales fell by 8% year-over-year in
2Q 2016, dragged by both Industrial (-9%) and Automotive (-5%), with notably
weak numbers in North America. EBIT was negatively impacted by margin
contraction at Industrial (-3.0%-pts, due to lower volumes and costs inflation),
which more than offset the margin improvement at Automotive (+1.0%-pts).
We expect 3Q 2016 to be sequentially weaker, but are encouraged by the
continued improvement at Automotive and what we see as signs of uptick in
demand in Europe. /F. Ibrahim, CFA
29-APR-2016
S&P GLOBAL RAISES SKF TO HOLD FROM SELL - RESTRUCTURING
PROGRESS AMID STABILIZING END MARKETS (SKFB SS, CURRENT PRICE:
SEK152.00 AS OF 28-APR-2016, ***)
We raise our 12-month target price to SEK155 (from SEK127), reflecting 2016
P/E of 13.8x, broadly in-line with SKF’s 5-year historical forward P/E of 12.9x,
balancing the restructuring potential and the challenging outlook. We cut
our 2016 EPS to SEK11.20 (SEK11.50) as SKF’s 1Q 2016 EPS of SEK2.40 missed
Capital IQ consensus by 7%. SKF’s 1Q 2016 results showed sales falling 8.9%
(organically -6.1%). The bright spot was automotive, a long underperforming
business, where sales were down 0.2% organically but margins rose from
2.2% to 6.4%. Fixing automotive is vital for the group to reach margin targets.
For once, few one-offs littered the results, with reported EBIT margin at 10.6%
vs. 8.8%, driven by a much reduced expense line - a sign that cost-cutting is in
action. SKF guides for slightly higher demand sequentially. We are no longer
negative on the stock as we expect good progress in its restructuring and its
end markets to stabilize. /F. Ibrahim, CFA
03-FEB-2016
S&P CAPITAL IQ MAINTAINS SELL OPINION ON SKF - 55% DROP IN 4Q 2015
NET PROFIT, LOWERS FINANCIAL TARGETS (SKFB SS, CURRENT PRICE:
SEK133.40 AS OF 02-FEB-2016, **)
We lower our 12-month target price to SEK127 (from SEK140), reflecting
2016 P/E of 11.0x. The implied discount to SKF’s 5-year historical forward P/E
of 13.3x is fair in our view on lower operating margin (9.2% vs. average of
12.0% in 2010-2014) and challenging outlook. 2015 reported EPS of SEK8.52
was lower than our and Capital IQ consensus forecasts by 17% and 28%
respectively. We lower our 2015 EPS forecast to SEK11.50 (SEK13.73) to factor
in the negative outlook. SKF’s 4Q 2015 net profit dropped 55% year-over-year
to SEK374 million as sales declined by 2% (-5% organically) and operating
expenses increased by 8%. The period saw a higher-than-expected sales
decline in North America (-12%), which was affected by lower demand and
supply chain destocking. SKF’s revision of its financial targets confirms our
view that its operating environment will remain challenging in the foreseeable
future and therefore, we maintain our negative stance on the stock. /F.
Ibrahim, CFA
Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA.
16-OCT-2015
S&P CAPITAL IQ MOVES SKF TO SELL FROM HOLD - LOWER 3Q 2015
ORGANIC SALES AS WEAKENING DEMAND EXPECTED TO CONTINUE (SKFB
SS, CURRENT PRICE: SEK155.30 AS OF 15-OCT-2015, **)
We cut our 12-month target price to SEK140 (SEK195), implying Capital IQ
consensus 2016 EV/EBIT of 10.0x. This is a discount to its 5-year historical
average of 11.4x, which we believe is justified given its lower operating
margin (3Q 2015 of 10.8% vs. 5-year average of 12.0%) and challenging
outlook. We cut our 2015 and 2016 revenue forecasts to SEK75 billion and
SEK77 billion, and the corresponding EPS forecasts to SEK10.27 and SEK13.73.
For 3Q 2015, organic revenue was down 5% on lower sales volume as demand
continued to weaken especially in Asia (-8%) and North America (-11%).
Operating margin declined by 1.0%-pts vs. 3Q 2014, contributed by margin
decline in Industrial (-2.2%-pts) and Specialty Business (-2.7%-pts). We
believe SKF’s 15% margin target is challenging given the latest margin trend.
SKF guided a weaker demand entering into 4Q 2015 and we see it continuing
in 2016 given the macro-economic uncertainty. /F. Ibrahim, CFA
15-JUL-2015
S&P CAPITAL IQ MAINTAINS HOLD ON SKF – PROGRESS TOWARDS MARGIN
AND CASH TARGETS MITIGATED BY WEAKER END DEMAND (SKFB SS,
CURRENT PRICE: SEK190.50 AS OF 14-JUL-2015, ***)
We maintain our Hold (***) and lower our 12-month target price to SEK 195
(SEK 220) which is a 2015 EV/EBIT multiple of 12.3x, vs. a 5-year average of
11.4x, reflecting the higher margin potential. SKF H1 15 sales were up 13.6%
(-0.2% organic). Organically, Europe rose 0.8%, despite weaker demand
in emerging markets and energy, North America fell 4.1% as automotive
underperformed, Latam rose 1.5% and MENA rose 15%, while Asia rose only
0.6% on Chinese destocking and lower railway demand. For Q3, SKF guides
for demand to be sequentially lower but this is not seasonally adjusted which
implies a near flat trend, not as bad as first thought, in our view. Adj. EBIT
margin at 12.6% in H1 improved on 2014 (11.9%) despite Automotive and
Speciality Business failing the 15% margin target (3.8% and 10.4%). Progress
was made on working capital, down SEK300 mln in Q2 while seasonally
up. We cut our sales forecasts for 2015 and 2016 by 1% and 1.5% on the
announced small disposals. /J. Jarmoszko
17-APR-2015
S&P CAPITAL IQ MAINTAINS HOLD ON SKF – MARGINS RISE BUT FLAT
DEMAND IN Q2 15 (SKFB SS, CURRENT PRICE: SEK210.20 AS OF 17-APR-2015
10:45 BST, ***)
SKF reported adjusted operating profit of SEK2.4 bln in Q1 15, up 25% and in
line with S&P Capital IQ consensus although sales fell 1% short of consensus.
Organic sales growth saw a further sequential decline to 1.4% (Q4 14: 1.8%,
Q3 14: 1.9%) including a 2.4% fall in North America due to lower activity in
mining and oil & gas. However, revenue rose 16.3% on currency effects of
14.9% from the weakening of the SEK. SKF sees demand remaining flat in Q2
15 (versus Q1 15 and 2Q 14) with no pick-up seen yet in Europe. We raise our
EPS to SEK13.72 in 2015E (+4%) and SEK16.21 in 2016E (+13%) to incorporate
the weakening in SEK (both transactional and translational benefits). We
maintain our Hold (***) and raise our 12-month target price to SEK220
(SEK200) on increased estimates. This is equivalent to a 2015E EV/EBITDA of
11.0x, a premium to the 3-year historic average (9.6x) as we see rising margins
on cost measures (adj. EBIT of 12.2%, 2014: 11.7%) which are 40% complete.
/W. Howlett, CFA
29-JAN-2015
S&P CAPITAL IQ MAINTAINS HOLD ON SKF – COST MEASURES
ANNOUNCED (SKFB SS, CURRENT PRICE: SEK195.00 AS OF 28-JAN-2015, ***)
SKF reported adjusted operating profit of SEK2.08 bln in Q4 14, up 15% and
in line with Capital IQ consensus (SEK2.07 bln). Volume growth edged down
to 1.8% (Q3 14: 1.9%) and SKF sees demand remaining stable sequentially in
Q1 15. However, net sales rose 12.6% supported by currency effects (+8.9%)
following the weakening of the SEK against the USD. The underlying EBIT
margin fell to 11.2% (Q3 14: 11.8%) and remains below SKF’s target of 15%.
SKF announced SEK1.2 bln of cost savings by end-2016 while incurring
restructuring costs of SEK1.4 bln through merging the two industrial units
and reducing headcount. The Automotive division, where profitability lags
well behind the group (underlying EBIT margin: 1.2%), will also see job cuts.
We maintain Hold (***) but raise our 12-month target price to SEK200 (155)
equivalent to a 2015E EV/EBITDA of 10.9x. This is a premium to the 3-year
historic average (9.6x) which we see as warranted given improving margins
on cost measures. /W. Howlett, CFA
Stock Report | 7-January-2017 | Ticker: SKFB SS
SKF
Glossary
S&P Capital IQ STARS – Since January 1, 1987, S&P Capital IQ Equity
Research has ranked a universe of U.S. common stocks, ADRs (American
Depositary Receipts), and ADSs (American Depositary Shares) based on
a given equity’s potential for future performance. Similarly, S&P Capital IQ
Equity Research has ranked Asian and European equities since June 30,
2002. Under proprietary STARS (STock Appreciation Ranking System),
equity analysts rank equities according to their individual forecast of an
equity’s future total return potential versus the expected total return of a
relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P
Europe 350® Index or S&P 500® Index)), based on a 12-month time
horizon. STARS was designed to meet the needs of investors looking to
put their investment decisions in perspective. Data used to assist in
determining the STARS ranking may be the result of the analyst’s own
models as well as internal proprietary models resulting from dynamic data
inputs.
S&P Capital IQ Quality Ranking (also known as S&P Capital IQ Earnings
& Dividend Rankings) - Growth and stability of earnings and dividends
are deemed key elements in establishing S&P Capital IQ’s earnings and
dividend rankings for common stocks, which are designed to capsulize
the nature of this record in a single symbol. It should be noted, however,
that the process also takes into consideration certain adjustments and
modifications deemed desirable in establishing such rankings. The final
score for each stock is measured against a scoring matrix determined by
analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the
following ladder of rankings:
A+ Highest B Below Average
A High B- Lower
A- Above Average C Lowest
B+ Average D In Reorganization
NR Not Ranked
S&P Capital IQ EPS Estimates – S&P Capital IQ earnings per share
(EPS) estimates reflect analyst projections of future EPS from continuing
operations, and generally exclude various items that are viewed as
special, non-recurring, or extraordinary. Also, S&P Capital IQ EPS
estimates reflect either forecasts of equity analysts; or, the consensus
(average) EPS estimate, which are independently compiled by Capital
IQ, a data provider to S&P Capital IQ Equity Research. Among the items
typically excluded from EPS estimates are asset sale gains; impairment,
restructuring or merger-related charges; legal and insurance settlements;
in process research and development expenses; gains or losses on the
extinguishment of debt; the cumulative effect of accounting changes; and
earnings related to operations that have been classified by the company
as discontinued. The inclusion of some items, such as stock option
expense and recurring types of other charges, may vary, and depend
on such factors as industry practice, analyst judgment, and the extent to
which some types of data is disclosed by companies.
S&P Capital IQ Core Earnings- S&P Capital IQ Core Earnings is a uniform
methodology for adjusting operating earnings by focusing on a company’s
after-tax earnings generated from its principal businesses. Included in the
definition are employee stock option grant expenses, pension costs, re-
structuring charges from ongoing operations, write-downs of depreciable
or amortizable operating assets, purchased research and development,
M&A related expenses and unrealized gains/losses from hedging
activities. Excluded from the definition are pension gains, impairment of
goodwill charges, gains or losses from asset sales, reversal of prior-year
charges and provision from litigation or insurance settlements.
S&P Capital IQ 12-Month Target Price – The equity analyst’s projection
of the market price that a given security will command 12 months hence,
based on a combination of intrinsic, relative, and private market valuation
metrics. Analysts may also review other proprietary inputs in determining
target price.
S&P Capital IQ Equity Research – S&P Capital IQ Equity Research is
produced and distributed by Accounting Research & Analytics, LLC d/b/a
CFRA (“CFRA US”). Certain research is distributed by CFRA UK Limited
(together with CFRA US, “CFRA”). Certain research is produced by
Standard & Poor’s Malaysia Sdn. Bhd (“S&P Malaysia”) under contract
to CFRA US. S&P CAPITAL IQ™ is used under license. The owner of this
trademark is S&P Global Inc. or its affiliate, which are not affiliated with
CFRA or the author of this content.
Abbreviations Used in S&P Capital IQ Equity Research Reports
CAGR- Compound Annual Growth Rate; CAPEX- Capital Expenditures;
CY- Calendar Year; DCF- Discounted Cash Flow; DDM– Dividend Discount
Model; EBIT- Earnings Before Interest and Taxes; EBITDA - Before
Interest, Taxes, Depreciation and Amortization; EPS- Earnings Per Share;
EV- Enterprise Value; FCF- Free Cash Flow; FFO- Funds From Operations;
FY- Fiscal Year; P/E- Price/Earnings; P/NAV- Price to Net Asset Value; PEG
Ratio- P/E-to-Growth Ratio; PV- Present Value; R&D- Research &
Development; ROCE- Return on Capital Employed; ROE- Return on Equity;
ROI- Return on Investment; ROIC- Return on Invested Capital; ROA-
Return on Assets; SG&A- Selling, General & Administrative Expenses;
SOTP- Sum-Of-The-Parts; WACC-Weighted Average Cost of Capital
Dividends on American Depository Receipts (ADRs) and American
Depository Shares (ADSs) are net of taxes (paid in the country of origin).
S&P Capital IQ Qualitative Risk Assessment. Reflects an equity analyst’s
view of a given company’s operational risk, or the risk of a firm’s ability to
continue as an ongoing concern. The S&P Capital IQ Qualitative Risk
Assessment is a relative ranking to the S&P U.S. STARS universe, and
should be reflective of risk factors related to a company’s operations, as
Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA.
All trademarks mentioned herein belong to their respective owners.
opposed to risk and volatility measures associated with share prices. For an
ETF this reflects on a capitalization-weighted basis, the average qualitative About S&P Global Equity Research’s Distributors:
risk assessment assigned to holdings of the fund.
This Research Report is published and originally distributed by CFRA US,
STARS Ranking system and definition: with the following exceptions: In the UK/EU/EEA, it is published and originally
bbbbb 5-STARS (Strong Buy): distributed by CFRA UK Limited, an Appointed Representative of Hutchinson
Total return is expected to outperform the total return of a relevant Lilley Investments LLP, which is regulated by the Financial Conduct Authority
benchmark, by a wide margin over the coming 12 months, with shares (No. 582181), and in Malaysia by S&P Malaysia, which is regulated by
rising in price on an absolute basis. Securities Commission Malaysia, (No. CMSL/A0181/2007) under license
from CFRA US, and its subsidiaries do not distribute reports to individual
bbbbb 4-STARS (Buy):
(retail) investors and maintain no responsibility for reports redistributed by
Total return is expected to outperform the total return of a relevant third parties such as brokers or financial advisors.
benchmark over the coming 12 months, with shares rising in price on an
absolute basis.
bbbbb 3-STARS (Hold):
Total return is expected to closely approximate the total return of a relevant
benchmark over the coming 12 months, with shares generally rising in price
on an absolute basis.
bbbbb 2-STARS (Sell):
Total return is expected to underperform the total return of a relevant
benchmark over the coming 12 months, and the share price not anticipated
to show a gain.
bbbbb 1-STAR (Strong Sell):
Total return is expected to underperform the total return of a relevant
benchmark by a wide margin over the coming 12 months, with shares
falling in price on an absolute basis.
Relevant benchmarks:
In North America, the relevant benchmark is the S&P 500 Index, in Europe
and in Asia, the relevant benchmarks are the S&P Europe 350 Index and the
S&P Asia 50 Index, respectively.
Disclosures
S&P GLOBAL™ and S&P CAPITAL IQ™ are used under license. The owner
of these trademarks is S&P Global Inc. or its affiliate, which are not affiliated
with CFRA or the author of this content.
Stocks are ranked in accordance with the following ranking methodologies:
STARS Stock Reports: Qualitative STARS recommendations are
determined and assigned by equity analysts. For reports containing STARS
recommendations refer to the Glossary section of the report for detailed
methodology and the definition of STARS rankings.
Quantitative Stock Reports: Quantitative recommendations are determined
by ranking a universe of common stocks based on 5 measures or model
categories: Valuation, Quality, Growth, Street Sentiment, and Price
Momentum. In the U.S., a sixth sub-category for Financial Health will also
be displayed. Percentile scores are used to compare each company to all
other companies in the same universe for each model category. The five
(six) model category scores are then weighted and rolled up into a single
percentile ranking for that company. For reports containing quantitative
recommendations refer to the Glossary section of the report for detailed
methodology and the definition of Quantitative rankings.
STARS Stock Reports and Quantitative Stock Reports:
The methodologies used in STARS Stock Reports and Quantitative Stock
Reports (collectively, the “S&P Capital IQ Research Reports” or “Research
Reports”) reflect different criteria, assumptions and analytical methods and
may have differing recommendations.
The methodologies and data used to generate the different types of
Research Reports are believed by the author and distributor reasonable
and appropriate. Generally, CFRA does not generate reports with different
ranking methodologies for the same issuer. However, in the event that
different methodologies or data are used on the analysis of an issuer, the
methodologies may lead to different views or recommendations on the
issuer, which may at times result in contradicting assessments of an issuer.
CFRA reserves the right to alter, replace or vary models, methodologies or
assumptions from time to time and without notice to clients.
STARS Stock Reports:
Global STARS Distribution as of September 30, 2016
Ranking North Europe Asia Global
America
Buy 25.00% 29.27% 16.13% 24.57%
Hold 50.63 53.66 77.42 54.74
Sell 24.37 17.07 6.45 20.69
Total 100.0% 100.0% 100.0% 100.0%
Analyst Certification
STARS Stock Reports are prepared by the equity research analysts of
CFRA and S&P Malaysia, under contract to CFRA. All of the views
expressed in STARS Stock Reports accurately reflect the research
analyst’s personal views regarding any and all of the subject securities or
issuers. Analysts generally update stock reports at least four times each
year. No part of analyst, CFRA, or S&P Malaysia compensation was, is, or
will be directly or indirectly related to the specific recommendations or
views expressed in a STARS Stock Report.
Stock Report | 7-January-2017 | Ticker: SKFB SS

SKF
General Disclaimers
Notice to all jurisdictions:
Where Research Reports are made available in a language other than English and in the case of
inconsistencies between the English and translated versions of a Research Report, the English version will
control and supersede any ambiguities associated with any part or section of a Research Report that
has been issued in a foreign language. Neither CFRA nor its affiliates guarantee the accuracy of the
translation.

The content of this report and the opinions expressed herein are those of CFRA based upon publicly-available
information that CFRA believes to be reliable and the opinions are subject to change without notice. This analysis
has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or
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ENTITIES SPECIFICALLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, to the full extent permitted by law,
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Past performance is not necessarily indicative of future results. This document may contain
forward-looking statements or forecasts; such forecasts are not a reliable indicator of future performance.

This report is not intended to, and does not, constitute an offer or solicitation to buy and sell securities or engage in
any investment activity. This report is for informational purposes only. Recommendations in this report are not
made with respect to any particular investor or type of investor. Securities, financial instruments or strategies
mentioned herein may not be suitable for all investors and this material is not intended for any specific investor and
does not take into account an investor’s particular investment objectives, financial situations or needs. Before
acting on any recommendation in this material, you should consider whether it is suitable for your particular
circumstances and, if necessary, seek professional advice.

Additional information on a subject company may be available upon request.

CFRA’s financial data provider is S&P Global Market Intelligence. THIS DOCUMENT CONTAINS COPYRIGHTED
AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM S&P GLOBAL MARKET INTELLIGENCE.
FOR RECIPIENT’S INTERNAL USE ONLY.

The Global Industry Classification Standard (GICS) was developed by and/or is the exclusive property of MSCI,
Inc. and Capital IQ, Inc. (“Capital IQ”). GICS is a service mark of MSCI and Capital IQ and has been licensed for use
by CFRA.

For residents of the European Union/European Economic Area: Research reports are originally distributed
by CFRA UK Limited (company number 08456139 registered in England & Wales with its registered office address
at 131 Edgware Road, London, W2 2AP, United Kingdom). CFRA UK Limited is an Appointed Representative of
Hutchinson Lilley Investments LLP, which is regulated by the UK Financial Conduct Authority (No. 582181).

For residents of Malaysia: Research reports are originally produced and distributed by S&P Malaysia, under
license from CFRA US. S&P Malaysia is regulated by Securities Commission Malaysia (License No. CMSL/
A0181/2007).

For residents of all other countries: Research reports are originally distributed Accounting Research &
Analytics, LLC d/b/a CFRA.

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CFRA, the CFRA inverted pyramid logo, and STARS are registered trademarks of CFRA.

Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA.

All trademarks mentioned herein belong to their respective owners.