Henkel Hold Recommendation Despite Rising Costs

MASTERS IN FINANCE
HENKEL AG & CO. KGAA COMPANY REPORT

CHEMICALS & CONSUMER GOODS 03. JANUARY 2017
STUDENT: PATRICK PECHER 27211@novasbe.pt
Recommendation: HOLD
Evolution instead of Revolution
Vs Previous Recommendation HOLD
Performance in three solid growing sectors Price Target FY18: 101.25 €

Vs Previous Price Target N/A
§ We recommend holding Henkel given our FY18 target price of
101,25€. This corresponds to an overall upside potential of Price (as of 2-Jan-18) 99.00 €
4.01% compared to the current market price, including a Reuters: HNKG.DE, Bloomberg: HEN3 GY Equity
dividend of €1.72.
52-week range (€) 92.54-114.25
Market Cap (€m) 46,559.2167
§ Adhesive Technologies, Henkel’s key segment, will be the
Outstanding Shares (m) 259.796
main driver in terms of organic growth with an CAGR of 3.7% Outstanding Preferred Shares (m) 178.163
in the next 5 years. Growth in major end markets will reinforce Source: Bloomberg
the position as the world leader with 25% market share in

2016. An increase of raw material prices however may put
pressure on the operating margin.
§ A highly competitive environment and potential increase of raw

material prices hinder revenue growth and profitability in the
laundry and home care segment. The CAGR for organic
growth is forecasted at 3.3% until 2022, which is 1.7% points Source: Bloomberg
below the average of previous years.

(Values in € millions) 2015 2016 2017F
Revenues 18,089 18,714 19,860
§ The beauty care segment also faces high competition and
EBITDA 3,105 3,345 3,557
increasing material prices. Nevertheless, organic growth is EBIT 2,006 2,125 2,215
expected to reach previous years CAGR of 2.2%. A shifting Net Profit 1,968 2,093 2,112
EPS 4.49 4.78 4.82
focus on acquisitions in the sector and an extensive network of P/E 19.7 20.7 21.2
co-operations in the e-commerce business will be decisive. EV/Sales 2.26 2.53 2.42
EV/EBITDA 13.2 14.2 13.5
§ Acquisitions remain a sales driver as a part of Henkel’s Net Debt/EV 1.8% 6.9% 7.3%
ROIC 40.4% 38.6% 33.4%
strategy, contributing approximately €338 million on average in
Source: Analyst Estimates, Company Reports
annually acquired revenue across all segments in the future,
but a strong Euro will set limits.
Company description
Henkel is a German manufacturer of chemicals and consumer
goods within the segments Adhesive Technologies, Laundry &
Home Care and Beauty Care.
THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY PATRICK PECHER, A MASTERS IN FINANCE STUDENT OF
THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A
MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL.
(PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)
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Table of Contents
COMPANY OVERVIEW ............................................................................. 3
SHAREHOLDER STRUCTURE ................................................................................. 3

ADHESIVE TECHNOLOGY MARKET ....................................................... 4
MARKET TRENDS .................................................................................................. 5

OUTLOOK .............................................................................................................. 7
LAUNDRY & HOME CARE MARKET ........................................................ 7
MARKET TRENDS .................................................................................................. 8

OUTLOOK .............................................................................................................. 9
BEAUTY CARE MARKET ........................................................................ 10
MARKET TRENDS ................................................................................................ 11

OUTLOOK ............................................................................................................ 13
INORGANIC GROWTH FACTORS .......................................................... 13
M&A ACTIVITY .................................................................................................... 13

FOREIGN EXCHANGE RATES .............................................................................. 15
FINANCIALS ............................................................................................ 16
COST OF GOODS SOLD ...................................................................................... 16

OPERATING EXPENDITURES ............................................................................... 18
CAPITAL EXPENDITURES .................................................................................... 20
RETURN ON INVESTED CAPITAL ......................................................................... 21
WORKING CAPITAL ............................................................................................. 21
CAPITAL STRUCTURE ......................................................................................... 22
VALUATION ............................................................................................. 23
COST OF CAPITAL ............................................................................................... 23

DISCOUNTED CASH FLOW .................................................................................. 23
SCENARIO ANALYSIS .......................................................................................... 24
FINAL CONSIDERATIONS ..................................................................................... 25
APPENDIX ................................................................................................ 26
REVENUES .......................................................................................................... 26
INCOME STATEMENT ........................................................................................... 27
BALANCE SHEET ................................................................................................. 28
STATEMENT OF SHAREHOLDERS EQUITY .......................................................... 29
REPORT RECOMMENDATIONS ........................................................................... 30
PAGE 2/32
Company overview
Headquartered in Düsseldorf, Henkel AG & Co. KGaA is a listed German
manufacturer of chemicals and consumer goods. The company’s operations are
divided into the three business segments Adhesive Technologies, Laundry &
Home Care and Beauty Care, serving both industrial and consumer markets. In
its Adhesive Technologies business Henkel is the global market leader across all
industry segments. In the Laundry & Home Care and Beauty Care segments,
Henkel has a leading market position in various product categories.
Graph 1 – Henkel’s revenue by

Adhesives, sealants and functional coatings from Henkel are used in a wide
segment in percent range of industries including aerospace, automotive, construction, electronics
and medical technology. This segment represents Henkel’s key value driver and
accounted for about 48% of the revenue in FY16. All products for industrial usage
are sold under the brands Loctite, Bonderite, Technomelt, Teroson and Aquence.
Henkel’s adhesive products for consumers and private use belong to brands like
Pritt, Ponal, Pattex and Ceresit. In the Laundry & Home Care business Henkel’s
product range extends from universal detergents over special detergents and
softeners to bath and glass cleaners, accounting for 31% of the revenue in FY16.
Source: Annual report
Among the best known brands are: Persil, Pril, Purex, White Giant and Bref. In
the field of Beauty Care Henkel manufactures products for hair, body, skin and
oral hygiene that are sold under brand names like Schwarzkopf, Syoss, Dial, Fa
or Schauma. The Beauty Care segment is the smallest of all three divisions and
generated 20% of Henkel’s revenue in FY16.
Shareholder structure
The current shareholder structure of Henkel consists of 178.2 million preferred
shares, which have been listed publicly since 1985 and 259.8 million ordinary
Graph 2 – Geographic ownership of
Henkel’s ordinary shares in percent shares, which have been listed since 1996. The major shareholders of the
Henkel ordinary shares with approximately 159 million shares, correspondingly to
61.02%, are members of the Henkel family. Other mentionable large
shareholders are the Vanguard Group, Blackrock and the Tweedy Brown
Company each owning around 1% of the ordinary shares. In terms of geographic
ownership, Germany is clearly the most dominant country followed by the USA,
Canada and Luxembourg. The preferred shares in contrast are entirely in free
float apart from the treasury shares. The institutional investors that own a
Source: Bloomberg
majority of preferred shares are internationally broadly distributed. In contrast to
the ordinary shares the geographic ownership is completely different. Whereas
investors from the USA and the UK account for more than 50% of the institutional
investors, only 10% of investors are from Henkel’s home country Germany.
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Adhesive Technology Market

As the worldwide market leader in the adhesive market this segment represents
Graph 3 – Company market shares
2015 in adhesives in percent Henkel’s most important business unit in terms of revenue and value generation.
The separation of the Adhesive Technology segment shows a high significance
of industrial adhesives, with about 80% of overall adhesive revenue, in
comparison to adhesives for consumers, craftsmen and buildings. Current
studies of the ‘Coatings World’ estimate the market value of the adhesive and
sealants on $53.8 billion in 2016. Henkel is the clear leader in this market with an
estimated market share of 25%, followed by Silka with 7%, 3M (6%) and HB
Fuller (4%). This leading position is also reflected in the broad range of industry
Source: Report on adhesive industry – applications, mentioned previously.
Ajay Kottakota
Due to the high dependence on various industry sectors we see a close

connection between the organic growth of Henkel and macroeconomic
developments, as well as current market trends. The industrial production index
(IPX), shown on the left, covers manufacturing, mining, utilities and construction
Graph 4 – Industrial Production Index sectors and is therefore an appropriate indicator for the market environment in
the industrial adhesive sector. In retrospect, the IPX can describe the organic
growth of Henkel’s adhesive business quite well, capturing the slump in 2013
(organic growth: 2.7%) and following upturn in the next year (organic growth:
3.7%). Over the last few years, the IPX has reflected the industrial upturn since
2010, reaching a record high in the second quarter of 2017. Visibly regaining
momentum in the second half of 2016, the index is expected to grow 2.5% in
2017. These positive dynamics from the industry can already be seen in Henkel’s
interim reports for the adhesive segments, which let us conclude that organic
Source: OECD
growth in FY17 will accelerate to approximately 4.4%. This value is significantly
above the CAGR of 2.9% for the previous 5 years. Regarding our future growth
expectations of Henkel we anticipate a reduction of the market’s momentum and
a settlement at annual average growth rates of 3.7% until 2022. Our forecasts
can be attributed to positive economic development and various industrial trends
Graph 5 – Global GDP growth in
percent that are presented in the following.
Global economic growth is expected to slightly pull on over the next years,
creating decent conditions for businesses depending on many industries.
Subsequent to the slump in 2016, which can be seen on the left, global GDP is
expected to increase to 3.6% in 2017 and further to 3.8% until 2022 according to
the World Bank. Key contributors are especially emerging and developing
countries. Broad-based upward revisions in the euro area, Japan, emerging Asia,
emerging Europe, and Russia clearly offset downward revisions for the United
Source: World Bank States and the United Kingdom in the short term. However, while the baseline
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outlook is strengthening, growth remains weak in many countries and inflation is

below target in most advanced economies. The broad distribution of Henkel’s
Graph 6 – Revenue of Henkel FY 16
by region in percent revenue generation (see graph 6) with 42% of revenue coming from emerging
markets in FY16, allows the company to incorporate growth in all relevant and
dynamic countries. The positive outlook for economic growth still provides a solid
base for potential organic business growth. Whereas global GDP grew annually
by 3.4% on average since 2012, the market for adhesives and sealants has
increased by 4% annually worldwide. This development was supported by a
steady recovery and driving trends in the major end markets of the adhesive
sector. The three most important end markets are packaging, construction and
automotive, which all together amount for over 75% of the worldwide adhesive
market (see graph 7). In the following we discuss recent and influencing trends
that occur in these three key end markets.
Market Trends
The first major trend that affects the adhesive and sealants market occurs in the
typically dynamic automotive sector. The car manufacturers have started to focus
Graph 7 – Application of adhesives by
industry in percent on the weight reduction of cars, by replacing metal components with composites
that can be bonded, support sales of automotive adhesives. There are two main
factors that drive vehicle weight reduction. First of all, stricter CO2 and fuel
economy regulations cause the industry to commit sustainability efforts to reduce
exhaust emissions. Secondly, increasing fuel prices support the motivation of
customers to purchase fuel efficient vehicles. Lightweight vehicle construction is
one of the most significant factors that immediately contribute to reduce fuel
Source: Report on adhesive industry –
Ajay Kottakota consumption and implicitly CO2 emissions. Additionally, the emergence of electric
vehicles offers new opportunities for manufacturers of adhesives, as market
shares of such cars are expected to increase from less than 0.02% in 2012 to 2%
in 2020. Although the use of automotive adhesives in electric vehicles is lower
due to less engine related assemblies, a key focus remains on the overall weight
of the car. The high weight of batteries forces car manufacturers to reduce the
overall weight by substituting traditional materials like steel with substrates that
Graph 8 – Global light vehicle sales in
million cannot be welded. The current usage of automotive adhesives per car lies
around 15kg on average and industry experts forecast that this amount may
increase by a minimum of 30% throughout the next 10 years. Overall car sales
are predicted to consistently go up during the next years, sales of light vehicles
are expected to exceed its previous level by more than 18% in 2022 compared to
2016 (see graph 8). As Henkel is serving all significant car manufacturers and
offers extensive solutions in lightweighting we expect the company to capture a
Source: Statista
lot of future growth potential in this market. The global automotive adhesive and
sealants market was valued $4,879.3 million in 2014 and is expected to grow
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with a CAGR of 8.8% between 2015 – 2020. In general, we see various growth
Graph 9 – Urbanization rate of China
in percent opportunities in the trend towards lightweight construction in the transport
business through the adoption of adhesive bonding technologies. This includes
also the aerospace, marine and train markets besides automotive, which Henkel
is all serving.
Another important trend that accelerates high demand for adhesives occurs in
the construction sector, which is the second largest in terms of demand (see
Source: Statista graph 7). It profits from the recovery of the housing and building market in
developed regions like the USA and Europe, in combination with a rapid
urbanization and population growth in developing countries. Graph 9 on the left
Graph 10 – Construction market in
top 50 countries in $ billion demonstrates the rapid urbanization in China, which increased from 50% in 2010
to approximately 56% in 2015 and is expected to continue growing. The general
importance of China for the adhesive market induced Henkel to open the world’s
largest adhesives factory in 2013 to expand production capacity for this region
and serve demand. Additionally, within the trend towards green buildings and
isolation, construction adhesives are used in numerous applications due to their
high durability. Based on the 50 most relevant countries worldwide, the global
Source: PR Newswire Association
construction industry is expected to regain growth momentum and to reach an
average annual increase of 3.9% over 2016 – 2020, which is significantly higher
compared to the CAGR of 2.8% between 2010 – 2015. Due to the increasing
Graph 11 – Size of green building range of applications resulting from the higher demand for green buildings,
market in the USA in $ billion
especially in developed countries, construction adhesives are expected to
exceed the industry’s average growth. The global value of the construction
adhesive market was therefore estimated to reach $10.56 billion in 2020 and is
projected to grow at a CAGR of 5.1% during 2015 – 2020. Henkel’s broad
presence in the developed and relevant developing markets support the
company to remain a key player in construction adhesives.
Source: Statista
Lastly, the largest application within the adhesive sector, packaging, will continue
to support the trend of consumerism, pre-packed food and other articles
purchased in a packed format. With a worldwide proceeding urbanization, the
Graph 12 – Food packaging market consumer habits of buying packed goods in supermarkets, retail outlets and
size by region in $ billion
online will displace other means of obtaining goods such as local markets. This
modern way of consuming food is well established in advanced (especially
western) economies, but is still evolving in many regions such as Asia, Africa or
the Middle East. Correspondingly the forecasted growth rates for the food
packaging market in the Asia-Pacific region and rest of the world are higher
compared to developed regions (see graph 12). As such, these factors drive the
Source: Markets and Markets demand for packaging materials which in turn use packaging adhesives. All in all,
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the global market of packaging adhesives is estimated at $14.7 billion in 2016,

expected to reach $18.2 billion by 2021 driven by a CAGR of 4.3%.
Graph 13 – Henkel’s annual organic

Outlook
and overall growth in adhesives in
percent
Whereas demand for adhesives in Europe has only shown slight growth,
influenced by overall economic developments, the Asia-Pacific region has
become the world’s largest purchaser of adhesives. This results from a fast-
paced growing economy and a dominant position in adhesive-intensive industries
of China, which is nowadays already contributing more than 20% of the global
adhesives and sealants revenue. The dominance of the Asia-Pacific region is
also reflected in our forecast for Henkel’s adhesive segment. While the North
Source: Annual report, Analyst estimates American market has been the second most important one for Henkel, Asia-
Pacific will close this gap in terms of revenue during the forecast period (see
graph 14). Emerging markets in general represent a major growth opportunity,
due to increasing levels of consumption and industrialization. Especially the
growing middle class in these regions may drive growth in end markets.
Graph 14 – Henkel’s revenue in the
adhesive segment by region in € Incorporating all previously mentioned factors and trends research expects the
billion
worldwide adhesive market to reach a value of $66,876 million by 2022, growing
at a CAGR of 3.7% during 2016 – 2022. This forecast is in line with our
expectations (3.7%) for Henkel’s future generated organic growth. The strong
market position enables Henkel to seize main trends on a broad basis and to
serve demand on various major end markets. Due to appropriate research
expenses (see Operating Expenses in the Financials chapter), which are
required in this technologically driven market to maintain the innovation standard,
and the continuing of targeted acquisitions Henkel will be able to strengthen its
Source: Annual report, Analyst estimates
worldwide leading position within adhesive markets and preserve its current
market share level. On average, we expect acquired companies to contribute
about 0.7% points per year to Henkel’s future revenue. However, due to high
exposure to currency fluctuations, later discussed in more detail, operating
revenue of Henkel’s adhesive segment will grow with a CAGR of 2.7% between
2017 – 2022.
Graph 15 – Laundry & Home Care
market 2016 by revenue in percent
Laundry & Home Care Market
Henkel’s second important source of revenue generation is the laundry and home
care business. Revenues in this market are mostly generated in the laundry care
segment, accounting for almost 50% of the market’s value in 2016. The
remaining value is contributed by household cleaners (20%), dishwashing
detergents (17%) and polishes, room scents and insecticides (14%). Henkel has
Source: Statista been active in all mentioned sub-segments, offering a broad portfolio of brands
PAGE 7/32
and products. Overall, Henkel has a strong position in developed countries, being
Graph 16 – Company market shares
in laundry care 2015 in percent a market leader in Europe and North America. Worldwide the company is
established as the third largest market player in the laundry market with a share
of 9% behind the market leader Procter & Gamble (27%) and Unilever (15%).
Those three companies alone represented half of the worldwide laundry market
in 2015. While western regions have contributed to a solid growth, the emerging
regions and especially Asia-Pacific were the key drivers in the last years. For the
future we expect a continuation of this growth pattern, but with a different pace
Source: Reuters
and driven by the latest market trends.
Market Trends
Characteristic for fast-moving consumer goods, the consumers’ shopping habits
are shaped by various forces, including product availability, innovation, cultural
tradition and financial considerations. In the following we present the most
important socioeconomic trends that affect the home and laundry care industry.
Graph 17 – Washing machine and
dryer penetration rates 2016 in According to the OECD the global middle class will increase from 1.8 billion in
percent
2009 to 4.9 billion by 2030. Economic prosperity will be a growth engine for
consumption, as consumers will be able to purchase appliances such as washing
machines or dishwashers and become more likely to trade up premium cleaning
and laundry products. Graph 17 on the left shows the penetration rates of
washing machines and dryers for households in the different regions. It is clearly
visible that developing regions are lagging behind Europe and North America
with penetration rates of 87% and 82% respectively. A closure of the gap, which
Source: The Nielson Company
is likely in the long-term, means also higher demand for detergents for the usage
of such appliances.
Another trend in modern society is the need for efficiency and products that
reduce the time spent on cleaning tasks. The global increasing workforce,
particularly driven by a growth of women labour force of more than 4% between
1990 and 2013 according to the World Bank, supports the demand for convenient
Graph 18 – Online shopping cleaning tools. Furthermore, the proceeding urbanization, as already presented in
penetration rates 2016 in percent by
country graph 9, is likely to lead to a greater adoption of modern cleaning appliances,
because residences will have the infrastructure needed to support these
machines.
Lastly, the development towards omnichannel is pioneering in retail as many

consumers use digital devices to complete their shopping. Graph 18 shows that
online shopping penetration rates are independent of regional location and can
also be very high for emerging countries. Therefore, it is even more important to
be present in the e-commerce business to distribute products also via this
Source: Statista channel and secure market shares. Henkel has agreed to various co-operations
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with online suppliers like Amazon and Alibaba to cover its online channel and
face competitors. We will discuss this topic in more detail in the beauty care
chapter. However, in order to succeed in the new retail landscape, manufacturers
will need to use a combination of online and offline offers to inform consumers
and add value throughout the entire shopping experience, which Henkel can offer
in many regions.
Outlook
Compared to the overall laundry and home care market, which showed a CAGR
of 2.7% in the last 5 years, Henkel could clearly outperform with annual average
growth being almost twice as much (5%). While Henkel’s organic growth was
approximately in line with market growth in Western Europe (1.1%) and North
America (0.6%), it highly exceeded market growth in emerging markets. In the
Asia-Pacific region Henkel’s CAGR of organic growth was approximately 9.6% in
comparison to the market’s CAGR of 4.3%. Henkel has still been profiting from its
early presence in China in 1971 and the first joint venture in 1990, producing for
the laundry and home care market. Nowadays the company is present in 12
locations across China, which helps Henkel to keep establishing its brands and
products. The strong positioning in such regions has significantly contributed to
Henkel’s positive development in the past. Consequently, the dependence on
emerging markets demonstrates potential opportunities and risks for Henkel.
Incorporating the mentioned trends the global laundry and home care market was
estimated by ‘Statista’ at $57.8 billion in 2016 with a CAGR of 2.3% over the
following years, reaching $64.3 billion by the end of 2021. However, considering
overall developments and Henkel’s current positioning, we expect Henkel’s future
organic growth to exceed average growth rates of the estimated laundry and
and overall growth in laundry and home care market reaching a CAGR of 3.3% between 2017 – 2022. While
home care in percent
Henkel is still expected to outperform the market, the pace of growth will clearly
go down. The average annual outperformance will decrease from 2.3% to 1%
respectively. Consequently, Henkel will still gain market share from competing
companies, but with a decent pace. We come up with this conclusion, because of
different key factors that emphasise Henkel’s future performance. Henkel has
strong brands with a common international positioning and therefore high
recognition value. Based on the strong performance and well standing in key
markets, sales will still increase above market expectations. However, Henkel’s
organic growth will be hindered by a further increase in competition. Besides the
competition with international players like Unilever, Procter & Gamble and Reckitt
Benckiser, retail chains and private labels are also launching own, mainly
cheaper, products. As a manufacturer of branded products Henkel will be forced
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to offer more promotional activities, in order to maintain the number of customers

and sales. Although established brands like Henkel’s Persil or Pril continue to be
laundry and home care segment by preferred by most customers, the large target group of price-consciousness
region in € billion
consumers should not be neglected.
Analogous to previous years, we therefore expect that Henkel can maintain its
excess growth in developing regions, but with a significantly lower premium. For
example, the forecasted average annual market growth for Asia-Pacific until 2021
reaches 3.9%, whereas Henkel can grow organically by 6.9% on average. While
we expect organic growth in Western Europe to meet market expectations
(0.8%), organic growth in North America (1.1%) is likely to slightly exceed market
expectations of 0.8%. This is mainly assigned to synergies from the acquisition of
‘The Sun Product Corporation’ in 2016, which lifted Henkel on the second rank in
the North American laundry and home care market. Furthermore, the
incorporation of of $1.1 billion revenue in North America in FY17 from this
acquisition made it the most important region for Henkel in this segment, visibly
in graph 20.
Graph 21 – Beauty care market 2016 The laundry and home care segment has benefited the most from acquisitions in
by product category in $ billion
the past, and we expect to see a continuation of that in the future, but in
combination with a shift towards the beauty care sector (for more details see
Inorganic Growth Factors). When also taking into account the fluctuations in
currency exchange rates the growth in operating revenue will reach a CAGR of
3.6% between 2017 – 2022. This growth rate is far below the last 5 year average
of 6.2%, attributable to slower organic growth, fewer acquisitions and higher
currency fluctuations.
Source: Euromonitor
Beauty Care Market
The third pillar of Henkel’s business is the beauty care market. Unlike to the
previous two segments, Henkel is not maintaining a similar strong market
position. Except a leading role in the category hair products, Henkel cannot fall
back on a dominating position. Furthermore, the beauty care market can be
Graph 22 – Regional split of beauty
care market 2016 in $ billion segmented in more product categories. The most important are skin care, hair
care, colour cosmetics and men’s grooming. Henkel is not participating in all
categories, only in the first three mentioned and oral care. Beauty products can
also be subdivided into premium and mass production segments, according to
brand prestige, price and distribution channels. From a global perspective, the
mass segment represents about 72% of total sales, while the premium segment
accounts for the remaining 28%. The majority of global premium cosmetics sales
is concentrated within developed markets, mostly the USA, Japan and France. In
Source: Euromonitor
concerns of the geographic aspect, Asia-Pacific is clearly the leading market,
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which can be seen in graph 22. The gap to the developed regions of Western
Europe and North America is going to increase even further over the next years.
Since the turn of the century the beauty market of emerging countries has been
growing significantly with a CAGR of 4.4%. From 2010 to 2015 the four biggest
Graph 23 – Changes in consumer emerging countries (China, Russia, India, Brasil) increased their market share in
prices of personal care products in
percent overall beauty market from 21% to 25%. At the moment, most of the major
international beauty care manufacturers are focusing on expanding their
presence in these regions, which applies also for Henkel. For most of them the
main challenge is to make their brands relevant to shoppers in markets where
consumer’s habits and cultures differ from what the companies are familiar with.
As manufacturers keep pushing into these markets, competition is reinforced and
prices are likely to stagnate or even decrease, which is already the case in
developed countries. Graph 23 shows the changes in consumer prices of
Source: Bloomberg
personal care products in the euro area and the USA since 2010. The overall
price increases were on a very low level and have even shifted towards
stagnation in recent years. Due to high competition, we expect to see similar
developments in emerging markets throughout the future.
Market Trends
The shifting focus on emerging markets has also enforced the relevance of the
mass market. International players have been attempting to penetrate this market
through product diversification in the context of product line prices, as new
product lines are being released at lowering price levels. This trend implicates
two important conclusions: First of all, companies have to show a high innovation
by launching new or improved product lines. And secondly, the high competition
involving decreasing prices, hinder sales growth. Henkel is severely affected by
Graph 24 – Revenue in $ billion of these developments, which justifies why the company shows a high amount of
selected companies in the beauty
care sector 2016 product launches and innovations in this segment and has been struggling with
decreasing market share, lagging behind in terms of organic growth compared to
overall market growth. Prestige beauty companies like L’Oréal, Procter &
Gamble, Unilever and Estée Lauder all have products in their portfolio with
significant national and international brand name recognition and consumer
loyalty. Additionally, these competitors devote significant resources to promote
their brands through advertising (see chapter Operating Expenditures). Graph 24
on the left demonstrates the balance of power among companies within the
Source: Annual report beauty care segment. L’Oréal was the clear leader in this segment with over $27
billion in revenue, followed by Unilever and Procter & Gamble. Henkel on the
other hand ranks only at the 16th position, still far behind the German competitor
Beiersdorf. The segmentation of the market reveals how difficult it will be for
Henkel to compete with the high number of peers, many of them being
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significantly larger. An important factor why Henkel will struggle to gain further
market share is that in contrast to most of the competitors the focus is not lying
on the beauty care sector. L’Oréal and Estée Lauder for example are pure beauty
care companies, but also diversified companies like Unilever (38% of revenue) or
Beiersdorf (83% of revenue) generated a significantly larger share of their
revenue in FY16 from this segment in comparison to Henkel (20% of revenue).
The higher specialization of competitors also comes along with a broader brand
Increasing competition and
Henkel’s slim brand portfolio and product portfolio, which Henkel is lacking. ‘Schwarzkopf’ is the driving force
among all brands of Henkel, giving the company a strong position in the hair care
segment, supported by ‘Syoss’. However, there are no other mentionable brands
in Henkel’s portfolio that play an important role in any other product category of
the beauty care market. Consequently, Henkel is well positioned to capture future
growth in the hair care segment, but with a forecasted CAGR of 2.2% between
2017 – 2022 the segment is among the slowest growing in beauty care. In all
other product segments it will be difficult to keep up with market growth, which is
why we expect a decreasing market share for Henkel in the overall beauty
market.
The competition and need for innovation however initiated Henkel to set up a
global operating research & development team to serve customers with the latest
products. The local presence of testing & development centres in Asia, Africa and
South America are supposed to take account of local distinctions and specific
customer needs that Henkel will have to cover in order to compete in the
emerging markets. Yet, the most influential trend in the beauty care sector is the
shift towards sales over the internet, similar to products of the laundry and home
care segment. E-commerce shops continue to expand their range of products
and websites explain the specifics of different products. Currently Henkel is
Importance of e-commerce distributing most of its products and brands online in co-operation with online
retailers like Amazon or store chains like dm. However, such co-operations are
not available in all countries, including Portugal, and leave space for expansion to
capture all potential growth. Advantageous was particularly the launch of a
partnership with Alibaba in 2015 to sell its Schwarzkopf hair care brand also
online in China. Although Henkel entered this market quite late, more than half of
the sales are generated digitally now. Typical consumers, who buy online, know
which products they want mainly because of satisfaction with the product quality
during previous use. As technology develops, manufacturers are trying to take
advantage of new opportunities and interact with consumers in a more practical
way. This happens through channels like websites, Facebook, Youtube or apps
for smart phones. Henkel has been using these media, enforcing especially the
awareness of its key brand Schwarzkopf. For example, the previously launched
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Schwarzkopf app encourages users to test new looks and implicitly new products
via a ‘live mirror’ application.

Outlook
and overall growth in beauty care in
percent
Recent studies estimate the total value of the beauty care market at $130.7
billion in 2016. The forecasted growth of the overall market is expected to follow
up previous years with an CAGR of 4.4% between 2017 – 2022. Taking into
account all recent factors we expect to see a slightly lower organic growth of
Henkel until 2022 compared to the last 5 years, dropping 0.1% points to a CAGR
of 2.2%. Consequently, Henkel is expected to lose market share as it cannot
keep up with overall market growth. Slower organic growth affects almost all
regions, except of Eastern Europe, which profits from the recovery of Russia, and
Source: Annual report, Analyst estimates correspondingly results in lower market shares. Although Henkel’s average
organic growth remains high in emerging markets like Asia-Pacific (5.4%), it will
still lag behind the regional growth (6.4%). Especially the high competition,
enforcing price wars and limiting Henkel’s market share are damaging for future
growth. Additionally, most products are related to the dominant brand
beauty care segment by region in € Schwarzkopf, leaving hardly any other brands in Henkel’s portfolio that can
billion
seriously compete in other beauty categories apart from hair care. However,
growth impulses can be created by focusing on acquisitions in this segment and
expanding the slim brand and product portfolio. When including inorganic growth,
the beauty care segment can succeed its previous 5-year average (3.7%) with
5.2%. However, the expectation of higher fluctuation in currency exchange rates
pushes operating revenue down to a CAGR of 3.3% until 2022. In terms of
regional developments, Asia-Pacific will become more important to Henkel and
clearly strengthens its position as the third largest market for the company,
Source: Annual report, Analyst estimates whereas most other regions show decent growth (see graph 26).
Inorganic Growth Factors

M&A Activity
Henkel has been highly active in the M&A market in the last years and as a part
of Henkel’s strategy this trend is likely to continue in the future. Since 2011
Henkel made an amount of 5 acquisitions per year on average, by spending over
€1.1 billion annually. Most of the acquired revenue can be attributed to
companies from the laundry and home care segment, followed by beauty care. In
both business units Henkel is striving to strengthen its categories, whereas
acquisitions in the adhesive technologies sector aim to expand the company’s
technology leadership. The regional M&A activities of Henkel are not limited to
PAGE 13/32
any specific markets, instead acquisitions are reported worldwide. However, it

appears a recent focus on the North American region due to Henkel’s largest
acquisition of ‘The Sun Products Corporation’ in the USA in 2016 and the
acquisitions of ‘Darex Packaging Technologies’ and ‘Nattura Laboratories’ in
2017. In view of the considerable amount of acquisitions we incorporated future
potential acquisitions into our model. In order to determine whether Henkel’s
Graph 27 – Henkel’s annual amount

acquisitions are value creating we conducted a precedent case analysis.
spend on acquisitions in € million Therefore, we chose the acquisition of the previously mentioned ‘The Sun
Products Corporation’, as it has been the largest takeover and happened
previously. The availability of evaluable data is also a crucial factor as most
companies among Henkel’s acquisition are relatively small, with a revenue below
€100 million. When Henkel acquired ‘Sun Products’ the revenue multiple of 2.2
was just slightly above the average of recent transactions (2.0), which validates
the acquisition as a precedent case. We used a discounted cash flow model to
estimate the value of ‘Sun Products’ at the time of the acquisition with the
following assumptions: ‘Sun Products’ contributed 6% to Henkel’s EBIT in 2017,
this amount is expected to increase constantly to 6.5% until 2022 and captures
future potential synergies between both companies. Other metrics like
depreciation or total investments equal the amount of Sun Products EBIT
contribution. A peer analysis for the The Sun’s beta, including a size premium,
allowed us to determine its cost of capital, in combination with a perpetuity
growth rate of 2% analogous to our valuation of Henkel. After incorporating all
assumptions we estimated the value of ‘Sun Products’ at €3.25 billion for Henkel,
exceeding the original purchase price of approximately €3.2 billion. This
corresponds to a net present value of €48.2 million or a value generation of 1.5%
per invested Euro. However, the positive return is based on the assumption of
synergies and by excluding them the value would fall on €3.01 billion. Therefore,
we consider the takeover of ‘Sun products’ as a value creative precedent case,
which is representative for Henkel’s acquisitions in the future.
EUR millions 2017 2018 2019 2020 2021 2022 Terminal value
EBIT 174.5 185.1 196.1 207.8 219.7 231.8
% of Henkel's EBIT 6.0% 6.1% 6.2% 6.3% 6.4% 6.5%
Depreciation -38.9 -40.4 -42.1 -43.9 -45.9 -48.0
% of Henkel's Depreciation 6.0% 6.1% 6.2% 6.3% 6.4% 6.5%
Positive NPV in acquisitions NOPAT 135.6 144.7 154.0 163.9 173.8 183.8
Total Investments -111 -65 -39 -52 -57 -58
% of Henkel's investments 6.0% 6.1% 6.2% 6.3% 6.4% 6.5%
FCF 24.8 79.9 115.3 112.1 116.7 125.6 3,613.6
PV FCF 24.8 75.7 103.5 95.4 94.0 95.9 2,758.8
Table 1 – Discounted cash flow valuation of ‘Sun Products’ (Source: Annual report, Analyst
estimates)
Forecasting acquisitions is problematic and nearly impossible for a longer timer

period, but in order to include them in our forecast we analysed Henkel’s
PAGE 14/32
previous acquisition pattern. The starting point is to estimate the future amount
spent per year on acquisitions for which we came up with approximately the half
(€560 million) of the previous years’ average. This amount seems reasonable as
transaction activity of Henkel has increased significantly over the last 4 years
(see graph 27) and is very likely to fall on a lower level. By applying the historical
Graph 28 – Forecasted amount spend revenue multiple we conclude that the annually acquired revenue is about €338
by Henkel for acquisitions by sector
in percent million. Table 2 shows how this revenue will be distributed among all segments
and regions where Henkel is operating. Clearly visible is a remaining high focus
on the laundry and home care segment, followed by beauty care. However, we
are expecting to see a relative shift towards acquisitions in the beauty care
sector, because Henkel will have to strengthen its brand portfolio and face
competition, and adjusted the historical weighting. The acquired revenue of
laundry and home care will amount for 45%, compared to previously 60%, and
Source: Euromonitor
beauty care will amount for 36% instead of 21%. In terms of regional distribution,
we also considered the historical focus and reasonable future concentrations.
The highest weights remain on Henkel’s most important markets: Western
Europe, North America and Asia-Pacific. Although North America has been
clearly in focus over the last two years, we expect to see a shift towards
emerging markets, especially Asia-Pacific. This shift anticipates that Henkel will
capture additional future potential growth in such an important market.
Acquired revenue EUR(m) by region
Region Adhesive Technology Laundry & Home Care Beauty Care Weight
Western Europe 12.9 30.5 24.4 20%
Eastern Europe 7.7 18.3 14.6 12%
Africa / Middle East 9.6 22.8 18.3 15%
North America 12.9 30.5 24.4 20%
Latin America 8.4 19.8 15.8 13%
Asia Pacific 12.9 30.5 24.4 20%
Total 64.3 152.3 121.8 100%
Table 2 – Henkel’s forecasted acquired revenue for each segment and region in € million (Source:
Analyst estimates)
Henkel’s CAGR for overall organic growth is forecasted at 3.3% between 2017
and 2022, when adding inorganic growth from acquisitions the CAGR increases
to 4.9% in the same time frame. This difference results from the annually
acquired revenue of €338 million. However, in order to finally reach Henkel’s
operating revenue we have to account for changes in foreign exchange rates.
Foreign Exchange Rates

The global operations of Henkel highly expose the company to currency
fluctuations. Respectively, a strong Euro in the future can have extensive limits to
PAGE 15/32
revenue growth. In order to adjust revenue for foreign exchange rates, we used
the forward rates of the main currencies (see table 3) for each region as a proxy.
All currencies are equivalently considered by Henkel in their financial reporting.
Change in forward currency rates
Currency 2017 2018 2019 2020 2021 2022

Dollar - Euro -6.7% -2.4% -2.6% -2.5% -2.3% -2.1%
Zloty - Euro 5.8% -2.2% -2.5% -2.7% -2.7% -3.0%
Ruble - Euro -2.0% -7.1% -6.6% -6.2% -5.9% -5.7%
Yuan - Euro -6.9% -4.7% -4.5% -4.0% -4.0% -3.3%
Lira - Euro -22.2% -13.3% -12.2% -11.3% -10.3% -9.7%
Peso - Euro -1.5% -8.1% -7.4% -7.0% -6.8% -6.5%
Table 3 – Annual change in forward currency rates (Source: Bloomberg)
The change in forward currency exchange rates concludes an appreciation of the

Euro compared to all other main currencies in almost every period until 2022.
Hence, the strong Euro can be related to the economic recovery and upturn in
the euro-zone, accompanied with a likely increase of the interest rate level by the
European Central Bank. As a result, we expect to see a hindered revenue growth
of Henkel in all regions. However, the forward rates appear to be very
consequent and relatively high, which is why we adjusted them for each region to
get a, from our perspective, more reasonable and valid forecast. The Turkish Lira
for example, which shows the most significant depreciation to the Euro, is not
representative enough for the whole region of Africa and Middle East.
Adjustments for this region were therefore the highest, followed by other
emerging markets. For developed countries, we used slight adjustments of the
Polish Zloty and the US Dollar. Finally, when adjusting the organic and inorganic
revenue (CAGR: 4.6%) for changes in foreign exchange rates we obtain a
forecasted CAGR of 3.1% for Henkel’s operating revenue between 2017 – 2022.
The difference (1.5% points) in growth between the sum of organic and inorganic
revenue and operating revenue shows the significance of currency fluctuations
for Henkel’s business.
Graph 29 – Henkel’s COGS by
category in percent Financials
Cost of Goods Sold
In terms of cost of goods sold (COGS) we do not expect to see significant
changes over the next years. They basically depend on two contrary
developments, the manufacturing costs and the material costs. Although Henkel
has shown proper efficiency results in the production process in the past (see
Source: Annual report below), which are likely to continue, we also expect overall slightly higher prices
PAGE 16/32
for materials. Materials like oil and special chemicals are relevant for the
production of most Henkel products and therefore prize changes can have
notable influence on the COGS. Oil prices are expected to rise, as discussed in
Graph 30 – COGS of Henkel and peer the following, and clearly affect the production costs for adhesives, whereas
groups in percent
special chemical prices can fluctuate but will not have severe impacts on
Henkel’s margin. Overall, we anticipate a very slight margin decrease in COGS
until 2022 to 52.5% of revenue, after a spike to 52.7% in 2017. Graph 30 is the
result of our benchmark analysis, which compares the COGS of Henkel with the
average COGS of its peers in each segment. This illustrates that Henkel’s COGS
can be replicated by the weighted average from the different sector averages.
With Henkel’s average of 52.5% in COGS in the last 5 years they are slightly
Source: Annual reports above the laundry care sector (50.4%) and are closer to the main segment
adhesives (65.7%) than the beauty care sector (29.1%). The weighted average
(by revenue) suggests historical COGS of 53.5%, which is just 1% point above
the historic average of Henkel and may indicate efficiency efforts in
manufacturing.
Despite efficiency efforts and the positive revenue forecast in the adhesive
technology market, higher material costs may hinder profitability in the future.
The cost side of adhesives, which is mainly driven by prices of raw materials that
are derived from crude oil, so called petrochemicals, showed a positive
development since the price drop of oil at the end of 2014. However, since crude
oil prices have rebounded from their price low of $27 per Brent barrel at the
Graph 31 – Brent crude price in $ per beginning of 2016, we expect to see a decent continuation of the increase in raw
barrel
material prices. Recently OPEC, Russia and nine other producers announced
that they want to extend the agreement on oil supply cuts until the end of 2018.
Following the agreement to cut oil production in the end of 2016, crude oil prices
have been revived and inventories are slowly declining toward their five-year
average. With the continuation of the cartel the crude oil prices are expected to
increase and settle above the current level of around $65 per barrel. Many key
commodity raw materials like ethylene or propylene (petrochemicals) have
correspondingly shown significantly higher price levels in the last months. A
Source: Bloomberg
further factor is the rising demand for such petrochemicals, which are also used
in large industries like construction and transportation. Since the adhesive
industry only makes up a small segment of this market, it tends to be a price
taker rather than a price setter. Accordingly, high volatility in the raw material
prices are a key factor that will probably hinder profitability in the adhesive
segment of Henkel in the future.
Similar to the adhesive technologies sector, volatility in raw material prices can
hinder growth and profitability of Henkel’s laundry and home care products, as
PAGE 17/32
well as products from the beauty care segment. The key resource palm oil, of
Graph 32 – Palm kernel oil price in $
per metric ton which the majority is palm kernel oil, forms the basis of many surfactants used in
detergent and cosmetic products. In the recent past palm kernel oil has reached
a higher price level prior to the years of 2016. However, after an interim high at
the beginning of 2017 prices have recovered (see graph 32). In the short term,
analysts forecasted a slight price increase of palm kernel oil until the mid of 2018.
Due to limitations to acreage in the key supplier countries Indonesia and
Malaysia, which produce about 90% of the global palm oil, prices also tend to
Source: Bloomberg
increase in the long run.
Operating Expenditures
For the operating expenditures we identify different developments relating to
Graph 33 – Henkel’s operating administrative and research expenses and marketing, selling and distribution
expenditures in FY16 in %
expenses. Latter represent the highest stake of Henkel’s operating expenditures
as graph 33 shows on the left. In order to ensure comparability with peers, we
combined administrative and marketing, selling and distribution expenses to
sales, general and administrative expenses (SGA) as most of the analysed
companies do not differentiate between these positions. Graph 34 on the left
demonstrates that there have been only small changes in the SGA margins
across all relevant sectors. While the beauty care peers have the highest SGA
Source: Annual report margin, due to above average expenses for advertising, the adhesive peers have
the lowest margin, because of low advertising expenditures. Henkel’s average
SGA margin (30.8%) however lies above the peers weighted average of 26%
over the last years. This fact suggests that there is still potential for improvement
in efficiency. Consequently, we expect to see a slight decline in Henkel’s SGA
margin to 29.2% until 2022.
Going more into detail, the expenses for administration as percent of revenue
Graph 34 – Sales, general and
administrative expenditures of Henkel
have increased from 5.0% in 2012 to 5.7% in 2016 and we expect a settlement at
and peer groups in percentage of
this margin until FY22. Administrative expenses are not simply increasing with
revenue
the size of Henkel, but also with its acquisitions. Many overhead functions
consequently need to be consolidated, which decrease expenses in the long
term, but not in the short term. As we assume a consistent acquisition rate of
Henkel this has to be taken into account. More significant change, in terms of
margins, will be likely to happen in the advertising expenses. Over the past 5
years the margin decreased from 26.1% in 2012 to 24.8% in 2016 and from our
point of view this trend will continue. Alongside classic advertising and point of
Source: Annual reports sale activities, advancing digitalization enables a significant increase in media
efficiency. Additionally, co-operations with large online retailers like Amazon and
PAGE 18/32
Alibaba push down distribution costs. Finally, we estimate a constant margin

Graph 35 – Research and
development expenditures of Henkel decrease to 23.6% of revenue until 2022.
and peer groups in percentage of
revenue
Research and development are the last relevant expenses, which also influence
Henkel’s innovation and competitiveness. There have been no significant
changes in Henkel’s research and development margin as percentage of revenue
over the last years, similar to the peers from various sectors. However, it is
recognisable that research expenses in the adhesive sector require a higher
amount of investments relative to the revenue compared to beauty and laundry
Source: Annual reports

sector. This is also in line with Henkel’s research and development expenditures,
as the adhesive segment amounted for 62% of the investments although the
revenue contribution was only 48% in FY16. For the future development of the
research and development margin we expect to see a maintenance of the
Graph 36 – Research and
development expenditures of Henkel
previous level at around 2.6%.
in FY16 by segment in percent
After taking into account all previous considerations, Henkel can improve its EBIT
margin to 15.4% (see table 4). Following a weak slump in 2017 to 14.6%, due to
higher COGS, the EBIT margin clearly exceeds the average of 14.1% of the
previous 5 years, which is mainly attributable to relatively lower advertising and
distribution expenses.
Graph 37 – Henkel’s total EBIT in € million and EBIT margin in percent (Source: Annual report,
Analyst estimates)
Graph 37 summarizes the development of total EBIT and the EBIT margin over
the last years and the forecast period. While the overall EBIT grew with a CAGR
of 6% between 2012 – 2016, the pace is expected to clearly slow down until 2022
with an CAGR of 4.2%. This is attributable to the slowdown in revenue growth
and in the EBIT margin. Latter has a limited scope for improvements in efficiency,
with an exception of the mentioned marketing expenses.
The conduction of a peer analysis allows us to compare Henkel’s profitability to

its competitors in the appropriate business segments and to evaluate the
potential for improvement in efficiency. Graph 38 compares the EBIT margin of
selected companies in FY16 that operate in all three segments of Henkel in
PAGE 19/32
combination with their revenue. Although there are partly large discrepancies
between the margins, depending on size and sector of the companies, Henkel’s
EBIT margin (14.8%) was just slightly below the average of 16.3%, suggesting
further room for improvement. Over the next years, we expect to see an
approach to the peers’ average.
Graph 38 – Henkel’s total Sales in € million, EBIT margin and Average EBIT margin in percent of
selected companies in FY16 (Source: Annual reports)
Graph 39 – Henkel’s capital

expenditures for intangible assets
Capital Expenditures
and PPE in € billion
Henkel’s capital expenditures (CAPEX) have been highly volatile in the past due
to high spending for acquisitions. In 2016 the peak of over €4.4 billion was
reached when the ‘Sun Products’ was acquired. The CAPEX can be attributed to
intangible assets or property, plants and equipment (PPE). While the investments
in PPE have been constant with decent increases, the expenditures for intangible
assets are depending on acquisitions and are therefore highly volatile (see graph
39). Our assumption of consistent acquisitions clearly flattens the CAPEX in the
future, after 2017. Consequently, the CAPEX slowly increases from €1.2 billion in
2018 to almost 1.4€ billion in 2022. Each year includes CAPEX of €560 million for
acquisitions at a constant level. The further rise in CAPEX is explained by
expansion CAPEX that Henkel invests mainly in its PPE to create further
production capacity. New plants are built especially in emerging countries like
Graph 40 – PPE of Henkel and peer Russia, India and China, but also in developed countries like the USA.
groups by percentage of revenue in
percent Additionally, to the plant expansions, inflation will increase overall expenditures.
When comparing Henkel’s overall PPE as a percentage of revenue one can see
that its PPE ratio is relatively smaller using a weighted average approach.
Henkel’s historical average of 14.6% is much closer to the beauty sector (13.8%)
than to the laundry sector (18.6%) or the adhesive sector (21.7%). This may
suggest that Henkel has been able to manufacture its products more efficiently
than peers, as the necessary amount of plants and equipment to generate
Source: Annual reports revenue has been relatively lower. Nevertheless, the analysis captures a
PAGE 20/32
historically decent and consequent increase of the PPE to revenue ratio in all
sectors and Henkel itself. For the future, we expect a slight decrease in FY17 in
this ratio for Henkel as the revenue of ‘Sun Products’ will be incorporate, but PPE
was already recognised in FY16. From FY18 onwards we expect to see a
consequent increase, correspondingly to the overall industry trend, of the PPE
ratio to 15.2% in 2022.
Return on Invested Capital

Furthermore, we analysed the return on invested capital (ROIC) of Henkel in
comparison to its competitors to assess the company’s efficiency at allocating the
capital under its control to profitable investments. With an average ROIC of 41%
over the last couple of years, Henkel belongs to the companies with the highest
potential for value creation. Considering Henkel’s WACC of 4.51% (for
calculation details see the Valuation section) the investments were highly value
creating as the cash flow for investors clearly exceeded its risks. Through the
observed years occurs a conversion of the ROIC rates from Henkel, Reckitt
Benckiser, L’Oréal and 3M, all settling at a similar level in FY16. Noticeable is the
almost parallel development of 3M and Henkel, which may be explained to the
high dependency on the adhesive business and similar efficiency.
50%
40%
30%
20%
10%
0%
2012 2013 2014 2015 2016
3M Avery Dennison HB Fuller Reckitt Benckinser Unilever
Procter & Gamble L'oreal Beiersdorf Estee Lauder Henkel
Graph 41 – Return on invested capital (ROIC) of selected companies in percent (Source: Annual
reports)
In our forecast, we predict that Henkel’s ROIC will settle slightly above the level
of 2016 (39%). 2017 will represent the only divergence with a drop related to the
high investments in the acquisition of ‘Sun Products’. However, the operating
cash flow after tax is expected to follow up already in 2018 and push the ROIC
towards its previous historical level of 41%, which we assume to be constant for
the future. Consequently, the level of value creation will remain high.
Working Capital
The total working capital of Henkel has fluctuated around zero with a tendency to
be negative in the recent past. While for most peers the working capital has been
PAGE 21/32
positive, there is no particular pattern identifiable. Whereas companies from the

beauty care and adhesive business showed a positive working capital, especially
3M, laundry and home care companies tend to have a negative working capital.
Graph 42 – Average working capital in home currency billions of selected companies over the past 6
years (Source: Annual reports)
For the future we expect to see a continuation of fluctuations in Henkel’s working

capital close to zero, meaning there is no definite convergence to the peers.
Overall, we anticipate a little faster increase in trade accounts receivables
compared to trade accounts payable and inventories. Although Henkel has short
terms of payment in the beauty and laundry care segments, which serve mainly
private customers, in the industrial segment of adhesive technologies, which has
companies as customers, the terms of payments are longer. As this segment is
the fastest growing in the future, trade accounts receivables will inflate
correspondingly. Due to growing bargaining power, particularly in the adhesive
business, trade accounts payable tend to follow. Inventories on the other hand
increase at a slower pace, because the e-commerce channel will allow a more
efficient distribution, especially in the beauty and laundry care segment.
Capital Structure
The current capital structure of Henkel with only 10% of debt slightly diverges
Graph 43 – Henkel’s capital structure
at market value in percent from the weighted average capital structure (12.8% of debt) of the previously
selected peers. Whereas companies from the laundry and home care business
showed the highest leverage with a debt to equity ratio of 19.2% followed by the
adhesive business (15.6%) and the beauty care business, which has clearly the
lowest leverage (5.6%). Nevertheless, we expect to see a convergence of
Henkel’s capital structure towards the peers average due to the dominant and
growth driving adhesive business, in which leverage is higher than currently.
Consequently, the target capital structure (11.1%) will be between the current
Source: Annual reports, Analyst
estimates one and the peers’ average with a debt to equity ratio of 12.5%. This ratio was
also applied in the valuation (see below).
PAGE 22/32
Valuation
In order to value Henkel we used a Discounted Cash Flow model. The
forecasting period for the DCF model was set to 5 years until the year 2022. A
top-down approach was chosen to forecast the company’s revenue and implicitly
the free cash flow, in order to determine its enterprise value. We started from the
Top-down approach overall market size, estimated Henkel’s market and how it will change in the next
years and multiplied them to obtain the future revenue. Given the high complexity
of Henkel, operating in different markets, we estimated the individual revenue for
each region in all three segments to forecast more accurately. Additionally, we
incorporated future revenue gains and losses attributable to acquisitions and
exchange rate fluctuations that significantly differ over regions and segments.
Cost of Capital
For the cost of equity we used the CAPM model by determining Henkel’s beta
Table 4 – Inputs for cost of capital
and ultimately its WACC. We used the current yield of the 10y German
Raw Beta 0.79
Beta lower bound 0.41 government bond as our risk-free rate with a value of 0.46%. In terms of market
Beta upper bound 1.17 premium we used the latest published numbers of Mr. Damodaran for Germany
Weighted Beta Peers 0.87 with 5.69%. Finally, we conducted a beta analysis of Henkel’s stock returns with
Risk-free Rate 0.46%
Market Premium 5.69% the MSCI World Index. We obtained a raw beta of 0.79, considering a target debt
Cost of Equity 4.96% to equity ratio of 11.1%. This beta value seems reasonable, as our benchmark
analysis from peers suggested just a slightly higher beta of 0.87. In order to
Risk-free Rate 0.46%
Probability of Default 0.47% determine the cost of debt, we took use the yield of Henkel’s bond with the
Recovery Rate 85.55% longest maturity, in this case until 2022, corresponding to 1.3%. Subsequently we
Cost of Debt 1.23% adjusted the yield considering a 5 year default probability of 0.5% according to
Bloomberg and Moody’s 5 year recovery rate of 85.5% for similar companies.
Tax Rate 24.1%
Target D/EV 11.1% Taking into account these factors the cost of debt are 1.23% before tax. By taking
Henkel’s average individual tax rate of the past 5 years we reached a cost of
WACC 4.51%
capital of 4.51% using the conventional WACC formula with the previously
Source: Annual reports, Bloomberg, mentioned target capital structure.

Damodaran, Moody’s
Discounted Cash Flow
By discounting the future cash flows we assign Henkel an enterprise value of €48
billion. For the terminal value we assumed a perpetuity growth rate of 2%, which
is equivalent to the target inflation of the European Central Bank. About 90% of
the total present value are attributable to the terminal value, which shows that a
high weight of Henkel’s overall value lies in the long-term future. Table 5
summarizes the price sensitivity of Henkel’s stock to changes in the WACC and
the terminal value.
PAGE 23/32
Terminal growth
102.38 1.7% 1.8% 1.9% 2.0% 2.1% 2.2% 2.3%
4.2% 103.9 108.2 112.9 117.9 123.5 129.6 136.3
4.3% 99.7 103.6 107.9 112.5 117.6 123.1 129.2
4.4% 95.8 99.4 103.3 107.6 112.2 117.2 122.7
WACC 4.5% 92.1 95.5 99.1 103.0 107.2 111.9 116.9
4.6% 88.7 91.8 95.2 98.8 102.7 106.9 111.5
4.7% 85.6 88.5 91.6 94.9 98.5 102.4 106.6
4.8% 82.6 85.3 88.2 91.3 94.6 98.2 102.1
Table 5 – Henkel’s share price sensitivity to WACC and terminal growth in € (Source: Analyst
estimates)
When adjusting the enterprise value for non-core and financial assets we reach a
market value of €44.7 billion, attributable to both common and preferred
shareholders. By subtracting the market value of the preferred shares we
conclude an ordinary equity value of €26.6 billion. Henkel has pursued a
consequent dividend policy by paying 40.4% of all dividends to shareholders of
preferred stocks. When assuming that this ratio will be maintained in the future,
an equal share of the total market capitalization can be attributed to preferred
stocks in the long term, representing the market value. It is necessary to take use
of the preferred shares’ market value (€18 billion) in this case as it clearly
exceeds the book value (€0.18 billion). Consequently, the remaining share of
59.6% is attributable to ordinary shareholders, which leads to the final share price
of €102.38. Compared to the current share price of €99, as of 02.01.2018, this
corresponds to a potential capital gain of 3.41%.
Free cashflow
EUR millions 2016 2017 2018 2019 2020 2021 2022 Terminal value
Operating income from sales (before tax) 2,775 2,908 3,035 3,163 3,299 3,433 3,566
% of revenue 14.8% 14.6% 14.9% 15.1% 15.2% 15.4% 15.4%
Taxes -650 -693 -722 -749 -784 -815 -846

Tax rate in % 23.4% 23.8% 23.8% 23.7% 23.8% 23.8% 23.7%
NOPAT 2,125 2,215 2,313 2,414 2,515 2,618 2,720

% of revenue 11.4% 11.2% 11.3% 11.5% 11.6% 11.7% 11.8%
Total investment -4,476 -2,406 -1,622 -1,185 -1,382 -1,452 -1,455

% of revenue 23.9% 12.1% 7.9% 5.6% 6.4% 6.5% 6.3%
Free cashflow to firm -2,351 -190 690 1,229 1,133 1,166 1,265 51,321
PV FCF 690 1,176 1,037 1,021 1,060 43,012
Table 6 – Discounted cash flow valuation in € million (Source: Analyst estimates)
Scenario Analysis
The high dependency on emerging markets initiated us to conduct a scenario
analysis to test the sensitivity of the Henkel’s revenue growth and respectively
the share price, if these markets experience a slowdown in growth. While
emerging markets contributed approximately 42% to Henkel’s revenue in FY16,
we expect to see an increase up to 46% until FY22. Table 7 demonstrates the
PAGE 24/32
sensitivity of the share price if revenue growth in developed and emerging

markets deviates from the basis scenario until 2022.
Emerging markets
102.38 -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%
-3.0% 78.4 81.8 85.4 89.0 92.8 96.6 100.6
-2.0% 82.7 86.2 89.7 93.3 97.1 100.9 104.9
-1.0% 87.2 90.6 94.2 97.8 101.5 105.4 109.3
Developed
0.0% 91.8 95.2 98.7 102.4 106.1 110.0 113.9
markets
1.0% 96.5 99.9 103.5 107.1 110.8 114.7 118.7
2.0% 101.4 104.8 108.3 112.0 115.7 119.6 123.5
3.0% 106.4 109.8 113.3 117.0 120.7 124.6 128.5
Table 7 – Share price sensitivity to growth deviations in developed and emerging markets in €
(Source: Analyst estimates)
When starting from the basis scenario (0% deviation in both markets), it is visible
that a decline in revenue growth in developed markets is more critical compared
to emerging markets. For example, a 1% point decrease of revenue growth
(assuming everything else constant) across all developed markets results in a
final share price of €97.8 in comparison to €98.7 for the same scenario in
emerging markets. The spread between these market breakdowns in the final
share price increases with the severity of the revenue decrease, showing €89 in
the worst-case scenario for developed markets and €91.8 for emerging markets.
This result is not surprising, as developed countries from Europe and North
America are still the major markets of Henkel. However, it is the probability that is
most relevant when analysing downside scenarios like in this case.
Final Considerations
While developed countries in general show more predictable and stable growth,
emerging countries have a significantly higher risk to deviate from growth
forecasts. Therefore, we put our focus on the downside scenario in latterly
Table 8 – Weighted share price by countries. With respect to the high growth rates in emerging markets, a deviation
scenarios in €
of -1% point does not seem unlikely and is therefore incorporated with a
Share price Weight Weighted price
DCF Valuation 102.38 75% 76.79 probability of 15% in our analysis. We also considered a downside scenario of
Emerging (-1%) 98.74 15% 14.81 -2% points in these regions with a 5% probability. Due to relatively stable growth
Emerging (-2%) 95.20 5% 4.76
predictions in developed markets, the downside scenario of -1% is only weighted
Developed (-1%) 97.79 5% 4.89
with a 5% probability. The highest weight however (75%) has our previously
Total 100% 101.25
conducted DCF valuation as a basis scenario. While more severe downside
Source: Analyst estimates scenarios are still possible, they were not taken into consideration due to their
low probability, which also applies to upside scenarios. Table 8 summarizes
these scenarios, their probability and the respective share prices. A weighting
leads to an overall price for Henkel’s stock of €101.25, which corresponds to a
potential capital gain of 2.27% compared to the share price of 99€ as of
02.01.2018. This represents our FY18 target price as it incorporates all relevant
risks with an appropriately weighted probability.
PAGE 25/32
Appendix
Revenues
Revenue forecast (global & by region)
EUR millions 2016 2017 2018 2019 2020 2021 2022

Operating revenue (global) 18,714 19,860 20,407 20,999 21,656 22,361 23,124
Growth in % 3.5% 6.1% 2.8% 2.9% 3.1% 3.3% 3.4%
Revenue adjusted for foreign exchange 19,369 20,725 20,845 21,413 22,027 22,706 23,419
Foreign exchange adjusted growth in % 7.1% 10.7% 5.0% 4.9% 4.9% 4.8% 4.7%
Revenue organic 18,655 19,279 20,506 21,075 21,689 22,368 23,080
Organic growth in % 3.1% 3.0% 3.3% 3.3% 3.3% 3.3% 3.2%
Western Europe
Operating revenue 5,999 6,137 6,260 6,382 6,500 6,616 6,721
Growth in % -0.8% 2.3% 2.0% 1.9% 1.9% 1.8% 1.6%
Revenue organic 6,039 6,033 6,206 6,330 6,450 6,566 6,673
Organic growth in % -0.1% 0.6% 1.1% 1.1% 1.1% 1.0% 0.9%
Eastern Europe
Growth in % 0.7% 4.5% 1.8% 2.3% 2.7% 2.9% 3.0%
Revenue organic 2,884 2,855 2,976 3,029 3,099 3,179 3,269
Africa / Middle East

Growth in % 3.7% -7.0% 3.7% 4.9% 5.8% 6.7% 7.1%
Revenue organic 1,403 1,447 1,369 1,419 1,488 1,574 1,677
North America
Growth in % 15.2% 20.8% 1.7% 1.5% 1.6% 1.7% 1.8%
Revenue organic 3,710 4,266 5,149 5,237 5,314 5,397 5,486
Latin America
Growth in % -5.0% 8.9% 4.4% 5.0% 5.3% 5.3% 5.4%
Revenue organic 1,263 1,122 1,223 1,277 1,341 1,412 1,485
Asia-Pacific
Growth in % 3.6% 0.4% 5.7% 5.8% 6.3% 6.1% 6.7%
Revenue organic 3,234 3,433 3,460 3,658 3,871 4,113 4,362
Corporate
Operating revenue 121 122 123 125 126 127 128
Growth in % -5.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
PAGE 26/32
Income Statement
Forecasting Income Statement
EUR millions 2016 2017 2018 2019 2020 2021 2022

Growth in % 3.5% 6.1% 2.8% 2.9% 3.1% 3.3% 3.4%
Cost of sales -9,742 -10,466 -10,744 -11,046 -11,380 -11,744 -12,140
% of revenue 52.1% 52.7% 52.7% 52.6% 52.6% 52.5% 52.5%
Gross profit 8,972 9,394 9,663 9,954 10,276 10,617 10,984
% of revenue 47.9% 47.3% 47.4% 47.4% 47.5% 47.5% 47.5%
Administrative expenses -1,062 -1,092 -1,124 -1,161 -1,204 -1,252 -1,307
% of revenue 5.7% 5.5% 5.5% 5.5% 5.6% 5.6% 5.7%
Research and development -463 -487 -504 -523 -544 -568 -597
% of revenue 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.6%
Marketing, selling, and distribution -4,635 -4,866 -4,955 -5,059 -5,178 -5,309 -5,455
% of revenue 24.8% 24.5% 24.3% 24.1% 23.9% 23.7% 23.6%
Other expenses (income) -37 -41 -44 -48 -51 -55 -60
% of revenue 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3%
Operating income from sales (before tax) 2,775 2,908 3,035 3,163 3,299 3,433 3,566
% of revenue 14.8% 14.6% 14.9% 15.1% 15.2% 15.4% 15.4%
Depreciation -570 -649 -662 -679 -697 -718 -739
% of PPE & intangible assets 3.1% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4%
EBITDA 3,345 3,557 3,697 3,841 3,996 4,151 4,305
% of revenue 17.9% 17.9% 18.1% 18.3% 18.5% 18.6% 18.6%
Taxes -650 -693 -722 -749 -784 -815 -846
% of operating income from sales (before tax) 23.4% 23.8% 23.8% 23.7% 23.8% 23.8% 23.7%
Operational result 2,125 2,215 2,313 2,414 2,515 2,618 2,720
% of revenue 11.4% 11.2% 11.3% 11.5% 11.6% 11.7% 11.8%
Other comprehensive income 3 -1,267 -554 -564 -535 -558 -527
% of revenue 0.0% 6.4% 2.7% 2.7% 2.5% 2.5% 2.3%
Interest income 20 30 34 39 44 48 53
% of financial assets 2.4% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Interest expense -25 -158 -152 -139 -132 -126 -123
% of financial liabilities 0.7% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4%
Other financial result -26 -9 -10 -12 -13 -14 -16
Investment result -2 2 3 3 3 4 4
% of financial assets 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Dividends preferred stock -269 -287 -307 -326 -342 -360 -376
% of total dividends 40.4% 40.4% 40.4% 40.4% 40.4% 40.4% 40.4%
Net financial result before taxes -299 -1,689 -986 -998 -975 -1,006 -984
% of revenue 1.6% 8.5% 4.8% 4.8% 4.5% 4.5% 4.3%
Tax shield -1 -31 -29 -24 -22 -19 -17
% of net interest result 23.7% 24.4% 24.4% 24.4% 24.4% 24.4% 24.4%
Financial result -298 -1,658 -958 -974 -953 -987 -967
% of revenue 1.6% 8.3% 4.7% 4.6% 4.4% 4.4% 4.2%
PAGE 27/32
Balance Sheet
Balance Sheet
EUR millions 2016 2017 2018 2019 2020 2021 2022

Working cash 374 397 408 420 433 447 462
% of revenue 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Inventories 1,938 2,022 2,087 2,158 2,236 2,320 2,411
Days inventories outstanding 73 71 71 71 72 72 73
Trade account receivables 3,349 3,376 3,490 3,612 3,747 3,913 4,070
% of revenue 17.9% 17.0% 17.1% 17.2% 17.3% 17.5% 17.6%
Income tax refund claims 281 278 286 273 282 291 301
% of revenue 1.5% 1.4% 1.4% 1.3% 1.3% 1.3% 1.3%
Other assets 589 596 622 651 682 716 752
% of revenue 3.1% 3.0% 3.1% 3.1% 3.2% 3.2% 3.3%
Intangible assets 15,543 15,930 16,223 16,600 17,000 17,454 17,935
% of revenue 83.1% 80.2% 79.5% 79.1% 78.5% 78.1% 77.6%
Property, plant, and equipment net 2,887 2,900 3,005 3,096 3,230 3,384 3,506
% of revenue 15.4% 14.6% 14.7% 14.7% 14.9% 15.1% 15.2%
Deferred income taxes 1,017 1,015 1,044 1,076 1,110 1,120 1,159
% of deferred tax related positions 4.2% 4.1% 4.1% 4.1% 4.1% 4.0% 4.0%
Total operating assets 25,978 26,513 27,165 27,885 28,720 29,644 30,596
% of revenue 138.8% 133.5% 133.1% 132.8% 132.6% 132.6% 132.3%
Income tax provision 464 462 221 371 382 405 414
% of taxes paid 80.1% 80.1% 78.6% 77.1% 75.6% 74.1% 72.6%
Other provisions 2,313 2,324 2,389 2,441 2,491 2,535 2,609
% of revenue 12.4% 11.7% 11.7% 11.6% 11.5% 11.3% 11.3%
Income tax liabilities 16 18 19 19 20 21 21
% of revenue 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Trade accounts payable 3,665 3,814 3,944 4,085 4,240 4,376 4,557
Days accounts payable outstanding 137 133 134 135 136 136 137
Other liabilities 420 446 464 484 506 522 540
% of revenue 2.2% 2.2% 2.3% 2.3% 2.3% 2.3% 2.3%
Deferred tax liabilities 833 856 880 907 936 968 1,002
% of deferred tax related positions 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Total operating liabilites 7,711 7,920 7,917 8,308 8,575 8,826 9,142
% of revenue 41.2% 39.9% 38.8% 39.6% 39.6% 39.5% 39.5%
Net operating assets 18,267 18,594 19,248 19,577 20,144 20,818 21,454
% of revenue 97.6% 93.6% 94.3% 93.2% 93.0% 93.1% 92.8%
Excess cash 1,015 1,337 1,144 1,137 1,178 1,145 1,328
% of revenue 5.4% 6.7% 5.6% 5.4% 5.4% 5.1% 5.7%
Other financial assets 829 989 1,138 1,289 1,443 1,600 1,761
% of revenue 4.4% 5.0% 5.6% 6.1% 6.7% 7.2% 7.6%
Assets held for sale 95 52 54 56 58 60 62
% of assets 0.4% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Total financial assets 1,939 2,378 2,336 2,481 2,678 2,805 3,151
% of revenue 10.4% 12.0% 11.4% 11.8% 12.4% 12.5% 13.6%
Other financial liabilities 278 298 280 266 254 242 232
Liabilities held for sale 13 14 14 13 13 13 13
% of liabilities 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Borrowings 3,725 4,598 4,423 4,034 3,852 3,660 3,567
% of revenue 19.9% 23.2% 21.7% 19.2% 17.8% 16.4% 15.4%
Provision for pensions and similiar obligations 1,007 809 779 749 719 689 659
% of revenue 5.4% 4.1% 3.8% 3.6% 3.3% 3.1% 2.8%
Preferred stock 178 178 178 178 178 178 178
% of total stocks 40.7% 40.7% 40.7% 40.7% 40.7% 40.7% 40.7%
Total financial liabilites 5,201 5,897 5,674 5,241 5,016 4,781 4,649
% of revenue 27.8% 29.7% 27.8% 25.0% 23.2% 21.4% 20.1%
Net financial assets -3,262 -3,519 -3,338 -2,759 -2,338 -1,977 -1,498
% of revenue -17.4% -17.7% -16.4% -13.1% -10.8% -8.8% -6.5%
Common Shareholders' Equity 15,005 15,075 15,909 16,817 17,806 18,841 19,957
PAGE 28/32
Statement of Shareholders Equity
Statement of Shareholders Equity
EUR millions 2016 2017 2018 2019 2020 2021 2022

Balance beginning 13,633 15,005 15,075 15,909 16,817 17,806 18,841
Transactions with shareholders
Dividends -397 -423 -453 -479 -503 -530 -554
Sales of treasury shares 0 0 0 0 0 0 0
% of shareholders equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Changes in ownerhsip interest -96 -63 -63 -66 -70 -74 -79
% of shareholders equity -0.7% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4%
Other changes in equity 38 -3 -5 13 0 8 -5
% of shareholders equity 0.3% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0%
Total transactions with shareholders -455 -488 -520 -532 -573 -596 -637
Comprehensive income
Net income 2,093 2,112 2,216 2,330 2,438 2,549 2,656
Other comprehensive income 3 -1,267 -554 -564 -535 -558 -527
Dividends on preferred stock -269 -287 -307 -326 -342 -360 -376
Total comprehensive income 1,827 558 1,355 1,440 1,562 1,631 1,752
Balance end 15,005 15,075 15,909 16,817 17,806 18,841 19,957
Total Dividends -666 -710 -760 -805 -845 -890 -930

% of net income 31.8% 33.6% 34.3% 34.5% 34.7% 34.9% 35.0%
PAGE 29/32
Disclosures and Disclaimers
Report Recommendations
Buy Expected total return (including expected capital gains and expected dividend yield)
of more than 10% over a 12-month period.
Hold Expected total return (including expected capital gains and expected dividend yield)
between 0% and 10% over a 12-month period.
Sell Expected negative total return (including expected capital gains and expected
dividend yield) over a 12-month period.
This report was prepared by Patrick Pecher, a Master in Finance’s student of Nova School of Business &
Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.
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masters graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed
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PAGE 30/32
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PAGE 31/32
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Henkel Hold Recommendation Despite Rising Costs

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Henkel Hold Recommendation Despite Rising Costs

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MASTERS IN FINANCE

HENKEL AG & CO. KGAA COMPANY REPORT

STUDENT: PATRICK PECHER 27211@novasbe.pt

Performance in three solid growing sectors Price Target FY18: 101.25 €

the position as the world leader with 25% market share in

§ A highly competitive environment and potential increase of raw

below the average of previous years.

SHAREHOLDER STRUCTURE ................................................................................. 3

MARKET TRENDS .................................................................................................. 5

MARKET TRENDS .................................................................................................. 8

MARKET TRENDS ................................................................................................ 11

M&A ACTIVITY .................................................................................................... 13

COST OF GOODS SOLD ...................................................................................... 16

COST OF CAPITAL ............................................................................................... 23

Graph 1 – Henkel’s revenue by

Adhesive Technology Market

Due to the high dependence on various industry sectors we see a close

outlook is strengthening, growth remains weak in many countries and inflation is

the global market of packaging adhesives is estimated at $14.7 billion in 2016,

Graph 13 – Henkel’s annual organic

Lastly, the development towards omnichannel is pioneering in retail as many

to offer more promotional activities, in order to maintain the number of customers

Graph 25 – Henkel’s annual organic

Inorganic Growth Factors

any specific markets, instead acquisitions are reported worldwide. However, it

Graph 27 – Henkel’s annual amount

PV FCF 24.8 75.7 103.5 95.4 94.0 95.9 2,758.8

Forecasting acquisitions is problematic and nearly impossible for a longer timer

Acquired revenue EUR(m) by region

Foreign Exchange Rates

Change in forward currency rates

Currency 2017 2018 2019 2020 2021 2022

Table 3 – Annual change in forward currency rates (Source: Bloomberg)

The change in forward currency exchange rates concludes an appreciation of the

Alibaba push down distribution costs. Finally, we estimate a constant margin

Source: Annual reports

Source: Annual report

The conduction of a peer analysis allows us to compare Henkel’s profitability to

Graph 39 – Henkel’s capital

Return on Invested Capital

3M Avery Dennison HB Fuller Reckitt Benckinser Unilever

Procter & Gamble L'oreal Beiersdorf Estee Lauder Henkel

positive, there is no particular pattern identifiable. Whereas companies from the

For the future we expect to see a continuation of fluctuations in Henkel’s working

Source: Annual reports, Bloomberg, mentioned target capital structure.

Taxes -650 -693 -722 -749 -784 -815 -846

NOPAT 2,125 2,215 2,313 2,414 2,515 2,618 2,720

Total investment -4,476 -2,406 -1,622 -1,185 -1,382 -1,452 -1,455

PV FCF 690 1,176 1,037 1,021 1,060 43,012

Table 6 – Discounted cash flow valuation in € million (Source: Analyst estimates)

sensitivity of the share price if revenue growth in developed and emerging

EUR millions 2016 2017 2018 2019 2020 2021 2022

Africa / Middle East

Forecasting Income Statement

EUR millions 2016 2017 2018 2019 2020 2021 2022

EUR millions 2016 2017 2018 2019 2020 2021 2022

Statement of Shareholders Equity

Statement of Shareholders Equity

EUR millions 2016 2017 2018 2019 2020 2021 2022

Total Dividends -666 -710 -760 -805 -845 -890 -930

Disclosures and Disclaimers

The additional disclaimers also apply:

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