Saint-Gobain: Large Volume Declines in Europe Send Revenue Lower but Record EBIT Margin Expected

No-moat Saint-Gobain SGO reported a 10% decline in revenue during the third quarter, of which 3% was organic. Volumes were 5% lower (of which 2% was from fewer working days), which is a less severe decline than 7% in the previous quarter. However, unlike in previous quarters, the benefits from the spillover of higher prices implemented last year were less pronounced and thus were unable to mitigate lower volumes to the same extent as in the past. Nevertheless, a less inflationary environment allowed the group to achieve a positive price-to-cost spread during the third quarter, with management guiding for a record operating margin during 2023, partially benefiting from divestments. Shares are marginally higher but remain undervalued to our EUR 62 fair value, which we maintain.

There was a significant contrast in performance across geographies, with only the Asia-Pacific segment reporting organic revenue growth during the year, driven by strong performance in India. Northern Europe once again showed the sharpest drop in volumes of 9% lower year over year, which is less severe than in the second quarter, whereas North America continues to show its resilience despite higher interest rates, reporting 4% growth. We expect the top-line performance to remain challenged for the remainder of the year, as price increases implemented to compensate for significant inflation last year begin to get incorporated into the prior year’s base. However, with energy prices declining from record levels last year and selling prices remaining stable, we are confident that management will achieve its double-digit EBIT margin target for the full year.