international analyst equity analyst europe insights

INDUSTRY NOTE

Europe | Themes & Tactics

Europe Insights 10 December 2014

Europe InsightsStructurally Challenged Stocks in 2015

EQU

ITY R

ESEARC

H EU

ROPE

Jefferies Int'l Ltd. Equity Research *International Analyst

+44 (0) 20 7029 8685 [email protected] Rennardson *

Equity Analyst+44 (0)20 7029 8447 [email protected]

Martin Brunninger *Equity Analyst

+44 (0)20 7029 8704 [email protected] Kerstens *

Equity Analyst44 (0) 20 7029 8684 [email protected]

Graham Phillips *Equity Analyst

+44 (0) 20 7029 8346 [email protected] Dickerson *

Equity Analyst+44 (0) 20 7029 8309 [email protected]

Justin Jordan *Equity Analyst

+44 (0) 20 7029 8976 [email protected]

* Jefferies International Limited

Key Takeaway

Jefferies European Research has selected 8 Underperform-rated stocks thatoffer potential downside in 2015 as structural challenges persist. The stocksare Carnival, Elekta, Fresenius Medical Care, Royal Mail, Sandvik, StandardChartered, Stora Enso and Volvo.

Our analysts have written recently on these stocks highlighting major challenges that leaveearnings and valuations at risk. For some, the structural problems have been in place for awhile but we believe that all 8 names will continue to face fundamental headwinds in 2015,even if a European and broader Global recovery is stronger than expected.

Carnival: Our in-depth study of historic cruise price data leads Ian Rennardson to concludethat market expectation for a decent rebound in net revenue yields is too optimistic.Carnival's discounting of close-in prices continues to deteriorate, off a weak initial pricingposition. It will have to continue to invest in its fleet in a mix of non-revenue generatingmaintenance areas before it can move to address its significant competitive disadvantage.This makes cash returns less likely. Recent oil price falls have lifted the shares but this lowquality earnings tailwind masks significant underlying issues.

Elekta: Martin Brunninger believes that efficiency improvements will continue to pressureend market growth of Elekta's radiation therapy machines and that competitive pressuresin the high margin software division are likely to remain a significant drag on the business.Over time, proton therapy will also create substitution headwinds for Elekta.

Fresenius: Slow to diversify away from dialysis care in the US, FMC is struggling to offsetstructural earnings pressure as the US government claws back treatment cost reductions andefficiency gains. Martin also highlights that sharp declines in new patient growth impactthe long term story. FMC trades on a sector multiple for half the growth.

Royal Mail: On-going competitive threats in mail (exacerbated by the recent Ofcomdecision around the USO) are being compounded by increasing competitive threats in RoyalMail's parcel business, with revenues here now likely flat vs historic 10% growth. DavidKerstens sees downside risk to margins (80bps decline to 18/19e vs cons at +200bps) andfurther risk to the shares even allowing for a more generous real estate valuation.

Sandvik: Recent work as part of our Cap Goods Team's initiation suggests that Sandvikhas demonstrated the worst structural margin erosion of the peer group over the last 11years, with limited ability to change this dynamic. Graham Phillips expects the stock tostruggle in a low growth world, with high correlation to German IP and significant miningand construction exposure (c.50% of sales).

Standard Chartered: Joe Dickerson maintains that capital intensive growth and a varietyof challenges (incl impairment risk given the sector and geographic exposures) will pressurethe CET1 ratio. Routes out of this problem will hurt earnings, returns and share price.

Stora Enso: The over-capacity in the graphic paper market is not a new problem. JustinJordan's recent initiation highlighted that beyond this, the balance sheet is the most gearedof its peers and expansion projects in both pulp (Montes del Plata) and renewable packagingcome with operational risk and, in China, uncertain end market demand.

Volvo: Also screening poorly in our cap goods initiation for structural margin erosion andregulatory pressure, which past cost savings plans have not been able to offset. Cyclicalslowdown of construction equipment sales (especially in Asia) are forcing some toughdecisions around the future shape of this business and more pain could be felt fromcustomer defaults, as seen by the most recent SEK650m charge in Q4.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 11 to 14 of this report.

Summary of Contents Page

Carnival - Ian Rennardson, European Travel and Leisure 3

Tel: +44 207 029 8447, Email: [email protected]

Elekta – Martin Brunninger, European Medtech 4


Fresenius Medical Care – Martin Brunninger, European Medtech 5


Royal Mail Group – David Kerstens, Postal Operators/Freight Forwarders 6


Sandvik – Graham Phillips, European Capital Goods 7


Standard Chartered - Joe Dickerson, UK and European Banks 8


Stora Enso - Justin Jordan, European Paper & Packaging 9


Volvo – Graham Phillips, European Capital Goods 10


Themes & Tactics

Europe Insights

10 December 2014

page 2 of 14 , International Analyst, +44 (0) 20 7029 8685, [email protected] Jefferies Int'l Ltd. Equity Research

Please see important disclosure information on pages 11 - 14 of this report.

mailto:[email protected]








Carnival – Issues are Structural not Cyclical

Investment Case for 2015

Carnival is having to discount in the ‘lates’ market more than its peers in order fill its ships, putting pressure on overall pricing. We think

this has been caused by under-investment in its fleet at the same time as peers upped the ante in terms of product quality and innovation.

We believe Carnival will take time to catch-up, if it ever does. We think the share price under-performance against Royal Caribbean (RCL,

Buy) will continue and reiterate our Underperform recommendation with $36/2300p PTs.

The bull-case on CCL is largely built on the premise that after a number of years marred by one-off issues, annual net revenue yield growth

will return to a 'normal' 4% - 5% and that costs will be cut over the next few years, meaning there is significant upside risk to estimates.

We disagree with this thesis. Our in-depth cruise industry price analysis shows that more than two years after the Costa Concordia disaster

and 18 months after the Carnival Magic and Dream issues, Carnival is still having to discount significantly more than its peers in the 'close-

in' period (1 to 3 months before sailing) in order to fill its ships. We estimate a meaningful 15% - 20% of cruises are sold 'close-in'. We

think this discounting means that any yield increases at CCL will be lower than those achieved by RCL.

We argue that this continued discounting is a consequence of a number of years of structural under-investment in CCL's product offering

from a features, environmental and maintenance capex point of view. This has been compounded by competitors such as RCL and NCLH

upping the ante in terms of new ship quality and innovation. CCL is having to spend considerably more than it originally planned on

keeping its ships competitive in order to regain lost ground on RCL in particular, whose ships resonate more with developing customer

preferences. It will take time to catch-up, if it ever does. This extra spending limits CCL's ability to return, as promised to shareholders,

excess cash, above the ordinary dividend. At the same time RCL has raised the possibility of share buy-backs/special dividends.

Consequently, we recently reduced our net revenue yield growth assumptions at CCL to 2.5% and 2.5% in FY15 and FY16 (from 2.5% and

3%). At the same time we raised our yield growth assumptions at RCL from 3% in both FY15 and FY16 to 4%. In addition, given recent

movements, we marked to market on fuel and FX. At CCL the headwind of a strong USD has not offset the benefits of a falling oil price,

and we raise our FY15/16 EPS estimates by an average of 5% after adjusting for lower yield assumptions.

Key Catalysts and Financial Data

Source: Jefferies estimates, Bloomberg

Cruise Line Close-in Pricing 2011-2014

Source: Jefferies estimates

Valuation

We recently raised our CCL/CCL LN price targets to $36/2300p. This would leave the shares trading on their long term average PE and

EV/EBITDA ratios of 13.5x and 8.7x respectively. We reiterate our Underperform recommendation as we still see scope for the company to

disappoint against market expectations over the next few years and believe many of the issues it faces are structural rather than cyclical.

Risks are a downturn in US and European consumer spending, volatile fuel prices, tougher regulation, Fx and event risk.

Valuation Scenarios


Metric Jef 15e Cons '15e Jef 16e Cons '16e

Revenue ($M) 13632 13600 14504 14600

EPS ($) $2.35 $2.25 $2.72 $2.98

Dividend Yield 2.3% 2.4% 2.3% 2.7%

P/E 18.8x 19.1x 16.2x 14.3x

EV/EBITDA 11.2x 10.9x 10.2x 9.3x

Key Catalysts

2015 guidance due 3rd week December

Continued weak close-in pricing

One-off events such as hurricanes, bird-flu

Key Forecasts

-15%

-10%

-5%

0%

5%

10%

2011 2012 2013 2014

Carnival Norwegian RCL

Price Target Value % U/D-side

Base Case 2300p -16%

Upside Case 3300p 19%

Downside Case 1500p -45%

Scenario

2.5% net revenue yield growth, bunker fuel at $552 per tonne

5% net revenue yield growth, bunker fuel at $550 per tonne

Flat net revenue yield growh, bunker fuel at $600 per tonne

Long View Valuation Sensitivity

Themes & Tactics

Europe Insights

10 December 2014



Elekta – Software Hardening


Through FY14/15, Elekta’s sales and profits have missed consensus consistently and often significantly. The company has downgraded

guidance for each of the last four quarters and we are increasingly concerned about the lack of visibility that the pipeline offers. Our key

concerns are materialising and we see a persistence of structural challenges ahead: declining need for new instalments, consolidation of

cancer centres and further loss of share in software. We believe consensus remains over-optimistic over the medium term and we expect

forecasts to come towards us as the structural challenges persist. On P/E the stock trades at 18.9x 2015 P/E for growth of 6.7% vs the

sector on 19.6x for 10%. Our PT of SEK61 implies potential 21% downside.

The Structural Challenges

In EMEA the company has struggled with delays of significant orders and we believe the region is quickly moving towards a replacement-

only market, as we have seen in the US (net new instalments -4% p.a since 2012). Innovation hinders new instalments as demand can be

absorbed by greater throughput rather than new capacity.

Healthcare reforms drive consolidation of cancer centres, increasing buying power at the cost of the manufacturers and a growing trend

towards large healthcare tender fosters greater pricing pressure. We believe key competitor Varian is better positioned than previously

with a versatile machine. Over the long-term we expect Proton Therapy to penetrate conventional RT from c.1% today to 15%-20%.

Of greatest concern to us, however, is the loss of share in the crucial US software market (up to c.80% gross margin), as reflected by the

fall in the Americas contribution margin from 31% to 25%. Elekta had built a dominant share, particularly in the OIS market (c.50%)

through effective strategy and a series of canny acquisitions but competition has intensified in recent years as innovative new packages,

like Raystation have built traction and it appears that Varian is converting more of its own machines back to its proprietary Aria/Eclipse

software. In our September initiation; “Initiating on Particle Therapy: Elekta Hold, IBA Buy” we estimated a 12%-15% EPS dilution in 2020e

based on our expectations for software share shifts.


Source: Jefferies estimates, FactSet

Elekta CER Sales and Order Book Growth

Source: Jefferies estimates, company data

Valuation

Our PT of SEK61 implies potential downside of 21% and is based on a DCF valuation and cross-referenced with relevant peer multiples. On

P/E, the stock trades on 18.9 x FY15E and 17.7x FY16E, compared with the sector on 20.0x and 17.7x. We forecast EPS growth of 5.2% on

a 3-year CAGR (consensus 16.4%) compared to the sector offering 10.3%.

Valuation Scenarios



Revenue (SEKm) 12,298 12,355 12,861 13,442

EPS (SEK) 4.13 4.10 4.41 4.79

Dividend Yield 0.0% 0.0% 0.0% 0.0%

P/E 18.9x 19x 17.7x 16.3x

EBITDA Margin 21.0% 21.5% 21.2% 22.3%

Key Catalysts

Feb-15 3Q earnings report

Apr-15 ESTRO conference

May-15 FY14/15 Results

Key Forecasts

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

CE

R S

ale

s &

Ord

er

gro

wth

Elekta Sales Growth Elekta Order Book Growth


Base Case SEK 61 -21%

Upside Case SEK 79 1%

Downside Case SEK 39 -50%

Scenario

Elekta continues to cede share in the high-margin software and services businesses

Volume decline in developed markets stabilises and near-term EM headwinds abate

Question marks intensify on balance sheet management, increasing pressure on CF


Themes & Tactics

Europe Insights

10 December 2014



Fresenius Medical Care – Margins Under Pressure


US Dialysis Care continues to face structural earnings pressure as the US government continues to claw back potentially sustainable profit

accretion. While DaVita moved to diversify its business model by leveraging structural trends in US Healthcare, FMC was slow to act. We

remain cautious on the margin opportunity and risk profile of the new Care Co-ordination (CC) division and are not yet convinced that it

can succeed where previous attempts have failed. FMC trades on 20.8x FY15 P/E for 5% growth vs sector 19.6x for 10%.

The Structural Challenges

The payer mix is gradually deteriorating based on a sharp decline in new patient growth and consolidation, another significant historic

profit driver for dialysis, has come to an end as the market is now almost fully consolidated. Treatment cost reduction and efficacy gains

have not resulted in sustainable margin expansion as the US government has clawed back the majority over time and the company has not

been able to monetise it’s improvements in treatment quality. Models that are targeted purely at cost savings from US dialysis will

continue to disappoint in our view.

The company's latest focus on Care Co-ordination is a holistic approach towards dialysis cost savings which has already been tried for a

few decades with very modest success. We believe the new division does hold promise and should deliver upside over the longer-term.

The company guides for an additional $5.0bn in sales by 2020e. However, while we acknowledge that acquiring new sales is eminently

possible, we would question both the profit contribution and risk profile of these new opportunities.

On a 12m rolling basis, the group EBIT margin has fallen 200bps from 16.6% to 14.6% in the last two years. As the CC strategy continues

to be rolled out, we expect margins to come under further pressure (although no ROIC guidance given for CC). Having shown a worrying

trend through 1H14, NCI pay-away looked a touch better at 3Q14 but another area of concern is the deterioration in CF metrics with FCF

conversion at 44% of EBIT (from c.60% in 2012). We are yet to be convinced that CC can succeed where previous attempts failed.

Key Catalysts and Forecasts

Source: Company data, Jefferies estimates, FactSet

MC EBIT Margin (12m Rolling) %


Valuation

Our PT of €43 is DCF-based and triangulated with peer multiples. Risks include reimbursement changes, greater efficiencies, litigation and

greater pricing power with private payors. On P/E, the stock trades on 20.8x FY15E and 19.9x FY16E, compared with the sector on 19.6x

and 17.7x. We forecast EPS growth of 4.8% on a 4-year CAGR (consensus 7.5%) compared to the sector offering 10.3%.

Valuation Scenarios



Revenue (USDm) 16,680 16,659 17,452 17,801

EPS (USD) 3.59 3.88 3.75 4.46

Dividend Yield 1.5% 1.3% 1.6% 1.4%

P/E 20.8x 19.2x 19.9x 16.7x

EBIT Margin 14.8% 14.7% 15.2% 15.2%

Key Catalysts

25-Feb-15 FY14 Report

30-Apr-15 1Q15 Report

30-Jul-15 2Q Report

Key Forecasts

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

EB

IT M

arg

in 1

2m

Ro

llin

g %


Base Case EUR 43 -28%

Upside Case EUR 66 11%

Downside Case EUR 30 -50%

Scenario

Care Co-ordination holds LT promise but squeezes margins and stretches valuation

Flat or even upward re-basing on grounds of improved treatment quality

DaVita continues to take share of the lucrative commercial patients in the US


Themes & Tactics

Europe Insights

10 December 2014



Royal Mail – Increasing Competion Eroding Profitability


Royal Mail’s profitability is expected to be increasingly eroded by increasing competition in both letter post and parcels, which in our view

is not yet reflected in consensus estimates. Competition in letter post is set to increase after Ofcom recently concluded direct-delivery

competition does not pose a threat to the USO, while proposals for access pricing sound relatively more supportive of direct delivery

competition. Therefore, we think Whistl will now likely resume the roll-out of their direct-delivery network, which is expected to put

further pressure on Royal Mail's letter volumes and profitability of up to 250bps by FY18/19E (vs a UKPIL margin of 5.5% in FY13/14).

Royal Mail’s parcel growth engine is faltering, with increasing competition from Amazon reducing the growth of the addressable market

from 4% to 1%-2%, creating over-capacity and price pressure. The impact is worse than previously expected, with parcel revenues now

expected to remain stable at best in coming years, compared to historic growth of 10%. Parcels are no longer able to compensate for

expected increasing margin pressure in letter post and we are projecting Royal Mail’s adjusted EBIT margins will fall by 80bps to 5.0% by

FY18/19E, whereas consensus estimates still imply an improving margin trend of over 200bps, which we think is too optimistic.



EBIT Margin Development - JEFe v Cons


Valuation

Royal Mail shares have underperformed the postal sector by 20% over the last six months and are trading at 9.2x FY15E EV/EBIT, implying

a 10% premium to the postal sector. Our DCF-based price target of 360p assumes a long-term EBIT margin of 5.0% before transformation

costs (compared to 5.8% underlying in FY13/14) and reflects assumed £150m higher pension cash contributions beyond FY17/18E and a

valuation of £660m for London development property. Key risk factors include e-substitution, increasing competition, regulatory

limitations and limitations to restructuring initiatives with a unionised labour force.

Valuation Scenarios



Revenue 9,439 9,463 9,405 9,520

EPS 30.3 32.3 24.2 28.0

Dividend Yield 5.1 5.2 5.1 5.2

P/E 13.4 12.6 16.8 14.5

EV/EBITDA 5.2 6.0 5.6 5.5

Key Catalysts

Q3 IMS in January 2015

End of access pricing consultation period on 24 Feb 2015

Ofcom decisions on access pricing expected summer 2015

Key Forecasts (£m)

JEFe

Consensus

0.0

2.0

4.0

6.0

8.0


Base Case 360p -11%

Upside Case 500p 24%

Downside Case 300p -25%

Scenario:

£150m higher pension cash contributions beyond FY17/18E; £660m property valuation

PostNL/Whistl deciding not to resume the roll-out in the UK

More severe margin pressure from increased competition in letters and parcels


Themes & Tactics

Europe Insights

10 December 2014



Sandvik – Highest Mining Exposure in 2015


We initiated coverage of Sandvik, along with the eleven other European Capital Goods companies, in our November 2014 report entitled

“Looking for Stars in a Low-Growth World”. Our analysis of Sandvik demonstrated the company had a high organic revenue correlation

with German IP (R² 75%) and the worst structural margin erosion (almost 300bp over 11 years). We prefer companies that are not IP

dependant for 2015 as we believe growth will remain subdued.

German IFO business expectations-next-six-months (our preferred relevant forward economic indicator) remains negative, Europe

continues to suffer from deflation and we expect further negative impacts from Russian sanctions. In addition, weaker commodity prices,

emerging markets and EM currencies are not good for European Capital Goods companies’ organic growth as they signal overall demand

weakness. The only bright spot is the US but Sandvik has only 18% of group sales into North America – this is below the European Capital

Goods sector average of 23%.

Sandvik continues to have the weakest end-market conditions due to its mining and construction exposure (almost half group sales).

Further analysis of the mining exposure also reveals more dependence on capex (falling 10%-15% p.a for next two to three years) v. opex

(production levels stable) and more exposure to opencut (e.g. coal very weak) v. underground (commodities prices fairing relatively

better). Overall we believe the long-term term sales target of 4%-5% annually as too ambitious. There is a tailwind in estimates from the

weak SEK but unless the SEK weakens again from here these are already included in our forecasts: Sandvik’s sensitivity is ±5% in a basket of

currencies is around ±SEK1.3b EBIT (±12%).

Encouragingly at the November 2014 CMD the company aims to release SEK4.5bn cash from working capital but we were disappointed

that the CEO stated that investors should not expect any major divestments. We had hoped Material Technology (15% of group sales)

could have been sold (competes against steel companies). We were also concerned that management expected an uptick in mining capex

in 2016 based on a management consultant study that did not seem to take into account cuts already announced by major mining

companies echoed by consensus estimates into 2015 and 2016.


Source: Jefferies estimates, Factset

Sandvik - Weak Organic Growth

Source: Jefferies, company data

Valuation

Our price target of SEK68 is based on our view that any premium to the SXNP on traditional ratings is unjustified. We believe a discount is

fair due to structural margin problems, Sandvik’s high cyclicality and the poor IP outlook. Our PT is based on 2015 EV/EBIT of 10.5x and

P/E of 12.7x, representing a 10%-20% discount to the SXNP. These discounts are in-line with past trading ranges on these metrics and our

view of the issues and risks facing the company.

Valuation Scenarios



Revenue (SEK bn) 91.4 92.7 93.6 96.5

EPS (SEK) 5.36 5.56 6.16 6.52

Dividend Yield 5% 4.80% 5.30% 5.20%

P/E 14.5x 14x 12.6x 11.9x

EV/EBIT 10.8x 10.2x 11.9x 11.7x

Key Catalysts

German IP/IFO monthly

FY14 results – 29 January 2015

1Q15 results – 27 April 2015

Key Forecasts



Upside Case SEK100 27%

Downside Case SEK55 -29%

Scenario

Little organic growth expected due to stagnant Europe and weak China and Brazil

Strong German IP, commodity markets/construction markets have coincident recovery

Cost cutting does not combat competitive pressures, returns, cash flow suffer, DPS cut


Themes & Tactics

Europe Insights

10 December 2014



Standard Chartered – Caught in a Vortex


Standard Chartered’s direction is uncertain. The bank’s growth over the past five years has been capital intensive and there are a variety of

headwinds likely to pressurize the CET1 ratio (credit risk migration and changes to the way the bank calculates exposure to financial

institutions, among others). We expect the CET1 ratio to trough in 2015 at 10.4% against a likely need to operate at 11.0% - 11.5%.

We believe the two primary options available to management to augment capital levels are: 1) shrink the asset base; 2) embark on a rights

issue. We believe the former is more likely because the investment proposition for a rights issue is weak at this stage. According to our

burn-down analysis, STAN would need $8.8bn of equity capital in a rights scenario.

In the scenario whereby STAN shrinks its loan book at a rate of 5% over 2015 and 2016, capital levels could reach 13.7% (though earnings

would fall a further 10% relative to our estimates). In either of these scenarios, we calculate 2016 RoTE falls to 8% meaning that investors

will have to re-assess sustainable return prospects for this bank.



STAN – 1yr forward consensus RoTE (1999 – present)


Valuation

We value STAN at a base case of 730p with downside in a more bearish scenario to 530p. Our estimates for 2015 are 18% below the

Street and the variance to consensus is explained nearly exclusively by impairments where we expect deterioration to 90bps of loans.

Valuation Scenarios



Revenue ($bn) 18.5 19.1 19.2 20.1

EPS (cents) 149.0 182.0 173.0 198.0

Dividend Yield 5% 5% 6% 6%

P/E 10.4x 8.5x 9x 7.8x

Key Catalysts

Results 4 March 2015

Key Forecasts


Base Case 730 -25%

Upside Case 1036 7%

Downside Case 530 -45%

Scenario

2% vol growth 14-16e, 90bs/75bps impairments/loans 15/16e, cost inflation at 2%, FY16 CET1 @10.6%

Loan growth 1% higher, credit quality stable (60bps impairements/loans), stable CIR, 16e CET1 @10.1%

5% loan contraction, impairments @110bps in 15 and 16e, stable CIR, FY16e CET1 @12.1%


Themes & Tactics

Europe Insights

10 December 2014



Stora Enso - Financial and Operational Risks


Stora Enso is a global paper, pulp & packaging company. While we are fundamentally supportive of its renewable packaging expansion

projects, Stora has a higher risk profile relative to peers with financial leverage of 2.8x net debt/EBITDA and capex commitments (€2bn+

over 2014-16) restraining the pace of deleveraging.

The Printing & Reading Division is c.40% of group sales. Structural demand decline in the European graphic paper market of -5% CAGR

(2007-2013) and industry over-capacity remains a concern. With digital media substituting paper, there is price/demand uncertainty until

post 1Q 2015 negotiations; further mill closures/disposals may be required (estimated €30-€60m closure cost per mill).

Supportive of using c. €250m cash generated from Paper to fund growth divisions, but FCF will decline with falling paper sales.

Stora Enso has been plagued by project delays in its new Montes del Plata pulp mill (Uruguay) and we highlight the operational risks in

their two key expansion projects;

€110m Varkraus (Finland) 4Q15: Conversion of UFP machine (office paper) to a Kraftliner (packaging paper) is technically

challenging and production ramp-up on new machines could take 18 months.

Potential €1.6bn Guangxi (China): This transformational project has project/operational ramp-up delays risks as well as market

demand uncertainty when the approved €760m Phase 1 investment comes on stream in mid-2016.

Within our European Paper & Packaging coverage we view Stora Enso as the most exposed to macro weakness due to its relatively higher

financial and operational risks relative to peers. Faster than expected declines in graphic paper demand would reduce FCF, lead to

exceptional mill closure charges and earnings downgrades.



Greater financial leverage relative to peers, 2.8x net

debt/EBITDA & capex of (€2bn+ over 2014-16)


Valuation

Our €5.50 PT is based on SOTP, equating to 6.6x CY15 EV/EBITDA, a discount to 7.3x of sector peers. Currently trading on a JEFe 7.6x

CY15 EV/EBITDA multiple we believe the market has underestimated the potential financial and operational risks that would be realised if

there are project/ramp-up delays and continued macro headwinds in Europe. Therefore, the key risks remain macro and declining graphic

paper demand/prices, which combined with potential operational project delays, could negatively impact performance over the next three

years. While long term we are positive on Stora’s renewable packaging division, in our SOTP analysis we applied a lower multiple to it

because of the higher project delay/ramp-up risks inherent in these large expansion projects.

Valuation Scenarios



Revenue (€m) 9,993 10,316 10,269 10,477

EPS (€c) 53.3 60.5 61.9 65.4

Dividend Yield 4.2% 4.2% 4.2% 4.3%

P/E 13.4 11.8 11.6 10.9

EV/EBITDA 7.7 6.9 7.30 6.6

Key Catalysts

European Paper capacity closures

Pricing in graphic paper, pulp & consumer board

FY14 results: Feb 4, 2015 & anncmts detailing group strategy under new CEO.

Key Forecasts


Base Case € 5.5 -23%

Upside Case € 8.2 15%

Downside Case € 3.5 -51%

Scenario

FY13-16 Rev CAGR of -0.9%. Conservative view on macro & operational ramp up

No operational delays & slow-down in strual paper decline 0% Rev CAGR FY13-16

Pulp & paper price declines combined with project delays & de-rating of the stock.


Themes & Tactics

Europe Insights

10 December 2014



Volvo – Challenges Into 2015 Remain


We initiated coverage of Volvo, along with the eleven other European Capital Goods companies, in our November 2014 report entitled

“Looking for Stars in a Low-Growth world”. Our analysis demonstrated the company had the second highest organic revenue correlation

with German IP (after SKF), the highest operational gearing and the second worst structural margin erosion (after Sandvik). We prefer

companies that are not IP dependant for 2015 as we believe growth will remain subdued. German IFO business expectations-next-six-

months (our preferred relevant forward economic indicator) remains negative, Europe continues to suffer from deflation and we expect

further negative impacts from Russian sanctions. In addition, weaker commodity prices, emerging markets and EM currencies are not

good for European Capital Goods companies’ organic growth as they signal overall demand weakness. The only bright spot is the US

including industrial, construction and truck end-markets. Volvo has 23% of sales into North America – this is only in-line with the

European Capital Goods sector average and specifically US truck is only 15% of group sales.

Of more concern is Volvo’s Construction Equipment division’s exposure to Asia, at 41% divisional sales – these sales fell 19% in 2013 and

are down a further 13% YTD 2014 as Chinese mining and construction customers continue to face difficult market conditions. We are not

optimistic about the medium term outlook for Chinese construction as the building sector faces excess inventory/overbuild – Volvo also

has mining exposure in this division. We do not see significant benefit from recent interest rate cuts in China (more about helping Chinese

businesses with distressed balance sheets). Volvo is seeing first-hand how bad customer’s distressed balance sheets are as it stands as

guarantor to defaulting customers who borrowed to purchase their equipment (SEK650m charge to be taken in 4Q14).

Volvo hopes to realise SEK10bn cost savings from 2012-16e. We are encouraged by this but sceptical about the company retaining much

of the benefit. Past plans have not been enough to offset competitive pressures, structural issues and regulatory pressures on reduced

emissions/R&D. Gross savings could move EBIT margins to 9% but we see only one-third of savings retained and see 7% margin in 2016.

Portfolio restructuring could help Volvo but this appears to be at an end. It appears Penta (engines) and Buses will be retained and we

also believe management is committed to keeping Construction Equipment (CE). Management is rationalising and reducing the CE

product line-up but this in our view could be detrimental. The viability of the dealer/distribution network and their scale will be negatively

impacted by a reduced product line-up. In addition, we believe Asian competition will remain relentless in these segments.



Aggressive Earnings Revisions Chart


Valuation

Our price target of SEK70 is based on 2015 EV/EBIT of 11.7x and P/E of 12.8x. Both these represent a discount to the SXNP on average of

about 10%, in-line with past trading ranges on these metrics and our view of the issues and risks facing Volvo. The EV/sales at our PT

equates to 0.7x, in-line with our 2016 EBIT margin target.

Valuation Scenarios



Revenue (SEK bn) 283 293 282 306

EPS (SEK) 5.49 5.77 7.17 7.79

Dividend Yield 3.80% 3.80% 4% 4.50%

P/E 15.5x 14.7x 11.9x 10.9x

EV/EBIT 13.1x 11.9x 10.1x 8.7x

Key Catalysts

German IP/IFO monthly, Truck data monthly

Divisions expected to make releases regarding already announced 3Q cost plans

FY14 results – 5 Feb 2015

Key Forecasts



Upside Case SEK 110 29%

Downside Case SEK 50 41%

Scenario

Little organic growth expected due to stagnant Europe and weak China and Brazil

Strong German IP, China/Brazil revival, co-incident European & US truck recovery

US truck market collapse, further Europe, China, Brazil weakness


Themes & Tactics

Europe Insights

10 December 2014



Analyst Certification:I, Jefferies Int'l Ltd. Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Ian Rennardson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Martin Brunninger, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, David Kerstens, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Graham Phillips, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Joseph Dickerson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Justin Jordan, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Jefferies Int'l Ltd. Equity Research is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLCand is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm,and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company,public appearances and trading securities held by a research analyst.

Registration of non-US analysts: Ian Rennardson is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

Registration of non-US analysts: Martin Brunninger is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

Registration of non-US analysts: David Kerstens is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

Registration of non-US analysts: Graham Phillips is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

Registration of non-US analysts: Joseph Dickerson is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

Registration of non-US analysts: Justin Jordan is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.

Themes & Tactics

Europe Insights

10 December 2014



https://javatar.bluematrix.com/sellside/Disclosures.action

https://javatar.bluematrix.com/sellside/Disclosures.action

The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion.Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pickfalls within an investment style such as growth or value.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Carnival (CCL: $43.97, UNDERPERFORM)• Carnival (CCL LN: p2,719.00, UNDERPERFORM)• Elekta (EKTAB SS: SEK77.45, UNDERPERFORM)• Fresenius Medical Care (FME GR: €59.67, UNDERPERFORM)• Royal Mail Group Limited (RMG LN: p398.70, UNDERPERFORM)• Sandvik AB (SAND SS: SEK77.20, UNDERPERFORM)• Standard Chartered PLC (STAN LN: p944.30, UNDERPERFORM)• Stora Enso Oyj (STERV FH: €7.11, UNDERPERFORM)• Volvo AB (VOLVB SS: SEK83.90, UNDERPERFORM)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1035 51.88% 276 26.67%HOLD 813 40.75% 142 17.47%UNDERPERFORM 147 7.37% 5 3.40%

Themes & Tactics

Europe Insights

10 December 2014



Other Important Disclosures

Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:

United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.

United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.

Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.

Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.

Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.

India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited(INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400051, India; Tel +91 22 4356 6000.

This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligationunder applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of whichare available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only byprofessional or institutional investors. None of the investments or investment services mentioned or described herein is available to other personsor to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited isregulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limitedpursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert orinstitutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connectionwith this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +656551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report isissued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities andFutures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation tothis report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India PrivateLimited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning ofthe Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject ofthis document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or productdisclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authorityunder the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securitiesand Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under theAct in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should informthemselves about and observe any applicable legal requirements in relation to the receipt of this document.

This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchangerates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior

Themes & Tactics

Europe Insights

10 December 2014



to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.

This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproductionand distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party contentproviders do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible forany errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party contentproviders give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose oruse. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content,including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. Theydo not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.

Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research issimultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damagesor losses arising from any use of this report or its contents.

For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES

© 2014 Jefferies Group LLC

Themes & Tactics

Europe Insights

10 December 2014



international analyst equity analyst europe insights

Documents