Equity Research – Linde Plc (LIN) Investment Case

• Linde is a leading global industrial gases and engineering company providing high quality solutions, technologies, and services.
• Formally known as Linde Air Products Company, the company merged with American Praxair to form Linde Group in 2018.
• Linde was founded in 1879 and is based in Guildford, in the United Kingdom.
• Effective October 31, 2018, Linde is dual listed on the New York Stock Exchange (NYSE) and Frankfurt Stock Exchange (FSX).
• In its 2021 financial year (FY21), the company generated group sales of $31 billion.
• It serves a variety of end markets including chemicals & energy, food and beverage, electronics, healthcare, manufacturing, and metals & mining.
• Its primary products in its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene).
• Linde’s industrial gases are used in various applications from oxygen for hospitals to high-purity & specialty gases for electronics manufacturing, hydrogen for clean fuels etc.
• The company also designs, engineers, and builds equipment that produces industrial gases and offers its customers a wide range of gas production and processing services such as olefin plants, natural gas plants, air separation plants, hydrogen and synthetic gas plants and other types of plants.
• Linde’s industrial gas operations are managed on a geographical basis. In 2018, 84% of sales were generated by Linde’s three geographic segments (Americas, EMEA and APAC) and the remaining 16% were related primarily to the Engineering segment.
• The company also delivers gas processing solutions to assist its customers with efficiency improvements and emissions reduction.

Source:www.linde.com (FY21)

1. Product Offering Diversification: The product diversity offered by Linde mitigates the risks of shifting supply and demand dynamics. It also allows for more variety to customers which boosts the company’s brand image and profitability. By diversifying its products and services, Linde can protect itself from external competition.
2. Geographic Diversification: Linde operates in 6 continents and 74 countries which serves as a competitive advantage over industry peers that operate in less-diversified regions.
3. Customer Diversity: Linde is not dependent on a single customer or a few customers which makes it a more valuable and less risky business than companies that have a few dominating contributors to their sales revenue.
4. Value Accretion Over Time: Linde can be classified as a high-quality company that has delivered a positive and stable economic return over time, with a cash flow return on investment (CFROI) above the company’s cost of capital. In 2021, Linde’s CFROI was 9.60% versus a discount rate of 1.94%.
5. Operating Margin Expansion: When it reported its fourth quarterly report, Linde posted its seventh consecutive quarter where operating margins expanded by more than 200 basis points. On a regional basis, the Americas segment is the clear margin leader at 28.3% in 2021, followed by EMEA at 25.5% and APAC at 24.8%. In its outlook statement, the company clearly stated that it plans for margin improvement in the regions lagging, which presents a clear opportunity for further margin expansion.
6. Improving Shareholder Returns: Linde has prioritised shareholder returns over time. In 2021, its ROIC (return on invested capital) improved to 17.7%, attributable to benefits from growing its earnings and shrinking the equity base which was achieved through a share buyback of $4.6 billion in the year.
7. Subdued Volatility Through Long-Term Customer Contracts: The majority of Linde’s business is conducted through long-term contracts which provide stability in cash flow. The company’s ability to pass through changes in energy and feedstock costs to customers is a competitive advantage. Its industrial gases business uses three basic distribution methods (i) on-site or tonnage (ii) merchant or bulk liquid; and (iii) packaged or cylinder gases.
8. Patents and Trademarks: Linde owns or licenses a large number of patents that expire at various times over the next 20 years. While these patents and licenses are considered important to its individual businesses, Linde does not consider its business as a whole to be materially dependent on any one particular patent, license or family of patents. Linde also owns a large number of trademarks, of which “Linde” is the most significant.
9. Benefits from Decarbonisation: The decarbonisation of large integrated mills in steel production requires increased gas intensities. Linde recognises three key innovations (i.e., AOD, CoJet, REDBOX) that require increased quantities of oxygen and argon in steel production. As an industrial gas supplier, Linde’s long-term growth is likely to be supported by the decarbonisation of steel mills (needed to meet industry’s 2030/2050 targets) through a combination of hydrogen and carbon capture. As such, Linde is well-positioned to add future value in the growing theme of cleaner energy.

• Weakening economic conditions in markets in which Linde conducts business.
• Increases in energy and raw material costs.
• A disruption in the supply of raw materials used by Linde.
• Risks associated with Linde’s international operations (subject to international events).
• Currency exchange rate fluctuations and other related risks may adversely affect Linde’s financial position (Linde’s revenue is denominated in currencies other than its reporting currency).
• Macroeconomic factors may impact Linde’s ability to obtain financing or increase the cost of obtaining financing.
• Catastrophic events that could disrupt Linde’s operations.
• Failure to keep pace with technological advances in the industry or if the company’s new technology initiatives do not become commercially accepted.
• Potential product defects and operational risks.
• Cybersecurity risks given Linde’s reliance on information technology systems and networks for its business and operational activities.
• Failure to effectively integrate acquisitions and joint ventures with partners.
• Regulatory risks due to geographic diversification.

Source: FactSet