Siemens Energy: Seems Prudent To Start Taking Some Gains

seekingalpha10-30

Siemens Energy has surged 431% from last year's lows, but the stock price now aligns with our valuation, prompting a reassessment.ENR faces challenges in closing the valuation gap with GE Vernova due ...

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GEV trades at an EBITDA multiple of 23.4x vs. ENR's current EBITDA multiple of 9.6x. At the same time, our review of both companies suggests significant differences. For starters, GEV is a clean story with significantly lower net customer advances, lower provisions, and no obligation to buy a stake in an Indian business at a high multiple in the future. GEV also, and in our opinion most importantly, has a higher share of revenues coming from Service  vs. ENR . Investors in the US are also very bullish on US electricity demand, driven not only by AI but also by crypto mining, onshoring of manufacturing , and general electrification. GEV's US exposure is ~2x that of ENR. Finally, ENR has significantly lower cash generation in the next couple of years, so there is no real prospect of divi","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4182":"重型电气设备","SMNEY":"Siemens Energy AG","SMEGF":"Siemens Energy AG"},"translate_title":"西门子能源：开始获利似乎是谨慎的","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SMEGF":0.9,"SMNEY":0.9},"content_text":"Siemens Energy has surged 431% from last year's lows, but the stock price now aligns with our valuation, prompting a reassessment.ENR faces challenges in closing the valuation gap with GE Vernova due to differences in revenue mix, cash generation, and market sentiment.ENR's Wind Turbine and Gas Turbine segments show limited potential for significant service revenue growth, making a valuation bump unlikely.European policy changes could boost ENR's grid business, but it's prudent to take gains now to avoid potential downside risks.   justhavealook/iStock Unreleased via Getty Images  The following segment was excerpted from this fund letter.  Siemens Energy ('ENR', SMEGF) has had a great run from last year's lows. The stock bottomed out on 10/26/2023 at €6.87 and is now trading at €36.48, a 431% return. Our position, the largest in the portfolio at 11.5%, was built with an average entry price of €11.06, yielding a total return of 229%. The sell-side is starting to take notice, and the firm's average 12-month sell-side price is now €33 across 21 analysts, up from the 12-month price target in December 2023 of €14.58. It's a day late and a dollar short, in our opinion. Unfortunately, the easy part of the investment is now behind us. Holding a position while management is executing and the market is positively repricing is easy. Selling decisions, on the other hand, are complex. Our life is made easier in this regard as the stock price of ENR is now in line with our valuation, assuming a return to positive EBITDA of the firm's troubled Wind Turbine business, an event that has yet to happen and one we don't expect to come to pass until 2026. At the same time, the rise in the stock price does call for a reassessment of our price target as it is based on a sum of parts multiples analysis that utilizes multiples, and multiples have an embedded market sentiment variable. Did we read the market sentiment around the business incorrectly and apply an EBITDA multiple that was too low? It is difficult to say, if GE Vernova (GEV), the closest comparable, is priced correctly, then we certainly did. GEV trades at an EBITDA multiple of 23.4x vs. ENR's current EBITDA multiple of 9.6x. At the same time, our review of both companies suggests significant differences. For starters, GEV is a clean story with significantly lower net customer advances, lower provisions, and no obligation to buy a stake in an Indian business at a high multiple in the future. GEV also, and in our opinion most importantly, has a higher share of revenues coming from Service (~45% in 2023) vs. ENR (~36%). Investors in the US are also very bullish on US electricity demand, driven not only by AI but also by crypto mining, onshoring of manufacturing (semi, solar, and battery production will be very energy-intensive), and general electrification. GEV's US exposure is ~2x that of ENR. Finally, ENR has significantly lower cash generation in the next couple of years, so there is no real prospect of dividends or share buybacks in the future, at least not prudent dividends or buybacks. Can ENR address any of these issues to justify closing the multiple gap? Perhaps, but it will be difficult, and we are not optimistic in the near term. ENR can never be a clean story as it has a messy history, so investors will always need to tussle with that reality. Furthermore, ENR has commitments to buy back a stake in its Indian business from Siemens and has a 20% shareholder (Siemens) that is intent on selling down its position. Both events will continue to weigh on the stock until they are resolved, which will take a few years. Furthermore, there is very little ENR can do about the bullish US electricity demand narrative. It is a moment in time that is boosting the appeal of GEV to US investors looking for a way to play an invogue theme. GEV is getting a pricing bump due to the narrative, even if it has not yet translated into a fundamental basis for a valuation bump. The positive sentiment component of the theme will disappear far sooner than ENR can expand its operations in the US. ENR can work to grow market share in the US electricity system, and they are, as we discussed in our 2 nd quarter letter, but that will take far longer than the sentiment will hold. The revenue mix is an interesting lever that the company could try to pull in the long term to increase the perceived value of earnings, but that will be a lengthy process. We suspect the multiple premium on GEV will dissipate far sooner than ENR will be able to increase service revenue by 10%. Services revenue in the Wind Turbine segment (the most obvious place for growth in service revenue) is also becoming highly competitive. Not only are turbine manufacturers becoming highly proficient at servicing the turbines of other manufacturers (Siemens Gamesa services over 12 gigawatts of thirdparty turbines, which represents 15% of its total onshore wind portfolio under service; Vestas services 9GW of other OEM turbines), but project developers are also taking more nuanced approaches to servicing. Developers looking to be asset owners are increasingly building in-house capabilities to lower maintenance costs. Italian wind giant Enel, for example, has an average servicing contract of just 3.5 years across its wind asset portfolio, after which it takes the responsibility in-house. On the other hand, developers looking to sell assets, such as Swedish developer OX2, have signed servicing contracts that average 31 years, which they hope will bring certainty to the future cost of owning assets and, thus, a clearer picture of the business case as the attempt to sell the assets to institutional investors. It seems unlikely that we will see a step change in servicing revenue from wind turbines. Incremental improvements, for sure, a massive bump that changes the company's overall revenue mix, unlikely. The Gas Turbine business is the other major source of servicing revenue. With an installed base of 7,800 turbines, Siemens turbine servicing business accounts for 60% of the Gas Turbine business revenue. Management believes it has the potential to deliver low-to-mid single-digit servicing revenue CAGR through 2026. Still, this growth rate does not drive the revenue mix at the business much closer to the GEV revenue mix. Service contracts on new gas turbines sold in 2023, for example, only add €130 million in new revenue to the top line, a bump of only 0.4%. It seems far more likely that GEV will get repriced lower on a lower multiple before ENR justifies trading at the 23.4x EV/EBITDA multiple that GEV trades at. While we find it unlikely that ENR will either get a ratings bump to the levels of GEV or that GEV will be able to maintain its high multiple for the next few years, an improving operating environment in Europe could produce a less significant multiple bump for ENR. While the European economy is weak, demand for ENR's services remains robust, backed by considerable government policy and spending. That positive operating environment appears likely to strengthen further if former ECB President and Italian PM Mario Draghi's recent report on how to promote private investment and boost Europe's competitiveness and productivity is executed, as seems likely. At the plan's heart is the observation that the power bills of large European manufacturing facilities are more than twice those faced by US equivalents. For a typical car factory in Germany, this results in incremental electricity costs of€0.5 billion per annum; for a large chemical plant, the annual cost disadvantage is as much as€1 billion per annum. Given this constraint on competitiveness, about half of the incremental investments suggested by the plan (€450 bn of€800 bn pa) are for clean energy and electric mobility. Specifically, the plan urges the creation of a liquid corporate PPA market to sell electricity at a fixed price from renewable energy directly to industrial customers. This would, hopefully, lower the costs and the volatility of energy procurement for these users. At the same time, the plan calls for the modernization of power grids, boosting the already robust investment (at least compared to the US) that Europe is making in modernizing its grid. If this plan is implemented, as seems likely, it could be a further boost to ENR's already industryleading grid business. We will continue to watch the situation and evaluate its potential impact on our valuation for ENR. At the same time, it seems prudent to start taking some gains on ENR to avoid repeating past mistakes resulting from an incorrect belief that momentum was on our side. While ENR took the elevator up rather than the steps, we are not interested in running the risk of the stock-taking the same elevator down, as stocks often do.  Opinions expressed herein by Massif Capital, LLC (Massif Capital) are not an investment recommendation and are not meant to be relied upon in investment decisions. Massif Capital's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is limited in scope, based on an incomplete set of information, and has limitations to its accuracy. Massif Capital recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies' regulatory filings, public statements, and competitors. Consulting a qualified investment adviser may be prudent. The information upon which this material is based and was obtained from sources believed to be reliable but has not been independently verified. Therefore, Massif Capital cannot guarantee its accuracy. Any opinions or estimates constitute Massif Capital's best judgment as of the date of publication and are subject to change without notice. Massif Capital explicitly disclaims any liability that may arise from the use of this material; reliance upon information in this publication is at the sole discretion of the reader. Furthermore, under no circumstances is this publication an offer to sell or a solicitation to buy securities or services discussed herein. Click to enlarge  Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479212956"}