The rise in orders looks secular with a further increase in decarbonization spending. As evidenced by the second quarter results, strong orders will result in a weak impact on revenue and margin. We are raising estimates by 5%, fair value to `2,300 and raising our rating to Reduce after the last year of underperformance against ABB. With stark 45X forward earnings valuations over two years, the shares are trading at a reasonable discount of around 20% to ABB.
Secular rise in orders
Siemens reported strong order intake growth of over 60% in the first half of FY22. The same reflected healthy 45% growth in product/service orders and 100% higher growth in projects. While both of these have benefited from one-off effects, inherent order strength underpins secular growth across all segments and in order size. Greenfield investment orders come from new businesses in the private sector and public sector e-mobility (metro, railway). Brownfield or renewal investments come from the usual cement, steel and automotive sectors. What is heartening is the commercial traction seen in the context of sustainability.
Second quarter results suggest limited flow of strength in revenue and margin control
Siemens reported 8/3% year-on-year growth in adjusted revenue and EBITDA in the second quarter and weaker EBITDA growth in the first half. The 2% growth in EBITDA during this period comes from foreign exchange gains. The weakness in the numbers above relative to order strength is partly related to supply chain constraints and the higher cost of logistics. According to our assessment, the main reason for the disconnect is the changing order mix in terms of longer execution period and lower margin (project vs. product).
We increase estimates by 5% on higher margin estimates
Our revised estimates take into account a higher margin trajectory, but still around current levels. Management shared the growing competitive pressures in key end-segments. Reducing the multiple gap with ABB depends on the pace of sustainability and export catch-up. After last year’s sharp underperformance of 25% against ABB, Siemens is trading at a discount of around 20% on a two-year forward basis against ABB. Much of this gap is likely to persist for the reasons discussed in our March note. Some narrowing of the gap may occur as Siemens begins to make inroads into the revenue theme of sustainability and increased exports (acquisition of C&S). We will endeavor to follow these themes for Siemens and reassess our position.