Siemens Energy: Play On Renewables And Energy Technology

Dear readers,

In this article, I’m initiating coverage of Siemens Energy (OTCPK:SMEGF). When the company spun off Energy, I received a fair share of stock due to my sizeable Siemens (OTCPK:SIEGY) position. I haven’t added to that position since instead preferring to focus on the basic company. However, the time might have come to revisit if Siemens Energy is the preferable way to get exposure to German industrials.

Let’s see what we have going for us here.

What is Siemens Energy?

Describing Siemens Energy is pretty easy – at least from a high level. The company is the legacy division of what remains of Gas & Power in Siemens, as well as including a majority stake (67%) of Siemens Gamesa (OTCPK:GCTAF). In short, you get exposure to pretty much all “things power” that Siemens did, or does.

Siemens Energy is managed by former Siemens CEOs and specialists – Christian Bruch has extensive expertise from Siemens, and the former Siemens CEO Joe Kaeser (The “Kaiser”) is the chairman of the supervisory board.

Siemens Energy has a lot of legacy under its name. The energy division has been a core part of Siemens ever since it became a large business. They have multiple milestones, such as the creation of the Siemens-Schuckertwerke almost 130 years ago, which produced things like aircraft, engines, and trains. It was later bundled into Power Engineering by 1969 and bundled into the Energy Sector in -08 prior to being spun off.

Siemens Energy Employs 88,000 people and has annual revenues of over €25B, making it one of the largest Siemens components that exist today. The Spin-off was performed in 2020, and trading of the Energy shares began around 2 years ago.

Since that time, the company has done fairly terribly on the stock market. The company began trading just above €20/share, and went up to around €30, only to then fall to the current level of €11.24/share, having lost almost 50% of its market value for the past 1-2 years.

I held onto a small stake of my original share, but sold around 85% of my received shares fairly early on, only to reinvest them in Siemens itself, which has done considerably better, because in the same timeframe returns have been close to flat, and even up with FX and dividends.

However, this does not mean that Siemens Energy is a bad company, or not worthy of your attention. Since the spin-off, the company has completed several improvements and changes in its portfolio. Siemens Energy is actually, not only due to Gamesa, in a good position to benefit from the changing energy market that we’re seeing today.

There are multiple scenarios as to how the electricity market will develop. Some negative, some positive – but all of them have the following themes in common.

And the thing is, if we accept that this is the scenario we’re looking at, then Siemens is set to see a considerable advantage from this over the long term. Why? Because Siemens Energy is active in all of these segments, directly or indirectly.

What was previously a somewhat clumsy “Gas & Power” segment, complemented by Gamesa, has been turned into the following operational segments.

• Gas Services, focusing on servicing the installed base of gas infrastructure through both a high-expertise service industry as well as decarbonization services and district heating. The focus is on upgrades, mods, and maintenance to increase efficiency and lower CO2, with a TAM of around €35B. The company expects this to see some decline going forward, but to manage margins of around 10-12% on an EBITA level. This part of the portfolio includes working with Gas turbines, steam turbines, generators, and heat pumps, and upgrading said assets.
• Grid Technologies focuses on things like HVDC, Stabilization and storage, switchgear and high-voltage transformers, and automatization and digitalization of entire grids. This segment focuses on enabling more renewable energy and increasing reliability. It has a TAM that’s twice as high as Gas, and a market that grows around 5% CAGR, with growth in mid-single digits and a margin of 8-10%.
• Transformation of Industry is the somewhat oddly-named third segment, coming in at 14% of sales revenues. This segment focuses on Hydrogen electrolyzer systems and Power-to-X solutions as well as industrial steam turbines and generators. It’s a high-growth market with a CAGR in TAM of 9%, but margins closer to 6-8%, with mid-single-digit growth. The goal is to grow green hydrogen demand, increasing electrification and efficiency.
• Gamesa is the largest single revenue segment in the company at 36% of sales. The company has a massive portfolio of wind renewables, with expected growth in annual offshore installations at a CAGR of 28% excluding China, and a 7% expected CAGR for global installed Wind as a whole. The segment is currently in trouble due to negative margins, impacted by supply chain and other issues – but it’s working to turn this around in the mid-to-long term.

That, as a whole, is Siemens Energy – and it’s not a bad collection of assets at all. The goal as a whole is to lead the energy transformation.

One of the biggest changes is the company’s ambition to completely de-list, and take over Gamesa. I am a fan of this plan. The funding of the M&A is already fully underwritten, and this is in line with the company’s vision of ESG as a business opportunity.

The core of investing in Siemens Energy is the belief by the company that the new business area margins easily manage the legacy margins of above 8%, as opposed to the current legacy being the higher-margin services the company actually has. The company targets being able to reach 8%+ margins in new areas by 2025 as of the current target.

The positives as the company currently report is an absolutely solid performance from Gas & Power in an environment that’s energy-starved. Gamesa is not doing well, but there are plenty of high-level reasons for this – but it is understandable that the company wants to take the reins more firmly, given the stellar market and order environment across the board. Dynamics are challenging still for wind, with supply constraints a huge problem as things currently are, but Gamesa’s order book is filled, with almost €35B of backlog.

However, a strong backlog doesn’t help when your company is influenced by component failures, repair costs, supply chain conditions, and plan ramp-ups. The company’s plan for this is simplifying company structure, focusing on sales and product roadmaps, and increasing P&L responsibility, which leads me to believe that there might be a fair bit of internal problems in Gamesa’s “shop”.

Christian Bruch has been appointed to the BoD as of June, so we’ll see how this changes going forward – but expect EBIT margins to remain negative for the year.

The company also has Russian impacts.

So, in essence, Siemens Energy is a play on Gamesa and the legacy operations coupled with new operations from Gas & Energy. This is not in any way an unattractive set of assets or a portfolio that you should be ignoring. There is a lot to be said about it.

However, we need to be able to pay a fair or even “good” price for it – so let’s focus on that and see what we have here.

Siemens Energy Valuation

The valuation for this company is a tricky business. Any time a company is in the midst of an ongoing transformation, things can be tricky – and Siemens is certainly that.

Let’s begin with some analyst targets. Analyst targets for Siemens Energy are clear – they’ve been declining for about a year, but have finally settled around the €20/share mark for the native, representing an upside of nearly 90% based on a current share price of €11.25. 14 analysts follow the company, and 8 of them would suggest that you can now “BUY” the company, with not a single “SELL” rating among the bunch.

It’s all a question of “how fast” can the company turn things around and start delivering the numbers that we might expect from a Siemens business such as this.

Even the lowest potentially targeted price for the company is here at around €10/share – not far from where the company currently is. On the basis of forward expectations, the company is expected to turn GAAP-positive in the next fiscal, with some volatility to it, while starting to bump its dividend in the years after 2022.

I forecast a slowly growing EPS, with potentially positive GAAP in 2023-2024. For this, you’re currently paying about a 0.25x revenue multiple, and a 2.59x EBITDA multiple. We’re bottom-feeding here. The current P/B for these sets of attractive assets is close to 0.5x, which when you consider that it’s a set of Siemens assets, is pretty amazing.

Siemens is a forward-looking sort of investment – and based on the current thinness of its ADRs, I would only buy the native ticker of ENR traded on the German market. It’s also an investment that requires years of patience, but with the very real potential of a 100-300% RoR if things revert. If The Company and management get its assets and its portfolio in order, as they seem to be in the process of doing, then this undervalued giant can go places.

That’s why I’ve now started to shift about 10-15% of my Siemens investment into Siemens Energy as opposed to the “base” Siemens stock. It also has to do with the current macro. I believe the upside for legacy and its portfolio will to a greater degree withstand current troubles due to the energy situation Europe is in.

In short, this is a company in a stage where the market hasn’t yet realized how “good” it actually is for what you’re paying. You’re paying less than 0.3x to sales and half the book value of the company for what is a superb mix of legacy gas/steam service assets and a class-leading renewable portfolio, albeit one that’s in need of a hacksaw.

If you, like me, believe that Siemens is capable of doing this, then there is very little realistic downside for the long term to be had here. Siemens Energy isn’t the greatest yielder yet – but can become one, especially at this price. It’s also BBB rated by S&P Global.

On July 2, 2020, S&P Global assigned a preliminary long-term investment grade rating of BBB with a stable outlook to Siemens Energy AG. On August 6, 2020, S&P Global assigned a preliminary long-term investment grade rating of BBB with a stable outlook to SE Global GmbH & Co. KG. After Spin-Off Completion, the preliminary long-term ratings became the long-term issuer credit ratings of Siemens Energy AG and SE Global GmbH & Co. KG. On September 20, 2021, S&P Global assigned the A-2 short-term issuer credit rating to Siemens Energy AG, as well as to Siemens Energy Global GmbH & Co. KG, which reflects the BBB long-term issuer credit rating. On March 1, 2022, S&P Global revised the outlook on Siemens Energy AG and SE Global GmbH & Co. KG to negative from stable and affirmed the BBB/A-2 long- and short-term ratings.

(Source: Siemens Energy)

So, it’s in an understandable negative trajectory due to Gamesa at this time – but I believe that improvements are on the way, and 2023-2024 will be excellent years that will see Siemens Energy catapult back to above €20/share.

For that reason, I give the company a “BUY” here.

Thesis

My thesis for Siemens Energy is as follows:

• The company is one of the more interesting plays in all of Europe on a mix of legacy Gas/power as well as a massive Renewable operation it seeks to pull from the public markets. The company is a transformation play, with a “due date” of 2023-2025 at the earliest, but now is the time to invest.
• I’m going in deeper, and I assign a “BUY” here with a PT of €20/share for the long term.
• Siemens Energy is a “BUY” for me – and I recently bought more.

Remember, I’m all about:

• Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
• If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
• If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
• I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized)

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.