Siemens Energy: Is a Turnaround on the Horizon? Why I’m Still Holding On

Dear readers/followers,

In this article, I’ll update on Siemens Energy (OTCPK:SMEGF), a company that I’ve reviewed a few times in the past. The reason why I owned shares is that I was actually assigned a small stake when Siemens Energy was spun off. I made a very impressive profit in the short term, which I like showing because it showcases the importance of valuation in these matters.

The slump that we’re in the middle of at this time is justified. Siemens Energy has had some very serious manufacturing and quality issues that have weighed on results for at least the 3 last quarters here.

Since I wrote about Siemens Energy last, we have 4Q23 to look at, and this is the quarter we’ll look at and estimate for the next fiscal.

Siemens Energy is, as I see it, not the “top” investment in this sector under really any context. It’s an interesting reversal play at the right price, and we need to make sure that we are, in fact, investing at the right price for an upside here.

Is this the right price? Let’s take a look.

Siemens Energy – a lot of upside at the right price, but a lot of uncertainty at this time.

The company was clear in its communication for 4Q – results were in line with the previous guidance. There are some positives to note here. Among other things, for FY23, the company saw a 33.8% increase in orders, though weighted to the beginning of the year, as 4Q saw a negative 7.8% YoY development in orders.

The backlog is at record levels, implying a continued appeal for the company here, with €112B worth of orders and a book-to-bill of 1.24x.

However, revenues and orders are only half of the story, as we’ve seen in other companies.

The company’s profit before special items, and again, this is before the special items, was negative €2.8B, with a negative 8.9% pre-special item profit margin.

The company did manage positive free cash flow, but this is only a small positive in the larger picture.

Siemens Energy has taken what it calls comprehensive measures at Gamesa to get the company back on the right side. Among these measures is the execution of a continued divestment program and acceleration of the company’s portfolio transformation. Gamesa, given that it’s the thing mostly dragging the company down here, is an important part here.

Siemens Energy Management has assigned a quality task force to the Offshore segment, and this task force is now fully operational. The ramp-up in the factory here is back on track, and the company is doing a strategic review of both the markets and the company’s products and competitiveness.

A recap of the guidance here, although I don’t believe this should be viewed as a positive, delivering negative profit and net income.

The positives here should be relegated to the fact that the company, without Siemens Gamesa, is actually positive. pre-tax and exclusive Siemens Gamesa, the company actually shown a very impressive profit development over the past few years since the spin-off.

However, Gamesa of course remains the impaired segment, and the company has no plans to divest the segment in its entirety – renewable wind is part of the company’s core operations, so the progress here is key, and what we can expect.

The measures taken here, and the plan for the sector, is simplifying the product portfolio, a significant reduction of onshore variants of products, with a continued focus on core company markets to ensure profitability. The turnaround is a long-term plan. Gamesa and Siemens Energy do not expect the segment to break even until 2026E. To be clear, that’s Gamesa, not Siemens Energy. Energy may become profitable much before that, but Gamesa will weigh things down for at least another 3 years.

Optimization is part of the company’s plan here as well, with an exit from non-core and optimization of the footprint for the company here.

Gamesa has turned out, unfortunately, to be an organization riddled with inefficiencies and problems, and this is what Siemens Energy has been “left” to handle.

I have no doubt in the long term that the company will be able to turn this around. But “long-term” is a somewhat unclear time period, and if it’s more than 2-3 years, then it’s really something where we could or should consider investing in other things – because you’re missing out not only on potential upside but yield as well.

Siemens Energy is not a bad company. It’s currently weighted down by what’s happening in Gamesa, to a very large extent.

However, the company’s extensive backlog and eventual profitable turnaround – which I believe in – will eventually result in an upside. Positive is also that the company has managed a lower overall net debt, and good maturities (well, decent ones, some maturing in 2024E), but the company is taking measures to strengthen both the balance sheet and the profitability.’

The company’s plan to strengthen its balance sheet also includes a sale of an 18% stake in Siemens Limited, the Indian branch, which will add €2B worth of proceeds in 2024, as well as €1B from divestments of other non-core assets.

The company also hasn’t excluded the possibility of another capital raise, which of course adds another uncertainty to the process and to the valuation, since we’re looking at debt or dilution.

The key ambition here is the stabilization of Gamesa. Everything else is the second priority here. Despite what can only be described as a catastrophic year due to Gamesa, company liquidity is decent, and Energy remains at a BBB rating, meaning it’s still considered investment-grade. if we take away the impacts, the profits for the company are actually doubled. If Gamesa worked, things would look very good.

I’m still very happy I sold my shares at a triple-digit profit, and I don’t have much interest in purchasing more shares at this valuation, yield, or upside compared to what else is available on the market.

Let’s look at the risks and upside for this company.

Risks and upside to Siemens Energy

The primary risk to Siemens, aside from Gamesa, is the company’s dependence on gas demand. This has declined since the height of 2000, and this will likely see a lowering of the profit from the company’s assets, which are currently part of the company’s higher-margin mix. Continued unforeseen repair costs for the company’s wind turbines, Gamesa, because of a faster product cycle as efficiency demands for renewables rise due to the competitive nature relative to other energy sources.

The risk of a capital injection or sale of critical assets is perhaps the most overarching risk to the company’s near or mid-term valuation development. If the company takes in new capital or if we see further asset sales, this will further impact earnings.

The upside to the company does exist. We have investments into critical electrical infrastructure that will accommodate renewables into the grid, which will be a tailwind for Siemens Energy. The transition from legacy coal to gas will also support near-term demand for large gas turbines – and this is part of what Siemens Energy does, and this also comes with service contracts, for a multi-decade lifespan for these assets.

The company also has, in fact, a good track record for turnarounds. It has turned around gas and power, and I have no doubt that they will also turn around Gamesa.

The valuation for the company dictates the following considerations at this time.

Valuation for Gamesa – Not that great, I’ll wait for better visibility

I was clear about my rotation targets and considerations in both my last, and the second to my last article. My last price target for the company was at a €20/share level, and I’m keeping this target at this time – but this target is for the extremely long-term, and the company is currently trading at €11.6.

At some point, this company is going profitable – that means that we have the opportunity to get in on the “ground floor”, but the obvious problem is we do not know how long we need to wait for this profitability to appear, or if anything else comes to disturb the trajectory.

However, we have more clarity at this particular point in time. I would say that once we have more information about the potential or likelihood of a cap raise, then that is the point where this company could become buyable.

Analysts have a very wide range of fair-value estimates for this company, but something common for most of them is that they’re at €15/share or above. S&P Global gives the company a target range of €12 on the low side and €27 on the high side, with 17 analysts following the company with an average of €19.5/share at this time. 9 out of 17 analysts are already at a “BUY” or equally positive stance here.

I share the sentiment that the company is going to go up eventually, but there are plenty of issues that I want clarity on first. The company has no real moat here, there is no real product differentiation here and the innovations are not unique enough to where they cannot, or will not be duplicated. As a renewable energy player with other key segments, the company can be compared to other players – and other players are far more attractive, safer and better rated here.

Siemens Energy remains BBB-rated, it has an unclear dividend development for the next few years. Because of these factors, I consider the company only partially investable here.

I was clear in my last article – and I’ll be clear here as well. I do consider it a “BUY” with a €20/share PT, but I also want to see better clarity before I invest here.

Because of this, my current thesis is as follows.

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 sticking to my “HOLD”, and I’m not adding shares of Siemens Energy here. My PT remains at €20/share, but I want to see what the company does in terms of recovery and other things going forward before I initiate a new position in the stock.
• For those reasons, I’m going more conservative here, and I believe investors should consider doing the same.

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.

It’s neither cheap, given current challenges nor with an attractive upside – I say “HOLD”.

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.

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.

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.