Company Reports

Siemens Energy's products and solutions helps generate one-sixth of the world's electricity. However, the group has failed to produce net income since its spinout from Siemens AG in 2020. Intense competition in several of its businesses have been compounded by quality issues with some of its wind turbines, resulting in large losses. Restoring profitability depends on the turnaround efforts at Siemens Gamesa and the magnitude of unforeseen losses to fix faulty wind turbines.

No-moat Siemens Energy upgraded its fiscal 2024 guidance, which most importantly saw it revise its free cash flow before tax guidance to an inflow of EUR 1 billion, after management initially expected a EUR 1 billion outflow. With a lot of bad news having been baked into the stock at the start of the year, including market speculation of a potential rights issues, improving prospects remove investors' balance-sheet concerns and have sent shares open 12% higher and up over 80% year to date. We're raising our fair value estimate by approximately 30% to EUR 19.5, which incorporates a EUR 3 billion cash inflow from disposals and an increase in our short-term revenue outlook, most notably for its Grid Technologies segment, which is a direct beneficiary of the renewable energy transition. Shares are trading at a 10% premium to our revised fair value estimate, and we maintain our very high uncertainty rating.

No-moat Siemens Energy returned to profitability during first-quarter fiscal 2024, largely driven by smaller losses at its Siemens Gamesa division and the EUR 1.7 billion disposal of an 18% stake in its Indian business, which will help restore some confidence in its balance sheet. Operating profit excluding special items of EUR 208 million (translating into a 2.7% margin) during the first quarter comfortably beat consensus' EUR 106 million loss and is a significant improvement on its EUR 282 million loss in the prior year. Full-year guidance of an operating margin between 1% and negative 2% remains unchanged, which likely indicates that the challenges Siemens Energy has faced during the past year, most notably relating to Siemens Gamesa, are not entirely over. Shares are up 20% year to date, following the unexpected positive preliminary update provided on Jan. 24, and are trading in line with our EUR 14.80 fair value estimate, which we maintain.

Investors in no-moat Siemens Energy received a welcome surprise in the form of strong preliminary first-quarter results, which comfortably exceeded company-compiled consensus. First-quarter orders grew 24% to EUR 15.4 billion, significantly ahead of consensus of EUR 12.8 billion. Declining losses within Siemens Gamesa also helped restore profitability to the group following two consecutive quarters of operating losses. The group wasn’t expected to deliver results until next month, and the impressive results sent shares 8% higher on Jan. 24. We continue to view the shares as marginally undervalued relative to our EUR 14.80 fair value estimate, which is unchanged. Outperformance during the first quarter was attributed to the timing of certain project deliveries; therefore, management maintained its full-year guidance.

The U.N. Climate Change Conference, otherwise known as COP28, has reiterated the secular growth theme underpinning our recently upgraded forecasts for the capital goods manufacturers. Combating climate change requires upgrading electricity grids to accommodate renewable energy and greater adoption of energy-management solutions for energy-intensive infrastructure, such as buildings and data centers. Wide-moat Schneider Electric is best positioned, in our view, and is trading at a slight discount to our recently revised EUR 174 fair value estimate.

We’re initiating coverage of Siemens Energy with a EUR 14.80 fair value estimate, a 25% discount to the current share price. Investors have rushed for the exits in response to severe losses incurred during fiscal 2023, largely confined to the Siemens Gamesa division, but have nevertheless cast doubts over the group's balance sheet. Their concerns have been alleviated somewhat by EUR 3 billion in announced asset disposals and guarantees from the German government to ensure the delivery of its order book. Restoring profitability depends on the duration of the turnaround at Siemens Gamesa and the magnitude of repair costs required to fix faulty wind turbines, underpinning our Very High Morningstar Uncertainty Rating. Our fair value estimate implies an EV/sales (fiscal 2024) ratio of 0.4 times.

Siemens Energy's products and solutions helps generate one-sixth of the world's electricity. However, the group has failed to produce net income since its spinout from Siemens AG in 2020. Intense competition in several of its businesses have been compounded by quality issues with some of its wind turbines, resulting in large losses. Restoring profitability depends on the turnaround efforts at Siemens Gamesa and the magnitude of unforeseen losses to fix faulty wind turbines.