Company Reports

Investors cheered wide-moat Alfa Laval’s delivery of strong first-quarter results—which tracked ahead of our full-year expectations—and upwardly revised guidance, which paints a rosier picture for Alfa Laval in 2024. First-quarter order intake was robust, rising 1% organically year on year, and 8% sequentially. Indeed, market conditions are proving more buoyant than we’d previously anticipated, with our prior forecasts factoring a material weakening in demand for Alfa Laval’s suite of highly engineered products in 2024. We lift our fair value estimate by 6% to SEK 360 to reflect the better-than-anticipated demand in 2024 year to date. A time value of money adjustment also contributes to our revised valuation.

Alfa Laval’s strategy is one of specialization that focusses on process engineering niches where it is a technology leader: separation, heat transfer, and fluid handling. Its industry-leading suite of highly engineered products improve energy efficiency and processing yields, reduce waste, and enhance manufacturing quality.

Wide-moat Alfa Laval’s fourth-quarter 2023 results fell short of our expectations, with the external demand environment representing more of a headwind than we’d anticipated and restructuring efforts also tracking behind our forecasts. New orders in late 2023 were soft relative to our expectations, with a number of puts and takes at the divisional level that led Alfa Laval’s full-year 2023 order intake to trail our forecast for the group by about 3%. Full-year 2023 group EBITA of SEK 10.2 billion also fell somewhat short of our expectations, owing primarily to a weaker-than-expected marine division profit margin, with previously announced restructuring efforts for the division taking longer to bear fruit than we’d previously credited.

Wide-moat Alfa Laval’s 2023 capital markets day provided us with no major surprises, with no material changes to either the group’s strategic direction or revision of the company’s financial targets announced. Consequently, we make no changes to our estimates or our SEK 340 fair value estimate. Alfa Laval shares screen as modestly overvalued, trading at a 7% premium to our unchanged valuation.

Alfa Laval’s strategy is one of specialization that focusses on process engineering niches where it is a technology leader: separation, heat transfer, and fluid handling. Its industry-leading suite of highly-engineered products improve energy efficiency and processing yields, reduce waste, and enhance manufacturing quality.

We raise our fair value estimate for Alfa Laval by 9% to SEK 340 following a transfer of analyst. Improved profitability in Alfa Laval’s energy segment—the result of operating leverage benefits on strong order intake for the segment and restructuring initiatives—is the dominant driver of our revised fair value estimate. Consequently, we expect stronger earnings growth over the coming decade than we’d previously credited and forecast a 10-year EBIT CAGR of 9%, up from 7% previously. We’ve also raised our cost of capital assumption to 8.6%—up from 8.0% previously—partly offsetting the uplift our improved earnings outlook confers on our fair value estimate. Elsewhere, we maintain our wide-moat, Medium Uncertainty, and standard capital allocation ratings for the stock. Alfa Laval shares trade at an approximate 7% premium to our revised fair value estimate.

Alfa Laval’s strategy is one of specialization that focusses on process engineering niches where it is a technology leader: separation, heat transfer, and fluid handling. Its industry-leading suite of highly engineered products optimize and consequently reduce the unit costs of a broad range of industrial processes for its customers in a diverse range of market verticals. Alfa Laval’s products improve energy efficiency and processing yields, reduce waste, enhance manufacturing quality, and/or ensure regulatory hygiene standards are adhered to. In particular, Alfa Laval’s offering finds application in industries that require high hygiene and safety standards from regulatory bodies and thus demand engineering sophistication, including energy, food, and marine end markets.

Wide-moat Alfa Laval delivered impressive adjusted EBITA growth of 36% during the third quarter. Its EBITA margin expansion of 200 basis points to 16.7% was driven by restructuring initiatives in the marine and energy segments, as well as a favorable sales mix to higher-margin services. Its organic order intake grew 2% during the third quarter; management expects it to be at a similar level in the fourth quarter. While we expect to update our estimates in our model, we don't expect our SEK 312 fair value estimate to change materially.

Alfa Laval’s highly engineered products have been a small but critical cost of its customers’ industrial processes for nearly 140 years. Regular investments into product development ensures that Alfa Laval maintains its leading market share in its core products of heat exchangers, separators, and fluid-handling systems.

Wide-moat Alfa Laval reported organic order growth of 9% during the quarter to a record SEK 18.4 billion, a slight increase from the record achieved in the previous quarter. Demand relating to aftermarket services and long-term projects remains healthy, particularly in the energy and marine end markets, which are at the forefront of the energy transition. Similar to other industrial businesses this quarter, the execution of a sizable order backlog from the previous year was the main contributor to the group’s 17% organic revenue growth year over year. While we plan to revise our top-line forecasts to reflect the group’s strong first-half revenue performance, we don’t expect to make a material change to our SEK 280 fair value estimate, which will alter our investment recommendation. Shares currently appear overvalued.

Wide-moat Alfa Laval reported a strong first quarter, delivering organic order growth of 25% and a sequential increase of SEK 2.6 billion from last quarter, despite having guided for demand to be at a similar level. However, management cautioned against investors expecting this rate of growth to be the norm and guided for demand to be sequentially lower during the second quarter. Order intake growth across the marine and energy segments outperformed Wartsila, which also reported its first-quarter results April 25, and mitigated a decline in orders in Alfa Laval’s food and water division due to a tough comparable. Similar to its peer, shares are trading higher on the day. We plan to revise our top-line forecasts to reflect the group’s strong first quarter but reiterate our SEK 280 fair value estimate. Shares currently look overvalued.

Wide-moat Alfa Laval alleviated investors' concerns about macroeconomic factors hitting demand after the company reported record fourth-quarter 2022 organic order and revenue growth of 16% and 14%, respectively. The outlook for 2023 is positive with management guidance for demand to remain at a similar high level during the first quarter of 2023 and the backlog is 61% higher than the previous year. To support strong demand, particularly customers’ decarbonization ambitions, the group will invest SEK 3.8 billion in capacity expansion, and guided for annual capital expenditure between SEK 2.5 billion and SEK 3 billion per year during the next three to four years, above our average annual estimate of SEK 2.2 billion. We maintain our SEK 280 fair value estimate and view shares as fairly valued.

The market is unsurprisingly disappointed after wide-moat Alfa Laval reported its lowest quarterly EBIT margin since 2017, which saw operating profit grow a mere 4% despite revenue growing 28%. The marine segment was the biggest detractor to results, reporting a 42% decline in operating profit. Nevertheless, we reiterate our SEK 280 fair value estimate and are confident that management will be able to restore profitability to levels that we have become accustomed to. Our optimism for a rebound in profitability is based on the announcement of a SEK 200 million restructuring program to address underperforming profitability in the marine segment, and secondly, the seasonality effect that impacted profitability in the food and water segment and will be less pronounced in the fourth quarter. We view shares as fairly valued.

Wide-moat Alfa Laval delivered strong second-quarter results, which should reassure investors that any operational hiccups in the previous quarter are being effectively managed. Demand exceeded management’s expectations and remains healthy, evidenced by 18% order growth (8% organic), to reach a record level. Second-quarter revenue growth of 19% exceeded operating profit growth of 13%, due to supply chain issues hitting deliveries in the food and water division, and Alfa Laval’s marine backlog being priced prior to significant cost inflation. We believe both are short-term issues rather than structural concerns for the business. We reiterate our SEK 280 fair value estimate and view shares as fairly valued.

There were many moving parts in wide-moat Alfa Laval’s first-quarter results that disappointed investors. The most evident dissatisfaction is the marine segment’s EBIT margin of 11%, down from 15% last year. The decline was mostly due to the existing marine backlog being priced prior to significant material cost inflation and higher royalty payments to a joint venture for marine water treatment systems, due to increased deliveries. While this may impact short-term profitability, we believe price increases that have already been implemented and a shift in the product mix will help margins return to normalized levels, and thus represent short-term noise rather than underlying issues. Results were also impacted by a SEK 602 million cancelation of Russian orders, mostly from the marine segment, and a SEK 721 million record order in the food and water business. We reiterate our SEK 280 fair value estimate and view shares as fairly valued.

Alfa Laval’s highly engineered products have been a small but critical cost of its customers’ industrial processes for nearly 140 years. Regular investments into product development ensures that Alfa Laval maintains its leading market share in its core products of heat exchangers, separators, and fluid-handling systems.

Wide-moat Alfa Laval reported a 26% increase in orders in the fourth quarter, largely flat sequentially from third-quarter 2021 and in line with expectations. Full-year order intake grew 18.4% organically to reach a record high of SEK 45.7 billion, which has fully recovered to exceed 2019 levels by 4%. Management’s guidance was strong: it expects first-quarter demand in 2022 to increase sequentially from the high levels of fourth-quarter 2021. We expect Alfa Laval to capture demand from the structural shift of industrial and marine customers toward energy efficiency and decarbonization, given its track record for product innovation and recently announced investment programme to expand its product portfolio. We maintain our SEK 265 fair value estimate and view shares as fairly valued.

Alfa Laval announced an investment program between SEK 7 billion and 8 billion over the next three to four years to satisfy high levels of existing demand and help expand its portfolio to cater to its customers ongoing decarbonization ambitions. We believe the step-up in investments will support Alfa Laval’s track record for product innovation and the group’s wide moat rating, which we maintain. We raise our fair value estimate to SEK 265 from SEK 242 to reflect a more favorable outlook in Alfa Laval’s end markets. The most notable increase is in the marine segment, which stands to benefit from new marine regulation, supporting a recovery in shipbuilding activity in the latter stages of our forecast period. Shares appear richly valued.

Alfa Laval’s highly engineered products have been a small but critical cost of its customers’ industrial processes for nearly 140 years. Regular investments into product development ensures that Alfa Laval maintains its leading market share in its core products of heat exchangers, separators, and fluid-handling systems.

Wide-moat Alfa Laval’s order intake came in slightly better than expected during the third quarter, driven by a record high order intake for the energy division. Management expects demand in the fourth quarter to be similar to the levels achieved this quarter. In order to meet demand, especially in faster-growing segments such as energy efficiency and alternative protein, Alfa Laval will be ramping up capital-expenditure investment in the next three years to around twice the level of the past. We await more details on the investment programme at the capital markets day next month before we adjust our SEK 242 fair value estimate. We currently view shares as richly valued.