Alfa Laval: 9% FVE Lift to SEK 340 on Analyst Transfer; Restructuring Delivers Profit Margin Benefit

We raise our fair value estimate for Alfa Laval ALFA 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 profit margins continue to improve in late 2023, with the group’s third-quarter EBITA margin firming 200 basis points to 16.7% as restructuring initiatives—in the marine and energy segments—deliver and strong order intake drives better fixed-cost recoveries in the group’s energy division. Longer term, we expect sales growth will average about 6% over the coming decade, and the group’s EBITA margin to firm to about 16.5%, up from 15.8% in 2022. Our forecasts sit a touch above Alfa Laval’s financial targets, which include annual sales growth of 5% and an adjusted EBITA margin of at least 15%. In particular, we think Alfa Laval’s EBITDA margin target is conservative, with the group’s EBITA margin averaging 16.3% over the 2018-22 period.

We continue to credit Alfa Laval with a wide moat rating, based on the confluence of intangible assets and switching costs that should help to protect Alfa Laval’s economic profit generation from competition over the longer term. We think Alfa Laval’s technological expertise in each of its three core technologies represent an intangible asset.