Raising Our Fair Value Estimate for Schneider Electric

We increase our fair value estimate for Schneider Electric SU to EUR 160 per share from EUR 150 based on the time value of money and increasing our medium-term assumptions. Our 2023-27 average organic revenue growth forecast increases modestly to just over 6%, with a more favorable view on medium-term structural growth drivers. The company exited 2022 with a strong backlog of orders, which will support revenue growth in 2023. At the end of the fourth quarter of 2022, the company had a backlog equivalent to six months of revenue. This is almost twice the size of its historical backlog rates, which means management has an unusually high level of visibility on 2023 revenue. As such, we have also increased our 2023 revenue growth forecast to nearly 10% on an organic basis, up from low single digits. We expect positive pricing on the backlog as well as some productivity gains to expand adjusted EBITA margin by 20 basis points to 17.8% in 2023. We maintain our wide moat rating.

The building sector is the largest contributor to global greenhouse gas emissions through direct and indirect emissions. We expect a faster replacement cycle of core low- and medium-voltage components by connected or “smart” versions that will be used in combination with building energy management software to lower building energy consumption. In addition, we expect strong demand for the company’s grid-edge and microgrid solutions, which can smooth the effects of bidirectional and volatile energy flow from electric vehicle charging and on-site power generation, such as solar.

We assume medium-term revenue growth above gross domestic product rates at just over 6% and a midcycle adjusted EBITA margin of just over 18%, assuming a higher retention to the bottom line of the company’s restructuring productivity gains than our previous forecasts.