Schindler Posts Solid 2022

We are maintaining our CFH 210 fair value estimate and wide moat rating after incorporating Schindler’s SCHN solid full-year 2022 results into our model. Like other elevator original equipment manufacturers, Schindler’s margins and inventory levels are currently distorted by long lead times in executing on the order backlog. Supply chain constraints over the past several quarters have led to unusually high inventory levels, and a backlog with more favorable pricing to come in later project executions. On the margin side, higher-priced orders will not likely convert into better group margins until second-half 2023. Similarly, the higher building inventory will not likely release working capital cash flows until second-half 2023 as well. Taking these factors into account our medium-term forecasts include operating margin forecasts that climb back up to precoronavirus (and resulting supply chain shortages that followed) levels not until 2025.

Our 2023 forecasts include the start of the recovery with 3.5% revenue growth, a 140-basis-point year-over-year margin improvement to 10.7%. However, this forecast looks less of a leap in light of company’s fourth-quarter 2022 margin reaching 10.2%, down 20 basis points year over year. By 2025, we expect the operating income margin to reach 11.4%, approximately in line with the 11.5% prepandemic average.

Similarly, we expect a modest pickup in revenue growth in 2024 to 4% from 3.5% in 2023, reflecting a gradual recovery in lead times or order execution rates as well as a recovery in China’s property market. Combined, our revenue and margin forecasts lead to 17% average growth on EBIT from 2023 to 2025, but quite a stable dividend given the company’s relatively frugal dividend payout historically.