The uptick in ordering appears secular with an added boost from spend on decarbonisation. As reflected in Q2 results the strength in ordering will see a weak flow-through into revenues and margin. We increase estimates by 5%, Fair Value to `2,300 and upgrade our rating to Reduce after the past one year of underperformance versus ABB. At stiff 45X two-year forward earnings valuations, stock trades at a reasonable ~20% discount to ABB.
Secular uptick in ordering
Siemens has reported a strong >60% growth in orders inflows in H1FY22. The same reflects a healthy 45% growth in product/service orders and a higher 100% growth in project orders. While both of these have benefitted from one-off effects, the inherent strength in ordering underlies secular growth across segments and order sizes. Greenfield capex orders are coming from new businesses in private sector and e-mobility in public sector (metros, railways). Brownfield or refresh capex is coming from the usual sectors of cement, steel and auto. What is comforting is the business traction seen in context of sustainability.
Q2 results suggest limited flow-through of strength in ordering into revenues and margin
Siemens reported 8/3% y-o-y growth in adjusted revenues and EBITDA in Q2 and lower EBITDA growth in H1. 2% growth in EBITDA over this period came from FX gains. The weakness in the above numbers versus strength in ordering is partly linked to supply chain constraints and higher cost of logistics. In our assessment, the bigger reason driving the disconnect is the changing mix of orders in terms of a longer execution period and lower margin (project versus product).
We increase estimates by 5% on higher margin estimates
Our revised estimates factor in higher margin trajectory though still around current levels. The management shared increasing competitive pressures in key end segments. Closing the multiple gap with ABB depends on pace of catch-up on sustainability and exports. After the past year of sharp 25% underperformance versus ABB, Siemens trades at ~20% discount on two-year forward basis to ABB. A large part of this gap is likely to sustain for reasons discussed in our March note. Some closing of the gap can happen as Siemens starts making inroads in revenues from the theme of sustainability and higher exports (C&S acquisition). We will aim to track these themes for Siemens and reassess our stance.