Siemens: European Macroeconomics Driving Orders Down
BMI View: Siemens Energy enjoyed a relatively good third quarter, with a modest y-o-y increase in overall revenue and profits. However, a y-o-y comparison could be deceiving, as earnings in Q311 were deflated by a one-off write-down. In fact, earnings for the renewable energy and power transmission divisions declined due to poorer margins. Additionally, we highlight that the volume of new orders has been on the downtrend since Q411 (July-September), and that the current order backlog could prove insufficient to drive future growth.
Revenue for Siemens Energy grew by 14% year-on-year (y-o-y) to reach EUR7.0bn in Q312 (April-June), up from EUR6.1bn from Q311. Net profits also saw stellar growth, increasing by over 200% y-o-y to reach EUR683mn in Q312, compared to EUR214mn in Q311. However, we highlight that net profit in Q311 was held back by a write-down of EUR682mn. This was due to the company's decision to exit its nuclear power joint venture with Areva.
Detailed Performance Breakdown
Siemens Energy is split into four divisions: fossil power generation, power transmission, oil and gas (O&G), and renewable energy. The company previously had a nuclear power division, and played major roles in the development of Germany's 17 nuclear power plants. However, the division was spun off following the Germany's decision to phase out nuclear power by 2022. Power distribution was previously included with transmission under Siemens Energy, but has since been shifted to the Siemens Infrastructure And Cities Sector.
In terms of revenues, the renewable energy division was the main driver of growth for Q312. Revenues for the division grew by 48% y-o-y in Q312 due to the continuing conversion of a large backlog of wind orders. In contrast, revenue declined for the solar business on a y-o-y basis, due mainly to steep declines in solar feed-in tariffs in Germany and Italy.
|Growth Stemming From A Large Order Backlog|
|Siemens Energy Historical Revenues, EURmn|
In terms of net income, fossil power generation was the outperformer in the sector. However, this outperformance can be attributed to the EUR682mn write-down that was taken by the fossil power division in Q311, following Siemens' decision to leave its joint venture with Areva S.A. If we exclude this extraordinary item, Q312 net income for the fossil power division actually shrank by 19% y-o-y. We also highlight that net income for renewable energy and power transmission shrank from Q311, even though both divisions achieved higher revenues in Q312 than in Q311.
|Substantial Growth In Net Income|
|Siemens Energy Sector Net Income By Subsector, EURmn|
We attribute the lower net incomes experienced by both divisions to lower profit margins. The profit margin for renewable energy dropped from 7.0% in Q311 to 2.5% in Q312. This was due to a EUR32mn provision for wind turbine components from an external supplier, and a charge of EUR20mn due to a capacity adjustment. Meanwhile, the profit margin for the power transmission division fell from 9.1% in Q311 to 3.2% in Q312. This was caused by a EUR22mn charge arising from grid connections to offshore wind farms.
Macroeconomics Holding Back Future Growth
We believe that the current macroeconomic situation in Europe is adversely affecting Siemens Energy's long-term prospects. New orders for the company have slowed down drastically over the last few quarters, from EUR8216mn in Q311 to EUR5317mn in Q312. We highlight that this could be problematic for the company in the following quarters, as order backlogs may prove insufficient to drive future growth.
|Marked Slowdown In New Orders|
|Siemens Energy Historical Breakdown Of Orders, EURmn|
The most pronounced change in new orders is seen in the renewable energy division, with orders dropping 60% y-o-y. Some of the reasons for this decline include tougher global competition, austerity measures in Europe that led to a contraction in renewable investment, and reductions in feed-in tariffs in several large European countries. Besides a decrease in orders for the renewable energy division, orders in the O&G division have come down as well due to weaker market for industrial steam turbines.
|Worrying Book-To-Bill Ratio|
|Siemens Energy - New Orders, EURmn (LHS); Book-To-Bill Ratio, (RHS)|
This decrease in new orders has caused a drop in the sectors book-to-bill ratio. Book-to-bill for the sector stood at 0.75x at the end of Q312, which is the lowest over the past few quarters. This means that the company received less new orders than it fulfilled. Should this situation continue over the near term, Siemens could run out of orders to service.
This significant decrease in the book-to-bill ratio could cause significant challenges for the company in achieving its revenue guidance target for FY11/12. The company had previously forecasted EUR6bn for FY11/12, but revised it downwards to EUR5.2-5.8bn in March 2012 due to project charges from offshore wind projects that were taken in Q212. These charges were incurred due to the introduction of new regulations governing offshore wind installations in Germany. Siemens was penalised as it was unable to meet some of these regulations, and was behind schedule for several projects.
A Drought For Renewable Energy?
Overall, we believe that Siemens looks set to face a tough time over the near-term. This outlook is in line with Siemens' appraisal of its growth prospects. In the release of its third quarter results, Siemens stated that prevailing market conditions for renewable energy are expected to remain challenging in the coming quarters. The company specifically highlighted pricing pressure as one of the main factors affecting growth, which we believe is the result of fiercer global competition.
Despite this bleak short term outlook, we continue to believe that renewable energy will be a key subsector for growth in the company. Germany has major plans to move towards a nuclear-free energy policy and renewables are expected to play a major role in substituting nuclear energy.
|Wind Energy To Grow In Germany|
|Generating Capacity In Germany By Type, MW|