Siemens Gamesa: Still Not The Time To Buy

Summary

• Siemens Gamesa's revenues are up 6.6% year-on-year.
• In Q2-2021, Siemens Gamesa had new order intakes for €5.5 billion, up 2.5x year-on-year.
• Revenue guidance for FY2021 has been reduced by 3.3%.
• Updated DCF valuation shows that the stock is trading close to its fair value.

Photo by fokkebok/iStock via Getty Images

Siemens Gamesa (OTCPK:GCTAF) (OTCPK:GCTAY) released its Q2 and H1 2021 earnings last Friday (30^th April). In this article, I will provide an overview of the financial results and I will update the DCF valuation that I presented in my previous article about Siemens Gamesa. Financials data and new information disclosed by the company do not change my position on the stock: indeed, I think that HOLD is still the proper recommendation.

H1-2021 results

Group revenues were €2.3 billion for Q2-2021, 6.6% higher than the same quarter of FY2020. The increase in revenues becomes even higher, ca. 10% year-on-year, if we consider the first half of 2021: indeed, revenues amounted to €4.6 billion versus the €4.2 billion of the previous year.

EBIT pre-PPA (purchase price allocation) and IR (integration and restructuring) for Q2-2021 was €111 million, more than 4x the value of Q2-2020 which, however, was a quarter deeply affected by COVID-19. The increasing trend of EBIT growth is confirmed by H1-2021 data with EBIT setting at €232 million versus the -€103 million of H1-2020. In terms of margin, results show that not only the Company is increasing the volume of its business, but it is also slightly improving its profitability: indeed, EBIT margin pre-PPA/IR was 4.8% for Q2-2021, 3.3 percentage points ((pp)) higher year-on-year, and 5.0% for H1-2021, 7.5 pp higher year-on-year.

After considering integration and restructuring costs (ca. €118 million), PPA amortization (ca. €119 million), interests and taxes (respectively €23 million and €27 million), the reported income to shareholders for H1-2021 amounted to -€54 million.

From the commercial point of view, Siemens Gamesa’s order intake was €5.5 billion for Q2, up 2.5 times year-on-year and 2.3x quarter-on-quarter. More than half of the orders (ca. 52%) are represented by offshore wind turbines while 25% is from onshore wind turbines and the remaining 23% is from the service business line. In Q2-2021, the backlog increased by ca. €3.6 billion, from €30.1 billion at the end of Q1 to €33.7 billion at the end of H1-2021.

Overall, the positive year-on-year trends show that the market, and Siemens Gamesa as well, is recovering from the strong negative impact that COVID-19 had on 2020 performances.

Outlook for 2021 is weaker than expected

During the earnings presentation, Siemens Gamesa’s top management announced new guidance for the overall FY-2021 revenues. From a range of €10.2-11.2 billion, the guidance was repositioned at €10.2-10.5 billion: considering the midpoints of the provided ranges, the updated guidance is ca. 3.3% lower than previously announced. The main reasons for such narrowed revenue guidance are to be found in some order intake deferrals and in delays in project execution due to the pandemic.

Besides reducing revenues forecast, top management also showed some concerns about the potential increase in supply costs due to raw material price increases and lower volumes.

Debt and liquidity

During Q2-2021, net debt increased by €296 million (or 62%) reaching the value of €771 million at H1-2021. Such a sharp increase was due mostly to an increase in working capital and lease liabilities. Liquidity should not be an issue for the company since Siemens Gamesa has €4.5 billion in credit lines, against which it has drawn only €1.5 billion so far.

DCF valuation - An update

In the previous article that I wrote about Siemens Gamesa, I performed a DCF valuation with some sensitivity analysis to understand the intrinsic value of the stock. The results showed that Siemens Gamesa was trading close to its fair value and that, in my opinion, there was limited room for upside.

In this article, I update my DCF valuation considering the new revenue guidance (€10.35 billion for FY2021) as a new starting point and slightly reducing the FCF-to-sales ratio (from 5.8% to 5.6%) to account for the potentially higher supply costs. All the other parameters remain unchanged: 7.9% revenue growth per year until 2026, 7.5% WACC, and long-term growth rate used as a driver for the sensitivity analysis. Results are outlined in the following table.

(Source: analysis on data from Reuters)

Considering the trading price of €26.90 (as of 4^th May 2021), the share is trading at a ca. 9% discount to its most cautious valuation (i.e., 4% long-term growth rate) while it is trading at a premium if compared to more optimistic growth rates.

Despite the potential upside shown by the higher long-term growth rate cases, I believe that, at the current trading price, investing in Siemens Gamesa might be a bit risky. Indeed, one should not forget that the company has warned about “higher expected supply costs”: forecasting the potential impact of the higher costs is not easy, but the fact that the company has mentioned it means it is a risk worth taking into consideration.

Conclusion

In conclusion, despite the stock price dropping ca. 16% from the time I wrote the previous article, I still believe that the proper recommendation for Siemens Gamesa is HOLD. The DCF valuation shows an intrinsic value close to the trading price and, together with the lack of clarity about a potential rise in supply costs, it invites to adopt a cautious approach.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.