Description

nVENT Electric Plc. (NVT)

nVent Electric (NVT) was spun off from Pentair PLC (PNR) in April 2018 and generally met with a collective yawn by Wall Street.  Most sell side analysts initiated with a Hold rating and the stock didn’t do much for most of its first year. While the street has warmed to the name in recent months, the stock is trading only about 10% above its $25.50/sh price at spin.  

Thanks to the spin, we believe that NVT was reborn as a more focused company. This notion was apparent at their February Investor Day, and management provided medium term guidance of GDP+ organic sales growth and expansion of operating margins.  This is in contrast to the growth-challenged narrative surrounding the company at spin (to demonstrate, the title of Goldmans NVT initiation report was “Searching for growth, but valuation balanced; initiate at Neutral”). With strong free cash flow conversion rates, we expect NVT to complete bolt-on M&A deals, which will also add to growth.  Looking out a couple of years, we believe NVT can generate ~$400mm in free cash flow. Assuming the stock should trade inline with a typical market mult (~16x FCF), and that a modest amount of free cash flow will be used to buy back shares, we derive a ~$39/sh target price, about 40% above the stocks current price.

Business Description

NVT is comprised of the following segments:

1. Enclosures ($1.0b 2018 Sales) - provide innovative solutions that protect, connect and manage heat in critical electronics, communication, control and power equipment.

2. EFS ($570mm) - provide electrical and fastening solutions that connect and protect electrical and mechanical systems and civil structures.

3. Thermal Management ($620mm) - provide electrical thermal solutions that connect and protect people, critical infrastructure, industrial processes and buildings.

Summary Thesis

1. Organic Growth: NVT can grow at an adequate rate over the next several years

• In short, NVT has modestly surprised in terms of organic growth, and we expect those trends to continue.

• In particular, NVT’s leverage to data centers/networking is an area of focus, with management highlighting during the Investor day that its liquid cooling offering as well as the 5G infrastructure build out are long-term structural drivers.

• Additionally, management has highlighted innovation, and It appears NVT’s product velocity is progressing well, with 32 key new product launches last year. Of note, NVT achieved high-teens growth in emerging markets like China/India, and in Enclosures, management expanded capacity last year in both countries.

• 2019 organic growth guidance is +2%-4%; we think NVT can meet those expectations (and potentially beat them even given a tough H1 macroeconomic environment)

2. Margin Expansion

• While freight, and potentially copper, are headwinds, we believe NVT has levers, including taking price and increasing productivity that should allow them to hit their ~50bps operating margin expansion goal.

3. FCF Conversion

• One of the most attractive facets of this business is a free cash flow converstion rate of >100% net income.

4. Bolt-on M&A

• Strong free cash flow generation will allow management to execute upon bolt-on M&A deals.  We expect >$100mm in M&A activity on average, that, on a back of the envelope basis, could add 1%-3% to sales per annum.

5. Share Buyback

• Strong FCF generation will also allow for a solid level of shareholder remuneration, and believe share repurchases could amount to $50-$150mm per annum.

6. Optionality

• And, as a bite-sized business, we don’t believe it’s out of the question that NVT could be bought out (and the presence of Trian could help in this respect).

Valuation

All-in, we see a reasonable path to about $2.40/sh in free cash flow in 2021.  Given the decent quality of the business, along with GDP+ types of organic growth rates, we see no reason as to why NVT can’t trade at an average market multiple of ~16x.  With that, we derive a ~$39/sh target for the stock, about 40% above the stocks last sale.

Catalysts

• M&A

• Quarterly results that reflect decent organic growth trends

• 2-year spin anniversary on 4/17/20

Catalyst

• M&A

• Quarterly results that reflect decent organic growth trends

• 2-year spin anniversary on 4/17/20