Description

Thesis Summary: 

Siemens Energy (ENR) is a leading pure play company active along the entire energy technology and service value chain.  The company is a global leader in an oligopoly with an installed base representing  ~1/6 of global electricity generation.  Levered to several megatrends, including power demand growth (thanks to electrification and AI-dedicated data center demand) as well as decarbonization, and trading at an extremely undemanding valuation of 4.8x consensus ’26 EBITDA, we see a path to Siemen’s more than doubling over the coming 12-months as the company rerates (perhaps quickly) towards its closest peer, GE Vernova, which spun out of GE in early April and trades at 12x ’26 EBITDA.  Importantly, we see very little downside, given its strong b/s (net cash), $119bn growing backlog, and FCF generation (mid-single digits despite substantial losses in its wind business this year). 

Situation Overview:

Siemens Energy is a €32 billion revenue company that provides fully integrated products, systems, solutions, and services across the energy value chain of electricity generation. The company was spun out of Siemens in September 2020, and ran into a series of unfortunate issues within its wind turbine manufacturing segment, including cost inflation and performance related issues, which led to losses in the segment (the result of a legacy acquisition of a Spanish company, Gamesa) as the company works through its backlog along with a cumulative €2.7 billion warranty provision.  Importantly, we believe the wind issues are behind the company, as the company recently began taking orders for its onshore wind segment and just recorded its third consecutive quarter without any additional provisions in its wind business.  As the company continues to distance itself from its wind issues and generates meaningful FCF (1bn this year), we believe investors will increasingly flock back to Siemens. 

Wind Inflection quotes from Q1 2024 Earnings Call:

• “I am happy to share that we have not suffered any further setbacks in onshore wind, and that offshore ramp up is progressing in line with our plans.”
• “Onshore remains and continues to be affected by the known quality issues and offshore by the ramp-up challenges.”
• “We have materially completed the root cause analysis for the priority one quality issues [in onshore wind], and for 80% of these we have short-term measures in place. We have already defined long-term corrective actions for half of the quality issues for half of the quality issues, while we continue to implement remediation and mitigations actions.”
• “Onshore orders, as communicated, due to the temporary suspension of sales, slightly halved due to the cessation of sales activities for 4x and 5x. Increased service revenue more than offset a decline in onshore and offshore businesses.”
• “the ramp-up is ongoing. In Cuxhaven, Aalborg, and La Havre (3/4 factories), we are progressing in line or slightly ahead of our plan. The ramp-up in Hull remains work in progress”

ENR Segments/Business Model

• Gas Services (33% of revenue, LSD% CAGR through 2026 growing in line with GDP, book-to-bill of 1.13 ttm)
• All business activities relating to the design, manufacture, and service of gas and large steam turbines, large generators, and heat pumps.
• Customers include utilities, independent power producers, municipal energy producers, EPC companies, and industrial customers.
• Competitors primarily include GE and Mitsubishi.
• Until recently, this business was viewed as a slowly melting ice cube, however, the recognition that gas needs to be part of the solution going forward has created a recognition that the combination of growing power demand and large service / parts (62% of revenue is service related) business will drive consistent and stable LSD% demand growth. 
• Grid Technologies (22% of revenue, LDD% CAGR through 2026 driven by renewable energy transition, book-to-bill of 2.28ttm)
• Focused on solving the complexity of integrating renewable energy into the energy grid infrastructure.
• Products include high-voltage direct current (HVDC) transmission systems, offshore wind farm grid connections, flexible alternating current transmission systems (FACTS), high-voltage substations, air- and gas-insulated switchgear, transformers, digital grid solutions and components, as well as storage solutions (pictures below)
• Serves a broad range of customers including independent power producers, transmission and distribution system operators, and industrial and infrastructure customers in industries such as oil and gas, chemicals, mining, and operators of data centers, airports and railway companies.
• Competitors include GE, Schneider Electric, ABB, Hitachi, and Mitsubishi.
• Transformation of Industry (14% of revenue, HSD% CAGR through 2026 driven by hydrogen and decarbonization, book-to-bill of 1.32 ttm)
• Focused on reducing greenhouse gas emissions in industrial processes.
• The TI portfolio includes electrolyzers, industrial steam turbines, industrial generators, turbo and reciprocating compressors, compressor trains, and service offerings for the whole portfolio, especially steam turbines and compressors
• TI benefits from rising demand for carbon-optimized energy technologies and the transition to a hydrogen-based economy
• Competitors include GE, Schneider Electric, ABB, Emerson Electric Co., Plug Power, Air Products, Neom Green Hydrogen Company.
• Siemens Gamesa (28% of revenue, LSD% CAGR through 2026 driven by wind inflecting and wind being a key part of the energy transition, book-to-bill of 1.56 ttm)
• Focused on the design, development, and installation of products in the renewable energy sector, with a focus on onshore and offshore wind turbines.
• Primary customers are large utilities, independent power producers, and project developers.
• Onshore wind is leading to more concentration, starting from a relatively dispersed supply side with no single company holding a dominant market share.
• Offshore wind markets are already served by just a few experienced players (Siemens, Vestas)[1][2]

Key Risks:

• With a 119bn backlog, there is a certain amount of “black box” E&C type risk, however, we believe this is mitigated by the fact that the worst of the inflation issues appear to be behind us and believe that new contracts are being structured with escalation clauses, etc.  In short, we believe that we should have seen the worst of the issues and expect all of the businesses to improve going forward.
• There is the potential for additional losses in the wind business, particularly in the offshore segment, where longer lead times (4-5 years) and large backlog (17bn backlog) are inherent risks in the business.  That said, we believe this is a good business going forward as the need for a pristine balance sheet / believe by customers that the company will be around in 20-years to service the projects creates substantial barriers to entry.  With GE recently deciding to exit the business, offshore has effectively become an oligopoly in developed markets between Siemens and Vestas.  Further, we believe that grid reliability / security related concerns preclude Chinese players from entering the market.  Finally, we believe any risks related to offshore wind are more than baked, given the 23bn Euro disconnect between GEV and Siemens Energy, despite being nearly identical companys in terms of revenue, backlog, forward margin potential, etc. 

Financial Projections:

Catalyst

Consistent execution

Multiple rerating closer to GEV