ABB: Powering up
The engineering conglomerate must avoid complacency
A capital markets day is usually a festival of granularity. Investors and analysts are bombarded with the minutiae of tax rates, depreciation curves and competitor analysis. ABB’s annual conflab could turn out rather more interesting.
The Swiss-Swedish engineering conglomerate has been urged by 5 per cent shareholder Cevian Capital to spin off its power grids division. The results of a year-long review will be presented on Tuesday. Most expect ABB will opt to retain it.
True, the market could ascribe a higher valuation to the division as a standalone entity than it does to ABB as a whole. Based on UBS estimates, ABB trades at about 11.7 times its earnings before interest, tax and amortisation. If power grids traded at say, 14 times, an extra $2.4bn of equity market value is theoretically available. The remainder of ABB’s business would be proportionately more exposed to growth segments such as robotics, where rivals such as Kuka and Fanuc are valued at higher multiples.
Cevian acknowledges that the vagaries of valuation alone are not a reason to incur separation costs it puts at $330m (plus extra annual costs of $60m). Its case rests in large part on improving cost control and margins. Power grids, which sell primarily high-voltage equipment to utilities, has the lowest margins of ABB’s four divisions. This is as much about portfolio mix as administrative flab. About three-fifths of sales come from relatively low-margin transformers and switchgear, says Morgan Stanley. Having already agreed to offload the cables part of power grids to NKT, it may offer hints as to the long-term future of transformers.
Other crowd-pleasers are also possible. It has just completed a $4bn share buyback; it could announce another. With just $1.65bn of net debt it could easily afford to. A tilt towards software and digitalisation, possibly through acquisitions, is also feasible. Or it could fall back on good old cost-cutting, extending an existing “white collar productivity” programme.
ABB’s shares have beaten the market over the past year. It may feel less need to be radical as a result. But it must also avoid complacency.