ABLZF - Accelleron: Off To A Good Start

Summary

• Accelleron Industries AG is off to a good start as an independent company, with several positives reported on its first trading update.
• The company has some attractive financial characteristics, and we particularly like the services segment because of its resilient recurring revenue.
• We currently believe shares to be a "Hold" and would consider them a "Buy" closer to a ~10x p/e multiple.

Accelleron Industries AG (ACLLY) is a spinoff from ABB Ltd (ABB), which we covered in a previous article , before it started trading separately. There appears to have been some initial pressure on the share price from some ABB shareholders selling the shares they received, but since November 2022 shares have done remarkably well. In this article, we'll focus on recent developments and check the valuation to find out if there is still value at current prices.

Business Overview

As a quick reminder, Accelleron manufactures and services high-power turbochargers. These are devices that enable internal combustion engines to operate more efficiently, and they also increase their power capabilities. Adding a turbocharger to an engine helps to increase its power by up to ~300%, lowers fuel consumption and CO2 emissions by up to ~10%, and reduces NOx emissions by up to ~60%. One fear that investors have is that as the world moves towards electrifying transportation, this could make turbochargers obsolete. While this is a legitimate risk, and one of the reasons we would not be willing to pay a high multiple for the shares, it is worth noting that this transition is likely to play out over several decades.

In the meantime, the company continues to enjoy its leadership position in its industry, with high profit margins, strong cash generation, and significant recurring revenue from the servicing of the installed based.

Recent Financial Performance

The company delivered its first trading update as an independent stock listed company in November last year, and it is expected to provide an annual report for 2022 on March 29th. We'll have to wait for the annual report to be published to have a much better idea on how the company is doing, but the trading update already provides some highlights.

Revenue growth for 2022 is expected to exceed previous guidance, reaching +8% in constant currency. This level of growth far exceeds the organic revenue growth target the company set itself, which is relatively low at 2% to 4% CAGR. The operational EBITA margin should come in at the upper end of guidance at ~24.5%. Apparently the company has also signed a significant number of service agreements, which should help recurring revenue grow nicely.

One of the tailwinds the company is benefiting from is the rising global demand for liquefied natural gas, which increased demand for turbochargers for gas compression and turbochargers for LNG carriers. The company also noted growing demand for small power plants and backup power sources for applications such as data centers.

The Crown Jewel is the Services Segment

One segment that we did not cover in much detail in our previous article is the services segment, and we should have, since it is probably the crown jewel of the business. It generates highly resilient and predictable recurring revenues, and it has evolved from a classic spare parts business to what the company calls an "availability as a service" model. One of the competitive advantages of the business is the scale of its global services network, with services stations all around the world.

The company is looking to further grow the business by further growing the market penetration of its own turbochargers, but it plans to also increasingly target non-Accelleron turbochargers. Based on the company's recent trading update, it sounded like the Services business is growing nicely.

Balance Sheet

We'll get a lot more details on the balance sheet when the company publishes its annual report on March. What we know so far is that net leverage at the spinoff date was expected to be quite moderate, at ~0.7x net debt to operational EBITDA.

Valuation

Accelleron is currently trading with a market cap of ~$2.2 billion, and we know this is a business that can generate ~$150 million in net income. The price/earnings ratio is therefore ~15x. While we believe this multiple to be reasonable, we would wait to buy shares closer to a ~10x multiple, which is near the lows where shares have traded.

One thing to like is that the business has excellent free cash flow conversion, averaging close to 100% conversion from net income.

Another thing to like about Accelleron Industries is that it is expected to have an attractive dividend yield. From what we understand, the company intends to pay its first dividend of around $75 million during the first half of the year. At current prices, this would represent a ~3.4% dividend yield. It is expected, however, that the dividend should increase significantly in the following years. The company's mid-term targets call for a payment of 50-70% of reported net income as dividends if net leverage is equal to or higher than 1.0x and up to 100% of reported net income if net leverage is below 1.0x. If the company pays all of its net income as dividends, then we estimate the dividend yield would be ~6.8%.

Risks

Accelleron Industries was just recently spun-off from ABB, and it has yet to create a track record as an independent company. In the long term, however, the main risk we see is that of the electrification trend making the company's turbochargers obsolete.

Conclusion

Accelleron Industries is off to a good start as an independent company, with several positives reported on its first trading update. We'll have to wait until the company publishes its annual report in March to get more details, but so far things are looking positive. Accelleron Industries AG is expected to generate significant free cash flow, it is likely to pay an attractive dividend, and the valuation still looks reasonable. The company faces the long-term risk of its products being made obsolete by the electrification trend, but this is likely to play out over several decades. We currently believe Accelleron Industries shares to be a "Hold," and would consider them a "Buy" closer to a ~10x p/e multiple.

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