SBGSF - Schneider Electric Could Benefit From EU Acts

Summary

• Schneider Electric's progressive dividend policy confirmed with the right strategic capital priorities.
• Portfolio reshaping in progress with cost saving plan already achieved.
• Strong backlog creation in 2022 gives us confidence for a solid 2023. Our buy rating is confirmed (and increased).

Even if we recently initiated Schneider Electric's coverage (SBGSF) (SBGSY), this is a company that we successfully invested in the past, and in July 2022 was back at an interesting entry point at the stock price level. So, after our release called Looking Ahead To Q2 Results , we are not surprised to have recorded a plus 37.85% in capital appreciation, significantly outperforming the S&P 500 return. In our initial analysis, we really deep-dived into the company's long-term upside, providing first insights into Schneider Electric's capabilities in EV and residential building efficiency. The company has also a strong footprint in IoT and digitalization and is living a second life thanks to the manufacturing onshoring. Just today, the German semis leader Infineon (which we also cover at the Lab) received the go-ahead from the German government and obtained approval to begin work on a €5 billion plant, whose production is scheduled for 2026. The EU Chips Act is intended to be the central tool for counter-measuring the US Inflation Reduction Act. This is supportive news on Schneider Electric's future performance and is also coupled with the energy independence act called RePowerEU . Aside from the MACRO positive key takeaways, it is important to report that they managed to confirm the 2022 guidance (despite the sale of SE' Russian activity ), has a truly global footprint, and has a solid track record in financial performances. Here at the Lab, we also commented on the Q3 results , and today we provide an update on the Q4 and FY 2022 accounts.

Starting with the CEO's words, Schneider Electric " deliver a strong 2022, despite the multiple challenges confronting businesses and individuals around the world ".

Schneider Electric's revenue reached €34.18 billion in 2022 and was up by 18.2% year-on-year with organic growth at a plus 12.2%. In Q4 alone, top-line sales also accelerated, delivering €9.32 billion with an increase of 17.8% compared to last year's end quarter. These positive results were driven by dynamic demand in all four end markets and clients' focus on sustainability, electrification, and digitization. Going down to the P&L, the company's adjusted EBITA delivered a plus 20% thanks to the structural cost savings initiatives of €1 billion already delivered. This was also supported by asset disposal (not considering the Russian entity sale). As confirmed by the CEO, 2022 was a significant year for the evolution of Schneider Electric's portfolio . In addition, the company completed the AVEVA deal which will allow Schneider Electric to accelerate in the software division. The company now aims to build " a single data hub to bring together the industry twin and the energy twin of our customers' enterprise" . In the company's reorganization, a page is turning for Schneider Electric. Its managing director, Jean-Pascal Tricoir will give up his post in May but he will keep the presidency. As already announced, the new CEO will be presented at the Annual General Meeting on May 4th and will be the current Aveva CEO Peter Herweck. Going back to the bottom line, net profit recorded €3.48 billion in the past year, compared to €3.20 billion achieved in 2021. Net income was slightly below the consensus estimate, while sales exceeded the €33.63 billion expected.

Source: Schneider Electric Q4 and FY results presentation

Conclusion and Valuation

As expected, the company increased the DPS to €3.15 from €2.90 (up 9% compared to the dividend paid last year). As a reminder, this is the 13th progressive dividend hike. It is also important to report the solid order backlog created in 2022 that will fuel Schneider Electric's growth ambition for 2023. For this reason, Schneider Electric anticipates an organic increase in sales between 9% and 11% with an adj. EBITA between a plus 12% and 16% (at constant scope and exchange rates). As reported last year, the euro currency, given its depreciation was a supportive catalyst. In the current fiscal year, we forecast that the French energy management group will have a negative impact on currencies between €600 million to €700 million and will partially reduce the EBITA margin by around 40 basis points. Here at the Lab, we also very much like Schneider Electric's capital allocation priority based on 1) solid balance sheet, 2) higher DPS, 3) portfolio optimization and 4) opportunistic buyback. Regarding the valuation, based on 2023 EBITA estimates, the company valuation remain depressed. Its direct US comps Rockwell Automation (ROK) and Eaton Corporation (ETN) are trading at much higher multiples; however, if we are pricing Schneider Electric historical EV/EBITA level at 13x, we are increasing our buy target at €175 per share (from €165 per share ).

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