2023-09-19 17:25:22 ET
Summary
- Aalberts is well-positioned to benefit from megatrends such as urbanization, energy scarcity, and digitalization.
- The company has a clear and successful capital allocation strategy, investing in organic growth and making strategic acquisitions.
- Aalberts has a strong dividend history, with a 10-year dividend growth CAGR of 12.2%, and offers a current dividend yield of 3.06%.
- The 1H2023 results are showing that Aalberts is well on track to deliver compelling long-term growth.
- Based on discounted cash flow analysis, Aalberts is 13.9% undervalued compared to its current share price.
Investment thesis
On the 11th of July I wrote an article about Aalberts N.V. (AALBF) and why I think the company is a great investment, especially for those who seek long-term dividend growth. Not too long ago the company published its 1H2023 results, so I want to update my investment thesis. Before we go to the half-year results, I will give you a summary of why I have included Aalberts in my own dividend growth stock portfolio.
Megatrends
Aalberts is in a good position to participate in several megatrends, such as:
- Urbanization: There should be a high long-term demand in energy efficient products in new build and in renovation of buildings.
- Energy scarcity: Aalberts offers a lot of energy efficient products. Think about the products they use in eco-friendly buildings and sustainable transportation.
- Digitalization: Aalberts plays a role in offering high-tech solutions to several semiconductor equipment manufacturers, such as ASML Holding N.V. ( ASML ) and Applied Materials, Inc. ( AMAT ). The products have the ability to improve functionality, performance and energy efficiency of semiconductor equipment. There is a lot of growth potential in this segment due to different growth drivers, for example AI, IoT and automotive.
You can read more about the various business activities of Aalberts in my previously written article.
Since all of the end markets of Aalberts are growing ones, it is likely that they can achieve growing earnings over time. Aalberts already has an excellent track record when it comes to sustainable growth.
Capital allocation
One of the greatest things of Aalberts is its clarity in capital allocation. I like the way the company operates with a long-term mindset.
The company invests a lot in organic growth and they also do a decent amount of acquisitions. In most cases I don’t like companies that are investing huge amounts of cash into M&A, but Aalberts shows us how to do it at a high success rate. In 20 year the company did 60-80 acquisitions and from 2019 to 2022 they also did several acquisitions .
One of the main characteristics of their acquisitions is that they are always an addition to the end markets where they are already doing business. Aalberts has a lot of knowledge in these end markets internally and they are using their own team to acquire other companies. I think this is a good sign, because I assume that the people who are working at Aalberts have more knowledge of these specific end markets compared to an M&A consultant. This adds more control in acquiring businesses and decreases the risk of potentially paying too much for an acquisition.
Dividend
Paying a dividend is also an important component of their capital allocation strategy. Aalberts is planning to pay out 30% of its net profit before amortization in dividends. For all the USA-based readers that are interested, dividend tax is withheld at the rate of 15% from gross dividends distributed.
Looking at the dividend history chart there is a lot to like, since they were able to grow the dividend at a 10-year CAGR of 12.2%. Combine this with a current dividend yield of 3.06% and it should compound nicely. Don’t expect a USA dividend aristocrat-like growth rate, because there is a chance that Aalberts won’t grow its dividend every year due to its cyclical character. However, if the company can meet my expectations of further growing their earnings we can expect some juicy dividend growth for the coming years.
Share price development
When my first article on Aalberts was published, the share price was €38.14.
On the 27 th of July Aalberts presented its interim results of 2023. The results were received very well and the stock price increased to €40.54 during that day. Since then the share price dropped quite a bit to €36.25 per share. Could the fundamentals of the company have changed, or is it an even better buying opportunity at the current price level? Let's find out!
1H2023 results
Before we dive into the numbers, let’s take a look at the main objectives they highlighted in their latest earnings call.
What really stands out is the importance to further drive sustainable growth, while strengthening their unique business positions. I think the company has some unique positions in their operating segments and they want to capture new market share during the next years. Unique products enhance margins and offer pricing power compared to peers.
Innovation plays an important role in achieving these goals. However, innovation comes at a cost and the CapEx in 1H2023 (€116.4 million) was about 38% higher compared to 1H2022 (€83.1 million). The cash was invested in organic growth, innovation and operational excellence plans.
Aalberts is spending more than 5% of their revenue on innovation. This should lead to a higher innovation rate in the future. In fiscal year 2022 the innovation rate was 17% and they have initiated a goal of 20% by the end of 2026. The innovation rate is an important metric, because this shows if the investments leads to value creation over time. I really like that mindset, because as investors we like to see a solid return on investment.
The results of the first six months are showing the strong market position of Aalberts.
The company has achieved a record revenue, EBITA and Cash flow from operations.
Their revenue was up 6% due to acquisitions in 2022 (€30.9 million) and organic growth (€88 million). There were also some divestments to further streamline their product portfolio.
Aalberts showed some pricing power, because they were able to hike their prices to compensate for high inflation related costs. However the added-value was 0.5% lower compared to 1H2022. I think this is still a good achievement because of customer destocking in their “eco-friendly building” segment.
The distribution of the revenue per end market is getting more evenly distributed. Every end market where Aalberts is doing business is a growing one in the long-term and every business segment of Aalberts had experienced growth compared to last year, except its largest one.
Looking at the revenue per end market the eco-friendly buildings sector is facing a -1.2% revenue decline. Customers are still reducing their inventory, especially wholesale customers. The housing market is still under pressure and there are a lot of postponed projects. Despite the difficulties in the market, they still earn a lot of money with the renovations (70% of revenue) of heating and cooling systems for energy efficiency, which is a lifesaver for Aalberts. They’re also making good progress with their new factories, which is necessary to further achieve organic growth in the future.
In Semicon efficiency they achieved 35.9% growth compared to 1H2022 and also their order book is still on a very good level. Aalberts is investing into expanding its capacity, which allows them to grow even further. The new acquired companies ISEL and KML are performing very well and are also ramping up manufacturing. At the moment Aalberts is also investing in new technologies like ultra-precision frames for semiconductor equipment.
Sustainable transportation also grew at 16.7% compared to 1H2022. The demand for precision manufactured parts is still high due to developments in:
- E-mobility
- Lightweight materials
- Sustainability and reshoring
Aalberts also gained some new projects in Europe and North America and especially the demand for sustainable electronic pressure regulators and safety valve applications for hydrogen are increasing. Aerospace and marine are performing really well despite the destocking.
Last but not least the industrial niches grew 4.6% compared to previous year. The demand for precision extrusion parts and specialized surface technology stayed high. Supply chain disruptions reduced heavily and this led to a higher amount of shipments. Customers were also destocking and the company took several actions to further capture market share.
Based on the revenue numbers we can conclude that the company is well on track to deliver what they promise. Despite a decline in revenue in their largest end market, Aalberts still achieved a 6% revenue growth compared to last year, which is a great achievement.
Financial health and balance sheet
What is also important to mention is the increase in net debt from €652 million in 1H2022 to €773 million in 1H2023. However they managed to reduce it compared to the end of fiscal year 2022. The current leverage ratio of 1.2 is still well under its own benchmark of 2.5. Despite the stable leverage ratio, higher interest rates led to a significantly higher net finance cost (€8 million in 1H2022 vs €20.2 million in 1H2023).
This was the main reason why the EPS was up “only” 2%. The company was transparent about it in their latest conference call and they will bring debt further down if it consumes too much of their cash flow in the long-term. In my opinion their financial costs are easily manageable, but they need to take it into account. One of their growing strategies is to strengthen business positions through bolt-on acquisitions and if the cost of capital is higher it could potentially be a less viable strategy.
In conclusion, Aalberts is well on track to execute their long-term growth plans. The company states that CapEx is needed to drive further growth. They expect that the CapEx will be around €250 million this year. In addition, they will going to reduce their inventories even more so they can generate a decent amount of free cash flow for the coming 6 months.
Investment risks
Despite the positives, it is always good to look at the possible risks of investing.
Firstly, the eco-friendly building segment is facing headwinds due to delay in new build projects. This also has to do with higher interest rates, mortgages and ,especially in the Netherlands, environmental topics. I think this is a short-term headwind that could possibly put some pressure on their performance. In the long-term I assume things are different because there is a lot of government support to build eco-friendly.
Also the EPBD (The Energy Performance of Building Directive) has been updated this year. This is the main legislative instrument in the European Union designed to improve energy efficiency in building and should play an important role to combat climate change. This update would set an earlier deadline for all new buildings to be zero-emission in 2028 and apply this obligation from 2026 for new build. This can be a potential catalyst for Aalberts.
Secondly, there is a lot of geopolitical friction, especially between China and the USA. Changes could negatively impact the financial performance of Aalberts.
Most of their revenue is generated in Western Europe and America, which accounts for 84% of total revenue. The exposure to China is relatively small, which is in my opinion a good thing from a risk point of view. However, the company is also doing business with ASML, so there is a possibility that Aalberts is going to experience headwinds in the semicon efficiency segment from the China related export restrictions .
Luckily, there are some positives to mention as well. At the moment different continents want to build their own semiconductor supply chain, so it is likely that the demand for their semicon efficiency products will be high in the long-term.
Valuation
In my opinion Aalberts is still undervalued. At the moment of writing this article, the company is trading at a PE of 12.68 , which is low compared to its own 5-year average of 18.54.
In my previous article I used a discounted cash flow analysis to calculate a fair value for Aalberts.
The free cash flow of 1H2023 was €109.6 million. This also has to do with the higher CapEx. In the latest earnings call, the CFO Arno Monincx said that they will further reducing their inventories so they will make good free cash flow this year. Last year the free cash flow in the second half of 2022 was €164 million, so I expect at least this amount in the second half of 2023.The free cash flow that I use should be at least €275 million, and the free cash flow of €280 million I used previously could be on the conservative side. However, there is a possibility that the CapEx will be higher compared to fiscal year 2022 so I tend to stick with my relatively conservative assumption of €280 million.
I used a 5 year growth rate of 7% and for the 5 years thereafter 5% because it's harder to make accurate assumptions over longer periods of time. This is a bit higher compared to my last valuation, because all the business segments are growing well and I still see appealing long-term potential in the eco-friendly building segment.
For the analysis I use a terminal multiple of 16, because I think this is justified for a high-quality business like Aalberts.
I applied a relatively high discount rate of 12.5%, because I want this as an annual return on investment. Aalberts has showed some high volatility in the past and has a beta of 1.62 , so I want to do some risk adjustment for it.
If I do the math the fair value is €41.30 per share, compared to the current share price of €36.25 it is 13.9% undervalued.
Conclusion
Aalberts is still on track to deliver long term growth, which should result in compelling shareholder returns in the form of reliable growing dividends. The investment thesis is still intact and after the last earnings results I am a bit more bullish about their future. At the current share price Aalberts is a solid “BUY” and I think it is a textbook example of an excellent business at an attractive price. Since the share price is dropping, the risk/reward potential is even better. Although there are a number of risks in the short-term, these do not outweigh the opportunities. Since the share price of Aalberts can be quite volatile, my advice is to dollar cost average to build your position.
PS: the stock is trading at Euronext Amsterdam and on the OTC markets. I highly suggest to buy it at the Amsterdam stock exchange for liquidity reasons.
For further details see:
Aalberts N.V.: A Great Dividend Growth Stock At An Attractive Price