Share tips: A play on urbanisation and climate change
By
Paul Hill Dec 23, 2011
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In Britain, our electricity grid uses what’s known as alternating current (AC). On a small island like ours, with relatively short transmission lines, the amount of power lost in the process of getting this AC electricity from one place to another isn’t too significant.
However, in larger countries such as China, India and Brazil, where electricity often has to cross distances of thousands of kilometres, AC’s natural inefficiency can prove expensive. So many governments now want to adopt high-voltage direct current (HVDC) technologies to reduce wastage.
In August ABB, the world’s largest builder of electricity grids (58% of sales), won a $1bn order from Dutch-German operator TenneT. It will supply an HVDC link connecting offshore wind farms in the North Sea to mainland Germany. O
n completion, the project will supply 1.5 million households with clean energy while keeping power losses down. And once new wind farms are added, TenneT will probably be forced to upgrade its existing distribution equipment too. That will mean more work for ABB.
Push the clock forward ten years and DC transmission lines may have spread across the globe – perhaps channelling solar energy to Europe from the Sahara desert, or geothermal power from Siberia. ABB’s chief executive Joseph Hogan thinks the sector will expand by 6% a year.
A similar pace of growth is expected in its automation market, where it develops sophisticated motors, robots, process controllers and software. All told, this should drive sales growth of between 5.5%-8.5% a year: from $31.6bn last year, to $45bn by 2016.
ABB (VTX: ABBN), rated OUTPERFORM by Robert Baird
ABB is also stripping out costs. It slashed $3bn in 2009/10, and is aiming for $1bn both this year and next. So Hogan expects to hit earnings before interest, tax, depreciation and amortisation (EBITDA) margins of 13%-19% through this economic cycle. That’s supported by a $28.5bn order book and robust output in developing nations, which account for around half of sales.
Its focus on climate change, smart grids and urbanisation should also shield the company from short-term volatility. The City forecasts 2011 revenues and underlying earnings per share (EPS) of $35.5bn and $1.39 respectively, rising to $37.5bn and $1.50 in 2012. That puts the shares on a price/earnings (p/e) ratio of 13. I value the group on a through-cycle EBITDA multiple of ten. Adjusting for the $803m pension deficit, that generates an intrinsic worth of 22 Swiss francs (CHF) a share.
Key risks for ABB include a hard landing in China. And the soaring Swiss franc isn’t helping in its export markets. All the same, with state-of-the-art technology across a broad range of territories, ABB is one to tuck away for the long term. Asset management group Robert Baird has a price target of CHF25, and fourth-quarter results are due out on 16 February.
Rating: BUY at CHF17
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