By Geoffrey Smith
Investing.com -- Nothing creates transparency like a conglomerate spinning units off, which makes the debut of Siemens Energy on Frankfurt’s stock exchange on Monday an interesting study in the outlook for the energy market.
Shares in the newly listed unit slumped in early trading, to give the company an implied valuation of some 15 billion euros, more than a quarter below what Siemens and its bankers had been hoping for.
Given that the company has a two-thirds stake in Siemens Gamesa (MC:SGREN), a builder of wind turbines, that had an implicit value of 10 billion euros, it’s clear that the market isn’t attaching too many hopes to the rest of its activities, most of which remain challenged by longer-term shifts away from fossil fuel-powered generation.
The creation of Siemens Energy was a chance for outgoing Siemens (DE:SIEGn) chief executive Joe Kaeser to unlock more value for shareholders by freeing the conglomerate of the dead weight that is its thermal power engineering business.
This outlook for this division has gone from mouth-watering to disastrous in the space of 12 years, as first the Great Recession, then the rise of renewables, severely dented global demand for expensive German gas and coal turbines. According to a presentation for the capital markets prepared by the company earlier this year, earnings – which had taken another hit as President Donald Trump’s trade wars stunted demand – had stabilized before the pandemic, but the most recent financials show that any hope of a turnaround is still largely just that: a hope.
Free cash flow for the nine months through June fell to 133 million euros, from a full-year total of 651 million over the whole of fiscal 2019. Before interest, taxes and amortization, the business made a loss of over 1 billion euros. It hasn’t helped that Gamesa during this period has been hit by a costly restructuring in India (a familiar example of Siemens’ hopes outrunning reality).
The company is promising big further reductions in costs and working capital over the next few years, but it acknowledges that past rationalizations haven’t been enough to make costs fall faster than revenues. Moreover, the new company has a gap of over 1 billion in pension liabilities that it will have to fund somehow (and the current discount rate of 1.8% for its liabilities looks high, given that the yield on 10-year German debt is below -0.5%).
It’s to Kaeser’s credit that, up until to the end of his tenure at Siemens, he has streamlined the parent company to be a much more focused and forward-looking company. Even so, the burdens of the past cannot be shaken off so easily: the company still has nearly half of the company and is only planning to sell down to 25%. That explains why Siemens has come out of the last decade in better shape than General Electric (NYSE:GE), its long-standing rival. Even so, this is an incomplete unlocking of value: the conglomerate discount will continue to dog Siemens stock for the foreseeable future, while the presence of the fossil fuel division is likely to weigh on Siemens Energy for just as long.