SecoWarwick: Capitalizing on Electromobility, ESG, and RES Trends - Investment Opportunity Analysis
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Good exposure to electromobility, ESG and RES
We are initiating our coverage of SecoWarwick with a Buy recommendation and target price of PLN 33.3.
SecoWarwick is a beneficiary of exposure to capital goods for the transforming automotive industry (electro mobility), growing investment in renewables (especially in wind, gas, nuclear and hydrogen power), deglobalization and the relocation of sub-supplier production to Europe and the US (onshoring), and trends towards greater efficiency and the concept of a circular economy (increasing investment in equipment with lower environmental impact).
SecoWarwick’s solutions can be used for NG-DRI plants (in the transformation of the steel industry), aluminum recycling plants (melting much cheaper than electrolysis, the growing role of ESG) and customers, when choosing SecoWarwick equipment, are driven by savings on the production process side (reduced gas emissions, lower consumption of energy raw materials).
The opportunity for the next few years for SecoWarwick is a strong position (TOP1) in CAB lines for aluminum processing, especially battery brazing with cooling systems. According to McKinsey, global production of battery cells will nearly quadruple and, given its global presence, SecoWarwick will be a beneficiary of this trend (presence in Europe, China and the US).
The company, with a record order book of PLN 560mn, has an opportunity to improve sales growth and financial performance in 2023, which, with low debt, may increase the chances of an increased dividend stream for shareholders
Risk factors
1. High sensitivity of results to business cycles. Historically, SecoWarwick's sales and results have been highly dependent on business cycles (capital goods market). A pronounced downturn could lead to a drastic decline in sales revenues and consequently financial results (see 2009).
2. Strengthening of PLN against USD. The strengthening of the zloty against foreign currencies is one of the biggest challenges for SecoWarwick from the point of view of competitiveness and the profitability of the contracts executed. The plants in Poland are most exposed to currency risk (Europe ~30% of sales; 30% of sales in EUR, 20% in USD). The company hedges 60% of the net contract exposure at the time of contract conclusion. Companies in the US contract in USD and those in China mainly in CNY.
3. High exposure to China. Currently, more than 30% of the group's sales are realized in Asia (primarily China). In contrast, China accounted for 55% of the group's realized EBIT in 2022. A possible drastic economic slowdown in China, the US-China trade wars, and a war over Taiwan could negatively affect the economic situation in China and indirectly the performance of the company there.
4. Increase in personnel costs and access to highly qualified staff. After material and energy costs, personnel costs are the second-largest category, accounting for 22% of total costs in 2022. SecoWarwick's workforce is primarily skilled engineers (over 60%), who are often attracted by competing companies. The group must keep an eye on salaries at a competitive level to avoid migration of talent out of the group. SecoWarwick is opening offices in locations where access to staff is better, e.g. an office in Zielona Góra, in Tarnowskie Góry, near Poznań.
5. Exposure to defense industry. SecoWarwick also has exposure to the defense industry (aircraft, helicopters, military drones) as a result of significant sales to the aerospace industry (approx. 1/3 of sales). In our view, exposure to the defense industry does not exceed 10% of total revenues. Some investors may statutorily exclude investments in companies with exposure to the defense industry, which may narrow the pool of potential investors (on the other hand, it is one of the factors for revenue growth).
6. Risk of trade barriers. The technological sophistication of SecoWarwick's products may result in part of the product range being subject to sanctions in the future, as was the case in Russia. The company has an outstanding deposit of EUR 252,000 relating to a contract that cannot be completed due to the sanctions in place (to date, a significant - more than 80% - part of the contract has been completed, all existing receivables have been paid by the counterparty). Also currently, trade barriers between China and India mean that SecoWarwick in China cannot supply products to India. The group plans to return to India in the future by building a branch there (there is already a sales & service division there).
Valuation
We base our valuation of the SecoWarwick group on a 50% discounted cash flow method and a 50% comparative valuation.
In the comparative valuation, we seek to benchmark SecoWarwick's performance against industrial capital goods producers. We include a 20% discount in the valuation due to the fact that the comparators are clearly larger in terms of business scale and many have greater sales diversification.
