Beyond Trump (2/11) : ABB

We identified 11 companies able to go beyond Trump's tweets and respect the following criteria : - Good «Fundamental Strength » - Market cap between €1.5bn and €20bn - Singular business model (capital light, excellent cash conversion, natural industry consolidator…)
ABB is a global provider of power and automation technology. The company was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. The company operates in four market-leading divisions: Electrification Products, Robotics and Motion, Industrial Automation and Power Grids. Although 2017 was a year of transition, the company profited from the shifts in the energy market (low carbon energy generation) and the accelerated digitalisation process in the industry. ABB is still at an early stage of digitalisation, although around 55% of the product portfolio is already digitalised. The company operates in more than 100 countries across the three regions Europe, the Americas and Asia with around 135,000 employees. ABB central to automation & e-motion
  • Ubiquitous need for automation meets few suppliers
  • Late but promising wake-up to «e-something» starting with e-mobility
  • Power related know-how absolutely ubiquitous…
  • ... and essential in greener tomorrow
  • Negative: ROCE kept low by ongoing asset rotation
Solid performance in Q2, again The group's posted solid Q2 results showing dynamic commercial activity across all geographies. The short-term outlook remains very positive while management remains cautious on the current geopolitical developments.
  • Total orders up +8% underlying to USD9.5bn, book-to-bill 1.07x (>1x in all divisions)
  • Revenues up +1% underlying to USD8.9bn
  • Operational EBITA margin up +60bp to 13.0%
  • Operational EPS up +27% underlying to USD0.38, mainly supported by finance and tax expense
  • Cash flow from operating activities at USD1.0bn
Orders ABB's Q2 results showed a good commercial activity with orders up for the fourth consecutive quarter (+8% underlying at USD9.5bn, reflecting a book-to-bill at 1.07x). Base orders were strong, showing a +9% growth yoy, while large orders saw a selective recovery (+2% growth). The order intake remains very healthy, mainly driven by Industrial Automation and Robotics & Motion, both showing a recovery in process industries. The order increase was broad-based across regions and we see the impressive growth in China (+23%) and the US (+7%) – ABB's two largest markets – as positive. Regarding China, management is very pleased by the sequential improvement in orders (+23% in Q2 after +12% in Q1), which is not entirely explained by the easier comps. Topline Revenue growth of +1% underlying (+5% reported) was driven by Robotics & Motion (+8% underlying) and Electrification Products (+4% underlying), while the low backlog in Power Grids was a drag on revenues (-8% underlying). For this particular division, management's short-term outlook implies a better performance in H2 18, especially after the continuing order momentum seen in Q2 (1.09x book-to-bill), investments made in the Power Up programme as well as the 5-year agreement signed with Orsted to connect UK power grids. Profitability A well-executed growth for ABB in Q2 with profit numbers well ahead of consensus expectations (EBITA up 12% to USD1.17bn). Profit development was led by the Electrification and the Robotics and Motion divisions. Overall, the margin uplift was mainly a result of tight cost control and volume growth. Management expects a positive margin accretion compared to last year, even despite the -60bp tailwind from the GE Industrial Solutions acquisition. Reported net income increased by +32%, mainly driven by contained financial and tax expenses. Cash generation After the weak Q1, the group's operating cash flow strongly recovered to USD1.0bn, as guided by management. GE Industrial Solution integration update Management gave an update on the integration of GEIS which is well underway and will provide increased exposure to the US as well as a broad installed base. The recently acquired division should contribute USD1.35bn to sales in H2 and will weigh on margins (-260bp impact on the Electrification products division with costs more weighted in Q3). Outlook and update on tariffs The group's short-term outlook remains positive while management remains cautious on the current geopolitical developments. Regarding the current trade war talks, management was more cautious on the potential negative impact on speciality steel as a raw material for motors – which is 1) mainly sourced from China, Japan and Korea, and 2) not produced in sufficient quantity in the US. Its main fear is that it does not get an exemption on speciality steel and is hoping for an alignment in tariffs with ready-made products which are self-contained in the US at the moment (with their own US production facilities). To read our full analysis on ABB : click here
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