Carlo Gavazzi Holding AG: Electronic components – boring stuff, no?

Deutsche Version

Plenty of people like to discuss e-mobility trends and proffer their opinion on who builds the best electric cars. But the discussions of those who like to dig a bit deeper may well revolve around battery manufacturers, as irrespective of the brand name on the radiator grille – oops, sorry, make that the front panelling: They all need batteries. Then again, if battery manufacturing is the “gold” of the e-mobility decade, Carlo Gavazzi could be said to be the seller of the shovels, buckets, and pans of the gold miners. Controlling a battery and its charging station is absolutely essential if it is to function – irrespective of which manufacturer has undertaken the task of soldering the batteries together. And this is just one of many high-tech areas of application of the unassuming components made by this Swiss industrial group, which is based in Steinhausen, Canton Zug, but active worldwide.

Focusing on electronic components for more than 90 years

The company Carlo Gavazzi was founded in Milan in 1931 and rapidly expanded into a variety of areas. The company’s history is characterized by numerous development steps, which include not just the commencement of new activities due to technological developments and market opportunities, but also the discontinuation or divestment of business activities for equally good reasons.

The Instrumentation and Control Panels business area was integrated into the group in 1953, followed by the Electromechanical Components and Electronic Controls area in 1965. In order to expand the product spectrum and tap into international markets, further companies were later founded or taken over. These include Reactor Controls, USA (1963), at that point the market leader in control rod hydraulic systems for boiling water reactors, Mupac (1986), a US manufacturer of electronic system packaging products, Electromatic (control components), Feme (relays and switches), and Areg (drive systems) (all in 1988), the Italian sensor manufacturer Saiet (2000), and the Californian company Channel Access (2001).

Business areas have frequently been relinquished too. For example, 1986 saw the sale of a joint venture stake to a Japanese partner, 1996 and 2000 were marked by the divestment of non-strategic businesses, 2002 saw the group part company with its Engineering and Contracting business unit, 2007 witnessed the discontinuation of the Channel Access distribution activities, and 2009 was marked by the sale of the Computing Solutions business unit.

Growth in business volumes has also necessitated the opening of production sites abroad, such as the commencement of sensor production in Lithuania (2004 onwards), the construction of a production facility in China, the establishment of regional headquarters in Singapore, and the opening of four further sales offices in China (all in 2005), and the completion of production relocation to Lithuania and Malta (2006).

Carlo Gavazzi Holding has been listed on the Zurich-based stock exchange SIX since 1984, which has brought it onto the radar of the investment community.

Supplier to a broad spectrum of customers

Today’s company has a workforce of almost 1,000 employees who develop, build, and sell electronic components for industry and building technology under the Automation Components heading. The products of Carlo Gavazzi are manufactured in Italy, Lithuania, Malta, and China, before then being marketed worldwide through a distribution network of 22 proprietary sales companies. The company’s products – in the form of sensors, monitoring relays, time relays, energy management systems, semiconductor relays, security components, and fieldbus systems – are used in automation solutions for industrial and building applications. Key customer groups include on the one hand OEM manufacturers for the packaging, plastics, and food & drinks industries, but also producers of material handling and conveyor technology equipment, door and entry control systems, lifts and escalators, as well as heating, ventilation and air conditioning technology.

The company’s core business operates at the “bottom end” of automation – a phrase that might initially strike the newcomer as rather unflattering but in fact represents the foundation of any complex, process-managed system. Gavazzi components operate in the places where data on environmental conditions is assembled and amalgamated. This data is then used as the basis for issuing control commands to (actuator) motors, valves, lights, and switches. Of the company’s total sales revenues of CHF 183 million (financial year 2021/22; +23.8% year on year), 43% relates to the Controls area, where the key points of focus are applications for heating/ventilation/air conditioning, automatic doors, and smart buildings. Solutions for energy management are quite clearly the growth driver in the Controls area, with annual growth rates of around 30%. A further 23% of revenues is generated through sensors for energy applications, lifts, and smart buildings. The remaining 34% is accounted for by semiconductor relays (“solid state switches”), which are primarily used in agriculture, the food and drinks industry, and mining. When revenues are broken down by region, EMEA emerges as the clear sales focus with a share of 67%, followed by the Americas (19%) and Asia-Pacific (14%).

The right components for the right application

The spectrum of individual components is extremely wide, not least because components are also developed according to specific customer wishes and specifications. Accordingly, some product groups and application examples have been amalgamated to make the company’s product and service spectrum more comprehensible:

• Sensors of many different types, such as those used in safety installations (“light barriers”) or which react to pressure, changes in distance (e.g. park distance control), speed of rotation, acceleration, liquidity flows, fill levels, and air humidity.
• Safety switches, which translate the signals from sensors into commands to actuators, motors, and similar components, and where necessary even into potentially explosive atmospheres.
• Solid state relays (SSRs), i.e. wear-free semiconductor relays for electrical circuits.
• Soft starters, which limit initial performance to prevent overloading, and thereby increase the longevity of motors and network components. For example, these might be used to prevent a conveyor belt or a door from suddenly starting and stopping their movements, instead allowing them to commence activity gently and quietly, which places less of a burden on the working materials.
• Self-engaging power supply units, which control the charge rate of batteries until the desired charging status has been reached.
• Digital meters, power analysis and control devices, and transformers, which facilitate the monitoring and optimum control of individual bulk power consumers in manufacturing.
• Data collection and read-out devices, which can send recorded sensor and electricity consumption data to remote recipients and receive control commands via web servers, e.g. to continuously monitor a wind power plant on the other side of the world.
• Accessories for the automation of buildings, which can be used to control heating, ventilation, air conditioning, sun protection, etc. automatically, and thereby save on resources.

Stringent demands of product quality and innovation

Particularly in the field of industrial applications, such components need to be resilient against vibrations, tremors, mechanical shocks, changing electromagnetic fields, chemical attacks (corrosive gases or liquids), and temperature fluctuations. Many of the products Gavazzi sells are concealed in control cabinets or other forms of housing where they fulfil their functions invisibly. In other words, users are wholly reliant on the long-term functioning of these small, unassuming components. The company might have deep traditional roots, but it is also successfully adapting to the modern need for increasing automation and miniaturization, particularly in connection with the Internet of Things, now frequently also referred to as Industry 4.0. Unsurprisingly, the themes of e-mobility and climate protection are being accompanied by a remarkable demand boom, and are at the same time exerting huge innovation pressure in the area of energy management solutions. The most resonant application examples here are the sensors and control devices required for wallboxes or for the charge and discharge control of costly high-performance batteries.

Impressive commercial development trajectory

The most recent set of annual financial statements as per 31.03.2022 reveals an increase in the order intake by 48.2% to CHF 232.1 million, resulting in not just higher revenues but an extraordinarily high order backlog of CHF 80.2 million. Thanks to an EBIT margin of 16.0%, the company unveiled EBIT of CHF 31.0 million and net profit after taxes of CHF 22 million (+81.8% year on year) for the 2021/22 financial year. On earnings per share of CHF 31, a dividend of CHF 12 was paid per outstanding bearer share, resulting in a dividend yield of 3.9% and a payout ratio of 39%. The company’s share capital is divided between two share class types – 1.6 million unlisted voting right shares with a par value of CHF 3 each, and around 391,000 listed bearer shares with a par value of CHF 15 each. Approximately 79% of all voting rights are in family ownership, which means external shareholders are very much the junior partners to the Gavazzi family on the control front.

Over the course of the last three financial years, the return on equity has increased in three leaps: from 6.7% (2019/20) to 11.4% (2020/21) and then 19% (2021/22), despite the company recording virtually no change in headcount over this period. Further indicators of shrewd company management include net liquidity of CHF 67 million, an enviably high equity ratio of 69%, and – as has been the case for several years now – the absence of any bank debt.

Based on the half-year figures as per 30.09.2022, the company’s success story appears to be continuing: Driven by a 67% increase in demand for control devices for energy management and energy efficiency solutions, half-year revenues recorded a further year-on-year rise of 13.1% to CHF 104.7 million. A 10% rise in the order intake to CHF 133.1 million pushed the order backlog to an estimated CHF 110 million, equivalent to around a half of annual revenues.

How attractive is the stock in a peer comparison?

In the case of Carlo Gavazzi, all the following key figures “per share” relate to 711,000 bearer share equivalents. A peer group comparison is complicated not just by the structure of share capital, but also by different financial years in some cases. The results of interim reports have not been taken into consideration for the purposes of this comparison. The companies that form the basis of the comparison have been differently affected by extraordinary factors such as COVID and supply chain disruptions in recent years, and are also benefiting from the corresponding catch-up effects to differing degrees. As there are no ideal equivalents to the Gavazzi Group trading on SIX Swiss Exchange, for the purposes of this exercise two stocks have been selected whose customer bases are likely to be at least in part identical to that of Gavazzi:

• Firstly, Belimo AG, around half of whose business revolves around control valves; note also that the regional proportion accounted for by the Americas is significantly higher. The sales revenues of this pioneer in climate-related products have increased strongly in recent years to the point where they are now some four times those of Gavazzi, although the growth momentum of the former has been less dynamic recently. The equity ratio is at a similar level, while the payout ratio works out at almost double that of Gavazzi.
• Secondly, Schaffner Holding AG, whose sales revenues are slightly lower at around CHF 160 million, and whose equity ratio and profit margin are likewise slightly smaller. A half of the recent distribution to shareholders was drawn from reserves.

(Source: own calculation)

Potential for improvement in stakeholder-oriented reporting

In view of the recent strong growth in business volumes, Gavazzi appears to be on the right track on the operational front. Moreover, the company does not appear to have been significantly affected by serious risk-entailing global trends such as the supply chain problem, which most companies are unable to control. But the image of a successful listed public company that is fit for the future is undermined by the fact that the company provides no ESG information as things stand. Such reporting is apparently high on the agenda of the company, which claims to see the associated benefit irrespective of the additional expense involved. But for interested parties waiting on such information, the plans and initiatives of the company in this area have been impenetrable for so long that the only timeline certainty appears to be the point in the near future at which such disclosure will become a statutory requirement. By contrast, the two above-mentioned peer companies already report in this area.

Summary

If we extrapolate the half-year figures on a pro rata basis to cover the full financial year just ended on 31.03.2023, the company should be unveiling earnings in the region of approx. CHF 27.0 million, or CHF 38 per share. Based on the current share price of CHF 310, this would result in a current P/E ratio of just 8.2x. However, such an extrapolation actually looks quite conservative, as the Group has booked significantly more orders and generated more revenues since the start of the 2021/22 financial year than in the preceding years, while maintaining a stable workforce. Given a balance sheet free of bank debt, robust business development, and further potential in the payout ratio, Carlo Gavazzi Holding could easily afford to bestow a higher dividend – say CHF 16 – on its owners this year. The stock price does not yet reflect the company’s healthy development, and the current dividend yield and further potential for an increase provide downside support. The crucial factor for the development of the valuation of this family-dominated company is therefore probably the question of when it will make good the gap between its ESG reporting and the desired market standard in this area. At any rate, short-term speculators are unlikely to experience much of a joyride with Gavazzi stock – and a further aspect to be aware of is the fairly limited volume of daily trading.