From 2019/20 onwards Gavazzi embarked on a spectacular growth trajectory, which is why its most recent half-year resembles not so much a crisis as a phase of consolidation at a high level. Digesting the basic numbers set out in the results of Carlo Gavazzi Holding for the half-year ending 30.09.2023 is not difficult – and it’s easy enough to understand why no analyst will be purring over them: The order intake recorded a year-on-year decline of 37.5% to CHF 83.1 million, sales fell 6.9% to CHF 97.5 million, and net profit was down by as much as 10.9% to CHF 12.3 million. Quite the sorry picture, no? In keeping with the market’s disappointed expectations, the share price has fallen by almost 10% since publication of these figures, from CHF 340 to CHF 308.
Energy management and energy efficiency as growth drivers
But on closer inspection, the negative reception of these half-year figures by the market is difficult to understand – quite the opposite, as this globally active producer of electronic components for industrial and building automation, which is headquartered in Steinhausen, Canton Zug, has essentially defended a high level of performance compared to the prior-year period for the fifth semester in succession. The most recent decline in sales is almost entirely attributable to the strength of the Swiss franc. In the prior-year period, the order intake hit a record level due to a number of extraordinary factors. With this in mind, the modest decline should not come as a surprise, and had in any case been flagged up as likely by the company in its 2022/23 annual report. From the perspective of a capital goods manufacturer (and its shareholders), a full order book may have a reassuring effect. In the case of Gavazzi, the current order backlog equates to around six months of sales – quite a plump cushion when compared with a sales equivalent of two-and-a-half months reported some three years ago. Indeed, from the customer’s perspective a trimming of the order book is essentially a positive development, as it means customers have to wait less long for the goods they have ordered.
Other elements in the latest set of figures underscore the company’s robustness: The gross profit margin rose from 51.3% to 53.6%, liquidity increased by 10.8% to CHF 54.5 million, while the equity ratio rose to an enviable 72.5%. The regional breakdown of sales reveals little change, with a slight increase in EMEA (69%) contrasting with slight declines in the Americas (19%) and Asia-Pacific (12%). The company perceives a weakening of its business activity in the industrial automation segment, particularly in the US and China. Control components were more in demand, sensors and switches rather less so. Particularly striking was the 42.6% growth in control components for energy applications, which according to the company was above all driven by unrelentingly strong demand for energy management and energy efficiency systems.
Carlo Gavazzi “yesterday” vs. “today”
By way of contrasting the stock market’s current expectations of the intrinsic value of Gavazzi stock with the company’s actual business development, a look back at the past is illuminating. Before a number of external effects – notably the Covid-19 pandemic and the Ukraine crisis – distorted the perception of equity values generally, the price of Gavazzi stock oscillated in a bandwidth of CHF 240-280 (February 2019 to February 2020). Taking the average price of CHF 260 along with average sales and earnings data for the three business years 2018/19 to 2020/21, we end up with a price/sales ratio of 1.23x and a price/earnings ratio of 19.25x. Thereafter, the conglomerate made a leap to a higher level of sales activity and earnings – and with almost no change in headcount, nota bene.
If we extrapolate the sales and earnings data of the last five business semesters (03/2021 to 09/2023) into full financial years, and compare their averages with the current price level of CHF 308, it emerges that the valuation of one franc of sales has barely changed (P/S ratio of 1.12x), whereas the P/E ratio has more than halved to 8.76x. Even when adjusted for the change in the stock price, one Gavazzi share therefore now works out twice as profitable (or “half as expensive”) as it was three-and-a-half years ago. Moreover, the company’s dividend payments have increased since 2021, with the most recent dividend yield amounting to 3.9%. The payout ratio of 30% would suggest that this level of dividend is sustainable at least, and if anything there is probably further upside potential here. The growing share of building components required for energy-sensitive applications, electro-mobility, and automation in both industry and buildings technology, as well as the ongoing development of new, innovative components point to further growth in this business rather than to any fundamentally justifiable deterioration.
Summary
The slump in the stock price from CHF 390 (end of July 2023) to its most recent level of CHF 308 looks excessive. For each listed registered share (nominal value: CHF 15), shareholders are likely to be looking at a half-year profit of CHF 17.36. It is only logical to expect a certain fluctuation bandwidth for the business results of a capital goods manufacturer, particularly when they are operating in an international environment that is far removed from a “best of all worlds” scenario. With a 12-month P/E of 8.8x, a current dividend yield of 3.9% on the basis of the last distribution, and a growing business in products for implementing the energy transition, Carlo Gavazzi looks like exactly the kind of investment many market participants are looking for.
Reasons for the valuation discount might be sought in the majority-securing capital structure and an ESG agenda that has yet to meet modern standards, but neither of these factors has undergone any change over the period in question. Pro-cyclical fluctuations are the natural way of things for companies that supply capital goods manufacturers. Order limits are recommended due to the low trading volume.
