Aalberts (AALB) demonstrated solid results
today for FY 2012. I have seen various social media comments stating that it is
a great company and the results were good. Even though I agree with these
statements, does that make AALB shares a good buy? Even if you don’t agree with
my conclusion, there’s lots of charts in this article for you to look at which
you might like.
In my preliminary draft I underestimated AALB’s
ability to weather the slowdown in Europe,
which it appears to have done effectively. This gives me some good information
on how to adjust my financial models for the company for when I initiate
coverage properly. If you haven’t seen AALB’s press release you can find it
here (it’s quite short): http://www.aalberts.nl/en/news_media/news/newsitem/126/Aalberts-Industries-realises-a-revenue-of-more-than-EUR-2-billion-and-a-5-higher-operating-profit-EBITA
I will not summarise most of the operational
highlights in the press release, I will just try and add my own initial thoughts
to the results for now. I will conduct an in depth analysis into the company
once the Annual Report is released on 14th March. I aim to build a
new model to help forecast the company better after that.
Revenues came in at EUR 2.02bn beating the
Bloomberg Businessweek consensus of EUR 2.0bn and a rise of 4.5% on 2011 (EUR
1.94bn) . The 10 year CAGR* is an impressive 11.1%, but does include
acquisitions. My revenue estimate was EUR 1.96bn – implying that the company’s
diversification proved more resilient in the challenging European construction
climate than I expected. The top line growth is encouraging given the slowdown
in European GDP in the second half of last year. Once decent economic growth
rears its head again in developed markets (whenever that may be), AALB should
be able to reap the dividends of its efficiency and cross selling drives. Organic growth was +2.1% in the Flow Control
(FC) division and -3.7% in the higher operationally leveraged Industrial
Services (IS) division.
Gross margin barely changed at 59.13% vs. 59.15%
in 2011. The company has said in the past that it can pass on fluctuations in
raw materials prices to customers and this still appears to be the case. EBITDA margin improved slightly to
14.63% from 14.42% in 2011, as SG&A expenses decreased as a proportion of
revenue. EBIT margin dropped
slightly to 9.98% from 10.04% as D&A charges were higher.
Figure 1: Growth
slowed down with no acquisitions being made in 2012, profitability remained
strong
Source: Annual
Reports, press releases, own work
The ROE of AALB has declined to 14.81% from
16.40% in 2011. This has been driven by continued deleveraging and, to a lesser
extent, by a higher effective tax rate as tax losses have already been used up
in previous years and a greater proportion of sales now come from the US.
Figure 2: Small
decline in ROE
Source: Annual
Reports, press releases, own work
Figure 3: Drivers of
ROE, deleveraging was the key driver
Source: Annual
Reports, press releases, own work
A measure of overall efficiency that I am using
to assess AALB is revenue and net income per employee. AALB is currently
generating a record EUR 163m revenue per employee.
Figure 4: Record
revenue per employee reached
Source: Annual
Reports, press releases, own work
AALB does slightly less well on a bottom line
basis, with net income per employee recovered but not at the record 2007 peak
level.
Figure 5: Net income
per employee is strong but not yet quite at the peak level reached in 2007
Source: Annual
Reports, press releases, own work
There are a few reasons for this, the main one
being SG&A expenses account for a larger proportion of revenue in 2012.
This is primarily due to personnel expenses becoming a greater proportion of
revenues (28% vs. 26% in 2007). This could indicate it is more expensive to
attract and retain talented employees than it was in 2007 (Note: Although SG&A
expenses have been declining as a % of revenues since 2009).
IS (29.4% of 2012 revenue)
From the press release:
“The markets for
Industrial Services showed a mixed picture. In some markets, volume decreased during
the year, while in various other markets sales continued at normal level. The good
profit could especially be achieved due to the continued focus on innovation of
new products and technologies in cooperation with customers.”
Although IS revenues grew by 2.8% in 2012 to
EUR 595m (2011: EUR 579m), IS experienced a significant drop in organic growth
in 2012 to -3.7%. The total revenue was boosted by a full year’s consolidation
of Lamers, DEC and Baum.
Figure 6: IS Total and
organic growth falling sharply
Source: Annual
reports, press releases, own estimates
The impact of the weaker markets in the area of
IS can be seen as the EBITA margin declined from 2011’s 13.78% to 13.37% in
2012.
Figure 7: IS Operating
margin declining slightly in mixed markets
Source: Annual
reports, press releases, own work
The average number of employees in the division
increased by 293 to 4,756 as sales and engineering capacity was expanded. When
looking at the division on a per employee basis it can be seen that revenue per
employee remains strong although has declined by 3.6% to EUR 125,150 per
employee in the past year. EBITA per employee has also declined 6.4% to EUR 16,700
from 2011’s record EUR 17,900. On the basis both of these efficiency bases the
IS division has just had its 2nd most productive year after 2011. Once
demand picks up in the markets of IS to match this new capacity, IS should be
in a good position to capitalise on this.
Figure 8: Operational
efficiency remains high
Source: Annual
reports, press releases, own work
FC (70.6% of 2012 revenue)
From the press release:
“The markets for Flow
Control showed divergent trends. While the market for building installations in
Europe remained unchanged and challenging, there was a visible improvement in
North America. In the markets for climate control, industry, and oil & gas,
good growth could be realised.”
FC revenues grew 5.2% in 2012 to EUR 1.43bn
(2011: EUR 1.36bn), organic growth here remained positive at a respectable 2.1%.
I will be looking into the key drivers of this in the Annual Report as well as
in the AGM minutes later this year, I expect the company to heavily mention
cross-selling, key account management and product development but I hope for more
details than is given in the press statement to assess the company’s progress
better.
Figure 9: FC total and
organic revenue growth rates softer in 2012 but remain positive
Source: Annual
reports, press releases, own estimates
FC made progress in improving its EBITA margin which
increased from 2011’s 9.50% to 9.76% in 2012. The company states in its press
release that this was due to an increased marketing and sales focus on rapidly
growing product lines and the intensification of sales of complete specified
systems (which was one rationale for the Lamers acquisition in 2011). The
company said it also expanded its market positions in the industry, district
energy and especially oil and gas (with which the BSM Valves acquisition will
help in 2013).
Figure 10: FC operating
margin made progress in 2012
Source: Annual
reports, press releases, own work
The average number of employees decreased by
142 to 7,625 as production efficiency projects progressed. The increased
diversification of FC to faster growing market segments such as oil and gas as
well as its more complete product offerings is appearing to pay off. Despite the
mixed market picture, revenue per employee increased 7.2% to EUR 187,400 and
EBITA per employee increased 10.1% to EUR 18,300. This is a good sign for AALB
as if more of FC´s markets recover, the company should be in a position to reap
the benefits. As the European building installation segment is likely to be
depressed for some time, it is encouraging that the US buildings installations
segment is growing.
Figure 11: FC operational
efficiency drives showing progress
Source: Annual
reports, press releases, own work
Geographical analysis
Operations in the US and Germany performed well,
while most countries in Western Europe showed slight declines in revenue. US
revenues now account for 19.19% of the total group revenues (2011: 17.79%).
German revenues now account for 17.66% of total revenues (2011: 17.44%).
Figure 12: 2012
revenue breakdown
Source: Annual
reports, press releases, own work
AALB seems to be mentioning expansion in
emerging markets (EM) more in its press releases over time. Although this is
encouraging it does not seem to be making much progress in the group´s results over
the past couple of years. Emerging markets outside Eastern Europe remain a modest
segment of the group´s portfolio. This will be something to keep an eye on in
the future as it could be a key driver for future growth. Although overall EM revenue
is at a record 17.68% of total group revenue, in 2008 this was just a little
less at 17.43%. Most of this is accounted for by Eastern Europe which was
10.87% of group revenue in 2012, overtaking France which experienced difficult
market conditions. Non-Euro EM has grown from 4.19% of group revenues in 2004
to 6.82% in 2012, it peaked as a percentage of group revenue in 2010 at 6.83%. A
long term influencing factor on this could be the balance between energy costs
in the US which are expected to decline with the development of shale oil as
well as the rising cost of labour in emerging markets.
Figure 13: Emerging
market exposure remains modest
Source: Annual
reports, press releases, own work
Note: I have taken the
“Other ex. Europe” segment of revenues to be Non-Euro EM
AALB’s Share Price
My old target price of EUR 16.79 will probably
have to be raised slightly due to these results. However I do not anticipate a significant
upgrade of my rating on the stock at this time (although I will be rebuilding
my forecasting model). The results while solid and beating my expectations
(which were lower than the consensus) are not sufficient in my opinion to be
the catalyst to drive AALB’s share price higher given the current price of EUR
16.39. They do however imply the company is well placed to grow in the future, even
in tough economic circumstances, with its positioning in growing market
segments. If European economic performance begins to trend upwards again and the
US housing market continues to improve, AALB should be well placed to
capitalise on this.
2012 was a rare year with no acquisitions (except the
announcement of BSM Valves, which will be consolidated in 2013). 2013 has
already seen a small acquisition of a surface treatment company in Germany,
however with the significant deleveraging of the balance sheet I would expect a
larger more significant acquisition on the horizon as AALB is rarely quiet on
the acquisition front. Assuming no positive surprises in the macro-economic
picture, perhaps future acquisitions will be the catalyst to drive this share
higher.
Figure 14: AALB’s 1yr
share price performance
Source: Yahoo, Annual
reports, press releases, own work
