Morningstar | Alfa Laval Posts Impressive 3Q 2018; Good News Likely Priced In
Alfa Laval's third-quarter results were better than expected, and we expect to increase our forecasts on the back of the results, which will likely lead to a modest increase in our SEK 185 fair value estimate. However, the favourable tailwinds for Alfa Laval's order book relative to other European cap goods firms are well known and priced into the shares, and even with our expected adjustments, we believe the shares are richly valued. We maintain our wide moat rating.Unlike some of the other capital goods companies we cover, Alfa Laval has benefited from late-cycle exposure, namely midstream investments in energy and a rapid rebound in orders in the marine sector, where the rebound in shipbuilding orders came much later than the rebound from the commodities, for example. Shipowners have also been investing in regulation-driven equipment that will need to be in place over the next few years. However, this has been known for a couple of years. Therefore, we are not surprised that Alfa is seeing less order book pressure, despite European PMIs rolling over, than a company like Atlas Copco, which is seeing weakness in shorter-cycle end markets like consumer electronics.
Group organic order and revenue growth were were up 26% and 17% in the third quarter, respectively, and counter to the margin pressure that many of its European cap goods peers are posting, Alfa Laval expanded its EBITA margin by 110 basis points year over year to 17.1%. In energy markets, the company has been seeing large orders for its heat exchangers, where orders started to pick up in earnest last year after the oil price began to recover from the 2014 sell-off. Although we see Alfa Laval as a later cyclical beneficiary, we don't think the current level of growth is sustainable for another year, given the increasingly tough comps and the time its customers have now had to catch up on delayed investments since the 2016 trough.
Alfa-Laval AB is a supplier of products and solutions in the technologies of heat transfer, separation and fluid handling. Co.'s equipment is used to heat, cool, separate and transport products in industries that produce food, beverages, fuel, chemicals, pharmaceuticals, starch, sugar and ethanol. They are also used aboard vessels, in power plants, in the engineering industry, for treating sludge and wastewater, for heating and cooling, and others. Co.'s products include: air heat exchangers, plate heat exchangers, shell-and-tube heat exchangers, thermal fluid systems, boilers, decanters, belt filter presses, high-speed separators, membrane filtration, pumps and valves, and tank equipment.
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