Morningstar | Alfa Laval Posts Strong Results but Not Enough for Punchy Market Expectations; Shares Fairly Valued
Most of Alfa Laval's end markets, including food and beverage, energy, and marine, continued to show good order growth in the fourth quarter, with the company posting its eighth quarter of order growth. For the full year, organic revenue and orders grew 12% and 19%, respectively, and the EBITA margin expanded 60 basis points. This was an impressive result, but the shares traded down with high expectations from the market coming into the quarter. The company reported revenue in line with our expectations but missed consensus by about 4%. We retain our wide moat rating and expect to make modest changes to our SEK 185 fair value estimate.Marine division orders were down 9% sequentially on an organic basis but against tough comparables. Full-year organic order growth was 46%, a rebound rate from the trough and partly due to compressed timing for shipowners to fulfill regulations for ballast water treatment and fuel sulfur content through equipment purchases. Given that the peak in expected orders for both is still a couple of years out (around 2022), we expect the order growth in the segment to be lower than the extraordinarily high 2018 rate but still have a decent runway ahead. This upgrade cycle has been discussed in detail by the company (and by the markets, including our own report in 2016), and so leaves little potential for surprise.
The energy segment increased orders 9% sequentially. However, the margin declined by 130 basis points year over year partly on the back of underutilisation due to the timing of order executions, among other factors. This will probably take a couple of quarters to iron out. However, group EBITA margin was still stable year over year due to the margin expansion in other divisions: greenhouse was up 480 basis points and food and water was up 80 basis points.
Food segment orders were strong, including in dairy, following the trends of the previous quarters. Water and waste continues to see pockets of weakness.
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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