EUR 850.00 For Business Accounts Only

Morningstar | Alfa Laval Reports a Surprising Drop in 2Q Marine Orders; Shares Fairly Valued

Wide-moat Alfa Laval surprised us and the market with a severe drop in orders for its marine division, the company's largest division and the one that has been bolstering the group's double-digit revenue growth for the last couple of years. Shares look fairly valued, as we are maintaining our forecasts and SEK 185 fair value estimate. While the negative order flow would likely filter down to our revenue forecasts for next year, we believe it is too soon to lower our forecasts. The weakness has only come through in one quarter so far, and the order backlog is at a four-year high and up 20% year over year, supportive of future revenue growth. Second-quarter revenue was more in line with expectations on the back of previous orders.

Second-quarter group-level orders were down 16% year over year, with the marine division's orders down 35%. Revenue grew by 7%, aided by the previous quarters’ double-digit growth in marine with EBITA margin benefiting from operating leverage and expanding by 30 basis points year over year to 16.5%. The marine division is prone to high volatility because of boom and bust periods in shipyard activity. However, in the past couple of years, regulatory-mandated equipment has added a boost to growth, aided by a return in ship contracting. This quarter, weaker shipyard contracting levels from chemical and product tankers hurt demand, as did offshore-related products. Higher comparables from strong growth last year were also cited by the company, but a slowdown in demand, even if perhaps temporary, was doubtless at play and was echoed by ball bearings supplier SKF as well in its second-quarter results. We will be looking to the next quarter to see if adjustments for next year's forecasts will be needed.