Morningstar | Alfa Laval's 2Q Growth Impressive but In Line With Expectations; Shares Overvalued
Alfa Laval's double-digit revenue and second-quarter earnings growth was impressive, but the share price pop on the back of the results looks overdone to us. While second-quarter revenue grew by 18%, the timing of large orders in this quarter and others means single-quarter growth rates can be volatile, making it essential to look at longer periods for underlying trends. On that basis, results look more moderate. First-half revenue is around half of our and consensus forecasts for full-year revenue, so it is trending roughly in line with expectations. The first-half EBIT margin expansion of 165 basis points was slightly less than our 180-basis-point full-year forecast, with lower-margin equipment revenue at higher portions relative to previous periods than service revenue. We maintain our wide moat rating and our SEK 185 fair value estimate, with shares looking overvalued.Alfa Laval's order book and sales growth are enjoying an uptick with a combination of support from the oil price and regulatory mandated equipment. The International Maritime Organization, or IMO, requires shipowners globally to reduce sulphur emissions and implement ballast water cleaning systems by 2020 and 2023, respectively. Alfa Laval's fastest-growing division this year, marine, reflects this, with 50% organic revenue growth in the first half and nearly one fourth of the orders driven by legislation. While this growth is welcome, given the dearth of orders in the division in the past couple of years, it is not sustainable, as hard deadlines for the regulatory compliance will translate to a drop-off in orders, and the equipment growth we are seeing now may be front-end-loading of the cumulative amount of orders from the two regulatory changes. Reflecting this in our model, we factor in 10% revenue growth this year, but our 10-year explicit forecast period includes a gradual fade down to above 2% growth in 2023, the deadline for the ballast water equipment, and then back up to under 4%.
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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