Company Trend Analysis - Siemens' Energy Strategy To Bear Fruit - OCT 2017

BMI View: While the financial performance of Siemens' energy division was mixed, overall we remain positive with regards to the company's strategy. Most notably, to focus investment into high-growth markets, increase its exposure to digitalisation and take advantage of the increasingly competitive global wind market.

Siemens' financial results were largely positive in Q3 2017, with revenues and net income increasing by 8% and nearly 10% respectively, compared with Q3 2016. However, orders were down, and this was largely due to a sharp decrease in orders in its energy business.

Energy Division Hits Total Siemens' Orders
Siemens' Financial Results (EURmn)
Source: Siemens

A range of factors have been cited as impacting the order numbers, including a slowdown from very high power and gas order levels in Q316 from the US, low transformers orders in the energy management unit and volatility in the offshore wind market and Indian onshore wind market resulting in a dip in orders for the Renewable Energy segment. Furthermore, profits decreased by over 20% in the Power & Gas division from the previous year, reportedly from 'revenue decline, lower capacity utilization and higher severance'. Similarly, the Energy Management segment also registered a contraction in profits of just under 15%. Profits from the Renewable Energy division were up nearly 15% in Q317, but were dampened by the integration costs associated with the merger of Siemens wind power business with Gamesa at the start of Q317.

Mixed Results For Siemens' Energy Division
Siemens Profit And Orders By Business Segment (EURbn)
Source: Siemens

While the financial performance of Siemens' energy division was mixed, overall we remain positive with regards to the company's strategy; to focus on expanding its exposure to high-growth markets and gaining technological expertise in both the power and wind sectors ( see ' Siemens: Geographical Expansion And Technology Acquisitions Will Support Competitiveness ' , April 11).

High Growth Markets To Remain A Focus

Given that many power markets in Western Europe are facing waning power demand and overcapacity, Siemens is increasingly targeting higher-growth, albeit riskier, developing markets for investment. This includes markets such as Argentina, Uganda, Iran and Mozambique ( see ' Gas Projects Support Upward Forecast Revision ' , May 23 2016). In particular, Egypt is a key market for Siemens and it signed its biggest single order with the country in 2015. In fact, in March it was announced that Siemens had connected 4.8GW of new capacity to the grid since the contract was initially signed. Egypt's power sector is set to expand rapidly over the coming decade, notably the gas sector, as the Egyptian government prioritise meeting pent-up power demand with domestically sourced feedstock amid a surge in gas production ( see ' Gas To Remain Main Focus Of Power Expansion Plan ' , August 1). We expect power consumption in Egypt to increase by an annual average of 5.8% between 2017 and 2026, and Siemens is in a good position to capitalise on this growing demand.

Gas To Increase Power Mix Dominance
Egypt - Electricity Generation By Type And y-o-y Capacity Growth
e/f = BMI estimate/forecast. Source: National sources, BMI

These emerging markets offer high rewards in terms of prospects for government and private investment in their rapidly expanding domestic power sectors, but also present high risks from the point of view of their business environment and political risk. This is evidenced in BMI's Power Risk/Reward Index (RRI), which assesses the different elements that impact the overall investment attractiveness of a country's power sector. As shown in the chart below, 'Rewards' in Iran, Argentina, Egypt and Uganda outperform the global average, but these countries also significantly underperform in terms of 'Risks'.

Riskier Markets To Offer Higher Rewards
Power Risk Reward Index By Country
Scores out of 100. Higher scores = most attractive markets

Siemens Well-Placed To Capitalise On Power Sector Transformation

Siemens remains committed to expanding its footprint into digitalisation; it has developed its own cloud-based internet of things (IoT) operating system (MindSphere), has launched a digitalisation hub in Singapore and is cooperating with the Chinese government in digital manufacturing, innovation and technology applications. Siemens' growing exposure to areas like energy services and digitalisation will position the company well to benefit from the ongoing power sector transformation towards a decentralised and more fragmented system, based around flexible generation (see ' Utilities: Renewables, Services & EVs Shape Corporate Strategy ' , September 7).

Furthermore, it was announced in July that Siemens and AES have combined to establish a new energy storage technology company called Fluence. While the agreement is yet to close (expected during Q417), it will mean that Siemens can benefit from the rise in the deployment of battery storage at the household and business level. While this will position Siemens more favourably in terms of its market offering, we note it will face increased competition from both utilities, who are adopting the same strategy, and non-traditional players that have entered the market to also offer energy services - for example, Tesla.

Siemens-Gamesa: Wind Power Heavyweight

The merger between Gamesa and Siemens has produced a wind power heavyweight, thanks to Gamesa's expansive global onshore wind footprint and Siemens' offshore segment expertise. We expect the company to remain a dominant player in the global wind sector, even as competition increases (see ' Power Sector M&A To Be Sustained ' , July 19).

Wind Capacity On The Rise
Global Wind Capacity
e/f = BMI estimate/forecast. Source: EIA, IRENA, BMI

As more and more countries turn to competitive auctions to procure renewables capacity, competition for contract opportunities increases as companies push bid prices lower and lower in order to win. In this environment, large international companies have an edge over small, local ones in winning contracts in the tendering process, given their ability to achieve economies of scale and get access to cheaper financing, as well as their greater experience in project development. As such, we believe that Siemens Gamesa Renewable Energy is in a strong position to dominate in the industry as auction schemes proliferate.