Keeping it simpl(er)
Siemens is a leading global industrial conglomerate based in Germany operating in the subsectors of Automation, Infrastructure, Transport and Healthcare. The company has a strong focus on technology, offering both hardware and software solutions to its clients.
Siemens core divisions are 'Digital Industries' which focuses on automation, and 'Smart Infrastructure' which focuses on electrification, building management systems and electrical products. The company also runs a 'Mobility' division which is focused on trains, railway signalling and communications products and has a 75% share in 'Siemens Healthiness'.
Historically a complicated conglomerate, Siemens has spent many years simplifying its business structure by spinning off low margin or unprofitable non-core assets such as its Energy business. Siemens has also invested heavily in software with $10 billion in acquisitions to date, which has aided it in gaining market share. We believe that there are further opportunities to simplify the business.
Digital Industries (DI)
Siemens' industrial automation division is its largest profit contributor and focuses on factory automation, motion control and process automation, along with a software offering which contributes about a quarter to divisional revenue. The software division consists mostly of product lifecycle management software. Siemens' automation business is also well-diversified across industries.
Automation offers many long-term growth opportunities which have been accelerated by the current headwinds of inflation, supply chain issues and labour shortages.
Siemans has performed well in automation over the past few years, gaining market share - in part due to its focus on software. The industrial software market is currenlty growing faster than industrial hardware and is estimated to be a $60 billion opportunity according to Emerson.
Siemens' peers' approach to software has been different, choosing rather to form strategic partnerships with software players or take part equity ownership. However, now its peers seem to be realising the benefit of bringing software inhouse, implying that Siemens' original strategy was the right one. It is Siemens' belief that you can only maximise productivity by combining software and hardware.
Software as a service
In 2022, DI began transitioning parts of its software business from large upfront revenue recognition towards a software as a service model (SaaS). This was to compete more effectively in the small-medium (SME) company space where companies want to reduce infrastructure costs, have low entry prices (and therefore lower risk), but can be scaled and continuously updated. For Siemens, it means that revenue is more predictable and resilient, and it can capture key customer insights. In the shorter term, however, revenue and margins will be impacted as the company 'swallows the fish'.
Siemens has already seen progress in this regard, with the proportion of SME customers having increased from 59% in 1Q22 to 79% in 1Q23, and recurring revenue making up 18% of revenue in 1Q23 as opposed to 6% in 1Q22.
Siemens has been seeing strong demand in DI's major market segments driven by a sharp increase in factory automation orders. The company has also been able to improve profitability in all its automation businesses supported by higher capacity utilisation and pricing, which has helped to offset cost inflation. Due to the move to SaaS within the software division, profit declined in the segment. The order book remains strong, with Siemens seeing little slowdown in its markets year-to-date.
For DI, Siemens is targeting a 5% to 7% compound annual growth rate (CAGR) for revenue over the next three-to-five years. The CAGR for software annual recurring revenue is targeted at over 10%. The profit margin for DI is the highest of the divisions at 19.9% in 2022 within a target margin of 17% to 23%. Near term, a record backlog of €14 billion and marginal customer cancellations has translated to strong sales growth guidance for 2023 of 12% to 15% on a comparable basis, and a profit margin of 20% to 22%
Smart Infrastructure (SI)
This division is expected to benefit from secular trends including decarbonisation, energy efficiency, electrification, reshoring and onshoring. The division's largest exposure is to buildings (residential: <5%). Siemens provides heating, ventilation and air conditioning controls, fire safety and integrated building management systems. The electrification division services electrical grids with simulations, switchgear, switchboards, and substation automation. The company also sells e-mobility charging infrastructure. SI is currently seeing large orders from the semiconductor industry but is well-diversified across its end markets.
As with Eaton, Siemens will benefit from the newly introduced Inflation Reduction Act and possibly a similar Act in Europe, which will encourage onshoring production, investments in green energies and related products, supporting retrofits for electrical efficiency for households and buildings and the investment in the electrical grid system.
After starting 2023 strongly and with a record backlog of €16 billion, Siemens has guided for the division to grow revenue 9% to 12% this year, with a profit margin of 13.5% to 14.5% (a 200bps increase from last year at the midpoint). Siemens' three- to- five-year target revenue CAGR is 4% to 6%, with service revenue growth of between 6% and 8% expected. The profit margin is anticipated to be 11% to 16%.
Mobility
Siemens' mobility division is a leading provider of transport solutions - offering trains, rail-based passenger and freight signal and control technology, electrification solutions and maintenance, as well as transport infrastructure. The business is non-cyclical as contracts tend to be long-term and therefore not influenced by short-term factors. The industry is growing, driven by urbanisation, the need to reduce carbon emissions in transport, digitisation and has high barriers to entry.
Mobility is not an obvious fit for the business considering fewer synergies than what is apparent between DI and SI and returns a low relative margin. While management has no plans for a spinoff of the division, we note that this could be a potential way for Siemens to further simply its structure and re-rate further.
In 2023, due to a €36 billion backlog, mobility revenue is expected to grow 6% to 9% with an 8% to 10% profit margin. The company's three- to-five-year revenue target is 5% to 8% on a CAGR basis and a profit margin of between 10% and 13%.
Siemens Healthineers
Siemens holds a 75% majority shareholding in German-listed Siemens Healthineers. Healthineers develops, manufactures, and sells a diverse range of innovative diagnostic and therapeutic products and services to healthcare professionals. The business is generally defensive and is expected to grow earnings on average 15% over the next three years, and to synergies from the recent acquisition of Varian.
We expect Siemens to sell down its shareholding in Healthineers over time - perhaps once the synergies from the Varian acquisition are realised. The division has little synergies with the rest of the group, further confirming our belief that the business will eventually be sold.
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