Fundamental analysis of SIEMENS GAMESA

SIEMENS GAMESA RENEWABLE ENERGY, S.A.

CIF A01011253 Spain Infrastructure Wind energy IBEX35 seen 1434 times Analysis date 28 September 2020

SIEMENS GAMESA RENEWABLE ENERGY, S.A. is a company dedicated to wind energy. Present in almost 90 countries, it offers a wide range of wind turbines both on land and at sea (onshore and offshore). In addition to providing maintenance and management services for wind farms.
Siemens Gamesa is born from the merger in 2017 of Siemens Wind Power and Gamesa. Both with a long history in the sector.


The goal of this analysis is to understand how SIEMENS GAMESA RENEWABLE ENERGY, S.A.'s business is, to know how it is managed and to decide if it is an option to incorporate it into a Buy&Hold focused portfolio. We usually divide the analysis into 3 sections to better organize ourselves: the balance sheet, the income statement and the final valuation. As always, all the data shown in this analysis has been obtained from the CNMV website and you can consult many other ratios of the company in this page.


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1 Balance Sheet Analysis

To begin with, let's take a look at the capital structure of SIEMENS GAMESA RENEWABLE ENERGY, S.A., that is, what it spends the money on (and how much) as well as to whom it is owed (and how much). We will calculate some ratios and see their progression over time. We are going to organize it in the following points:
  • 1.1 Analysis of the asset
  • 1.2 Analysis of liabilities and net worth
  • 1.3 Indebtedness
  • 1.4 Safety margin
  • 1.5 Liquidity/Treasury
  • 1.6 Working capital



1.1 Analysis of Assets

The structure of the assets will indicate the degree of immobilization of SIEMENS GAMESA RENEWABLE ENERGY, S.A.'s resources. That is, how much of its total assets are fixed assets (real estate, investments, goodwill, etc). In this case:

Immobilization = Fixed Assets / Total Assets = 55,45%



Inmovilization

The immobilization of the company has been modified in the last 2 years, going from 30% to 56%. Siemens provides Gamesa with a higher proportion of fixed assets and this is reflected in the joint balance sheet. When we break down each of the items, it will be interesting to see which of them grow and which do not.


We will first break down the asset as a function of time, so we will make visible which part is current asset and which part is fixed asset. Its variation over time can give us information on profound changes in the company:


Breakdown of Total Assets

As we can see in the graph, both the fixed and current assets have grown a lot. When we saw the variation of the immobilization ratio, we only knew that the fixed asset was growing more than the current one, now we know that both have grown. This is not surprising, but it is interesting to see that Siemens and Gamesa, despite being former competitors in the same sector, had very different capital structures.
Even if we did not know about the Siemens Gamesa merger, when we find these jumps in an asset chart it can only be a few things that cause it. They can be capital increases, consolidations of companies that become controlled, mergers or a large loan, which is less likely.
Let us continue to learn what the fixed asset consists of and how it has changed after the merger:


Breakdown of Fixed Assets

The items of the fixed assets do not present important variations. Except for the goodwill, which goes from 25% of Gamesa's fixed assets to 50% of the assets in Siemens Gamesa. We have already commented on some occasions that goodwill is nothing more than a mismatch between what the company owns/debts (net worth and liabilities) and what can be accounted for as assets.
In any case, we need a few years to be able to see the trend they have or if they are stable over time. The items that make up the system and their proportions are as follows:
  • Goodwill (53.25%)
  • Other intangible assets (22.39%)
  • Tangible fixed assets (15.95%)
  • Deferred tax assets (4.73%)
  • Non-current financial assets (1.75%)
  • Other non-current assets (1.08%)
  • Investments accounted for using the equity method (0.85%)
We do the same with the current assets:


Breakdown of Current Assets

The current assets after the merger show less variation in absolute terms. It is noticeable that all the items grow less the customers. It would be logical that when adding up both accounts the customers would be added, so if they have not done so it is because Siemens did not contribute much in this aspect. The items that make up the current assets are as follows:
  • Other current assets (31.31%)
  • Stocks (28.09%)
  • Effective (18.94%)
  • Customers by sales (15.92%)
  • Current tax assets (2.65%)
  • Other current financial assets (2.60%)
  • Other debtors (0.49%)



1.2 Liability Analysis

In this section we will see the structure of the liabilities of SIEMENS GAMESA RENEWABLE ENERGY, S.A., which gives us information about the origin of the resources available to the company. It tells us where the money comes from and to whom it is owed. To find out the proportion of capital belonging to the company compared to that belonging to others, we have the following formula:
% of equity capital = Equity / Total Capital = 38,73%



Own capital

The proportion of equity has been increasing since it bottomed out in 2013. It is curious that in this graph we do not see the jump we saw in assets. This is because the distribution of liabilities and equity was similar in both companies, unlike the distribution of assets.
In the following images we will see if the progressive increase in equity is due to an increase in equity or a decrease in liabilities.
We will start with a grouped chart of the liabilities (net worth, fixed and current liabilities) and then break each of them down:


Breakdown of Liabilities

In view of the image, the net worth is the one that has grown in the last years. This has been an aspect that has also improved after the merger. Let's now break down the net worth to see the items that make it up:


Breakdown of Equity

The reserves have varied over time, but you can see how they have fallen after the merger. On the other hand, the issue premium has increased considerably. In the future we hope to see the reserves increase, generating value for shareholders. In fact, this can already be seen.
The most important items that compose it are:
  • Emission premium (95.58%)
  • Reservations (9.14%)
  • Registered capital (1.87%)
  • Result attributed to the parent company (1.08%)
  • Minority interests (0.04%)
We continue to break down current liabilities:


Breakdown of Current Liabilities

Current liabilities show less variation compared to equity. Before the merger it was fairly stable and after the merger we see how some items appear that before were practically testimonial. We refer to "current provisions", "debts to credit institutions" and "other current liabilities".
As for current provisions, they are made up of guarantees and contracts at a loss. An item that hardly existed before the merger.
On the other hand, "other current liabilities" include tax liabilities, current obligations with personnel (pension plans) and "others", which are not specified in the report and we know what they are. Despite the fact that they have grown a lot, we only need to continue observing the variation of these items and study if they can be an indication of something serious or that makes us change our feeling. For the moment nothing important. The most important games that compose it are:
  • Other current liabilities (43.04%)
  • Suppliers (36.33%)
  • Current provisions (9.61%)
  • Short-term debt with credit institutions (5.32%)
  • Current tax liabilities (2.54%)
  • Other creditors (2.36%)
  • Other short term financial liabilities (0.80%)
As for fixed liabilities:


Breakdown of Fixed Liabilities

Fixed liabilities show a similar variation to equity. When the merger became effective, non-current provisions skyrocketed to be by far the largest item of fixed liabilities. Again, the provisions are composed of warranties, or in other words, costs of repair and replacement of components in poor condition during the warranty period. They are also made up of contracts that are at a loss. At the moment, it seems that Siemens is contributing to Gamesa in the merger more than ever before, but also a few million in warranties and loss-making projects. The most important items are:
  • Non-current provisions (48.78%)
  • Long-term debt with credit institutions (33.65%)
  • Deferred tax liabilities (12.28%)
  • Other long-term financial liabilities (3.34%)
  • Other non-current liabilities (1.96%)



1.3 Debt Analysis

Once we have seen the composition of the balance sheet in a general way, let's review some ratios. A very important concept in the valuation of a company is the debt, since a company that has no debts can not go bankrupt. The progression of the debt ratio tells us how big a company's debts are in relation to its own resources:

Debt = Outside Capital / Own Capital = 158,23%



Indebtedness

Debt has been decreasing in recent years to 160%. Until we compare it with EBIT we cannot be sure that it is a good figure, but at first glance it is not bad. In addition, the merger has had a positive effect, as it has dropped from 200% to 150%.
To put it in context, the average debt in the sectors where it operates is Therefore, the debt ratio is lower than the average of the IBEX and infrastructures. Let's look at the debt over EBIT:


Indebtedness on EBIT

This graph does not show the data correctly because the EBIT for September 2017 was -3 million euros. In any case, although it is getting worse after the merger, the data is not bad, currently the debt is around 8 times the EBIT. In fact, what has happened is not that the debts have increased, but that, as we will see later, the EBIT has decreased quite a lot. We will see later if the costs of maintaining this debt are high or bearable.


1.4 Safety Margin

In order to operate properly, companies normally need their fixed assets to be covered by their own capital plus long-term debts. This is known as the safety margin. Otherwise it would mean that part of the company's fixed assets (offices, land, machinery, financial assets...) have to be paid with short-term debt, which can be quite dangerous. This is not something that should be fulfilled yes or yes, but it is a sign of good health.

Safety margin = Fixed Assets / (Equity + Fixed Liabilities) = 107,49%



Margin of Safety

The safety margin has decreased in the last 12 years to around 100%. That's right, but it shouldn't go any lower if you don't want to enter a difficult area.


1.5 Liquidity/Treasury

The liquidity ratio tells us the company's ability to get rid of current liabilities if needed.

Liquidity = Current Assets / Current Liabilities = 110,28%


If we represent it over time:


Liquidity

Liquidity must always be close to 100% or above, otherwise there may be problems paying debt maturities or short term payments. In the case of SIEMENS GAMESA RENEWABLE ENERGY, S.A., it has correct liquidity that also decreases almost from the beginning of the data provided by the CNMV. It is true that there has been an upturn in the last year that must be monitored.


1.6 Working Capital

The working capital indicates the amount of current assets that are financed with permanent resources. The higher it is, the fewer financing problems there will be if there are quarters with less turnover. To evaluate working capital we relate it to current assets and sales:

Maneuvering fund on assets = (Current Assets - Current Liabilities) / Current Assets = 9,32%
Sales Working Capital = (Current Assets - Current Liabilities) / sales = 14,30%



Working Balance

The same applies to the working capital. It has decreased all the series of data until it remains in the environment of 0% positive. As in the case of liquidity, there is an increase that will have to be kept under surveillance to see if it is confirmed that it is rising or falling again.
In any case, it is not a negative background, so everything is correct.


2 Income Statement Analysis

When studying the income statement we will calculate the following ratios and their progression over time:
  • 2.1 Analysis of income, expenses and profit
  • 2.2 Return on Equity (ROE) and Return on assets (ROA)
  • 2.3 Margin on sales



2.1 Analysis of income, expenses and profit

We start with net profit and FGO (funds generated by operations): In Fundamental Analysis we like to show the FGO next to the net profit, which is the money that the company has managed to earn. To calculate it, we add the amortizations to the net profit and thus avoid possible adjustments by decreasing this concept. Some companies may be forced to make up the profit in this way if they have not done particularly well.

FGO = Net Profit + Amortization



Profit vs Funds from Operations

Looking at the graph of FGO and Benefit a thought comes to mind. Gamesa pointed out ways with a promising profit increase (although with some episode of losses) and the merger with Siemens has not brought an increase in profit, but quite the opposite. These mergers need some time to digest the accounts and see the real impact of costs and synergies. For the time being, it seems that they will need some more exercises to stabilize. Let's see how the revenue looks:


Sales

Again, sales are falling after the merger, although they seem to be trying to recover. We will continue to see this in future analyses. Another fact that is always interesting is the breakdown of expenses:


Expenses

An important fact is that after the merger the expenses increased, but the following year they were reduced. Probably as a result of synergies or perhaps due to a lack of contracts, since this type of company can modulate its expenses based on orders.
In addition to the operating costs, we have to take into account the financial costs. A company can have a very large debt, but if the expenses it generates are bearable with the EBIT there is no problem. Siemens Gamesa has moderate financial expenses compared to EBIT. That's a good figure:


Financial Expenses vs EBIT

2.2 Return on equity (ROE) y Return on assets (ROA)

The ROE, or Return on equity, measures SIEMENS GAMESA RENEWABLE ENERGY, S.A.'s profits compared to its own funds. It is a way of measuring the profitability and quality of business management. It only makes sense to see it this way when it is a sustained ROE over time. A high ROE in an isolated exercise can be caused by an increase in debt, which gives a greater capacity to buy assets and therefore, an increase in profit. The problem comes later, when that debt has to be paid and expenses skyrocket:

ROE = Net Profit / Equity = 1,08%



ROE

Siemens Gamesa's ROE has been greatly reduced over the past 2 years. Again, the reason may be that they have not yet digested each other and synergies and process optimizations are yet to emerge. At the moment we can only wait to see how the data evolves. To see it in context, the average ROE in the sectors where it operates is:
  • INFRASTRUCTURE (0.73%)
  • A_WIND (1.08%)
  • T_IBEX35 (1.33%)
Therefore, it is not far from the average of the sectors where it operates in Spain and the IBEX35. As for the ROA, we have a very similar graph.
ROA = Net Profit / Assets = 0.42%



ROA

2.3 Margin on Sales

Let's calculate the margin on sales of SIEMENS GAMESA RENEWABLE ENERGY, S.A., that is to say, what proportion of sales ends up being constant and sound profit:

Margin on Sales = Net Profit / Sales = 1,45%



Beneficio over Sales

As for the profit on sales, it has been varying quite a lot. From 12% at the end of the 2000's to the current 1.45%, passing through negative ratios in times of loss. As we have mentioned before, all ratios seem to be adapting to the new situation of the company.
We can also see how the margins of SIEMENS GAMESA RENEWABLE ENERGY, S.A. behave. On the one hand, we have the operating margin, which tells us what proportion of sales ends up being EBIT. On the other hand, the operating margin tells us what proportion of sales ends up being profit before taxes.


Margins

Once again, the margins are low.


3 Dividend and general valuation




SIEMENS GAMESA RENEWABLE ENERGY, S.A. currently has 681143000 shares in circulation, with a treasury stock of 0.238%. It has a EPS of 0.10 and is currently paying a dividend of 0.05 per share per year, i.e. a payout of 52.39%. In view of the data, the payout seems sustainable.


In conclusion, at current prices (22.35) it gives a dividend yield of 0.23%, the book value is 9.11 per share and the PER is 226.34. The data tells us that for the moment we should keep watching the bulls from the barrier. Siemens Gamesa has a lot of potential, but its numbers are not particularly attractive at the moment. There are two possible scenarios:
  • Siemens and Gamesa are digesting and that takes time. Synergies and process optimization do not appear automatically, you have to look for them and make the appropriate changes. If we find ourselves in this scenario we will see how the ratios improve in the future.
  • The economic environment is not favorable and there are problems to raise or maintain sales. In this case we will see how the company will remain in this limbo struggling to stay in green numbers each year, but without advancing or growing.
In any of the 2 scenarios we considered, we did not contemplate the purchase of Siemens Gamesa at these prices. The market expects a strong improvement in profits, but we prefer to see them than imagine them.


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Balance, Income Statement, Cash Flow...
Employees 212 (47.20% women)
Profit 136.9M €
Earnings per share 0.2 €
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