The move to a cleaner energy system is bigger than just the electric grid - it also involves industry and buildings. Siemens Energy offers a suite of products to help companies electrify their operations, while MHI focuses on helping companies switch their heat source from coal to gas, cutting carbon emissions by about 40 per cent in the process. Beyond industry, buildings of all kinds can be much more energy-efficient than they are today. In Europe, where buildings account for 40 per cent of total energy consumption, Signify brings a simple solution: just replace the lights. Lighting accounts for nearly half of cities’ total electricity use, and replacing inefficient lights with Signify’s excellent LED systems can cut the related carbon emissions by 75 per cent or more.4
The preceding sketch barely scratches the surface of the major energy transition themes, but in our view, it is an encouraging story. There are challenges and trade-offs, but these companies are applying their skills in innovative ways to move both their own businesses and the broader transition forward.
Solid businesses at attractive valuations
That alone wouldn’t earn their stocks and bonds a place in the portfolios. As investors, the key for us is the relationship between the companies’ fundamental prospects and the prices of their shares and bonds. In each of these cases, we think their prospects are underappreciated by the market.
That has allowed us to build positions in these companies at attractive prices. Drax trades for less than five times earnings. Helix and Signify trade for less than ten times free cash flow. Siemens Energy is struggling to work through quality control issues at its wind turbine unit, but in our view the long-term value of its businesses is substantially higher than its current market capitalisation. MHI has begun to attract attention for its defence business, but still trades at a lower valuation than the typical global stock - as does Prysmian, where consensus earnings estimates are just starting to reflect the growth potential we’ve long seen.
The energy transition features no shortage of complexity and controversy. Put those together, and it also features plenty of investment opportunity.
Sources
2 https://www.energy.gov/gdo/articles/one-year-building-better-grid
4 https://www.signify.com/en-id/sustainability/green-switch/renovation-wave
