Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!

Background:

I am currently trying to deal with what I expect to be a long-term trend towards electrification (see the first post). Since I’m still learning, I decided to start with a “basket” approach, where I try to build a basket of (lower weighted) potentially interesting stocks and then dive deeper in the following months / years a little shallower than otherwise.

This is meant to be a “scientific experiment” so it can be easy for me to find out that some (or all) positions don’t make sense and I sell them.

An alternative would be to read months / years, write down a lot and then come out with a few “persuasion” investments, but this path is more difficult for me to implement. I prefer to get my toes in the water early to stay motivated.

Since all of the effort in this industry / industry is focused on building the infrastructure of the future, many of the companies will have a capital-intensive business model. Of course, I’d prefer low-capital business models with super-low valuations, but I haven’t been able to identify any yet.

Finally, I am aware that I might be a little late for the party, but my expectation is that the party will go on for a long time.

Are cables the new shovels?

During the gold rush in the Wild West, there was a famous saying that the surest way to get rich in the gold rush is not to dig for gold, but to sell shovels to gold diggers. The deeper meaning of this saying is, in my opinion, that in a gold rush-like situation you can make a lot of money by selling relatively ordinary things to people who need them urgently when they (locally) become scarce.

Energy transition / electrification – implications

The introduction of more renewable energies into the grids has two main problems:

  1. The energy is usually generated far away from the actual consumption
  2. The energy supply is more volatile

Much has been written about the need for memory, but much less about another interesting aspect:

In general, the networking of power grids is always beneficial for the stability of the grids, especially with fluctuating power sources.

If there is a gray, windless February day in Germany, there can be sun in Italy or wind in Norway. The connection of national grids over longer distances becomes all the more important, the higher the share of renewable energies. For example, the EU recognized this relatively early on and set an electricity import / export obligation of 15% for each member state.

From a technical point of view, for the long-distance transport of electricity, the “alternating current” electricity must be converted into “direct current” electricity. The efficiency losses are mostly due to this conversion, distance as such is not a big issue, especially with high voltages.

It’s also important to understand that there is a limit to the amount of electricity that can be carried through a cable. The most recently opened interconnector between Germany and Norway, for example, has an output of 1400 megawatts / h or 1.4 gigawatts / h. For comparison: Germany’s installed capacity is over 200 gigawatts / h and the actual consumption is up to 60 gigawatts / h. Much more cables are required just to connect networks.

On the other side of the world, for example, a Singaporean-Australian company is building a 4000 km cable between Australia and Singapore.

In short, electricity will be transported over much greater distances in the future than it is today and tThis will lead to a much higher demand for high voltage power cables over a long period of time.

The cable industry:

Interestingly, there are 3 different European publicly traded companies that appear to dominate the cable market:

Prysmian From Italy, Nexans from France and NKT from Denmark.

The proportion of business that is directly related to electricity varies between the 3 players: for Prysmian it is ~ 47%. for Nexans 55% and NKT almost ~ 90%.

Chart comparison

NKT Prysmian Nexans

Over the selected period of ~ 7 years, all three stocks performed almost identically, but with a large difference in volatility. Prysmian, the largest company, looks a lot more stable than Nexans and NKT.

In the case of NKT, keep in mind that in 2017 they spun off a division called Nifilsk.

Nexans announced in February that it would become fully “electric”, ie divest other activities.

The industry as such is capital intensive and standardized to a certain extent. Customers demand a certain (high) quality as well as the ability to lay the cables (subsea) and offer maintenance.

As a result, returns on investments have generally not been that high in the past. However, if you look at the company presentations you can see that the order books are already pretty full and from what I have seen there are no major additional capacity increases planned for these 3 players so far.

From what I’ve heard, if you want to get a new cable in 2023, you have to order right away and make a large down payment.

So overall, I see a good chance that we will see a long upswing in business and even a kind of “super cycle”, although some of that is already clearly priced in.

All 3 players have the ability (and their own ships) to actually lay underwater cables. Since ships are always cool to look at, here are pictures of one ship per company:

Prismian:

1600x680-LDV-New-Ship-Header

Nexans:

DJI_0762 low resolution

NKT:

NKT Victoria_DJI_0028

Perhaps these ships also represent a kind of “” entry barrier. On the other hand, there were cartel fines for the major cable manufacturers in 2014, so the entry barriers do not seem to be that high.

From a valuation point of view, all 3 companies are clearly not cheap. P&L statements are difficult to read due to hedging, depreciation, etc., but my guess is that all three are trading at around 9-12x EV / EBITDA 2021

Starting position: NKT & Nexans

As a starting position, I invested 1% of the portfolio in NKT (at 276 DKK) and Nexans (at 72 EUR). The reasons are as follows: I made my decision based solely on the pictures of the ships.

  1. NKT is already a pure electrification game and is the most conservatively financed of the three. You also have a fairly plausible medium-term outlook for double-digit sales growth and a margin increase for the next 3-5 years
  2. Nexans has announced that it will focus on electrification. Here the outlook is less clear, but the stock seems to be a bit cheaper than the other two competitors at around 9x 2021 EV / EBITDA.

As mentioned above, neither are “sexy business” from the rearview mirror. However, as far as I know now, I think all three companies have some very good years ahead of them with a good chance of rising profits and stock prices.

I have slightly reduced my position at Agfa and Euronext to refinance around 1.5% of the portfolio value. Some readers might consider this to be the most relevant part of this article 😉

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