Powering growth through exports
United Power Technology AG (UP7G.F) is pursuing a strategy intended to set it apart from Chinese contractors manufacturing commodity-type generators. This is based on penetration of export markets, for which a high-quality product is required, a focus on larger engine sizes that attract higher margins, vertical integration and continued investment in new product development. The Chinese market is challenging, making it tougher for a return to growth in FY14. However, at the current share price the stock appears undervalued even if profits fall below FY13 levels.
Domestic competition affects FY13
FY13 revenues declined by 7% year-on-year. The mild hurricane season in the US during 2013 reduced demand for back-up power generation. Sales in China were affected by deceleration of growth and intense domestic price competition. Commercial and residential generator sales, which accounted for 52% and 42% of FY13 revenues respectively, declined by 8% and 6%. Adjusted EBIT margins declined from 14.9% to 13.4% as pricing pressure in China was partially offset by more efficient production techniques, reduced administrative overheads and a higher proportion of United Power-branded sales, which attract a better margin. Net cash rose from €28.5m at December 2012 to €31.8m at December 2013.
Strategy to help return company to growth in FY14
Management guidance is for revenues and margins to be lower in FY14, as reflected in consensus estimates. It intends to arrest the decline by focusing on the growth of higher-margin United Power-branded goods, further penetration of new markets including Russia, Africa, Latin America and South-East Asia and continued investment in new product development, principally expanding the range of enginepowered products.
Valuation: Trading at a substantial discount to peers
The average P/E for power generation companies globally is 15.9x. The company’s shares would be trading at a substantial discount to the average even if profits were to slump to half FY13 levels if the challenging conditions in China, with intense pressure on pricing, persist. The balance sheet is strong and, if necessary, management can conserve cash by postponing expansion plans at the third factory and deferring the proposed dividend increases, so the size of this discount appears unwarranted.