Machinations | finnCap Industrial Technology quarterly sector note - Jan 2021

Feb 04, 2021 / News

Highlights this quarter

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Looking beyond lockdowns

As we continue through what is hopefully the final phase of the pandemic before vaccines start to take effect, the current lockdown is likely to have a minor effect on the sector. In combination with a last minute, albeit ‘barebones’ Brexit trade deal, there is good reason to start to become more optimistic about prospects for the sector, with two big uncertainties clouding investment decisions now becoming a lot clearer. As many capex decisions are fairly binary, greater confidence should help unlock corporate investment following a year of carefully husbanding cash. This may also result in a bounce in M&A activity. Looking at PMI and industrial production data, we see further upside after the progressive recovery from pandemic low points.

Building Products

Over recent months, trading updates by companies in the construction/building products sectors have been bullish, with a marked and progressive recovery seen in RMI and housebuilding sector, partly helped by Government support packages and policies. Many in the sector have seen a striking increase in profits from their pandemic lows, with many signalling trading has exceeded expectations, with their focus on cash flow now resulting in
lower levels of net debt than anticipated, which in turn may spur M&A activity. We take a look at valuations in the sector and also focus on some attractively valued stocks which have announced positive trading updates. We highlight Norcros, Alumasc, Michelmersh and Somero.

Building back better and greener

The Government has recently unveiled its flagship policy document itemising individual strategies and policies called “10-point plan for a Green Industrial Revolution”. One policy that has gained attention has been the commitment to bring forward by 10 years (to 2030) the date when the UK will cease selling new petrol and diesel vehicles. Other measures encompass accelerating zero emission vehicles, greener public transport and constructing greener public buildings, carbon capture, nuclear and offshore wind power. It also highlights the role of the new hydrogen economy. The cumulative effect of these measures is to reduce UK carbon emissions by 180m tonnes of CO2 between 2023 and 2032. EU truck manufacturers have also recently agreed to phase out diesel trucks.

We also look at the recent announcement by BritishVolt to commence construction of its first UK gigafactory at Blyth to serve the burgeoning EV battery supply chain. Production of batteries is expected in 2023, with capacity to produce up to 300,000 batteries pa by 2027. This equates to c.12.5% of a typical year’s car sales, even with the recent commitment for Nissan to expand its battery capacity, more investment is required to ensure a viable UK-based EV supply chain.

Sector valuation

In the quarter, both larger and smaller industrials have performed well, with the larger caps up 14% and smaller caps up 17.7%, against the ASI, which also rebounded by 15%. The sector bellwethers trade on a prospective median P/E of 23.2x, while the small caps trade on a median P/E of 18.7x. The market has significantly rerated in the expectation of earnings recovery, while management guidance has remained fairly cautious.

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