Engineering group ABB's divestment plan receives cool market reception

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ZURICH (Reuters) – Engineering group ABB’s ABBN.S plan to offload three of its most profitable businesses, announced on Thursday, was met with disappointment by analysts who described the strategy as unambitious.

FILE PHOTO: The logo of Swiss power technology and automation group ABB is seen at the Swiss Economic Forum (SEF) conference in Interlaken, Switzerland May 24, 2019. REUTERS/Arnd Wiegmann

ABB said it was “exploring all options” to exit its turbocharging, mechanical power and power conversion divisions, which have combined annual sales of $1.75 billion, or 6% of group sales.

The businesses could collectively be worth in the region of 3-4 billion Swiss francs ($3.3 to 4.4 billion), according to two people familiar with the industry.

The Swiss company, whose products range from electric ship motors to factory robots, has been carrying out a review of its operations since Chief Executive Bjorn Rosengren took over in March and said ABB was weighed down by a complex business model.

Like other industrial groups, ABB is trying to focus on fewer business areas to improve it margins and sales. Its share price has underperformed peers over the last decade.

Analysts were, however, unimpressed by the new divestment plan, with Gael de-Bray at Deutsche Bank describing it as “uninspiring.”

The three business are among ABB’s most profitable, with profit margins well above the group margin target of 14% to 16%.

“This divestment program will therefore dilute the group’s overall margin,” de-Bray said. “Overall, we estimate that the portfolio review is unlikely to trigger any further re-rating.”

ABB’s share price fell 2.6% on the Swiss blue chip index, making it one of the weakest performers on the Stoxx 600 Industrial Services index .SXNP, which was 0.9% lower.

SEB said it was surprised to see three high performers rather than stragglers chosen for disposal, while other analysts had expected bigger disposals.

“Against high market expectations, the announcement today may be seen as somewhat underwhelming,” JP Morgan analyst Andreas Willi.

SALES OUTLOOK LOWERED

ABB’s turbocharging business could be worth 1.5-2 billion Swiss francs, according to the two people familiar with the industry. Mechanical power could be worth 1-1.5 billion francs, and power conversion up to 0.5 billion francs, they said.

The group’s shares have risen 26% over the past decade, lagging a 95% gain in the Stoxx industrial services index.

Earlier this year, ABB completed the sale of its power grids business to Hitachi 6501.T, a decision undertaken by Rosengren’s predecessor Ulrich Spiesshofer.

It is nonetheless doing less to slim down than Germany’s Siemens SIEGn.DE which floated its $18.6 billion gas turbines business in October and agreed to sell its business selling the Flender gear box unit.

ABB also lowered its annual sales growth target to a range of 3% to 5% over the economic cycle, down from its previous target range of 3% to 6%.

Analysts also expressed disappointment about the company’s plans to increase research and development spending to 5% of revenues, up from 4.7% at present, a figure below the 8.1% level at Siemens, a big rival and among the industry’s leaders.

However activist investor Cevian, ABB’s second-biggest shareholder with a 4.9% stake, said it had confidence in CEO Rosengren, who formerly led Sweden’s Sandvik SAND.ST, to improve performance.

“We all saw how quickly Bjorn improved Sandvik’s performance and outperformed all expectations – and we expect to see this again,” Cevian co-founder Christer Gardell told Reuters.

“We see no reason why ABB should continue to underperform peers either on growth (or on) margins by 2023.”

Reporting by John Revill; Additional reporting by Oliver Hirt in Zurich Arno Schuetze in Frankfurt; Editing by Subhranshu Sahu and Pravin Char