Wednesday, 10 June 2020

NIBE Industrier - Portfolio Addition

NIBE is a heating technology company based in Sweden with a current market cap of SEK 95bn (£8bn). It has three basic business areas - Element, Climate Solutions and Stoves. 

Climate is the fastest growing segment and over the past year accounted for around two thirds of sales and contributed 72% of the groups profits. Clearly climate change is rising to the top of the political agenda on a global basis and the company are well positioned to take advantage of the opportunities this provides - especially in the field of heat pumps which will become an option for heating our homes as an alternative to fossil fuels such as natural gas. It is one of the leading companies in Europe and North America in the area of sustainable solutions for domestic heating.

The company has been trading for over 70 years and has a long-standing ethos of working on sustainable solutions and energy efficiency. It was floated on the stock market in 1997 and has grown sales at an average of 18% p.a. over the past 20 years building an ever increasing global presence.

Climate

Climate change is the greatest challenge of our time. We need to reduce greenhouse gas emissions by 50% by 2030 compared to 2010 levels to keep on track for net zero by 2050. All of the products offered by the company are designed to make a significant contribution to tackle climate change. They offer sustainable, energy-efficient solutions such as heat pumps that reduce energy consumption by up to 80% and reduce GHG emissions in all types of buildings both domestic and commercial.


Earlier this year, the EU announced their 'GreenDeal' and proposals to target net zero carbon emissions by 2050. A central part of the strategy will be the goal to decarbonise the energy sector and prioritise energy efficiency and transition to a power sector based on renewable energy.

Heat Pumps

Heat pumps and related technology are tried and tested solutions for space heating in Scandinavian countries but relatively unknown in many parts of the world. Many countries, including the UK are actively looking at ways to decarbonise the domestic heating sector which accounts for around 40% of carbon emissions.

The largest sector for the group is climate solutions and within this sector, the largest element is heat pumps. These pumps extract the stored energy from the sun contained in the soil or air and transfer this energy indoors to provide indoor heat as well as hot water. The two main types of heat pump are ground source where pipes are laid under the soil and air source where heat is extracted directly from the air.


In the UK (and much of Europe) around 90% of our homes are heated by gas central heating. However we have legislated for net zero emissions by 2050 and will need to find alternative ways to heat the nations homes as gas (a fossil fuel) will not be an option. We have already ruled out gas central heating for all new homes built from 2025 so electric heat pumps (as well as green hydrogen and battery storage) will likely play a big part in the huge transition of our energy use.


The UK still offers financial incentives to install a heat pump via its Renewable Heat Incentive. This covers a period of 7 years from installation and will provide payments for a typical home of £1,300 p.a for air source heat pump and a higher figure of £3,300 p.a. for a ground source heat pump. In addition there will be a significant saving on heating bills. These incentives will go a long way towards the costs of installing a heat pump system which range between £6,000 for air source and maybe up to £20,000 for a ground source heat pump. The scheme currently runs until March 2022 but it is hoped this will be extended.

Obviously the demand for solutions which support the switch from fossil fuels to renewables will grow and grow. As the market grows so prices fall which in turn creates greater demand. Companies like NIBE who have a clear commitment to sustainable solutions will be the likely beneficiaries of the transition to a new way of doing things. This is why I have decided to add this company to my portfolio.

Results for 2019

Combined sales increased by 12% to SEK 25.3bn and profits of SEK 2.2bn which suggests a margin of ~10%. The company pays dividends which increased by 7.7% this year to SEK 1.40 per share (subject to FX considerations for UK shareholders!). However this is a yield of under 1.0% of the current share price.

Here's a link to the results (pdf) from the company website.

Results for Q2 to end June will be available on 19th August and should give a clearer picture of progress in relation to Covid-19.

2 Yr Chart NIBE v FTSE All Share Index
(click to enlarge)

The share price has been a little choppy due to Covid over the past few months but recovered momentum from a low point of SEK 120 in March to hit an all-time high of SEK 216 at the end of May. The shares have been added to my green portfolio at the price of 201 (£17.00 at current exchange rates) earlier this week and I will look to build a larger holding over the coming few months when more funds are available.

This addition expands the number of stand-alone companies in my 'green' portfolio to 14.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

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