Accelleron: ABB Spinoff Looks Like A Slow Grower With Decent Income Potential (ACLIF)

Being an investor in ABB (ABB), I automatically received some shares of their spin-off Accelleron (OTC:ACLLY) at the end of 2022. Not really knowing what to do with these shares, I decided to wait until more information about Accelleron was available.

At this moment, the amount of financial information about Accelleron is still very limited, even while ploughing through old financial reports of its parent company ABB. But still, I will try to work with what’s available to make an informed estimate about whether the company could be a good investment at the current price level.

Accelleron

But first things first: what does Accelleron do? Fellow Seeking Alpha contributor WideAlpha wrote an informative article about the spin-off of Accelleron, in which he gave a nice description of the business of the company. I will provide a brief overview about the market and competitiveness of Accelleron here, for more details I will refer to the article of WideAlpha and to a presentation which Accelleron gave at Capital Markets Day on August 31, 2022.

Accelleron is a global leader in high-power turbochargers, with an installed base of more than 180,000 turbochargers and more than 100 service stations globally. Also, it is nice to know that 75% of their service-driven revenues is recurring, making these service stations a relatively stable source of revenue for the company.

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Accelleron is active in 4 sectors: Marine, Power, Oil & Gas and Rail. Accelleron provides a range of turbocharger products specific to each sector, and also developed a software platform (Tekomar XPERT) to optimize operations for power plants. With Accelleron’s products, their customers, which are in energy-intensive industries are able to streamline and make their operations more efficient. By doing this, Accelleron helps their customers to save costs, reduce emissions and achieve their goals.

Accelleron offers some of the best products in their markets, with best-in-class efficiency and up to 25% higher power density compared to its closest peer. Also, they own 119 patent families and continue to expand this intellectual property by spending about 7% of annual revenue on R&D.

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Accelleron has a global presence, shown on a map presented at their capital markets day which you can show in picture 3. Interesting to see is that 40% of their revenues are from Asia, the Middle East and Africa, 41% are from Europe and 19% are from the Americas. This shows that Accelleron is truly a very geographically diversified company.

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Summarized in one sentence, Accelleron helps energy-intensive customers to make their operations more efficient by providing best-in-class turbochargers and service.

Financial Information

As I already mentioned at the beginning of this article, there is no wealth of financial information available about Accelleron. They yet have to publish their first annual report since the spin-off (we will have to wait for this until the 29th of March 2023), and the past financial reports of their parent company ABB did not list financial results for Accelleron separately.

The company did however provide an interim trading update on the 14th of November 2022. This trading update was relatively brief, but did contain some interesting information:

• Organic revenue growth in 2022 is expected to reach levels of 8% (previously predicted was 6%) year-on-year.
• EBITDA margin is expected to be at 24.5%.
• A rise in the global demand of liquified natural gas (LNG) led to increased demand for turbochargers in gas compression.
• Partly as a result of this demand for LNG, the shipbuilding industry demand seems to be on track as well.

Combined with financial information which Accelleron provided during their Capital Markets Day, we can try to make an estimate about their results for 2022.

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Accelleron’s revenue in 2021 was $758M. This means, that with a year-on-year growth rate of 8%, their 2022 revenue will be about 819M.

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In picture 5 you can see the operational EBIT of Accelleron and their margins. We already know that their 2022 group margin will be about 24.5%, which is slightly lower than their 2021 margin. This means that their expected EBIT is about $201M, which is a 6.7 percent increase year-on-year.

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In picture 6 we can look at the free cash flow conversion, which is at very decent levels. If we expect that net income in 2022 will also rise with 6.7 percent, net income will end up around $153M. But this net income is not the only thing which matters for share price valuation, we also need to keep an eye on free cash flow conversion. And this is where the company already experienced some difficulty in H1 2022:

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Due to supply chain challenges (which included unplanned longer lead times for parts), the free cash flow conversion in H1 2022 dropped to only 39%. If we expect that free cash flow conversion in H2 2022 will be comparable to H1 2021 (so the company experiences no additional problems but does not recover yet from its previous supply chain challenges), free cash flow conversion in 2022 will end up around 66%. This is much less than it was in 2021.

Valuation

As I demonstrated in the previous section, net income of Accelleron in 2022 can be expected to be around $153M. Even though their free cash flow in 2022 will suffer from supply chain problems, this can be expected to be a temporary problem which will likely correct itself over time.

Let us now take a look at the share price and the market capitalization of Accelleron since their listing:

Graph 1: Accelleron ADR share price and market capitalization since spin-off

At this moment, the market capitalization of Accelleron is $2.2B. With 2022 earnings of $153M, this would mean that their forward P/E ratio is about 14.4.

One thing we can conclude from the share price graph of Accelleron is that there probably was no significant selling from ABB shareholders in the short term after the listing.

Dividends

I expect Accelleron to be a decent dividend payer, also illustrated by their own financial outlook:

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For 2022, Accelleron expects to pay about $75M in dividends, which at this moment means that their dividend yield is 3.4%. This is not bad. On the mid-term, they expect to pay out 50-70 percent of their reported net income if their net leverage is larger or equal to 1, and up to 100 percent of their reported net income if their leverage is below 1. Currently their leverage is 0.7, which means that, unless Accelleron increases its leverage quickly, dividend can be expected to increase not only because of earnings increases but also because of a higher payout ratio.

For the expected net income in 2022, which I expect to be $153M, Accelleron will likely pay out at least 50% (76.5M) and maybe 70% (107.1M) and possibly but very unlikely 100% ($153M). The 100% case would mean a dividend yield of 6.9 percent. Accelleron defined the mid-term as 4-5 years, so it is likely they will incrementally increase their dividends and not go to 70 or even 100 percent of payout after only one year. So their dividend will likely be increased steadily during the coming years, and not extraordinarily quick.

Conclusion

Accelleron is an interesting company specializing in turbochargers which spun off from ABB in 2022. The company helps energy-intensive customers to make their operations more efficient by providing best-in-class turbochargers and service.

Accelleron is not likely to be a quick compounder, but a solid and dependable income generator. Their growth in 2022 was solid with 8%, and their dividend payout ratio is likely to be around 3.4%.

The company has some good future prospects, especially for the short to mid term, since the drive to make energy-intensive operations more efficient is gaining traction, and some of their key markets such as the LNG industry are rapidly expanding. On the long term the company might suffer from the potential electrification of many of their markets, or the potential use of hydrogen and fuel cells in for instance the marine industry.

But Accelleron is a market leader and the company is likely to continue to stay relevant for the foreseeable future. With a forward P/E ratio which I estimated at 14.4 for their 2022 earnings, the company does not appear to be overly cheap or expensive. A P/E ratio of around 15 seems fair for solid but relatively slow-growing companies like Accelleron. If they consistently prove to be quicker growing than expected, the P/E ratio has the potential to rise a bit though, considering Accelleron is an industry leader in their niche.

I will continue to hold the shares which I received from the spin-off since I like solid and dependable companies like Accelleron, but I do not expect annual double digit returns on this investment.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.