European Stock Story of the Month – Belimo

From a carbon point of view, buildings need to be a major element our focus. How we currently use them, how they consume energy and, more topically, how safe are they for us to return to in our post COVID-19 world whether as places of work or as locations to send young people for education. According to a Finnish study,[1] buildings consume 40% of electricity produced in the EU, and produce 30% of total CO2 emissions. The study also states that digitalisation could have a major impact on the process of CO2 reduction.

Two decades of technological advance have provided huge growth in our ability to generate low carbon electricity. Last year, the UK managed to achieve generation output where renewables outpaced fossil fuels for the first time since the UK’s first electricity generating station opened in 1882.[2] In 2019, renewables share of electricity generation was a record 37% of the total. This sounds very impressive until we factor in just how inefficient and wasteful our habits are in terms of consumption. As the world warms, so our need for air conditioning or HVAC (heating, ventilation and air conditioning) increases. The added challenge comes from a scientific hurdle - the warmer the environment the less efficient the production of electricity is in terms of thermal generation.

So how can we invest in companies which span the disconnect between production and resource wastage. Our current inability to manage this gap needs to be identified, measured and addressed if we are to have any hope in meeting the climate targets. Switzerland is home to a rather staggering array of smaller companies whose innovation we have touched upon in previous bulletins, and Belimo (www.belimo.com) is just such an organisation, though these days it is no longer such a small company. Belimo is the world’s market leader for field-based devices which control and regulate HVAC systems, with products such as damper actuators, control valves and sensors. These are used both for air and water systems, and their presence is so ubiquitous that they state that their products are used in every third commercial building.[3] These products help to moderate and oversee fire and smoke protection, room handling, heating and cooling systems and air handling. In the post COVID world, air handling is a major factor in whether premises can be opened to the public as circulation and cleaning is of paramount importance.

We like Belimo because of its quality. It has delivered consistently high margins and returns on its capital base. It is market leader in its field, whose company presentation is unabashedly titled “Small Devices, Big Impact”.[4] This is no joke - Belimo has successfully delivered extraordinary solutions worldwide since its inception in 1975. This year Belimo delivered its 100 millionth actuator. We also like the way that Belimo delivers detailed information on its own carbon footprint, measuring the production and assumed lifetime cost of its own footprint at the various scope levels, as well as the promised value- added angle for its customers. The original expertise in air is being replicated in water, which the company entered during 1998. R&D spend is being increased and innovation is at the heart of the business. The building energy efficiency market is growing as demand for logic sensors, actuators and energy valves expands and Belimo leads with its access to contractors and equipment manufacturers. New build is far from the only opportunity. Retrofit is increasingly a mainstay for the company as buildings regulations are on the increase. Belimo’s products are relatively cheap implying a low investment for a big value uplift for a building’s manager.

The balance sheet is robust, and the Finance Director is beefing up his capabilities to manage challenges ranging from harmonised reporting to foreign exchange risk, given the high proportion of Swiss Franc costs. I first started looking at Belimo when it was a very small company back in 2010. The valuation was very rich with a share price of CHF1,000 and we were concerned that returns weren’t sustainable, I was proved wrong over the next 2 years and by 2012, when I bought into Belimo for clients, the stock had already doubled. The share price has more than trebled since then,[5] reflecting a bumper decade for the company and its shareholders. Who knows what the next ten years will bring but air quality and air conditioning that actually works are two fairly important factors in the quest to getting us all back to working from the office. Belimo is a company that can address both issues.

Information is accurate as at 11.09.2020. Opinions constitute the fund manager’s judgement as of this date and are subject to change without warning. The officers, employees and agents of CIP may have positions in any securities mentioned herein. This material may not be distributed, published or reproduced in whole or in part. With investment capital is at risk.

Sources and References

[1] https://cdn.caverion.com/docs/default-source/investors-docs/presentation-docs/2020/caverion---road-show-presentation-august-2020.pdf?sfvrsn=c9a1517a_0 (p9)

[2] https://www.carbonbrief.org/analysis-uk-renewables-generate-more-electricity-than-fossil-fuels-for-first-time#:~:text=In%20the%20third%20quarter%20of,biomass%20and%206%25%20from%20solar.

[3] https://www.belimo.us/mam/corporate-communications/company-presentation/EN_Belimo_company_presentation_2020.pdf (p5)

[4] ibid

[5] Factset

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