Siemens: revving up new engines for growth

Siemens has come a long way in its 170-odd years. On Wednesday, the one-time titan of German industry showcased its new stripes as a tech wunderkind, providing hardware and software for everything from running buildings to streamlining production for a Covid vaccine.

Ambitious growth targets of 5-7 per cent for revenues over the business cycle, up from 4-5 per cent, are a sharp turn from the profit warnings that marked the last decade. 

Since then, Siemens has ditched the vast conglomerate structure, hiving off its energy and health businesses and coalescing around digital industries and infrastructure. These markets, it reckons, have a total addressable size of €440bn. Having jettisoned capital intensive heavy industry — along with accompanying long product cycles — the company aims to win round investors with more investment in research and development and a progressive dividend policy.

Overall, R&D is estimated at about 8 per cent of sales last year, up from 6-7 per cent in 2017-2019. In digital industries it is set to outspend nearly all of its peers. Jefferies reckons on 13 per cent, pipped only by Japanese robotics maker Fanuc. Improved cash conversion paves the way for other investments, both organic and M&A.

The tilt towards higher growth markets, allied with a leaner structure, brings P&L benefits. Siemens has carved out the low-growth energy business. Transitioning to digital industries means that it is targeting a profit margin of 17 per cent to 23 per cent. It expects last year’s digital revenue of €5.3bn to grow at a compound annual growth rate of roughly 10 per cent until 2025.

So why the collective shrug from investors? Some optimism is already baked in, with total returns outpacing those of peers. But it may also be because revenue models are still evolving across newer business lines, from licences to subscription in the case of software. Siemens faces a new set of competitors in its chosen fields too. Growth in cloud-based applications has attracted rivals including Dassault Systems. Still, with shares trading at a discount to peers, according to S&P Global data, the reworked German group deserves a bigger fanfare.

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