BayWa — Shaping the future with positive energy

Through its three core segments, Energy, Agriculture and Building Materials, the group fulfils the fundamental human needs of heat, power, food and shelter. While these are highly defensive markets, which has been advantageous during the coronavirus pandemic, the opportunities for growth within BayWa’s established market of southern and eastern Germany are limited. Consequently, since 2009 management has pursued an acquisition programme that has transformed the group into an international operation and responded to the need to adopt more environmentally sustainable practices in food production, energy generation and building construction. In the process, the group has moved up the supply chain by diversifying into the construction and sale of wind and solar projects. Operating profit from the three core segments has almost trebled since 2009, with almost all the growth attributable to activities introduced from 2009 onwards.

The Renewable Energies segment, BayWa r.e, is a key element of this growth. EBIT attributable to this business unit rose by 39% year-on-year during FY19 to a record €101.1m, representing 54% of the group total. Management expects the EIP investment will enable BayWa r.e. to scale up the project business from 0.9GW in FY19 to up to 3GW of project sales per year from FY25 onwards. The capital will also enable BayWa r.e. to develop its independent power provider activity, creating a recurring revenue stream from contracts to supply power from 2022 onwards.

Our peer multiples analysis shows BayWa is trading on prospective EV/EBITDA and P/E multiples that are similar to or at a premium to our samples of stocks in the conventional energy, agriculture and building materials sectors and at a discount to our sample of stocks in the renewable energy sector.

BayWa was founded in 1923 in Bavaria and has its roots in regional cooperative trading of materials used in the agricultural industry: grain, chemical fertilisers, animal feeds and farm machinery. Since then, the group has evolved into one of Europe's largest trading (wholesale and retail) and logistics groups and now has around 3,000 sales locations spread across over 40 countries supported by a global trading, service, distribution and procurement network. Its primary markets are in Germany, Austria and the European Union and to a lesser extent New Zealand and the US, with a focus on rural regions. It is headquartered in Munich and employs around 19,000 people worldwide.

Through its three core segments, Energy, Agriculture and Building Materials, the group fulfils the fundamental human needs of heat, power, food and shelter. While these are highly defensive markets, which has been advantageous during the coronavirus pandemic, the opportunities for growth within BayWa’s established market of southern and eastern Germany are limited. Moreover, these markets are not static. As each of them is transformed by the need to adopt environmentally sustainable practices, BayWa has developed new, strategically significant business activities.

For example, noting the shift from conventional to renewable energy, the group started to acquire companies developing solar parks and wind farms in 2009, an activity grouped together as BayWa r.e. in 2012 to give greater impetus to growth in this segment. The group entered the global fruit markets in 2011 with the acquisition of T&G Global (formerly Turners and Growers) in New Zealand. Then in 2012, it stepped up from being Europe’s largest agricultural trader to becoming a global player through the acquisition of international grain trader Cefetra and a 60% stake in the international agricultural trading group Bohnhorst Agrarhandel (wholly owned subsidiary since 2015).

The development of new business activities has been a success. In FY19, 65.1% of EBIT was attributable to companies acquired from 2009 onwards (see Exhibit 3). In parallel, management is enhancing the competitive strength of its older businesses, for example implementing a programme which completed in FY17 to reduce the number of sites in its Building Materials segment.

Demand for renewable energy generation capacity globally is growing as governments strive to fulfil their decarbonisation commitments. For example, the International Energy Agency (IEA) calculates that for the energy sector globally to reach net zero emissions by 2050, CO2 emissions from the power sector will need to decline by around 60% between 2019 and 2030, new solar PV installations will need to grow from 110GW annually to nearly 500GW and power sector investment to triple from $760bn to $2,200bn. Wind power is also expected to grow. In November, the Global Wind Energy Council (GWEC) predicted that 71.3GW of wind power would be installed in 2020 despite the impacts of COVID-19. This is only a 6% reduction on the forecast it made in Q120 prior to the coronavirus pandemic and an 18% increase compared with FY19. GWEC also predicts that 348GW of new capacity will be installed between 2020 and 2024, bringing total global wind power capacity to nearly 1,000GW by the end of 2024, which is an increase of 54% for total wind power installations compared to 2019. While some project completion dates have been pushed into 2021 because of the pandemic, 2021 is expected to be a record year for the global wind industry, with 78GW of new wind capacity installed.

BayWa has been involved in the renewable energy sector since 2009. Business activities address three areas: projects, services and solutions. The projects activity encompasses project planning, management and construction of wind farms and solar parks and the subsequent sale of finished plants. The services activity covers planning and technical services, provision of consumables, technical and commercial operational management, plant management and energy trade. The solutions activity primarily involves the distribution of photovoltaic (PV) components such as inverters. BayWa is the largest distributor of PV systems in Europe and one of the top three in the US. The distribution activity provides a useful differentiator, reducing the cost of components for projects and ensuring availability, as well as generating around a tenth of the business unit’s EBIT.

Sales of completed energy projects more than doubled year-on-year during FY19 from 453MW to 912MW including 12 free-standing solar parks with a total output of 620MW, a floating solar park of 8MW and 10 wind farms with a combined output of 283MW. Projects were completed in Australia, Europe, Mexico and the US. The division assumed responsibility for the commercial and technical management and maintenance of most of these plants following their sale. During FY19 the business unit was responsible for facilities with a total installed output of 8.3GW and traded 3.5GW of renewable energy. Sales from the business unit rose by 29% year-on-year in 2019 to a record €1,975.3m and EBIT by 39% to a record €101.1m. Management expects 2020 project sales to total around 0.9GW, supporting segmental EBIT at similar levels to FY19.

However, the project activity is capital intensive, with capital invested averaging €1.5bn during FY19, representing 33% of the group total. The €500m green bond issued by the group in June 2019, which was the first green bond to be issued in Europe, financed an estimated 637MW of solar and wind capacity. BayWa has recently supplemented this finance with a further transaction. In December 2020, it announced that funds advised by Energy Infrastructure Partners (EIP, formerly Credit Suisse Energy Infrastructure Partners) will take a 49% in BayWa r. e., in which EIP will make an equity contribution of €530m.

Management expects that the EIP investment will enable BayWa r.e. to scale up the project business to up to 3GW of project sales per year from 2025 onwards, accelerating the exploitation of a project development pipeline totalling 13.6GW. The capital will also enable BayWa r.e. to become the largest PV distributor globally and to develop its independent power provider (IPP) activity, creating a recurring revenue stream from contracts to supply power from 2022 onwards. BayWa r.e. is already engaged in this activity, signing a 10-year virtual power purchase agreement with AB InBev in January 2020 enabling the brewer to make all of its beer across Europe using renewable energy by mid-2022. Scaling to 250GWhr of electricity per year by 2022, this agreement was the largest pan-European corporate solar deal at the time. Management projections presented in December 2020 show that IPP activity will represent 23% of segmental revenues by 2023 and project sales 56%, contributing to segmental EBIT of over €170m. By 2028, management intends to be selling around 3GW electricity per year from its own power generation assets.

BayWa’s conventional energy business unit is primarily engaged in selling heating oil, fuels, lubricants and wood pellets in Austria and the German states of Bavaria, Baden-Württemberg, Hesse and Saxony. Heating materials are predominantly sold through in-house offices. Diesel fuel is sold to over 100 group filling stations and partner stations in Germany. BayWa also offers a fleet filling station card, which is accepted at around 3,300 filling stations across Germany. The sale of conventional heat carriers complements the domestic agricultural trading and supply and building materials activities, with many common customers forming a stable customer base.

The business unit continues to evolve in response to the transition from fossil fuels to renewable energy. In December 2019, the group sold its TESSOL subsidiary which had a network of 176 petrol stations in southern, central and eastern Germany to the AVIA Group for €70.2m. The transaction was part of a capital reallocation in the corporate portfolio to increase investment in strategic business areas. In January 2020, the business unit was restructured to create a Mobility Solutions activity focused on low-carbon transport. This activity includes planning and operation of electric vehicle charging infrastructure, establishment of a network of filling stations for liquefied natural gas (LNG), which is a lower carbon emission alternative to conventional transportation fuels, and filling station charge card solutions. For example, BayWa’s established fleet filling station card may also be used by drivers of electric vehicles, giving users access to over 30,000 charging stations in Germany and around 40,000 in the rest of Europe.

Revenues attributable to the business unit fell by €584.5m during the nine months ended September 2020 (9M20) to €1,323.6m, reflecting the loss of TESSOL sales (c €290m) and lower fuel prices. EBIT increased by €4.5m to a record €26.0m, supported by above average volumes of heat energy carriers as consumers stocked up in response to low prices and VAT rates and the expectation of price increases in 2021 related to the introduction of carbon taxes. It is possible that there will have been further benefit in Q420 from consumers purchasing ahead of the introduction of carbon taxes in 2021 and the return of the VAT rate to 19%.

The Agricultural segment covers the key elements of the supply chain, from production to marketing of agricultural produce. The segment is split into four business activities:

Revenues attributable to the Agriculture segment declined slightly, by 0.9% year-on-year during 9M20 to €8,116.1m. while EBIT increased by 17.8% to €77.5m. Revenues attributable to BAST were lower, partly because of restricted trading caused by the coronavirus pandemic, but the business unit compensated for lower volumes through higher margins as commodity prices rallied in the third quarter and demand for feedstuff grain was boosted by a recovery in the pig population in China following an earlier outbreak of swine flu. Volume and price increases enabled Global Produce to increase both revenues and underlying EBIT. Revenues from the domestic agricultural trade business grew slightly, reflecting a modest increase in volumes of grain traded, but EBIT reduced because of weaker demand for herbicides caused by the dry weather and low fertiliser prices caused by low oil prices. Demand for agricultural equipment was boosted by the reduction in VAT mid-year, supporting growth in both revenues and EBIT for the business unit.

Management expects the segmental result for FY20 to be higher than FY19 despite the coronavirus pandemic. It expects that commodity price volatility will continue during Q4, benefiting international trading activity, while the Global Produce business is expected to benefit from marketing the German apple harvest at above-average prices and a seasonal rise in demand for exotic fruits in the run-up to Christmas. The order book at the end of September indicated that a strong final quarter for the Agricultural Equipment business is likely. While a year-end rally in the domestic agricultural trade business is unlikely and the cost of restructuring the operation will have a negative impact on earnings, both these effects will be more than offset by performance gains in the other three business units.

BayWa is the second-largest building materials trader in Germany with over 120 retail locations in southern and eastern Germany as well as around 30 sites in Austria. The business unit also serves a number of franchise partners in the building materials and retail business in Austria, which collectively operate around 1,000 sites. The business segment serves commercial and private customers, supplying the full spectrum of building materials so it can act as a ‘one-stop-shop’ for construction companies. Management has decided not to grow the segment through geographical expansion – in fact, it undertook a restructuring programme which completed in FY17 to reduce the number of sites it operated. It has elected instead to enhance the product portfolio, strengthen online activity and to move up the value chain.

BayWa is responding to consumer demand for more environmentally friendly construction by introducing building materials that minimise the emission of pollutants as well as improving energy efficiency. It currently offers around 7,000 products which meet its low emissions criteria. In addition to offering an online portal for business and private customers, the segment has a virtual planning tool for houses, enabling consumers to visualise what products in the online catalogue will look like in situ. It also has a property configurator, ‘Mr + Mrs Homes’, which allows private developers and construction firms to design homes in 3D, obtain estimates of costs in real time and submit plans for approval by the relevant authorities.

The trading activity is supplemented by the provision of services and participation in niche construction projects. During FY19, the building services activities were pulled together into a single entity positioned to install plumbing, heating and ventilation on a national basis. Since 2018, the business unit has been working with construction companies in Germany on projects on a joint venture basis. Typically, these projects showcase energy-efficient building design, helping drive demand for innovative materials. For example, BayWa is involved in a project of six buildings on a 10,000 square metre site in Schrobenhausen, where solar panels on the roofs provide electricity for charging cars and for use within the properties and heating is provided by a wood-fired system. The project is unusual in co-locating residential and commercial property, thus reducing traffic. In addition, profits from the sale of projects will form an additional income stream. Management expects that building sales will commence in Q420, contributing an estimated €2m EBIT to the segmental total.

Revenues attributable to the business unit rose by 10.6% year-on-year during 9M20 to €1,410.5m. Order intake in the German construction industry between January and August was almost as high as the previous year despite the coronavirus pandemic. Moreover, consumers spent money that would have been spent on holiday travel on home improvement projects. The reduction in VAT mid-year and low interest rates also boosted demand for building materials. Unsurprisingly, online sales developed positively during the period. EBIT attributable to the business unit as a whole jumped by 68.2% to €39.2m. In its Q320 results statement, management noted that it expected that volume-related year-on-year revenue and earnings growth was likely to continue to the end of FY20, resulting in significant increases in both revenues and earnings for the year as a whole.

This segment is responsible for marketing and developing digital products and services that enhance productivity in agriculture. It is also responsible for the group’s e-commerce activities, although the revenues and profits attributable to these activities are assigned to the individual segments. The activity was kick-started in 2015 through the acquisition of FarmFacts, an established developer of desktop or cloud-based digital farming solutions encompassing the entire agricultural value chain. The software is suitable for small and mid-sized farms, not just for large ones, and currently has over 18,700 users who collectively farm more than 25% of the agricultural land in Germany. The software helps farmers improve their productivity while complying with increasingly stringent legislation on nitrate emissions which limit the amount of fertiliser that farmers can apply. For more detail, please refer to our AgTech report.

Revenues attributable to the business unit rose by 15.7% year-on-year during 9M20 to €8.1m, primarily because of more intensive marketing of smart farming solutions during Q3 following the launch of an additional software module. This enables farmers to obtain agricultural input offers from various providers and conclude purchase and delivery arrangements online, complementing the more traditional services offered by the domestic agricultural trading activity. Operating losses narrowed by 17.6% to €8.4m.

Group revenues declined slightly, by €275.2m year-on-year during 9M20 to €12,197.8m, reflecting the loss of TESSOL sales (c €290m). EBIT jumped by 32.9% to €102.7m, with performance improvements in each of the three core operating segments. This growth was achieved despite absorbing c €18m additional costs associated with modified work practices required to combat the coronavirus and the absence of any exceptional income from the disposal of subsidiaries, which benefited 9M19 by €7.0m.

Net debt (cash less debt excluding finance leases) increased by €194.3m during the nine-month period to €3,579.3m at the end of September 2020. Gearing (net debt/equity net of minority interest) rose by 44.1pp to 374.7%. The primary cash movement was a €419.1m increase in inventories associated with the development of as yet unsold wind parks and solar farms that were under construction at the end of Q320. We expect this inventory level to have reduced by the year end as projects are sold during Q420.

In its statement accompanying the nine-month results, management stated that for FY20 as a whole it expects EBIT to be the same or higher than the €188.4m achieved in FY19, despite the coronavirus pandemic. Looking further out, when commenting on the EIP investment in December 2020 management presented projections based on the accelerated growth achievable following the EIP investment which showed group EBIT reaching €358m by FY25. Management expects the accelerated growth to result in an increase in EBIT from FY21 onwards but a reduction in EPS in the short term. Management’s projections show the equity ratio (equity divided by total shareholder equity and liabilities) improving from 15.3% at end FY19 to 22.5% at end FY25, and net debt/EBITDA falling from 6.0x at end FY19 to 3.7x at end FY25.

Looking at our peer multiples analysis, we note that BayWa is trading on prospective EV/EBITDA and P/E multiples that are similar to or at a premium to the respective means of our samples of stocks in the conventional energy, agriculture and building materials sectors and at a discount to the mean of our sample of stocks in the renewable energy sector for prospective EV/EBITDA and 2020 P/E multiples, but not the 2021e P/E multiple. This is to be expected, given that BayWa has activities in all of these sectors. In addition, 2021 bears the dilutive impact of the EIP investment without much of an uplift in EBIT as it will take time for the additional renewable energy projects enabled by the investment to be constructed and either sold or used to generate IPP revenues. Consensus estimates show EPS falling to €0.91/share in FY21 before rising to €1.47/share in FY22, which is equivalent to a PER of 22.3x at the current share price.

Our sum-of-the-parts analysis shows that, based on the proportion of operating profit attributable to the four core segments in FY19, BayWa is trading at a discount to the weighted mean with respect to FY21e EV/EBITDA and a premium with respect to FY21e P/E, reflecting the dilutive impact of the EIP investment. As noted above, management is projecting segmental EBIT from the renewable energy segment to exceed €170m by 2023, so the proportion of operating profit attributable to the renewable energy segment is likely to be higher in FY21 than FY19, resulting in higher weighted means than shown in our calculation. BayWa’s FY21e P/E ratio value is higher than the mean for our renewable energy sample because of the short-term dilutive impact of the EIP investment discussed above.