Morning Note: Market news and an update from engineer Atlas Copco.

Market News

Gold dropped below $2,420 per ounce, retreating further from record highs as the dollar rebounded on robust US economic data, although bets for Federal Reserve interest rate cuts remained intact. The greenback was bolstered by stronger-than-expected manufacturing growth in the US Mid-Atlantic region for July. The 10-year Treasury currently yields 4.21%.

US equity markets fell last night – S&P 500 (-0.8%), Nasdaq (-0.7%). Chinese investors sold a record $42.6bn of US stocks and bonds in May. Funds in China may have offloaded American securities to reduce risk amid uncertainty around the presidential election, said Global X Management’s Billy Leung, adding there’s also “possible political influence” to cut dollar holdings.

This morning in Asia, markets were also weak: Nikkei 225 (-0.2%); Hang Seng (-2.0%); Shanghai Composite (+0.2%). The yen slipped back down to 158 against the dollar, while Japan’s core CPI accelerated for a second month to 2.6% in June, a tad weaker than expected. China’s Third Plenum fell short on growth catalysts.

The FTSE 100 is currently trading 0.2% higher at 8,205, while Sterling buys $1.2936 and €1.1881.

Donald Trump officially accepted the GOP nomination and vowed to end support for EVs and “bring auto jobs back to our country” through the proper use of taxes, tariffs, and incentives.

Source: Bloomberg

Company News

Yesterday lunchtime Atlas Copco released Q2 results slightly below market expectations. Looking forward, the group expects the near-term outlook to remain at the current level. In response, the shares, which are listed in Sweden, fell by 5%.

Atlas Copco is a world-leading manufacturer of innovative compressors, vacuum solutions, generators, pumps, power tools, and assembly systems. The group has a diverse customer base made up of general manufacturing (22%); process industry (20%); electronics/semis (16%); construction (12%); auto (10%); and other (20%). The products help the customer to increase operational performance, save energy costs, reduce contamination, cut down on failures in the field, lower noise levels, and extend service intervals.

As a result, the company provides exposure to a broad range of trends: demand for increased energy efficiency and reduced emissions; increased use of lightweight materials in transport industries; the transition from petrol to electric vehicles; increased use of demanding materials and production environments in processes for semiconductor and industrial production; increased production automation and smart factories; demand for improved ergonomics; and increased demand for digitally-supported service offers. Overall, the company will play a role in the effort to reorganise and improve the resilience of supply chains, bring manufacturing closer to domestic markets, and increase automation in the face of higher labour costs or deteriorating demographics. Finally, over time the vacuum business should benefit from the expansion of the North American semiconductor manufacturing market.

The target is to grow revenue by 8% per annum, primarily through organic means, complemented by selective acquisitions of companies in or close to existing core competencies. The group operates an asset-light strategy – only components that are critical to the performance of the equipment are manufactured in-house. The company has integrated itself with its customers and can provide rapid and extensive services and support of their installed base of equipment. 36% of revenue (and 50%+ of operating profit) is generated from service (i.e., spare parts, maintenance, repairs, consumables, accessories, and rental). This is more stable than equipment sales (64%) and provides a strong base for the business and greater resilience in difficult times. The cost of the group’s equipment is low relative to the customer’s operating costs and, as a result, the company has strong pricing power, important at a time of raw material cost inflation. Atlas Copco is based in Sweden and reports in Swedish Krona (SEK).

During the second quarter of 2024, the overall demand for the Atlas Copco’s equipment and services was mixed, and the order intake remained at the same level as the previous year. Compared to the previous quarter order volumes decreased.

Revenue grew by 3% to a record SEK 44.8bn, versus the market forecast of SEK 45.0bn. In organic terms, which exclude M&A (+2%) and currency (-1%), growth was 2%. Order intake fell by 1% in organic terms to SEK 43.7bn, below the market forecast of SEK 44.7bn.

Atlas Copco operates through four divisions or ‘Techniques’, with the performance in the quarter as follows:

·       Compressor Technique (44% of 2023 sales): organic revenue and orders rose by 9% and 6%.

·       Vacuum Technique (25% of sales): organic revenue fell by 8%, while orders rose by 2%.

·       Industrial Technique (16% of sales): organic revenue grew by 4%, while orders fell 13%.

·       Power Technique (16% of sales): organic revenue was flat, while orders fell 11%.

Order volumes for industrial compressors were basically flat, and significant order growth was achieved for gas and process compressors. Order volumes for vacuum equipment remained at the same level as the previous year, supported by increased demand from the semiconductor industry, whereas demand from industrial and scientific vacuum customers was lower. The order intake for industrial assembly equipment and vision solutions decreased markedly, as a result of lower demand from the automotive industry. Orders for power and flow equipment decreased significantly, mainly due to lower order intake for generators and pumps. The service business, including specialty rental, continued to grow with increased order intake in all business areas and in all regions.

Atlas Copco generates attractive margins, with gross above 40%, providing some shelter against rising raw material costs, and operating margin above 20%. In Q2, adjusted operating profit rose by 3% to SEK 9.8bn, just below the SEK 10.0bn market forecast, with the margin down 10 basis points to 21.8%, held back by sales mix and R&D investment.

EPS grew by 11% to SEK 1.57, versus the market forecast of SEK 1.56. The return on capital employed during the previous 12 months slipped from 30% to 29%, although still well above the group’s 8.0% cost of capital.

The company has a robust balance sheet and continues to generate strong cash flow (SEK 6.9bn in Q2). Net debt reduced from SEK 32.0bn to SEK 21.6bn, while interest-bearing liabilities have an average maturity of 5.2 years. Financial gearing is a very comfortable 0.5x net debt to EBITDA. The group continued to consolidate its industry with acquisitions. The dividend policy is to pay out 50% of net income. For 2023, the group approved a payout of SEK 2.80 per share, 22% higher than the previous year, equivalent to a 2% yield.

During the quarter, Vagner Rego, formerly the Business Area President for Compressor Technique, took up the role of CEO.

The group provided brief commentary on the near term outlook – it expects ‘customer activity level will remain at the current level’.

Source: Bloomberg