Neles Oyj - defensive valve business

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Let’s open a discussion forum specifically for valves. This valve business is undoubtedly challenging for small investors, as few of us deal with industrial valve solutions and flow technology on a daily basis.

Even before the listing, Valmet announced that it had acquired a stake in Neles:

Neles is a good and high-quality global company, a large part of whose business is recurring, and which has a strong position in the pulp and paper industry. The company has shown its ability to achieve good growth and has the potential to continue growing. Today, we have agreed to acquire a minority stake in Neles, and our goal is to increase our ownership when the share price of Neles supports the purchase of additional shares. Valmet’s goal is to be actively involved in Neles’ development over the long term. The strategic rationale for the share acquisition is also supported by the fact that Valmet and Neles have a common history, the companies serve the same global industries, and they benefit from the same megatrends.

Pasi Laine, CEO of Valmet, June 17, 2020

Information about the upcoming Neles Corporation

The upcoming Neles Corporation is a renowned provider of flow control solutions and services. It serves the oil and gas refining industry, pulp, paper and bioproducts industry, chemical industry, and other process industries. Neles has 2,900 employees and operates in over 40 countries. Neles’ audited 2019 carve-out revenue was 660 million euros and carve-out operating profit was 93 million euros.

Source:
https://www.metso.com/fi/uutiset/2020/5/tulevan-neles-oyn-virtuaalinen-paaomamarkkinapaiva-2020/

Neles is a globally leading valve, valve automation, and services company with a strong position in the pulp and paper industry. Approximately 70% of Neles’ revenue comes from recurring business. Neles’ business covers several process industries and geographical areas, with 26% of the company’s revenue coming from the pulp and paper industry. Since 2011, Neles’ received orders have grown by approximately 5% annually, and profitability has improved.

neles-key-figures-en
neles-key-figures-en650×650 137 KB

Figures source: Neles CMD 2020

Source:
https://www.valmet.com/fi/sijoittajat/valmet-sijoituskohteena/yritysostot-ja--myynnit/vahemmistoosuus-tulevasta-neleksesta/

Brief history of the upcoming Neles Corporation

The first in the industry

From the beginning, it was clear that only a metal-seated valve would work in these conditions. However, such a valve had never been designed before. After two years of intensive work, Neles’ product development team presented the product now known as the Neldisc valve. The U-shaped metal seal and elliptical disc formed a unique triple-eccentric valve structure that we are accustomed to seeing in many current butterfly valves. Neles’ version was the first in the industry.

The first deliveries at the end of 1975 exceeded all expectations, and the valves proved to be bubble-tight even at high temperatures. The product incorporated many innovations related to its structure and manufacturing technology. When the product development project ended, intellectual property rights for the revolutionary combination of the elliptical disc and metal sealing ring had been secured in 13 countries.

More information:
https://www.metso.com/fi/showroom/oljy-kaasu/yli-40-vuotta-luotettavia-lappaventtiileja/

Summary

Overall, the upcoming Neles Corporation has been described in many contexts as a strong player in its field and a global leader, with the majority of its revenue coming from recurring business. Due to its market leadership, defensive nature, and future growth prospects, I see Neles as an attractive investment case.
What do you think?

Let’s also add a link to the company’s brand new website:

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Great job opening the Neles thread, @Don_Jari. Due to its defensive nature, Neles could be suitable as a long-term anchor in an investor’s portfolio. Erkki Vesola from Inderes already briefly covered the company on May 28th in this video:

Vesola noted in the video that Neles’ news flow is not usually strong, as larger orders account for 2% of turnover. This means that big, impressive headlines are unlikely to excite investors, and the pace will be defensive. To the beginning of this thread, a few pieces of information about Neles could be added to supplement the comprehensive opening post.

Company History

  • 1956 Antti Nelimarkka and Eino Santasalo establish Neles Oy. The company begins developing manual shut-off valves, control valves, and remote-controlled shut-off valves.
  • 1970 Neles’ own research activities begin with the establishment of a metallurgical laboratory.
  • 1982 Rauma-Repola Oy acquires Neles Oy.
  • 1983 Neles establishes its own flow laboratory.
  • 1988 Rauma-Repola acquires valve company Jamesbury Corp., which merges to form Neles-Jamesbury.
  • 1997 Neles-Jamesbury becomes Neles Controls.
  • 1999 Neles Controls merges with Valmet Automation Oy.
  • 2001 Valmet Automation becomes part of the Metso Group; Neles continues as a valve brand.
  • 2020 Neles separates from Metso to become its own listed company.
    More on the company’s history:
  • http://www.verkkouutiset.fi/antti-nelimarkan-neles-oli-oman-aikansa-nokia/#ca46465d
  • 8.27. Neles-säätöventtiilit | Puunjalostusinsinöörit

Product Development

  • metal-seated ball and butterfly valves and their manufacturing technology
  • development of positioners (pneumatic => electro-pneumatic => digital positioner)
  • Subsea valves (Neles Marine) developed for North Sea gas production, installed on the seabed

Valve Industry Acquisitions made during Metso’s time:

  • 2000 StoneL Corp. (USA), (incl. positioners)
  • 2001 Valvcon Corp. (USA)
  • 2008 MAPAG Valves GmbH (Germany), (butterfly valves)
  • 2012 Valstone Control Inc (South Korea), (globe control valves)
  • 2018 Rotex (RMEPL), valve unit (India) (limit switches, process valves, automation products)

A Few Comparables

  • Cameron (A Schlumberger Company)
  • AVK Group (Denmark)
  • Emerson Electric Co. (Fisher Valves) (NYSE:EMR)
  • BEL Valves (UK)
  • Flowserve Corp. (NYSE:FLS)
  • XHVAL (China)
  • Pentair Valves (NYSE:PNR)
  • JC Valves
  • PetrolValves
  • Valvitalia
  • Walworth
  • IMI Plc (LSE:IMI)

Neles’ Market Position

  • highly fragmented market (TOP10 holds 22% of the market)
  • Neles is a market leader in pulp and paper industry valves
  • Neles’ German unit is also a strong player in industrial valves
  • Neles focuses on ball and butterfly valves, whose names refer to the shape of the closing part.
  • quantitatively, the most small valves are manufactured
  • the majority of sales come from large valves

Growth

  • over the last 10 years, order intake has grown by approximately 4-5% annually
  • automation controlling valves has now grown faster than actual valve manufacturing

Defensiveness

  • good brands matter, technical expertise in customer processes, service capability are key
  • customers are not very price-sensitive, as a valve failure quickly causes significant financial losses for the customer
  • 30% of turnover is dependent on customer investments, 70% of turnover is regularly recurring

Future

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This Neles would indeed interest me for my own portfolio. I see a bit of the same potential here now, at least in the initial stages of the stock market, as I once did in the Caverion/YIT case.

Mainly, I’m now wondering whether I should still buy Metso early next week and then sell the MOs after the demerger, or buy Neles directly on July 1st. Which strategy would be cheaper, and how might the stock prices behave on the first day?

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I have the same thoughts. I came to the conclusion to buy Metso now, sell MO, and buy more of the four with the sum. I suspect the MO price will overshoot a bit. Pure gut feeling.

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I think Metso is at least starting to be pretty fully priced. At some point on another forum, it was suggested that at the beginning of the merger, those who don’t want to own Neles will dump the shares regardless of the price. In that case, the price of an oversold stock might drop to an attractive level. Unless all the vultures are on the same carrion…

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Nothing to add myself, but I have to tip my hat to you, @Don_Jari, for a great opening, and right after that, an excellent continuation from @Contrafun. :slight_smile: I’m following this thread; it will be interesting to see how the merger plays out and how Neles will be priced in the first few days.

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If only we could get Inderes and maybe :crown:-Eki or Antti V. to follow the company, that would be great…

Addition: I saw from the Metso Outotec thread that @Ruonis is also very knowledgeable about valves due to his work. Let’s hope we get to hear his expert comments on this forum as well.

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Thanks to @Don_Jari for the excellent opening and @Contrafun for the good follow-up. I recall a few other people familiar with the valve industry writing useful text in the Metso Outotec thread, so I dare to hope that this thread will become a good source of information for investors interested in Neles.

In addition to Finland, Neles has production facilities in Brazil, South Korea, India, China, Germany, and the USA. The most important technology center is located in Vantaa. A new factory is set to open in China soon. The industrial valves manufactured by Neles are slightly larger than the common gadgets familiar to the general public: the largest valves have a diameter of 2.5 meters, and the price tag for such valves is a six-figure euro amount.

In Germany, one of Neles’ service centers is located in Leuna, near Leipzig, which seems to be Germany’s most important research and production hub for renewable energy. Neles has a familiar Finnish customer in Leuna, as UPM is currently building a biorefinery there. I recall that Fortum (Uniper), Neste, and Wärtsilä also have operations in Leuna. In addition to Leuna, Neles has two other large service centers in Germany.

The pandemic has delayed the completion of a service center being built in northeastern France. Once opened, this new service center, due to its favorable location, will also be able to serve customers in southern Germany and Switzerland. With the newest unit, Neles has four large service centers in France. About six months ago, Neles opened a new service center in Portugal. In total, Neles has about forty service centers, typically located in oil, gas, and chemical forest industry clusters in e.g., the United Arab Emirates, Brazil, Canada, Mexico, Norway, Sweden, Saudi Arabia, Singapore, Finland, and the USA — but for some reason not in Russia or Venezuela.

Neles has over a hundred customers under valve service agreements, which provides a good basis for stable revenue. Predictability is further enhanced by the fact that the customer base is generally quite reluctant to switch suppliers if no defects have occurred in previously supplied valves — and Neles’ valves have shown fewer defects than average. Neles primarily gains new customer agreements when a customer is dissatisfied with the products of a previous supplier.

Jukka Moisio, who achieved good results as CEO of Huhtamäki from 2008–2019, will start as chairman of Neles’ board. A month ago, he was called from a well-deserved sabbatical on short notice to become CEO of Nokian Tyres. Moisio is also on the board of Metsä Board, so he is also familiar with the needs of Neles’ customer base through that channel.

Neles’ dividend policy is moderate compared to Metso: the goal is to pay about 40% of net profit as dividends.

Guesses for Neles’ opening price on July 1st? My own guess in light of current stock prices and other information: 9.03.

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The same speculation was made when Valmet spun off, and it so happened that Valmet’s share price remained stagnant for a couple of months until it began its ongoing rise. I don’t believe at all in a significant drop for Neles, but it probably won’t go up much in July either. I would feel pretty safe buying Metso now in June.

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My (pure) guess: €8.90. It won’t go below €8, thanks to Valmet.

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I read the 480-page history published in 2003 by Jouko Koskinen, the long-term CTO and CEO of Neles. From memory, here are some excerpts that provide perspective on potential corporate arrangements:
-Neles stated 50 years ago that its valves were too expensive for heating and water plants (assuming at least solid-free waters)
-Sometime around the 1970s, Neles stated that black iron valves were not their thing
-Already in the 60s, several Swedish pulp mills only accepted Neles valves. Of course, the Swedish NAF did not like this.

My own observation was that valve manufacturers that had fallen behind the technological forefront were acquired. Since 30% of Neles’ revenue comes from valves for new plants, this, in my opinion, mitigates technological risk.

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Thanks for the incredibly thorough messages! I’m still wondering about the dividend policy—is there any information or guesses on how it will develop and what its goal is?

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My guess: opening price €8.68.

  • Neles accounted for 23 percent of Metso’s 2019 earnings. Neles’ value thus calculated is 0.9-1.3 billion.

  • The comparison group to be compiled for Neles is interesting, as not all flow control companies are suitable comparators (differences in business and offering). Quote from Metso’s old material: “We are one of a few flow control companies that can deliver an entire valve solution including the valve, actuator and smart controller.” (metso.com/industries/valves-for-process-industries/go-with-the-flow/valves-in-minerals-processing)

  • DNB had compiled the following comparison group for Neles: Emerson Co. (NYSE: EMR), Flowserve (NYSE: FLS), IMI Plc (LON: IMI), SPX Flow (NYSE: FLOW), Rotork Plc (LON: ROR), Mueller (NYSE: MWA)
    => Peer group EV/EBIT 2020e 17.5x and 2021e 14.7x

  • Old estimates have also used Metso Flow Control as comparators: SpiraxSarco (LON: SPX), Circor (NYSE: CIR), Alfa Laval (STO: ALFA), Sulzer (SWX: SUN), Velan Inc. (TSE: VLN)

  • Danske’s peer group 5-year EV/EBIT was 14.1x and OP’s used EV/EBIT multiple was 15x.

=> Based on these, the market could accept an EV/EBIT multiple of 14-15x for Neles.

  • Neles adjusted EBIT €93 M, Metso (Neles) shares: 150,348,256 pcs
    => EV/EBIT 13.5 = €8.35
    => EV/EBIT 14.5 = €8.97
    => EV/EBIT 15.5 = €9.58
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Metso’s share price is in such a big drop today (approx. -5%) that I think I’ll buy it today and open my Neles position that way. If the Metso-Outotec share price recovers tomorrow, I could then sell them and use the proceeds to buy more Neles. Let’s see if this little maneuver results in a profit or a loss :smiley:

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While looking at the course information, I started thinking about the exact same solution :grin: However, Neles’ opening price might potentially jump during the first couple of days, so one could potentially already cash in some profits there :man_shrugging_t2:

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8.05 seems to be the “closing price” for Neles before it transitions into an independent company tomorrow. This is a cold calculation based on Outotec’s and Metso’s closing prices today, so this calculation might not have much value; tomorrow is a new day :slightly_smiling_face:

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Will separate pages and links etc. be opened for Neles by tomorrow, @Yu_Gong? :thinking: Is it already known whether the company will be covered by Inderes’ monitoring?

Addition: The first stock exchange release is out :star_struck:.
https://www.inderes.fi/fi/tiedotteet/neles-oyj-metso-oyjn-osittaisjakautuminen-rekisteroity

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Yeah, probably not many sellers around the 8,000 mark…

Other than in the internal contests of algo-bots…

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Yeah, the company page will be opened tomorrow once the course data starts coming in (course/largest owners/bulletins and videos will be visible, if available), but I can’t/won’t directly comment on monitoring. :frowning: Of course, you can express your wish for an Inderes analysis to the company through the company’s IR :wink:

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Expressed. There was also a fervent wish to get the company’s investor relations person or representative to this forum, in the same way that Mirko or Kati participate in their own companies’ discussions. :folded_hands:

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