How AI, EVs and clean energy are driving an NKT boom
We are all about finding unrecognised growth opportunities.
That is why we look for companies that provide critical infrastructure for major structural shifts. In the global energy transition, NKT A/S (NKT: DC) is such a linchpin in its sector, electrical transmission grids.
Electric grids are under pressure to deliver to three areas of exponential demand growth: the need for renewable generation, wholesale EV adoption, and the boom in data centre and AI demand.
According to the International Energy Agency (IEA), the world must add or replace 80 million kilometres of power lines by 2040 - effectively doubling the existing approximately 40 million km global grid to prevent severe transmission bottlenecks - in order to connect the generators with their customers in these new economies.
This has created a material operational bottleneck.
High-voltage direct current (HVDC) subsea and underground cable manufacturing is concentrated among a small number of major Western players: NKT, Prysmian, and Nexans.
Barriers to entry are high.
It takes over three and a half years to bring new capacity on line, manufacturing facilities are capital-intensive and specialised cable-laying vessels are scarce, making it almost impossible for current industry capacity to meet kilometre demand targets.
The trio of grid companies is booked solid for the next 10 years, leaving a structural deficit that cannot be bridged.
While Prysmian and Nexans are formidable legacy giants, in our view, NKT is the superior investment vehicle for exposure to the HVDC grid boom given its pure play HVDC focus, capital efficiency, and execution track record.
Cable manufacturers previously operated as low-margin commodity price takers, accepting slim terms just to maintain plant utilization. That dynamic has completely inverted.
Transmission system operators (TSOs) like TenneT (Netherlands/Germany), and 50Hertz (Germany) are no longer running standard procurement tenders.
Instead, they are locking in massive multi-year framework agreements and paying NKT capacity reservation fees and forward progress payments. TSOs do this to guarantee factory slots and secure cable-laying vessels years in advance.
These arrangements can fund NKT's capital expenditure upfront, reduce balance sheet funding risk and improve NKT's pricing power.
As high-margin HVDC projects step up in execution and new capacity comes online, NKT's operational earnings before interest, taxes, depreciation and amortisation (EBITDA) margins are expected to expand toward approximately 20%.
Based on current assumptions around pricing, customer-funded capex and project execution we believe that NKT's return on capital employed (ROCE) could increase from aproximately 12% today to over 24% over the next five years.
That is a pretty compelling statistic, in our view.
The grid replacement cycle in Western economies is a multi-decade affair.
On two-year forward consensus estimates, as recent capacity investments ramp to full output, NKT trades at an attractive approximately 10x-12x EV/EBITDA (and under 18x price to earnings ratio).
For a dominant pure-play business with customer-financed capital expenditure, a €13 billion-plus order book and exposure to long term grid investment, we view the current valuation as attractive relative to the potential earnings growth opportunities - we thought that might excite you.
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