The Brazilian industrial company is a leading player in industrial electro-electronic equipment and energy systems with exposure to both domestic and overseas markets. It is a clear long-term beneficiary of the electrification of the world energy system through the products and services it offers.
Research Assessment
WEG has a long track record operating mainly in the capital goods sector, with a roughly 50/50 split across domestic and overseas business. It has manufacturing units in 12 countries and sales in more than 135, with around 37,000 employees.1 It is a diverse business, with key business lines including low voltage electric motors, gears, drives, industrial automation equipment, electric generators, transformers, renewables and electric vehicle powertrains.
It is the domestic leader in low voltage electric motors, with roughly 80% market share. There is significant revenue upside potential from international growth, as well as the expansion of the product range in areas such as renewables, including wind and solar, electric powertrains and digital solutions. WEG has constantly adapted to market developments, which is demonstrated by the fact that 56% of products sold in 2021 were released in the last five years.2
WEG’s net revenue by business line and market in 2021
Source: WEG Integrated Annual Report 2021, page 22.
WEG has sustainable Return on Invested Capital (ROIC) and growth at the centre of its philosophy, which drives key strategic decision-making and influences management remuneration. This fits alongside WEG’s long-term mindset, which is one of its key competitive advantages.
Having kept the company within our research coverage due to its positive thesis and strong fundamentals, we purchased it for the portfolio recently while the market valuation was particularly attractive.
Key fundamental data: WEG in a sector context
| WEG% | MSCI Emerging Markets Industrials Sector | |
|---|---|---|
| ROE (FY2) | 28 | 13 |
| Revenue growth (trailing 5yr, p.a.) | 20 | (4) |
| Earnings growth (trailing 5yr, p.a.) | 26 | 12 |
| Revenue growth (FY2) | 15 | 6 |
| Earnings growth (FY2) | 21 | (14) |
Source: FactSet, August 2022.
WEG has a clear culture which is part of the competitive advantage of the company.
ESG Assessment
Sustainability overview
The fundamental sustainability characteristics of WEG are strong, and several sustainability themes are driving our investment thesis for WEG. The global focus on electrification and renewable energy are important tailwinds for WEG through the products it offers. WEG is also a clear contributor to several UN SDGs.
We believe there are areas for improvement on both the social and environmental points, however we believe that the company displays willingness to embrace an ESG agenda. The company has appointed a chief sustainability officer and committee to actively pursue better ESG practices, as its characteristics thus far have been more a by-product of its natural success as opposed to specifically targeting an outcome.
Sustainability rating: 2.3
Governance overview
WEG has a clear culture which is part of the competitive advantage of the company. A key ingredient to this has been the influence of the three original founders, who are today represented by their surviving family members. However, we would like to see more independence on the board and higher remuneration hurdle rates. Historic capital allocation has been of the highest quality, having maintained industry leading returns despite the increasing internationalisation of the business.
The management team follows a clear pattern of internal promotions and longevity at the company which speaks to the internal culture and quality of training/development. The current CEO started as a trainee in 1981.
Information disclosure for both financial and qualitative information is strong, and the company has produced an integrated annual report since 2013.
Governance rating: 2.3
Areas for improvement
The roughly 80/203 gender split (male/female) is in line with industry peers, but women are under-represented at a senior level. On a positive note, the company recently appointed a female to the Board of Directors.
We are in discussions with the company regarding net zero commitments. We understand this is the top priority of the Sustainability Committee and they are currently working with a consulting company to help form their approach. The company already discloses Scope 1, 2 and 3 Emissions which have been validated by a third party.
The future of WEG in the global transition to a low-carbon economy
As the world transitions to an ever-increasing electrified society, the importance of electric motors continues to increase. Electric motors represent around 70% of industrial electricity consumption and electricity consumption is by far the largest component of the total cost of ownership of electric motors. With this backdrop, there is a clear regulatory trend towards higher efficiency electric motors. As a leading player in this industry, WEG is set to benefit from this multi decade trend.
Renewable energy is obviously key to driving lower emissions and the technology is economically viable. WEG has been strategically positioning itself for years in this market and has developed key solutions as part of its Energy Generation, Transmission and Distribution business segment. The introduction of wind turbines and solar systems in particular will be future growth drivers for the business.
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1Source: WEG Integrated Annual Report 2021, pages 14 and 41.
2Source: WEG Integrated Annual Report 2021, page 23.
3Source: WEG Integrated Annual Report 2021, page 15.
4Source: WEG Investor Relations Presentation July 2022, page 4.
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