Road safety – a UN goal you can invest in

Written by Neil Brown on 12th October 2017

What is the number one cause of mortality for 15 to 29-year-olds around the world? It may surprise you to learn that it is road traffic accidents. According to the World Health Organisation, there are 1.3 million deaths on the roads every year, which equates to 3,500 a day.

The United Nations – as part of its Sustainable Development Goals and Decade of Action for Road Safety 2011-2020 – has targets to halve the number of deaths and injuries from road traffic accidents by 2020. This is not only the right thing to do but is also profitable for those companies that can develop the technologies that will deliver this target.

The new tech could reduce road deaths

The most interesting growth for investors is likely to come from Active Safety systems, which are bringing down injury rates through incident avoidance and crash protection. These are based on electronic technologies in vehicles including sensors and response mechanisms in steering and braking.

Accelerated by new developments and the electrification of vehicles, it is estimated that the market for Advanced Driver Assistance Systems will reach €58bn by 2025, with Automatic Emergency Braking (AEB) expected to be standard on virtually all new cars by this date. This requires a significant increase in the semi-conductor material in a car. On average, there is £230 of semi-conductor content in a current internal combustion engine car but this trebles to around £700 for a full electric vehicle.

A number of companies we hold across our funds are benefiting from these themes, primarily through the adoption of AEB.

Growth market, doing good

Infineon Technologies, for example, is a German analogue semiconductor manufacturer, playing a key role in providing the chips for auto safety systems. With the semiconductor content in cars continuing to grow, the market is expected to exceed $35bn in value next year. Infineon has a strong management team and several attractive metrics: a return on equity above 15 per cent, 10 per cent-plus compound annual growth rate (CAGR) on revenues and 15 to 20 per cent earnings per share.

Another major player in the smart mobility market is French company Valeo, which offers one of the largest range of smart sensors and features for enhanced automated driving systems. It markets itself as offering smart technology for smarter cars.

AEB is proving to be the seatbelt of the current generation as a step change in car safety: 100 per cent of new cars in Europe are expected to have this feature by 2020 (plus 80 per cent in the US and 50 per cent in China), creating a €10bn market.

Valeo has a track record of converting high sales growth into margin expansion, earnings growth and return on equity – the latter is 23 per cent and growing. Despite this, it is still only moderately expensive against its own history.

Moving one step back in the supply chain, Dutch business ASML sells the machines that make semiconductors and is currently the world’s largest supplier of photolithography systems.

Faster, smaller, greener is ASML’s guiding principle, continuing Moore’s Law towards smaller, cheaper, more powerful and energy-efficient semiconductors. Intel co-founder Gordon Moore has said the number of transistors per square inch on integrated circuits is doubling every year.

Current estimates claim the Internet of Things will connect 50 billion devices by 2020, each containing at least one chip. ASML is at the centre of these fast-moving developments, with a near monopoly in the €6bn a year European lithography market and its focus on next generation Extreme Ultraviolet Lithography (EUV) technology puts the company in a potentially dominant position until 2030.

Another play on the electric cars theme is global materials technology and recycling group Umicore, headquarted in Belgium, which has activities in scrap and precious metals as well as catalytic converters and advanced electric vehicles battery material.

The company makes and distributes nickel-manganese-cobalt (NMC) cathode material for lithium in batteries and we see growth prospects on a three-year view based partly on increased take up of electric vehicles. This is despite the fact Tesla does not use NMC at present and China is still employing lithium-iron phosphate batteries.

Umicore has around a 30 per cent market share in NMC cathodes, is set to be one of the leading players by 2020 and is well positioned in the materials/electric vehicles supply chain to benefit from increased penetration.

Moving to other auto safety developments, LED headlights are a low energy and safer option for cars and German company Hella is the market leader in this area. Data show 50 per cent of accidents happen at night but just 30 per cent of car trips, and this lighting provides superior illumination of the road for drivers and faster signalling of braking for other cars.

LED headlight penetration was just 5 per cent in 2015 but is expected to grow to 20 per cent by 2020. Hella generates strong growth and high and expanding margins with good cash conversion, a strong balance sheet and growing returns on invested capital.

Elsewhere, French company Michelin is a world leader in energy efficient and safer tyres and has a key part to play in global efforts to reduce road deaths.

Michelin’s motorised wheel makes it possible to design lighter, more compact or more spacious vehicles. Mounted on either the front or the rear, and on two or four wheels, it eases the process of turning conventional vehicles into hybrids.

We believe the company’s commitment to energy efficiency and auto safety will enable tyre growth ahead of the market: Michelin’s 4 per cent sales growth target compares to the 2.5 per cent to 3 per cent expected for the market.

We also feel the company’s superior management practices and commitment to reducing the manufacturing footprint will allow it to expand margins. Michelin does look expensive against peers but that is due to a de-rating of other names in the sector after the VW crisis.

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