ARTECHE

Arteche Lantegi Elkartea (BME: ART) represents a compelling case study in business transformation and operational excellence. What appeared in 2021-2023 as a sleepy electrical equipment manufacturer has transformed into a company experiencing a remarkable inflection point in profitability and returns on capital. With ROIC exploding from 3.8% to 18.3% over four years and accelerating momentum in both margins and growth, Arteche has evolved from deep value opportunity to quality growth story.

Investment Thesis in Brief:

• ROIC Acceleration: From 3.8% (2021) to 18.3% (2025) - a 50.62% CAGR, now well above 15% hurdle rate

• Expanding Margins: Direct margin reached 37.1% in H1 2025 (up 210 bps YoY), EBITDA margin hit 15.0% (up 390 bps YoY), demonstrating sustained operating leverage

• Structural Moats: Multi-year certification barriers, deep utility relationships (80-year partnership with Iberdrola), critical infrastructure positioning with #1/#2 market positions

• Accelerating Growth: Orders exceeded €300M in single half-year for first time (+6.2% YoY), revenue +13.9% to €256.2M in H1 2025, backlog at €340.3M providing strong visibility

Current Valuation Context (€22.40 per share):

• Market Cap: €1,277M | Enterprise Value: €1,314M

• EV/EBITDA: 17-20x (depending on baseline used)

• The market has recognized the transformation - stock up 88% in 2024, +6% in 2025 YTD

• At current price, market implies 15%+ revenue growth and 14-16% EBITDA margins sustained for 5+ years

• For new investors: Attractive if you believe the transformation is structural and sustainable; expensive if you believe mean reversion is coming

The market is offering the opportunity to buy a 18%+ ROIC business with expanding margins, durable competitive advantages, and double-digit growth for less than 5x EBITDA. These opportunities are rare and typically don't persist once institutional capital discovers them.

The Business: Critical Infrastructure for the Energy Transition

What Arteche Does

Founded in 1946 in Mungia, Spain, Arteche manufactures and supplies mission-critical electrical equipment and solutions for utilities worldwide. As Alexander Artetxe, President & CEO, describes the company's mission: "Our purpose is to ensure universal access to clean, efficient, and high-quality energy."

The company operates across three business segments:

1. Measuring & Monitoring: Instrument transformers (current, voltage, combined) from medium voltage (up to 72.5kV) to high voltage (up to 800kV). These devices convert high-voltage electricity to measurable values for meters and protection systems.

2. Network Reliability: Auxiliary relays, capacitor banks, harmonic filters, and grid reliability solutions that ensure stable power delivery and renewable energy integration.

3. Transmission & Distribution Automation: Substation automation systems, distribution automation controllers, reclosers, and digital measurement solutions aligned with IEC 61850 standards for smart grids.

With equipment operating in over 175 countries and more than 80 technical-commercial offices globally, Arteche serves the full value chain from generation to distribution.

The Business Model Advantage

Arteche occupies a unique competitive position as a "hybrid" between Tier I global giants and Tier II specialists. This positioning provides:

• Flexibility of smaller players: Faster response times, customization capability, closer customer relationships

• International footprint of large players: Global manufacturing presence (Europe, Americas, Asia-Pacific), comprehensive product portfolio

• Critical mass without bureaucracy: 2,643 employees, €447M in revenue (2024), sufficient scale to invest in R&D while maintaining agility

This hybrid model allows Arteche to compete for complex, high-spec projects that Tier I players may find too small, while offering capabilities that pure specialists cannot match.

The Moat: Deeper Than It Appears

1. Certification and Homologation Barriers

The most underappreciated aspect of Arteche's moat is the multi-year certification process required for electrical equipment. Utilities cannot simply switch suppliers on price:

Certification Requirements:

• UL certification (United States) - validates safety, flammability, durability

• MC certification (Measurement Canada) - required for all billing equipment

• USDA RUS approval - for rural utilities

• IEEE C57.13, IEC 61869 standards compliance

• Country-specific approvals (E.ON Germany, NBR Brazil, JIS Japan, GOST Russia)

The Time Barrier: Product homologation with utilities can take years. Once certified and integrated into a utility's approved vendor list, switching costs become prohibitive. The utility has:

• Validated the equipment's reliability and compatibility

• Trained personnel on installation and maintenance

• Integrated the products into their systems

• Built operational procedures around the equipment

This creates powerful customer stickiness. Arteche's corporate presentation notes they have developed homologations with utilities worldwide, representing years of relationship investment.

2. Deep Strategic Relationships

The Iberdrola Case Study:

Arteche's 80-year partnership with Iberdrola (one of the world's largest utilities) exemplifies the stickiness of their business model:

• 1946: Iberdrola becomes Arteche's first customer

• 2017: Iberdrola awards Arteche "Special Award for Best Supplier of the Year" for "a long history of always offering a high level of quality and reliability"

• 2017: Iberdrola Mexico names Arteche "Best Supplier in Innovation and Competitiveness"

• 2025: Arteche wins Iberdrola's "Innovation Award at Global Supplier of the Year 2025"

This isn't a transactional vendor relationship—it's a strategic partnership spanning eight decades and multiple continents. Arteche follows Iberdrola internationally, supplying equipment in all countries where Iberdrola operates.

Why This Matters:

When a utility expands or modernizes infrastructure, they rely on trusted suppliers with proven track records. The cost of equipment failure in electrical grids is catastrophic (blackouts, safety incidents, regulatory penalties), making reliability paramount over price.

3. Technical Expertise and Innovation

Over 50% of Arteche's sales come from products and services introduced in the last decade. This isn't a company resting on legacy products—they're actively innovating in high-value segments:

Advanced Technology Products:

• Optical Current Transformers (OCT): Based on the Faraday effect, these non-conventional instrument transformers are critical for HVDC (High Voltage Direct Current) links used to interconnect offshore wind farms

• Digital Instrument Transformers: IEC 61850-9-2 compliant for digital substations

• SmartVAR IC: Plug-and-play reactive power compensation systems for renewable grid integration

• IEC 61850 Substation Automation: Modern digital protocols replacing legacy systems

The complexity of these products creates knowledge barriers. Arteche actively participates in international electrical bodies (IEC, IEEE, CIGRE, CIRED), helping shape industry standards.

4. Mission-Critical Infrastructure Positioning

Arteche's equipment sits at critical points in the electrical grid:

• Measurement and protection systems that prevent catastrophic failures

• Grid automation enabling renewable energy integration

• HVDC technology for offshore wind interconnection

• Grid code compliance solutions for solar and wind farms

The consequences of failure (blackouts, explosions, fires) make utilities extremely conservative in vendor selection. Once a supplier proves reliable, utilities are reluctant to switch.

5. Switching Costs Beyond Certification

Even after initial homologation, ongoing switching costs include:

• Inventory harmonization: Utilities maintain spare parts inventory; switching vendors requires duplicate inventory

• Training costs: Maintenance crews trained on specific equipment

• System integration: Digital systems (SCADA, automation) integrated with specific equipment protocols

• Operational procedures: Standard operating procedures built around specific equipment characteristics

The Financial Inflection Point

The ROIC Explosion

The most striking aspect of Arteche's recent performance is the dramatic ROIC improvement:

Total ROIC Change: +364.74% | CAGR: +50.62%

This isn't marginal improvement—this is business transformation. The company has crossed the critical 15% ROIC threshold and shows accelerating momentum.

What's Driving ROIC Expansion?

Breaking down ROIC into its components (ROIC = NOPAT Margin × Invested Capital Turnover) reveals the sources of improvement:

1. Margin Expansion (Profitability per Unit)

Direct margin progression showing continuous improvement:

• H1 2023: 32.0% of sales

• H2 2023: 32.1% of sales

• H1 2024: 35.0% of sales

• H2 2024: 36.0% of sales

• H1 2025: 37.1% of sales (+210 bps vs H1 2024)

Full year direct margin:

• FY 2023: €133.6M, 33.0% of sales

• FY 2024: €163.4M, 35.5% of sales (+340 bps, +22.3% absolute growth)

EBITDA margin - the acceleration is remarkable:

• H1 2023: 9.3% (€17.4M)

• H2 2023: 10.9% (€23.3M)

• H1 2024: 12.1% (€24.6M)

• H2 2024: 11.0% (€27.0M)

• H1 2025: 15.0% (€38.3M) - a stunning +390 bps improvement vs H1 2024

Full year EBITDA:

• FY 2023: 10.2% (€40.7M on €401M revenue)

• FY 2024: 11.5% (€51.6M on €447M revenue), +26.8% YoY

• LTM June 2025: 13.6% (€65M on €479M revenue)

Management attributes margin expansion to "high sales volume, updated selling prices, and improvements in operational productivity" with structural expenses held at 23.4% in H1 2025.

Operating income CAGR: 29.93% (2019-2025) Revenue CAGR: 12.37% (2019-2025)

Operating leverage is evident: Operating income growing 2.4x faster than revenue indicates significant and sustainable margin expansion.

2. Improved Capital Efficiency

The company's capital deployment discipline is strengthening:

• Net Financial Debt/EBITDA: 1.0x (Dec 2023) → 0.5x (Dec 2024) → 0.6x (June 2025, including M&A)

• Free cash flow/EBITDA: 48% (FY 2024), 23.5% (H1 2025 after M&A and dividend)

• Average debt maturity improved to 4.6 years (H1 2025) from 3.6 years (FY2024)

• 76% of long-term loans hedged against interest rate risk

• Average cost of debt: 3.5% (down from 4.3% in 2024)

Management increased capacity by 15% globally in measurement and monitoring plants during 2024, providing a real-time test of incremental ROIC.

Revenue and Growth Momentum

FY 2024 Full Year Results (exceeded all guidance):

• Revenue: €447.4M (+11.5% YoY, +14.2% constant currency)

• Order intake: €532.4M (+12.3% YoY)

• Net profit: €18.9M (+56.7% YoY)

• Book-to-bill: 1.19x

• Year-end backlog: €279.8M

H1 2025 Performance (momentum accelerating):

• Orders: €302.2M (+6.2% YoY) - first half-year ever exceeding €300M

• Revenue: €256.2M (+13.9% YoY, +17.7% constant currency)

• Direct margin: €94.0M at 37.1% (+210 bps)

• EBITDA: €38.3M (+55.6% YoY), 15.0% margin (+390 bps)

• Net profit: €19.9M (+168.5% YoY) - already exceeding full FY2024 profit

• EPS: €0.35 (+169% YoY)

• Book-to-bill: 1.18x

• Backlog: €340.3M (+21.6% YoY)

FY 2025 Guidance (updated):

• Revenue: €500-515M (midpoint +13% vs FY2024)

• EBITDA: €72.5-77.0M (midpoint +46% vs FY2024)

• EBITDA margin: 14.5-15.0%

Geographic performance (H1 2025):

• EMEA: 43% of revenue (+25.6% YoY)

• North America: 30% (+8.9% YoY)

• Latin America: 14% (+0.7% YoY)

• Asia-Pacific: 13% (+7.7% YoY)

Business line performance (H1 2025):

• Measurement & Monitoring: 72% of revenue (+20.0% YoY)

• T&D Grid Automation: 17% (-0.2% YoY)

• Network Reliability: 11% (+1.8% YoY)

The Order Backlog: Visibility Into Future Growth

The Order Backlog: Visibility Into Future Growth

The order momentum demonstrates Arteche's strengthening competitive position:

FY 2024:

• €532.4M in new contracts (+12.3% YoY), exceeding €500M for first time in company history

• Year-end backlog: €279.8M

• Book-to-bill ratio: 1.19x

H1 2025:

• €302.2M in orders (+6.2% YoY) - first half-year ever exceeding €300M

• Current backlog: €340.3M (+21.6% vs H1 2024, includes €5.1M RTR Energy acquisition)

• Book-to-bill ratio: 1.18x (18% more orders than revenue)

This backlog-to-annual-revenue ratio of approximately 0.7x provides strong visibility into 2025-2026 performance, especially since:

• Growth rate exceeds market average (management confirmed)

• Reflects demand across all geographies and business lines

• Occurs during period of unprecedented global grid investment

Order mix evolution (H1 2025 vs H1 2024):

• Measurement & Monitoring: 76% of orders (+3.6%)

• T&D Grid Automation: 16% (+4.9%)

• Network Reliability: 8% (+44.3%) - fastest growing segment

Geographic order strength:

• EMEA: 45% of orders (+3.7% YoY)

• North America: 31% (-8.0% YoY)

• Latin America: 10% (+56.4% YoY) - strongest growth

• Asia-Pacific: 15% (+28.8% YoY)

Industry Tailwinds: Positioned at the Intersection of Mega-Trends

1. Grid Modernization

Electrical grids worldwide face urgent modernization needs:

• Aging infrastructure: Much of developed-world grid infrastructure is 50+ years old

• Smart grid transformation: Transition from analog to digital monitoring and control

• Reliability requirements: Increasing demand for uninterrupted power

Arteche's Exposure: Direct beneficiary through instrument transformer replacement, substation automation upgrades, and digital measurement systems.

Example: Mexico's SCADA REI Project (Smart Grid) with CFE, the Federal Electricity Commission, aims to modernize 115kV substation automation systems. Arteche supplies measurement, protection, and control panels for Mexico's largest substations.

2. Renewable Energy Integration

Solar and wind energy create grid complexity:

• Variability: Intermittent generation requires sophisticated balancing

• Grid code compliance: Renewables must meet strict connection requirements

• Reactive power compensation: Managing power quality with variable sources

Arteche's Exposure:

• Implemented 3.7GW of renewable interconnection in 2018 alone

• SmartVAR IC solutions specifically designed for wind and solar farms

• Harmonic filters and capacitor banks for grid code compliance

• Record orders for harmonic filters in Australia, US, and Canada

3. HVDC and Offshore Wind

Offshore wind farms require High Voltage Direct Current (HVDC) links for efficient long-distance transmission. This is one of the fastest-growing segments in electrical infrastructure.

Arteche's Exposure:

• Optical current transformers specifically designed for HVDC applications

• Expanded range of high-voltage measurement equipment for HVDC links

• Positioned early in technology adoption curve (differentiation opportunity)

4. Electrification Mega-Trend

Global electrification of transportation, heating, and industry drives massive grid investment:

• Electric vehicles increasing peak loads

• Industrial electrification for decarbonization

• Data center proliferation requiring grid capacity

• Heat pump adoption in residential

Investment Scale: Utilities worldwide are announcing multi-billion dollar grid investment plans. Iberdrola alone announced €58 billion investment (2025-2028), with €37 billion specifically for electricity networks.

5. Regulatory Support

Governments globally are mandating grid upgrades:

• US: Infrastructure Investment and Jobs Act, IRA

• EU: Green Deal, grid digitalization mandates

• Mexico: Energy transition initiatives

This creates sustained, multi-decade demand visibility.

Return on Incremental Invested Capital (ROIIC): Is the Moat Widening?

While historical ROIC shows impressive improvement, the critical question for compounding is: What returns are they earning on new capital deployed?

Evidence of Strong ROIIC

1. Operating Leverage Operating income growing 2.4x faster than revenue suggests high incremental returns. When a company can grow profits substantially faster than sales, it indicates:

• Fixed cost leverage (high incremental margins)

• Pricing power

• Efficient capital deployment

2. Free Cash Flow Growth Outpacing Earnings FCF per share CAGR (15.89%) keeping pace with operating income growth (29.93%) while revenue grows at 12.37% suggests:

• New investments generating strong cash returns

• Working capital efficiency improvements

• Low incremental capital intensity

3. Order Backlog Growth Above Market Average Winning new contracts at rates exceeding industry average while maintaining/expanding margins indicates:

• Competitive advantage is strengthening (not weakening)

• Ability to be selective on project economics

• Pricing power in market

The Critical Test: Production Capacity Expansion

In 2024, Arteche increased production capacity by 15% globally in measurement and monitoring plants. This significant capacity expansion provides a real-time test of ROIIC:

What to Monitor:

• Revenue growth 2025-2026 from newly installed capacity

• Margin maintenance or improvement with higher volumes

• Asset turnover (revenue per dollar of invested capital)

If Arteche can grow revenue 15%+ in 2025-2026 while maintaining 35%+ direct margins and 11.5%+ EBITDA margins, it would demonstrate ROIIC well above 20%, signaling a widening moat.

Strategic Evolution: Multiplying Network Reliability Potential

In H1 2025, Arteche made strategic moves that significantly strengthen its competitive position in the fastest-growing segment:

The Network Reliability Transformation

Arteche is assembling a comprehensive power quality and grid reliability platform through targeted acquisitions and partnerships:

1. RTR Energy Acquisition (100% ownership, 2025)

• What: Spanish manufacturer of capacitors and power quality solutions with industrial base in EMEA

• Strategic fit: Adds manufacturing capacity for capacitor banks and harmonic filters

• Revenue contribution: €5.1M added to H1 2025 backlog

• Integration: Complements Arteche's existing intelligent reconnection systems and power quality solutions

2. AMETS Joint Venture (with Mondragon Group and Ikerlan, 2025)

• What: New joint venture focused on power electronics technology, specifically STATCOMs (Static Synchronous Compensators)

• Strategic importance: STATCOMs are critical for grid stability with high renewable penetration

• Technology: Addresses reactive power compensation and voltage regulation - increasingly vital for decentralized grids

• Partners: Mondragon (industrial expertise) and Ikerlan (R&D center) bring complementary capabilities

3. Teraloop Partnership (minority stake expanded September 2024)

• What: Flywheel energy storage technology specialist

• Application: Short-duration grid stabilization and frequency regulation

• Market timing: FEDER financing now available for energy storage projects using flywheel technology

• Differentiation: Mechanical storage complements chemical batteries for specific grid applications

The Integrated Value Proposition:

This platform creates a comprehensive network reliability offering:

• Capacitor banks & harmonic filters (RTR Energy): Grid code compliance for renewables

• Intelligent reconnection systems (Arteche core): Distribution automation

• Power electronics/STATCOMs (AMETS JV): Voltage stability and reactive power

• Flywheel storage (Teraloop): Frequency regulation and short-duration storage

Management notes this addresses the reality that "a decentralized network is a more complex network that needs our products to be of high quality and reliable."

Business Impact:

• Network Reliability segment grew +44.3% in H1 2025 orders (fastest growth of all segments)

• Addresses the shift from unidirectional to multidirectional power flows

• Positions Arteche for energy storage market expansion

• Creates cross-selling opportunities across utility customer base

This strategic positioning is particularly astute given that grid complexity is increasing exponentially with renewable integration. Each solar farm and wind installation requires power quality solutions to meet grid codes - creating recurring demand as renewable capacity expands globally.

Competitive Positioning: The Hybrid Strategy

Differentiation vs. Cost Leadership

Using Michael Mauboussin's ROIC framework:

• ROIC = (NOPAT/Sales) × (Sales/Invested Capital)

• ROIC = NOPAT Margin × Invested Capital Turnover

Arteche's Position: Differentiation with Improving Capital Efficiency

Current metrics suggest:

• NOPAT Margin: ~8-9% (estimated from EBITDA ~11.5%, adjusting for D&A and tax)

• Invested Capital Turnover: ~2.0-2.2x (estimated from ROIC ~18% and NOPAT margin)

This places Arteche in the "differentiation" quadrant—earning returns through higher margins rather than extreme capital efficiency (like retailers).

Why This Works:

1. Product Differentiation: Complex, certified equipment with technical specifications

2. Service Differentiation: Close customer relationships, technical support, customization

3. Quality/Reliability Premium: Mission-critical infrastructure commands reliability premium

4. Capital Requirements: Manufacturing requires capital (plants, equipment, inventory), limiting turnover

The improving ROIC while maintaining differentiation strategy suggests Arteche is:

• Capturing more value (pricing power)

• Operating more efficiently (cost reduction)

• Both simultaneously (operating leverage)

Competitive Landscape

Tier I Competitors (Global Giants):

• ABB, Siemens, Schneider Electric

• Advantages: Scale, comprehensive portfolios, brand recognition

• Disadvantages: Bureaucracy, may not pursue smaller projects, less flexibility

Tier II Competitors (Specialists):

• Smaller regional players

• Advantages: Local relationships, niche expertise

• Disadvantages: Limited product range, smaller geographic reach, less R&D investment

Arteche's Sweet Spot:

• Large enough for international projects and comprehensive solutions

• Small enough to maintain customer intimacy and flexibility

• Specialized enough to compete on technology, not just price

The 21.6% growth in Asia-Pacific (strategic expansion region) suggests Arteche can successfully enter new geographies by leveraging:

• Existing product homologations

• Technical reputation

• Relationship-transfer from international utilities

Risk Factors and Considerations

1. Cyclicality of Utility Capex

Utility capital expenditure can be cyclical based on:

• Regulatory environments

• Interest rates (utilities are capital-intensive)

• Economic conditions

Mitigation:

• Multi-year contracts and backlog provide visibility

• Grid modernization is secular, not cyclical trend

• Geographic diversification reduces single-market risk

• Recurring maintenance and service revenue provides stability

2. Commodity Price Exposure

Instrument transformers use copper, aluminum, and steel. Material cost inflation could compress margins.

Mitigation:

• Management notes "vast majority of contracts include pass-through clauses with possibility of price transfer to client"

• Can offset temporary impact by increasing prices

• Direct margin improvement despite commodity volatility demonstrates pricing power

3. Technology Disruption

Digital transformation of grids could favor software/tech companies over traditional equipment manufacturers.

Mitigation:

• Arteche actively investing in digital solutions (IEC 61850, optical transformers)

• Software layer requires hardware foundation (their equipment)

• Participating in industry standards bodies (IEC, IEEE) positions them early in technology shifts

• 50%+ of sales from products introduced in last decade shows innovation capability

4. Customer Concentration

Heavy reliance on large utilities (especially Iberdrola) creates concentration risk.

Mitigation:

• Operating in 175+ countries with diversified customer base

• Iberdrola relationship is strategic partnership, not one-off vendor

• Evidence suggests Arteche wins business on merits across many utilities

• 5 main markets (US, Spain, Mexico, Australia, Canada) provides geographic spread

5. Small Cap Liquidity and Volatility

€266M market cap means:

• Limited institutional coverage

• Higher volatility

• Liquidity constraints for large positions

Reality Check: This is a feature (enabling mispricing), not necessarily a bug for patient, long-term investors.

6. Sustainability of ROIC Improvement

The critical question: Is ROIC improvement structural or cyclical?

Bull Case: Structural improvement from:

• Market position strengthening (certification barriers, relationships)

• Operating leverage from fixed cost base

• Mix shift to higher-margin digital products

• Pricing power from mission-critical positioning

Bear Case: Cyclical boost from:

• Temporary grid investment surge

• Favorable industry conditions

• One-time efficiency gains

What to Monitor:

• ROIC maintenance/improvement through 2025-2026

• Margin sustainability with new capacity

• Return on new production capacity investment

• Pricing trends in new contracts

Valuation Perspective

Current Metrics (as of H1 2025)

• Market Cap: ~€266M (stock up 6% YTD 2025, +88% during 2024)

• Enterprise Value: ~€303M (including net debt)

• LTM Revenue (June 2025): €478.8M

• LTM EBITDA: €65M

• LTM Net Income: ~€30M (annualizing H1 2025 run rate)

• Current EPS run rate: ~€0.70 annualized

Implied Multiples:

• EV/Revenue: 0.63x

• EV/EBITDA: 4.7x

• P/E: ~9x (on current run rate)

• Forward P/E (2025E): ~7-8x (using midpoint guidance)

• FCF Yield: ~12-14% (estimated on H1 run rate)

Comps Framework

For a company with:

• 18% ROIC (and improving, with H1 2025 trajectory suggesting potential 20%+)

• 15% EBITDA margins (H1 2025 actual, guiding 14.5-15% for FY2025)

• 13% revenue growth (at constant currency)

• Strong FCF conversion (23.5% FCF/EBITDA even after M&A)

• Net debt only 0.6x EBITDA (including acquisitions)

• 3rd generation family management with skin in the game (52% ownership)

Comparable quality infrastructure companies trade at:

• EV/EBITDA: 10-16x for quality operators with moats

• P/E: 18-28x for compounders with sustainable competitive advantages

• FCF yields: 4-6% for quality growth companies

Implied Valuation Gap: Arteche trades at a 55-70% discount to quality comps.

Why the Discount?

1. Small cap: €266M market cap below most institutional minimums

2. Spanish domicile: BME listing gets less coverage than major exchanges

3. Transformation not yet recognized: ROIC improvement from 2021-2025 is dramatic but recent

4. Limited liquidity: 15.4% free float (family 52%, ECN 20%, institutional 12.6%)

5. Not in indices: Limited passive inflows

6. Analyst coverage: Minimal sell-side coverage

However, the company is actively professionalizing:

• IPO in 2021 brought governance improvements

• Board includes 4 independent directors (44% of board)

• Implementing SCIIF (Internal Financial Reporting Control System)

• ESG ratings improving (EcoVadis Silver, CDP Discloser)

• Committed to >30% dividend payout

DCF Framework

Base Case Assumptions:

• Revenue growth: 10-12% (below recent 13.9% but above GDP, reflecting capacity expansion)

• EBITDA margin: 13-14% (conservative vs. current 15% in H1 2025)

• Capex/Sales: ~4% (per strategic plan)

• ROIC maintained: 16-20% range (conservative vs. current trajectory)

• Terminal growth: 3%

• WACC: 9-10%

Implied Fair Value: €7.50-10.00 per share (60-115% upside from ~€4.66)

Bull Case Scenarios: If ROIC sustains above 18% and margins expand to 15-16% EBITDA (which H1 2025 suggests is achievable), valuation could re-rate to 10-14x EBITDA, implying €10-15 per share (115-220% upside).

Bear Case Floor: Even reverting to 12% EBITDA margins and 10% growth, the company deserves 7-9x EBITDA given the moat characteristics, implying €5.50-7.00 per share (20-50% upside from current).

Dividend Yield: Company paid €0.166 per share in 2024 (50% payout on FY2024 earnings). With EPS potentially reaching €0.70-0.80 in 2025, a 30-50% payout suggests €0.21-0.40 per share dividend potential (4.5-8.6% yield at current price).

Reverse DCF: What Does the Market Price Imply?

At the current price of €22.40 per share, let's reverse-engineer what the market is expecting:

Current Market Metrics:

• Share price: €22.40

• Shares outstanding: ~57 million

• Market cap: €1,277M

• Net debt (H1 2025): ~€37M

• Enterprise Value: €1,314M

What Growth/Returns Does This Imply?

Using the H1 2025 annualized EBITDA run rate of ~€76.6M (€38.3M × 2), the current valuation implies:

• EV/EBITDA: 17.2x (based on run rate)

• EV/EBITDA: 20.2x (based on FY2024 actual €51.6M)

• EV/EBITDA: 17.5-18.1x (based on FY2025 guidance €72.5-77M midpoint)

Reverse DCF Assumptions (working backwards from €22.40):

• WACC: 9%

• Terminal growth: 3%

• Current EBITDA: ~€75M (using H1 2025 annualized)

• Current EBITDA margin: 15% (H1 2025 actual)

To justify a €1,314M enterprise value, the market is implying:

Scenario 1: Steady-State Excellence

• Revenue CAGR: 15-18% for next 5 years

• EBITDA margin: 15-16% sustained

• Terminal EBITDA: ~€150-170M by year 5

• Implicit assumption: Current momentum continues with minimal margin compression

Scenario 2: Moderate Growth with Margin Expansion

• Revenue CAGR: 12-15% for next 5 years

• EBITDA margin: 16-18% (further expansion from current 15%)

• Terminal EBITDA: ~€140-160M by year 5

• Implicit assumption: Operating leverage continues, margins reach best-in-class levels

Scenario 3: High Growth, Current Margins

• Revenue CAGR: 18-20% for next 5 years

• EBITDA margin: 14-15% (slight compression from scale)

• Terminal EBITDA: ~€165-190M by year 5

• Implicit assumption: Market expansion and share gains accelerate

What Would Need to Go Wrong for Current Price to Be Fair?

For the current €22.40 to represent fair value (not overvalued), Arteche needs to deliver approximately:

• Revenue growing 15%+ annually through 2029

• EBITDA margins sustained at 14-16%

• ROIC maintained above 15%

• No major competitive disruption

Sensitivity Analysis at €22.40:

Key Insight from Reverse DCF:

The current €22.40 price implies the market believes Arteche will:

1. Sustain H1 2025 momentum (15% EBITDA margins, 14-15% revenue growth) for the next 5+ years

2. Successfully execute on capacity expansion, M&A integration, and market share gains

3. Maintain ROIC above 15-18% on incremental capital deployed

4. Face minimal competitive pressure despite success attracting attention

Is This Reasonable?

Bull Case (Price is Fair to Cheap):

• H1 2025 results show accelerating momentum, not decelerating

• Structural tailwinds (grid modernization, renewable integration) are multi-decade

• Competitive moats are strengthening (certifications, relationships, technology)

• Management has proven execution capability (ROIC 3.8% → 18.3% in 4 years)

• M&A is strategic (RTR, AMETS, Teraloop strengthen Network Reliability)

• Market position is #1 or #2 in most segments addressed

• 15% global capacity expansion in 2024 being absorbed rapidly

Bear Case (Price is Fully Valued to Rich):

• 17-20x EBITDA is premium valuation for industrial manufacturer

• Revenue growing 15%+ annually is difficult to sustain for a €500M+ revenue business

• Competition from Tier I players (ABB, Siemens, Schneider) could intensify

• Utility capex is cyclical, current strength may not persist

• Small float (15.4%) may create technical dynamics disconnected from fundamentals

• Stock up 88% in 2024 - some profit-taking risk

Balanced Assessment:

At €22.40, the market is pricing in continued excellence, not just stability. The valuation assumes:

• Arteche is a quality compounder, not a cyclical industrial

• The ROIC transformation is structural, not temporary

• Management will successfully execute on strategic plan

• Industry tailwinds will persist for years

For long-term investors who believe these assumptions are correct, the current price may still offer reasonable returns (10-15% annualized) if execution continues. However, the margin of safety is considerably thinner than at €4-5 per share.

The critical question: Is Arteche a 15% grower with 15% EBITDA margins and 18% ROIC sustainably, or is this a temporary peak that will mean-revert?

The evidence from H1 2025 (margins expanding to 15%, revenue growth accelerating to 13.9%, net profit +169%) suggests the former. But at 17-20x EBITDA, there's limited room for disappointment.

Risk/Reward at €22.40:

• Upside: 30-50% if margins expand to 16-17% and growth sustains at 15%+ (becomes true compounder)

• Downside: 20-30% if growth slows to 8-10% or margins compress to 12-13% (reversion to industrial mean)

• Expected return: 10-15% annualized over 3-5 years if base case materializes

This is no longer a deep value opportunity, but could still be attractive for quality growth at reasonable price (GARP) investors who believe in the structural transformation thesis.

Critical Questions Answered by Management

The corporate presentation and recent results address several key investment questions:

1. What Drove the ROIC Explosion?

Answered: Management attributes the improvement to multiple factors working in concert:

• Volume leverage on fixed cost base: "EBITDA increased driven by high sales volume and improvements in operational productivity"

• Pricing discipline: Direct margin expanding from 32% → 37% demonstrates pricing power, not just volume

• Product mix improvement: >50% of sales now from products introduced in last decade, suggesting shift to higher-value offerings

• Capacity utilization: 15% global capacity expansion in 2024 being absorbed quickly (H1 2025 revenue +13.9%)

• Operational excellence: Structural expenses held at 23.4-23.9% even as revenue scales

The combination of revenue growth (+13.9%), margin expansion (+390 bps EBITDA), and controlled capex (~4% of sales) creates the mathematical conditions for explosive ROIC improvement.

2. Is This Sustainable or Cyclical?

Strong evidence of structural improvement:

1. Certification barriers strengthening: Presentation emphasizes multi-year homologation processes with utilities across IEEE, IEC, UL, MC, USDA RUS standards

2. Market share gains, not just market growth: Management notes order growth "above market growth" - they're winning competitively

3. Customer concentration healthy and stable: Top customer only 11%, Top 5 total 24%, with 55% customer recurrence and 30+ year average relationships

4. Technology leadership: 73 R&D projects for 2024-2026, doubling R&D investment, with €150M estimated sales from new products

5. Strategic positioning improving: Acquisitions (RTR, AMETS JV, Teraloop) specifically target high-growth grid reliability segment

3. What's the Incremental ROIC on New Capital?

Highly encouraging early signals:

The 15% capacity expansion completed in 2024 provides real-time evidence:

• H1 2025 revenue: +13.9% YoY (+17.7% constant currency)

• H1 2025 direct margin: 37.1% (up from 35.0% in H1 2024)

• H1 2025 EBITDA margin: 15.0% (up from 12.1% in H1 2024)

This suggests the new capacity is generating strong incremental returns - revenue growing rapidly while margins actually expand (opposite of what happens with low-return capacity additions).

Additionally, management guidance for FY2025 implies:

• Revenue: €500-515M (midpoint +13.3% vs FY2024)

• EBITDA: €72.5-77M (midpoint +46% vs FY2024)

• EBITDA margin: 14.5-15.0% (vs 11.5% in FY2024)

The implied incremental EBITDA margin is approximately 40% (incremental EBITDA €23M on incremental revenue €60M), suggesting very high incremental returns.

4. How Sticky Are Customer Relationships Really?

Quantified evidence from presentation:

• Duration: Average customer relationship >30 years

• Recurrence: >55% of 2024 revenue from recurring customers

• Formalization: >45 framework contracts in place (multi-year agreements)

• Examples:

  • Iberdrola: 80 years, awarded "Innovation Award at Global Supplier of the Year 2025"

  • Multiple certifications per customer (utilities require approval for each product line)

  • 1,500+ utility customers globally

The presentation emphasizes "proximity and perseverance" as core values, with the tagline "Moving together" - suggesting relationship-based, not transactional, business model.

5. What's the Competitive Landscape?

Market positioning revealed:

Arteche holds #1 or #2 positions in most markets it addresses:

Key insight: Arteche is not a subscale niche player. They're a global leader in specific segments (electrical relays, certain MV transformer markets, reclosers in select geographies) while being Top 10 in others.

The "hybrid Tier I/Tier II model" is validated by the data - large enough to compete with ABB/Siemens/Schneider in select segments, yet flexible enough to win business the giants don't prioritize.

6. How Will They Deploy Capital?

Clear capital allocation priorities from Strategic Plan 2024-2026:

1. Organic growth: Capex ~4% of sales, primarily capacity expansion and R&D

2. R&D investment: Doubling from 2024-2026, >3.5% of revenues

3. Inorganic growth: "4 pillars" M&A strategy:

   • Geographic expansion (focus: US and APAC)

   • New solutions (complete portfolio)

   • New technologies (energy transition)

   • New segments (respond to energy transition)

4. Shareholder returns: >30% payout minimum, 50% delivered in 2024

5. Balance sheet discipline: Target <2x Net Debt/EBITDA including acquisitions

Management has demonstrated capital discipline:

• NFD/EBITDA: 2.2x (2020) → 0.5x (2024) → 0.6x (June 2025 including M&A)

• Free cash flow: 48% of EBITDA (FY2024), target >30%

• M&A focused on strategic fit (RTR, AMETS, Teraloop all in Network Reliability)

7. What About ESG and Governance?

Tangible progress, not greenwashing:

Environmental:

• Carbon footprint reduction: 26% achieved (vs 2021 base, target >50% by 2030)

• Renewable electricity: 63% (2024), target 100% by 2030

• Waste recycling: 69% (2024), target 100% by 2030

• EcoVadis rating: Silver (Top 15%), CDP: Discloser 2024

Social:

• Women in management: 30% (2024), target 40% by 2030

• Safety: Accident frequency rate 6 (2024), target 0 by 2030

• Stable employment: 2,600+ employees globally

Governance:

• Board composition: 4/9 independent (44%), family 3/9 (33%), other 2/9

• Ownership: Family 52%, ECN 20%, institutional 12.6%, free float 15.4%

• 3rd generation family management with long-term orientation

• SCIIF implementation underway (audit-ready by 2026)

• UN Global Compact signatory since 2014

Management quote (from values): "Arteche is much more than a simple company, Arteche is a project shared with all our customers, with our suppliers, and with the whole of the society in which we develop our activity."

This long-term, stakeholder-oriented philosophy aligns well with sustainable value creation for shareholders.

The Investment Thesis: Why Arteche Now?

Inflection Point Recognition

Arteche sits at a rare inflection point:

1. Financial transformation: ROIC 3.8% → 18.3% completed, but not yet recognized

2. Market positioning: Hybrid model proving superior in current environment

3. Industry tailwinds: Grid modernization entering multi-decade cycle

4. Capacity expansion: 15% increase provides near-term growth catalyst

5. Valuation disconnect: Trading like cyclical commodity when building structural moat

The Compounder Checklist

Expanding Moats: ✅

• Multi-year certification barriers strengthening with technology complexity

• Customer relationships deepening (80 years with Iberdrola, expanding)

• Technical expertise in high-growth segments (HVDC, digital transformation)

• Market position improving (order growth above market average)

Expanding Margins: ✅

• Direct margin: 35% and rising

• EBITDA margin: 11.5%, up from sub-10%

• Operating income growing 2.4x revenue growth

• Pricing power evident in margin expansion despite growth

Durable ROIC Over 15%: ✅

• Current ROIC: 18.3%

• Four-year trajectory: Accelerating improvement

• Evidence of high incremental returns (operating leverage)

• Structural drivers (not cyclical bounce)

Three-Year Roadmap

Base Case (Probability: 60%):

• Revenue compounds at 9-10% (capacity expansion + market growth)

• EBITDA margins maintained at 11-12%

• ROIC sustained at 15-18%

• Multiple expands to 8-10x EBITDA as quality recognized

• Return: 15-20% annualized

Bull Case (Probability: 25%):

• Revenue compounds at 12-15% (capacity expansion + share gains)

• EBITDA margins expand to 13-15% (operating leverage + mix)

• ROIC expands to 20%+ (high incremental returns proven)

• Multiple expands to 10-14x EBITDA

• Return: 25-35% annualized

Bear Case (Probability: 15%):

• Revenue growth slows to 5-6% (utility capex cycle pause)

• EBITDA margins compress to 9-10% (competitive pressure)

• ROIC reverts to 12-14% (improvement proves temporary)

• Multiple stays at 5-7x EBITDA

• Return: 5-10% annualized

Expected Return: ~16-18% annualized (probability-weighted)

What Could Change the Thesis?

Positive Catalysts

1. Analyst coverage expansion: Major European bank initiates coverage

2. Index inclusion: Enters MSCI Small Cap or sector index

3. Strategic investor: Utility or infrastructure fund takes 5-10% stake

4. Major contract win: Secures multi-year mega-project (especially in HVDC)

5. M&A speculation: Tier I player eyes acquisition for technology/relationships

6. Margin expansion proof: 2025 results show sustained 12-13% EBITDA margins

Negative Signals to Monitor

1. Order backlog deterioration: Q1 2025 contracts decline YoY

2. Margin compression: Direct margin falls below 33% or EBITDA below 10.5%

3. ROIC regression: Falls back below 15% without clear explanation

4. Customer concentration: Iberdrola share increases above 30% of revenue

5. Capacity utilization: New production capacity remains underutilized

6. Management turnover: Key leadership changes without clear succession

7. Technology disruption: Evidence of digital solutions bypassing hardware

Conclusion: From Hidden Gem to Recognized Compounder

The question now is: "Is Arteche a sustainable quality compounder that can grow 15% annually with 15% EBITDA margins for the next 5+ years?"

H1 2025 results provide compelling evidence the answer is yes:

• Direct margin: 37.1% (vs 35.0% in H1 2024) - still expanding

• EBITDA margin: 15.0% (vs 12.1% in H1 2024) - accelerating, not plateauing

• Net profit: €19.9M (vs €7.4M in H1 2024) - +169%

• Already exceeded full-year 2024 net profit in just six months

• Revenue growth accelerating (+13.9% vs +11.5% prior year)

• Book-to-bill at 1.18x - orders still outpacing revenue

The evidence overwhelmingly suggests structural durability:

1. Structural factors, not cyclical: Multi-year certification barriers, deepening customer relationships, technology leadership in growth segments

2. Operating leverage proving out: Margins expanding while growing, suggesting pricing power

3. Capital efficiency improving: FCF growth, capacity expansion discipline

4. Industry tailwinds accelerating: Grid modernization entering multi-decade investment cycle

5. Management execution: Consistently beating guidance, capacity expansion at opportune time

For investors seeking companies that compound at 15%+ through economic cycles, Arteche checks the boxes:

• ✅ ROIC > 15% (18.3% in 2025, with H1 trajectory suggesting potential 20%+ as margins approach 15%)

• ✅ Expanding margins (direct margin 37.1%, EBITDA margin 15.0% in H1 2025, guiding 14.5-15% for full year)

• ✅ Widening moat (certification barriers deepening, #1/#2 market positions strengthening, strategic acquisitions in Network Reliability)

• ✅ Secular growth tailwinds (grid modernization entering multi-decade investment cycle, €58B Iberdrola alone investing through 2028)

• ✅ Rational capital allocation (net debt 0.6x EBITDA including M&A, FCF/EBITDA 48% in 2024, >30% dividend payout committed)

• ✅ Alignment (3rd generation family management with 52% ownership, long-term orientation)

The opportunity exists because:

1. Small cap (€266M) flying under institutional radars

2. Spanish domicile and BME listing (less covered than US/UK)

3. Recent transformation (ROIC improvement 2021-2025 not yet recognized in valuation)

4. Boring industry (electrical equipment lacks glamour of tech/AI)

5. Limited liquidity (15.4% free float constrains institutions)

This is classic quality value: a genuinely improving business, building structural competitive advantages, trading at a cyclical commodity multiple.

Management's confidence is evident:

• Raised FY2025 EBITDA guidance to €72.5-77M (€65M LTM actual already)

• Doubled R&D investment commitment

• Strategic M&A continuing (RTR, AMETS, Teraloop)

• Increased dividend payout (50% in 2024 vs 30% minimum commitment)

• Expanded production capacity by 15% globally

For quality-focused investors with 3-5 year horizons, Arteche warrants serious consideration. The combination of ROIC transformation (3.8% → 18.3% and rising), margin expansion (approaching 15% EBITDA), structural moats (30+ year customer relationships, certification barriers), and valuation disconnect (4.7x EV/EBITDA) creates an asymmetric opportunity:

• Meaningful upside if quality becomes recognized: 10-14x EBITDA multiple re-rating implies €10-15/share (115-220% upside)

• Limited downside given cash generation, established business, and backlog visibility: Even at 8x EBITDA implies €6-7/share (30-50% upside)

The fundamental question for prospective investors: Do you believe the ROIC improvement from 3.8% to 18.3% (and accelerating to potentially 20%+) is structural or temporary?

The evidence—multi-year certification barriers, deepening customer relationships (30+ year average, 55% recurrence, >45 framework contracts), technology leadership (>50% sales from products <10 years old), strategic positioning (Network Reliability transformation), industry tailwinds (global grid investment acceleration), margin expansion continuing (+390 bps in H1 2025), and operating leverage (incremental EBITDA margins ~40%)—overwhelmingly suggests structural.

If correct, Arteche is precisely the type of compounder that generates wealth through business quality, not market timing. The H1 2025 results, showing net profit already exceeding full-year 2024 in just six months, suggest the inflection point is here and accelerating.

The market is offering the opportunity to buy a 18%+ ROIC business with expanding margins, durable competitive advantages, and double-digit growth for less than 5x EBITDA. These opportunities are rare and typically don't persist once institutional capital discovers them.

For patient investors willing to look beyond market cap screens and geographic biases, Arteche represents a compelling asymmetric bet on a quality business in the early stages of its re-rating journey.

Right now it sits on my watchlist, which you can access in real-time in our community.

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