NKT: Powering the Energy Transition

NKT is a leading provider of high-voltage power cable solutions, playing a crucial role in the energy transition, grid modernization, and electrification. With a strong presence in Europe and a record-high order backlog, the company is well-positioned to benefit from rising demand for renewable energy infrastructure. Ongoing investments in production capacity and technological advancements further strengthen its competitive edge. The question remains: Does NKT offer a compelling investment opportunity in the evolving energy landscape?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in NKT. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of  NKT either. Thus, I have no personal stake in NKT. If you want to purchase shares (or fractional shares) of NKT, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

NKT is a Danish company with a history dating back to 1891, making it one of the pioneers in the power cable industry. Today, it focuses on designing, manufacturing, and installing power cable systems that enable sustainable energy transmission. The company operates across three segments: Solutions, Applications, and Service & Accessories. Solutions, the largest and most profitable segment, specializes in high-voltage power cable systems for long-distance electricity transmission, both onshore and offshore. These cables are essential for integrating offshore wind farms into power grids and strengthening electricity networks across regions. NKT has advanced production facilities in Karlskrona, Sweden, which focuses on offshore projects, and Cologne, Germany, which specializes in onshore projects. By offering turnkey solutions that include design, manufacturing, and installation, NKT reduces complexity for customers. The company’s cable-laying vessel, NKT Victoria, adds another level of expertise, allowing it to efficiently handle complex offshore installations, which are becoming increasingly critical as energy transmission moves further offshore. The Applications segment supplies low- and medium-voltage power cables that are critical for infrastructure projects, renewable energy, and building construction. These products are used in local power grids, industrial sites, and residential buildings, ensuring the efficient distribution of electricity. Since electricity distribution requirements vary across regions, NKT works closely with utilities, contractors, and renewable energy developers to adapt its products to specific market needs. This segment benefits from strong, long-term customer relationships, which allow the company to remain flexible and responsive to evolving industry trends. Service & Accessories provides lifecycle services such as maintenance, repairs, and accessories to ensure the long-term reliability of power cable systems. Since power infrastructure is designed to last for decades, ongoing servicing is essential to minimize downtime and maintain efficiency. NKT offers repair and maintenance solutions for both offshore and onshore cable networks, ensuring customers can maximize the value of their investments. The company also produces essential cable accessories, such as joints and connectors, at its facilities in Germany, India, and Sweden. NKT has built a strong moat through its leadership in high-voltage direct current (HVDC) technology, which is increasingly in demand as electricity transmission moves toward more efficient long-distance solutions. HVDC technology is particularly important for connecting offshore wind farms to the grid and enabling cross-border electricity transmission with minimal power loss. As energy generation moves further from consumption centers, the need for HVDC solutions is growing, positioning NKT as a key player in the market. The company’s ability to deliver end-to-end turnkey projects simplifies operations for customers, reducing complexity and strengthening long-term partnerships. Its manufacturing facilities are strategically positioned to handle both offshore and onshore high-voltage projects, while its cable-laying capabilities add another layer of competitive differentiation.

Management

Claes Westerlind is the CEO of NKT A/S, a position he has held since May 2023. He is a Swedish national with a Master of Science in Mechanical Engineering from Chalmers University of Technology and the Hong Kong University of Science and Technology. Claes Westerlind has more than 15 years of experience in the power cable and high-voltage industries. He began his career at ABB (now Hitachi Energy) in 2006, where he held various technical, sales, and managerial roles within the power cable and high-voltage direct current (HVDC) converter business units. In 2017, he joined NKT following its acquisition of ABB HV Cables. By 2019, he was appointed Executive Vice President and became a member of NKT’s global leadership team. During this period, he played a key role in securing a record-high order backlog for the high-voltage business and led major investment and expansion initiatives at the Karlskrona facility. Upon his appointment as CEO, Claes Westerlind expressed his commitment to leading NKT through its next strategic phases, highlighting his passion for the power cable industry and the company’s strong growth prospects. His leadership is centered on driving expansion, fostering innovation, and strengthening NKT’s position in a market that is increasingly focused on electrification and renewable energy infrastructure. With his deep industry expertise and a proven track record in high-voltage solutions, Claes Westerlind is well-positioned to guide NKT forward. His leadership, combined with a clear vision for growth and sustainability, makes him the right person to navigate the company through the opportunities and challenges of the evolving energy landscape.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. NKT has historically delivered a disappointing ROIC, only surpassing 10% once in the past decade. In some years, ROIC was even negative. This is largely due to the capital-intensive nature of its business, which requires significant investments in advanced production facilities and specialized equipment that take time to generate returns. Additionally, the company operates in a market driven by large-scale, complex projects with long lead times. Competitive bidding and cyclical demand have also put pressure on margins, making it difficult to maintain consistently high returns on capital. Due to these industry dynamics, NKT often uses return on capital employed (ROCE) as a key performance metric. While its historical ROCE has not been particularly strong, the company has recently raised its mid-term financial targets and now aims to achieve an ROCE of over 20% by 2028, signaling optimism about future profitability. It is worth noting that NKT recorded a historically high ROIC (and ROCE) in 2024, but this was largely driven by the sale of NKT Photonics. As a result, such elevated returns are unlikely to be sustained. However, management’s target of exceeding a 20% ROCE by 2028 suggests confidence in improving operational efficiency and long-term profitability.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2014 to 2015 as Finbox only provides data for the past ten years. NKT has experienced periods of declining equity in past years but has managed to reach a record-high equity in 2023, surpassing it again in 2024. With management’s focus on improving profitability, I believe equity will continue to grow in most years going forward.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. NKT has had one year with negative free cash flow but has consistently generated positive free cash flow since 2019. In 2024, the company achieved its highest free cash flow ever, though the numbers were significantly boosted by the sale of NKT Photonics. As a result, such high free cash flow and levered free cash flow margins are unlikely to be repeated in the near term. However, even without the impact of the NKT Photonics sale, the company would have still delivered a record-high free cash flow, despite a significant increase in capital expenditures, which is an encouraging sign. NKT is currently in a heavy investment phase, with construction activities ongoing at multiple sites. Management expects capital expenditures to remain elevated until 2028, with 2025 being the peak year. Given these investments, free cash flow may decline in the coming years, even when excluding the impact of the NKT Photonics sale. Additionally, both the levered free cash flow yield and free cash flow yield have been temporarily inflated by the sale and are expected to decline next year. As a result, the current high free cash flow yield does not provide an accurate picture of NKT’s valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a three-year period, calculated by dividing total long-term debt by earnings. Upon analyzing NKT’s financials, the company currently has no debt. However, this calculation is based on the inflated earnings from 2024, which were affected by the sale of NKT Photonics. Using the 2023 figures, NKT had 1,28 years of earnings in debt, well below the three-year threshold. This indicates that debt is not a concern for me if I were to invest in NKT. It is also worth noting that while there has been a small uptick in long-term debt in 2024, NKT has consistently reduced its debt since 2017. This demonstrates the company’s commitment to maintaining financial discipline and suggests that debt is unlikely to become a significant issue in the future.

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Risks

The execution of high-voltage projects presents a significant risk for NKT due to the scale, complexity, and long timelines associated with these projects. Each project consists of multiple stages - including production, delivery, and installation—all of which require precise coordination across different teams, suppliers, and locations. Given the high degree of customization in these projects, any unexpected challenge - such as equipment failures, supply chain disruptions, adverse weather conditions, or resource shortages—can lead to significant additional costs. These may include expenses for rework, replacement materials, and extra labor, as well as financial penalties imposed by customers for missed deadlines or quality issues. One of the biggest challenges in project execution is the need for long-term planning. High-voltage projects often span multiple years, and NKT must commit to schedules and pricing long before production and installation begin. This means the company has limited flexibility to adjust for unforeseen cost increases, material shortages, or regulatory changes that may arise during the execution phase. Additionally, these projects require careful coordination with third-party contractors, regulatory bodies, and grid operators, adding another layer of complexity. The risk is further amplified by NKT’s record-high project backlog, which places immense pressure on production capacity and installation schedules. With multiple projects running simultaneously, any delay in one project can have a cascading effect, disrupting timelines for other projects and creating operational bottlenecks. If execution challenges become widespread, they could strain customer relationships, damage NKT’s reputation, and impact the company’s ability to secure future contracts, particularly in a market where reliability and timely delivery are critical.

Commodity price volatility poses a significant risk for NKT due to its heavy reliance on raw materials such as copper, aluminum, and plastics, which constitute a large portion of its production costs. Fluctuations in the prices of these materials can lead to unpredictable increases in input costs, making it difficult for NKT to maintain stable profit margins. Several factors contribute to this volatility, including shifts in global supply and demand, geopolitical events that disrupt supply chains, and market speculation that can trigger sudden price spikes. The growing demand for copper, driven by the energy transition and increasing electrification, has tightened supply and pushed prices higher in recent years. Additionally, geopolitical tensions, trade restrictions, or disruptions in key mining regions can further exacerbate price volatility, limiting access to essential materials and increasing procurement costs. This is particularly challenging for NKT, as high-voltage projects often span several years, with contracts signed well before production begins. Accurately forecasting material costs over such long timeframes is difficult, creating the risk that rising commodity prices could erode profitability over the course of a project. To mitigate this risk, NKT employs hedging strategies and includes contractual provisions that help offset some of the impact of price fluctuations. However, these measures may not fully protect against sustained or extreme price increases, particularly in prolonged periods of market instability. Additionally, while commodity costs are a major factor, managing other cost categories remains crucial for maintaining financial stability, given the long-term nature of NKT’s project commitments. Despite risk management efforts, commodity price volatility remains a key challenge that can significantly affect NKT’s production costs, profit margins, and overall financial performance.

Competition presents a significant risk for NKT, particularly in the high-voltage segment, where Europe remains its core market. The company faces the potential entry of new competitors, both from within and outside Europe, which could impact its market share, profitability, and overall competitive position. Several factors contribute to this risk, including shifts in market dynamics, cost pressures, evolving customer preferences, technological advancements, and regulatory changes that could lower barriers for new entrants. A key concern is the increasing presence of foreign competitors, including the potential expansion of Chinese manufacturers into the European market. While NKT has not yet encountered Chinese competition in the high-voltage direct current (HVDC) and high-end procurement processes in Europe, there has been activity at lower voltage levels. The risk is that, over time, Chinese companies or other low-cost manufacturers could establish production facilities in Europe, allowing them to compete more aggressively by reducing logistical and regulatory challenges. This could intensify price competition and put pressure on NKT’s margins, particularly if competitors can offer similar high-voltage solutions at a lower cost. The regulatory environment will play a crucial role in shaping the competitive landscape. NKT has emphasized the importance of ensuring that competition occurs on fair and equal terms within Europe. If regulatory frameworks fail to prevent unfair competitive advantages - such as state-backed subsidies or differences in labor and environmental standards - NKT could face increased challenges in maintaining its market position. Beyond external threats, existing European competitors are also adapting to changing market conditions. Companies within the region are expanding production capacity, investing in new technologies, and optimizing their supply chains to remain competitive. This requires NKT to continuously invest in innovation, efficiency improvements, and strategic partnerships to maintain its leadership position in the high-voltage market.

Reasons to invest

Favorable global trends make NKT an attractive investment as the world moves toward a more electrified, sustainable, and digitalized future. The increasing demand for power cable solutions is being driven by structural megatrends, including the energy transition, the modernization of aging power grids, and the rise of electrification across industries. These trends are creating long-term growth opportunities for NKT, positioning the company at the center of a rapidly expanding market. The energy transition is one of the most significant factors supporting demand for NKT’s power cable solutions. Governments and corporations worldwide are accelerating their shift to renewable energy sources such as wind and solar. This transition requires substantial upgrades and expansions of power grids to integrate new renewable energy capacity. NKT plays a critical role in this process, as its high-voltage direct current (HVDC) and high-voltage alternating current (HVAC) cable solutions enable the efficient transmission of clean energy over long distances. Without these advanced power cables, large-scale renewable projects would struggle to deliver electricity to consumers, limiting the expansion of clean energy infrastructure. Electrification is another key driver of demand for NKT’s cable solutions. The growing adoption of electric vehicles, heat pumps, and electrified public transportation is placing increasing pressure on power grids, creating an urgent need for stronger and more reliable infrastructure. More than 40% of Europe’s power grid infrastructure is over 40 years old, requiring significant replacement and reinforcement to support rising electricity demand. The European Union’s Electrification Action Plan and European Grids Package further emphasize the necessity of modernizing grids to enable decarbonization and enhance economic competitiveness. As a leading provider of medium- and high-voltage power cables, NKT is well-positioned to benefit from the large-scale investments required to upgrade and expand power transmission networks. Digitalization is also unlocking new opportunities for NKT as power grids become smarter and more efficient. The increasing need for real-time monitoring, predictive maintenance, and enhanced security of critical infrastructure is driving demand for smart cables equipped with built-in data collection and fiber optic capabilities. With growing geopolitical tensions and heightened concerns over cyber and physical threats to energy infrastructure, securing electricity transmission systems has become a top priority. NKT is at the forefront of these advancements, offering power cable monitoring solutions that improve grid reliability and operational efficiency.

Expanding capacity is a key reason to invest in NKT, as it enhances the company’s ability to meet growing demand for power cables driven by the energy transition, grid modernization, and electrification. To maintain its position as an industry leader, NKT is making significant investments to scale up its high- and medium-voltage cable production and installation capabilities. A major component of NKT’s expansion strategy is its €1 billion investment program announced in May 2023, aimed at strengthening its high-voltage cable production. One of the most significant projects within this program is the construction of a new high-voltage factory in Karlskrona, Sweden, which will feature a 200-meter extrusion tower - the tallest of its kind in the world. Once completed, this will be the world’s largest offshore high-voltage cable production site, enabling NKT to manufacture long-length HVDC cables essential for large-scale renewable energy projects and cross-border electricity transmission. To complement this expansion, the company is also building a new cable-laying vessel, NKT Eleonora, which will enhance its ability to execute complex offshore wind and interconnector projects. Both investments are expected to be operational by 2027, significantly increasing NKT’s capacity to meet the growing demand for high-voltage power transmission solutions. In addition to high-voltage expansion, NKT is scaling up its medium-voltage cable production to support Europe’s electrification and green transition. The company is upgrading its factory in Denmark, adding new production and testing facilities to accommodate rising demand from renewable energy projects and grid reinforcements. Further capacity expansions are underway at production sites in Sweden and the Czech Republic, with completion expected by 2026. These investments are crucial for modernizing Europe’s aging power grid infrastructure, which plays a key role in integrating renewable energy sources and electrifying transport and heating systems. Beyond organic expansion, acquisitions are also strengthening NKT’s growth strategy. In June 2024, the company acquired SolidAl, a Portuguese power cable manufacturer, expanding its production capacity for medium- and high-voltage cables up to 225kV. This acquisition also enhances NKT’s geographical presence in key markets such as France, the UK, Ireland, Spain, and Portugal.

A record-high order backlog is a strong reason to invest in NKT, as it provides multi-year earnings visibility and reinforces the company’s critical role in the energy transition. At the end of 2024, NKT’s high-voltage order backlog stood at EUR 10,6 billion, more than double its 2022 level. This substantial backlog highlights NKT’s ability to secure large-scale, high-value contracts, primarily from major European Transmission System Operators, with over 85% of the backlog linked to these long-term customers. The company's consistent success in winning large projects reflects its strong reputation and competitive positioning in the market. The backlog ensures greater predictability in revenue and capacity utilization, with approximately 26-29% expected to be delivered by 2025 and the remainder extending into 2026 and beyond. This structure provides stable and recurring revenue streams, reducing short-term uncertainty and supporting the company’s long-term financial goals. Beyond securing future earnings, the backlog also validates NKT’s ongoing investments in expanding production capacity, as demand for high-voltage solutions continues to grow. A significant portion of NKT’s backlog is tied to interconnector projects, which account for approximately 55% of its order book, followed by offshore wind projects at around 40%. These projects are essential for cross-border electricity transmission and integrating renewable energy sources into national grids. With the EU committed to expanding renewable capacity and upgrading grid infrastructure, demand for NKT’s cable solutions is expected to remain strong, reinforcing the company’s long-term growth prospects. The strength of NKT’s backlog also allows the company to take a selective and disciplined approach to new tenders, ensuring that it prioritizes profitability while securing sustainable growth. As the company scales its operations with new factories and expanded production facilities, the backlog provides a solid foundation for long-term earnings growth and market leadership.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 31,24, which is from 2024. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 12,1% over the next five years. Additionally, I have selected a projected future P/E ratio of 24, which is twice the growth rate. This decision is based on NKT's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 575,60. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy NKT at a price of DKK 287,80 (or lower, obviously) if we use the Margin of Safety price. However, the EPS in 2024 was boosted by the sale of NKT Photonics, making it an outlier. If we instead base the calculations on 2023 earnings, the Margin of Safety price would be significantly lower at DKK 144,18.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 9.598, and capital expenditures were 3.453. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.417 in our calculations. The tax provision was 283. We have 53,669 outstanding shares. Hence, the calculation will be as follows: (9.598 – 2.417 + 283) / 53,669 x 10 = DKK 1.390,75 in Ten Cap price. However, the 2024 numbers were boosted by the sale of NKT Photonics, making it an outlier. If we instead base the calculations on 2023 numbers, the Ten Cap price would be significantly lower at DKK 595,17.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With NKT's Free Cash Flow Per Share at DKK 114,50 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 1.577,31.  However, the free cash flow in 2024 was boosted by the sale of NKT Photonics, making it an outlier. If we instead base the calculations on 2023 earnings, the Payback Time price would be significantly lower at DKK 645,39.

Conclusion

I believe NKT is an intriguing company with strong management and a solid competitive position. The company has built a moat through its leadership in high-voltage direct current technology. Historically, its (ROIC has been low due to the capital-intensive nature of the business, making ROCE a more relevant metric. NKT expects to consistently achieve a ROCE above 20% from 2028. Free cash flow will be impacted by high capital expenditures in the short term but is expected to increase in the long term once capacity expansions are fully operational. The execution of high-voltage projects poses a risk due to their complexity, long timelines, and potential delays from supply chain disruptions or unforeseen challenges, which could increase costs and affect future contracts. Commodity price volatility is another risk, as fluctuations in raw material costs can erode profit margins, especially given the long project timelines and limited flexibility to adjust pricing. Additionally, competition remains a concern, with new entrants, particularly from China and other low-cost manufacturers, potentially pressuring margins and market share in the high-voltage segment. Existing European competitors are also expanding and investing in new technologies. Despite these risks, favorable global trends support NKT’s growth, as increasing electrification, renewable energy expansion, and grid modernization drive demand for its power cable solutions. Expanding capacity is a key reason to invest in NKT, as its €1 billion investment program and strategic acquisitions strengthen its ability to meet rising demand. A record-high order backlog provides multi-year earnings visibility, securing stable revenue streams and reinforcing NKT’s role in the energy transition. I would not place too much emphasis on the inflated 2024 numbers, but if you are looking to invest in renewable energy, NKT may be a good choice below the 2023 Ten Cap price of DKK 595.

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