LONDON (Reuters) - Investment funds seeking to invest at the intersection of Europe and technology are finding rich pickings in places that some may find surprising: sprawling industrials like trains-to-turbines Siemens and engineering group ABB.

FILE PHOTO: Siemens AG headquarters in Munich, Germany June 14, 2016. REUTERS/Michaela Rehle/File Photo

Building on their traditional expertise in factory automation, the conglomerates’ digital divisions are adding cutting-edge software and systems that help customers design, build and test their products faster and more cheaply.

In so doing they bring new value to companies historically linked mainly to customers in the power, energy and mining sectors that have had to slash spending in the past few years due to a precipitous drop in commodity prices.

Not only is the divisions’ growth outstripping that of legacy fossil-fuel businesses, but a trend toward breaking out their earnings separately in company reports allows investors to see value that was previously buried.

“Your industrial company today is not your dirty factory bending metals and producing simple and large objects,” said Andreas Fruschki, director of equity research, Europe at AllianzGI.

“It’s a more high-tech, nimble assembly site.”

Their efforts are attracting the attention of investors looking for less obvious technology plays as the tide turns against U.S. stocks like Facebook, Apple, Netflix and Google, due to their uncomfortably lofty valuations.

Meanwhile in Asia the soaring market capitalization of a handful of companies such as China’s Alibaba and Tencent means investors in exchange traded funds (ETFs) who want exposure to a range of companies are finding themselves increasingly exposed to a single sector.

The growth opportunities in European industrials are still limited by legacy businesses, however, said Neil Campling, head of global TMT research at Northern Trust Capital Markets.

The oil & gas and mining sectors have cut capital expenditure to $706 billion in 2016 from $1.29 trillion in 2013, according to figures from S&P Global, which added that a slight recovery is expected in 2017.

“But you’re certainly seeing that factory automation, machine vision, automation, industry 4.0, improvements in supply chain systems, all these kinds of things ... (are) enjoying very strong growth,” Campling added.

INDUSTRIAL SOFTWARE

Siemens’ Digital Factory, widely seen as the global leader in industrial software, only started reporting separate results in the German company statements in 2015.

The 13 percent of 2016 revenue it contributed is still small fry compared with the power and energy divisions’ 40 percent. But while sales in Siemens’ power and gas segment declined 11 percent in the fiscal third quarter, digital saw 11 percent growth and accounted for more than a fifth of total profits.

Swiss power grids maker ABB is also winning investors’ attention thanks to its robotics segment, although oil & gas, mining and other industries still account for more than 40 percent of company revenues.

ABB Ability, a digital software and services platform that can connect to robots for remote monitoring and diagnostics, which partners with Microsoft and IBM, is starting to contribute to growth, ABB CEO Ulrich Spiesshofer said in a press release after the company released results for the second quarter that ended June 30.

Robotics orders jumped 12 percent year-on-year in the quarter to more than 25 percent of the company’s total.

While some technology assets have been developed in-house or through collaboration, others have come from acquisitions.

Siemens has spent more than $5 billion in the past 18 months acquiring industrial software companies while shedding legacy businesses like hearing aids and household appliances and preparing to list its giant healthcare unit.

ABB this year bought automation software firm B&R for almost $2 billion, the biggest acquisition under its current chief executive, to better challenge Siemens.

“The more exciting themes now are themes like automation, and that is definitely one we’ve angled our portfolios towards,” said Tim Crockford, European equities portfolio manager at Hermes.

Crockford added German forklift truck and robotics maker Kion Group to his portfolio in 2016 on expectations for growing demand for warehouse automation, driven by e-commerce, via its acquisition of U.S. firm Dematic last year.

Bank of America Merrill Lynch singled out Swedish machinery maker Atlas Copco for its SmartLink data monitoring program for air compressors, which looks to anticipate problems before they arise, an example of how the “Internet of things” is transforming the way equipment works.

“Industrial companies with big software businesses generate stronger growth and profitability than their automation peers,” BAML said in a research note last month.

While the European industrials sector has outperformed the broader MSCI Europe benchmark over the past year, the companies still haven’t reached the heights of tech stocks like semiconductor manufacturers.

“There are no ‘pure’ plays in Europe,” Barclays capital goods analysts wrote in a note.

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