Analyst Note, Jeffrey Vonk, 07/11/2014
Vestas reported excellent third-quarter results, with revenue of EUR 1.8 billion, up 26% year on year. Operating profit margin increased 440 basis points, thanks mainly to higher volume and to a lesser extent decent cost control. The 36% increase in turbines produced and shipped confirms our view that the company's expanding installed base provides an excellent platform for additional services and improved customer loyalty. Management upgraded 2014 guidance for revenue from a minimum of EUR 6 billion to EUR 6.4 billion-7.0 billion and for EBIT margin of 6.0% to 7%-8%. As we were already expecting revenue of EUR 6.7 billion and EBIT margin of 7.4%, we see no reason for major changes to our fair value estimate and no-moat rating.
Weak order intake of 1.17 gigawatts in the quarter, a decrease of 24% year on year, was mainly due to low U.S. order intake. The cancellation of a 254-megawatt Brazil project will affect order intake in the fourth quarter. Year to date, though, order intake is up 12% from last year. In the U.S., market activity is correlated with the production tax credit that expired in 2013. A potential extension of the PTC, expected at the end of 2014, could stimulate U.S. order intake.
The value of the backlog at Sept. 30 was EUR 13.4 billion, a decrease of 3.6% from the same time last year. Positively, the service backlog component increased by EUR 0.2 billion. Additionally, 66% of the expiring service contracts were renewed during the third quarter. The slightly lower renewal rate compared with the second quarter can mainly be attributed to an unusually high share of contracts up for renewal in China with associated low renewal rates.
Despite the weak order intake in the third quarter and lower backlog, we believe Vestas is well on track to meet our estimates for 2014. And Vestas' improved profitability opens the door for a dividend, which the company hasn't paid since 2003. We expect dividend payments to be reinstated in 2015.
Den fulde analyse af Vestas kan læses her.
Bull og bear scenarier
Bulls say
- Wind energy is the only renewable energy source that is cost-competitive against conventional power sources like coal and natural gas in the future.
- Vestas is likely to benefit as governments across the world put heavy emphasis on renewable power generation in stimulus packages.
- After years of turbine equipment price declines Vestas can regain pricing power. The combination of good volume growth, increasing pricing power, and expense control will lead to expanding margins.
Bears say
- With current low natural gas prices, wind is less economic from a cost perspective, especially without governmental incentives, and many power generators are unlikely to make the investment in wind over the near term.
- GE entered the market in 2004 and has since been able to capture significant market share. As GE becomes more experienced at putting the turbines together, we expect its costs and prices to fall, putting even more pressure on Vestas.
- Vestas' continued focus on costs and the lack of product development erode the company’s offering, leading to market share losses.
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