Investeringskommentar, Jeffrey Volk, Analyst, 09/02/2016
After updating our sales and profit estimates for Vestas and correcting for the time value of money, we are increasing our fair value estimates to DKK 400 per share (from DKK 377) for Danish shares, and to EUR 52 (from EUR 51) for European shares. We maintain our no-moat rating. Vestas reported fourth-quarter results ahead of our expectations, with revenue growth of 22.7% compared with the year-ago period and an adjusted EBIT margin of 16.5%, up 260 basis points.
In 2016, Vestas expects revenue of at least EUR 9 billion and adjusted EBIT above 11%. We view this guidance as conservative, and think it is very likely that it will be raised during the year, as it was in 2015. We expect revenue to rise from EUR 8.4 billion in 2015 to EUR 9.5 billion in 2016, with an adjusted 2016 EBIT margin of 11.4%. Strong order intake (up by 41% in 2015 across the Americas, Europe, and Africa) and a strong backlog of EUR 16.8 billion at year-end 2015 support our view of revenue growth. The five-year extension of the US production tax credit, which was announced in December, bodes well for continued high activity levels in 2016-17.
After the third-quarter results, we indicated that we don't view the pricing stability (seen in the second- and third-quarter results) as sustainable in the long run. Lower MW prices are necessary to reduce the levelised cost of wind energy, in order to increase its competitiveness relative to other forms of energy generation. The average selling price of order intake in the fourth quarter expressed per megawatt hour, or MWh, depends on several factors (such as wind turbine type, geography, and scope) and declined to EUR 0.9 million from EUR 0.96 million in the third quarter. In our valuation estimates, we have built in some price stability for 2016, but we foresee falling prices per MWh in the long run.
Bulls Say
- Wind energy is the only renewable energy source that is likely to be cost-competitive against conventional power sources like coal and natural gas in the future.
- Vestas is likely to benefit as governments across the world place a heavy emphasis on renewable power generation in stimulus packages.
- After years of declines in turbine equipment prices, 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 economical 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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