Summary

  • Vestas Wind Systems (Vestas) is the global leader in wind energy solutions. It manufactures and serves wind turbines in 83 countries.
  • Revenue growth has been impressive in the past and 2020 was no exception. However profitability has been in downtrend due to a tough competition.
  • The company has strong balance sheet and ambitions to outperform the market. However the stock price is high by stock evaluation method based on historical P/E.
Dividend    Revenue    Profitability    Financial Strength    Investment Case

Danish Vestas (VWS) provides sustainable energy solutions with 140 Gigawatts (GW) of wind turbines around the globe. According to IRENA (International Renewable Energy Agency) at the end of 2020 global wind capacity was 733 GW. It has installed base of more than 75K turbines. Vestas covers the entire life cycle of a wind power plant. The company’s vision is to be the global leader in sustainable energy solutions. The transition to the renewable energy sources to tackle a climate warming problem is a huge tailwind for the company. Different countries have introduced incentives for renewable sources through tax advantages. At present less than 2% of all energy comes from wind turbines. According to Wood Mackenzie a global wind power capacity is expected to grow at 8% per year until 2030.

As Vestas has a leading position in the wind energy industry its growth opportunities are significant.

The company has the following three segments of business:

  • Onshore – 79% of revenue in 2020. The company provides wind turbine products (wind turbines, wind power plants and development sites) and is the global leader in onshore energy market. Activity level is increasing. Vestas delivered 17055 MW to the customers in 2020.
  • Offshore – 8.5% of revenue. Vestas is the second player in offshore market (after Siemens Gamesa) and has ambition to become the leader. In December 2020 it acquired all shares in joint venture MHI (Mitsubishi Heavy Industries) Vestas Offshore Wind.
  • Service – 13% of revenue. A revenue is derived from service contracts, sale of spare parts and other related services. Vestas is the first company with 100 GW of wind turbines under service. The division is expected to grow fast. A revenue in Service business grows along with growing fleet of installed turbines. At present it has a total of 117 GW under service and the order backlog with expected revenue of EUR 24 B.

Vestas is integrating onshore and offshore divisions to create a unified product and business platform within the company.

The renewables industry faces issues of intermittency (energy is produced when the wind is blowing and the sun is shining) and limited dispatchability (power should be dispatched on demand). Vestas is looking for solutions to those problems. It developed transportable Battery Energy Storage Solution. The battery charges when the wind blows and stores the energy generated when not in use. The other significant issue is declining profitability. Countries around world have increasingly used auction systems to build wind parks.  Companies compete in these auctions by the price per MW-hour leading to lower profit margins for bidders.

This year in April a stock split at a ratio 1:5 was implemented by the company.

  Dividend

Dividend Dividend Yield 5Y Growth PayOut Ratio Ex-Dividend Date
EUR 1.14 per share 0.72% 4.6% per year 29% 2021

After stock split dividend is EUR 0.23 per share with low dividend yield of 0.72%. Dividend is quite volatile tracking the pattern of EPS development as the company targets payout ratio of 25–30%. Dividend for 2020 is 7.5% higher over year. With such low payout ratio dividend is well covered by earnings but it is not covered by free cash flow. Vestas initiates share buyback programs based on performance thus improving dividend safety. It is reasonable to expect that the future dividend growth mirrors a future EPS growth.

  Revenue

Revenue 5Y Growth Revenue growth over 2020 Company Outlook 2021
EUR 14.8 B

 

 

 

 

12% p. a.

 

 

 

 

Total sales                      22%

By divisions:

Onshore                        24%

Offshore                        0%

Service                          10%

Revenue in the range EUR 15.5–16.5 B.

Service revenue to grow about 15%.

Revenue in offshore segment of EUR +3 B by 2025.

 

 

Revenue growth has been accelerating in recent years. 5 years average growth is impressive at almost 12% per year. In 2020 it increased by 22% year -on- year despite Covid – 19 related challenges. In that year Vestas delivered the largest number of wind turbines to customers in the company’s history. Order backlog is also growing at impressive pace.

Vestas develops new way of manufacturing wind power products – modularization. It launched fully modular the EnVentus wind turbine platform. It allows to combine standard modules into new products thus allowing for synergies across platforms and types of products.

Vestas expects that repowering of older assets within ageing wind turbine fleets would be a significant driver of demand in the future. By now it is centered around Europe and the US. For example, in Netherlands 200 wind turbines will be replaced by new Vestas turbines. New turbines will generate almost three times more energy with less than half of the number of turbines.

In August 2021 the company lowered its outlook for 2021 due to supply chain disruptions and rising costs. That indicates that business environment continues to be challenging for the company.

Over long term the company has ambition to grow faster than the market and be a market leader in revenue. In the coming years onshore wind energy market is expected to stabilize at 2020 level and then grow again. The company has opportunities in both mature markets and the new developing ones. Newly acquired offshore business is expected to grow fast in the coming two years and then decline towards 2025. Then by 2025 a steep increase in offshore installations is expected. Vestas aims to become a leading player in offshore wind power. Service revenue should grow faster than the market.

  Profitability

Profit 5Y Growth Net Profit Margin ROE Company Outlook
EPS EUR 3.9

Net Profit EUR 0.77 B

 

4.7% p. a.

 

 

5.2%

 

 

16.6%

 

 

In 2021: EBIT margin before special items of 5-7% (for service it is 24%)

Long – term: EBIT margin at least 10%.

In recent years EPS has not been in such a consistent uptrend as revenue indicating competitive pressure on profitability. Though the trend in the last two years is positive. In 2020 EPS was EUR 3.9, an increase of EUR 0.33 over year. EPS was positively impacted by income from investments in joint ventures, including MHI Vestas Offshore Wind.

At the same time EBIT (operating profit) was down 30% over year due to higher production costs. In Onshore division profitability is decreasing despite a growing revenue. EBIT was 46% lower over the year due to competitive pressure and EBIT margin was 3%. In Service division the EBIT margin increased from 25.8% in 2019 to 27.6% due to efficient cost management. In offshore division EBIT was negative due to warranty provisions. The Group’s EBIT margin (before special items) for 2020 was 5.1%, down from 8.3% in 2019.

The company has a long-term ambition to reach EBIT margin of at least 10%. EBIT in Offshore division should be at par with the company’s overall margin and in Service – around 25%. That long-term target is supported by the revenue growth ambitions in all divisions, particularly in highly profitable Service division. The revenue growth together with the growth of the operating profit as percentage of a revenue (up from 5% to 10%) would lead to high EPS growth. However these targets look too aggressive taking into account the current competitive environment. For our model we assume that EPS would double in 5 years, growing 15% per year in the next 5 years.

  Financial Strength

Company Capital Structure

In EUR B

Year 2019 2020 1HY 2021
Equity 3.293 4.654 4.481
Cash 2.89 3.06 1.596
Financial Debt 0.82 1.354 1.479
Debt/Equity 25% 29% 33%

The level of debt is low. Financial debt is well covered by both equity with the latest Debt -to- Equity ratio at 33% and operating cash flow with coverage at 55%. Vestas is committed to maintain Debt -to- EBITDA ratio bellow 1x (i.e., debt should not exceed annual EBITDA). At the end of 2020 it was 0.98x. Also the company has a strong cash position to fund a future growth. Vestas has Baa1 long – term issuer credit rating with stable outlook from Moody’s rating agency.

  Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Please note that we use the stock price of EUR 157.45 (31.49 x 5) instead of current price of EUR 31.49. This is due to a stock split at a ratio 1:5 – for a consistency of projections current price multiplied by 5 is used.

Assumptions of dividend and EPS growth over the next 5 years
We assume both dividend and EPS grow at 15% per year. So the total dividend income over the next 5 years would amount to EUR 8.84 and EPS in 5 years will be EUR 7.84 per share.
Projected stock price
Average P/E over the last 5 years (20) multiplied by EPS in 5 years =20 x EUR 7.84 = EUR 157.
Future Returns Based on the Assumptions
Stock price upside potential                                       -0.4%    from the current price EUR 157.45

Overall return on investment*                                    5.3%

Compound Annual Return on Investment                 1%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

The wind power plays increasingly important role in electrification of industries and mobility systems providing a room for strong growth in the future. Vestas is well positioned to benefit from it. The company has strong balance sheet and ambitions to outperform the market. The major risk for Vestas is price pressure from competitors that leads to low level of profits in the main division. The growth in highly profitable Service division mitigates that risk and contributes to the company’s ambitions to improve profitability.

There is no much upside potential after a stock price run this year despite optimistic enough future profitability assumptions used in the projection. It seems that the future potential growth in revenue and profits is priced in the value of the stock. So there is less scope for returns from investing in this well-run company.

 

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any position within the next 72 hours.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.

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