This article first appeared in De Telegraaf Questor column.
One of the best litmus tests for a company’s long-term success is how well it handles a recession. Do it right and the company will come out stronger. Doing it wrong will only make any existing problems worse.
Vestas Wind Systems (DK:VWS) is in the first of these two camps. As a manufacturer of wind turbines, the Danish company felt the full force of the slump in the wind energy market that took place just over two years ago.
The group posted heavy losses in 2022 after rising inflation and rising interest rates forced developers to shelve new wind projects, and rampant cost increases quickly made existing contracts unprofitable.
However, to its credit, Vestas quickly completed its old contracts, prioritized pitching for new work with more sustainable margins, and introduced a series of product improvements along the way. At the end of last year, the group was profitable again, operated more efficiently and celebrated a record increase in new orders.
Betting on recovery
With inflation finally under control and central banks preparing to cut interest rates, Vestas is now in a particularly good position to benefit from a long-awaited recovery in new wind energy projects. Analysts predict a strong increase in turnover and profit for this year and the coming years.
The group has received the backing of six of the world’s best performing fund managers. These professional investors are among the top 3% of the 10,000 equity fund managers that Citywire tracks. Their belief means Vestas has a AAA rating from Citywire Elite Companies, which rates companies based on the backing of the world’s top investors.
Top three elite financiers
Sources: Citywire/Morningstar, latest holding data.
One of them is Jonathan Waghorn, manager of the Guinness Sustainable Energy fund.
“Wind has been a very difficult market over the last 18 months,” says Waghorn. “Higher interest rates and the spike in inflation we have experienced have increased costs for what are already capital-intensive businesses.
‘But Vestas is by far the best benchmark for a wind equipment manufacturer, and when you look at order growth and book-to-bill ratio [a measure of how strong demand is]they show that we are in for a very interesting revival for wind energy.’
There are several reasons why Waghorn might be right on both counts. A big one is the energy transition, where most of the world’s economies will phase out polluting fossil fuels and increasingly generate their energy using cleaner renewable sources such as wind, solar and hydropower.
How Citywire Elite Companies.
Transitional treasure
Wind currently supplies about 17% of Europe’s electricity demand, according to industry mouthpiece WindEurope. With the European Commission aiming to increase that figure to 50% by 2050 but falling dramatically short so far, new wind farms will need to come on stream thick and fast – with installed wind energy capacity expected to rise from 255 GW to a whopping 1,300 G.W. GW over the period.
As economic conditions become more manageable, Vestas will benefit greatly from the renewed demand for its turbines. In addition, the country will benefit from generous wind subsidies, not only from the EU but also from the US, under President Biden’s Inflation Reduction Act, and from other countries.
And then there are some company specs worth mentioning. Illustrating its ability to win business, in 2022 – the year it made losses – Vestas recorded orders worth 11,189 MW of power generation and had a backlog of contracts worth €49.5 billion. By the end of last year, the company had added a further 18,386 MW of orders and its backlog of contracts amounted to €60.1 billion.
In addition to the production of turbines, Vestas is also increasingly offering service contracts for their maintenance. Not only does this ensure that a greater proportion of revenue returns, but the Ebit margin (on earnings before interest and taxes) is much higher, at just under 22% last year, compared to just 1.5% for the group .
Analysts expect the services sector to generate almost a quarter of this year’s expected €18.6 billion turnover and account for the bulk of €980 million in profits.
A company that can do this well in a recession should thrive when the market booms again.
| Key Facts – Vestas Wind Systems | |||
|---|---|---|---|
| Market capitalization | DKK 193 billion | Price | 191 DKK |
| Net debt | €69 million | Net debt/Ebitda | 0.1x |
| 52 weeks high/low | 219 DKK / 133 DKK | Return on invested capital | 0.4% |
| F’cst price for profit | 30 | F’cst dividend yield | 0.8% |
| F’cst growth in earnings per share | 203% | Share price over 12 months | -5.6% |
Source: FactSet. EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts based on the next 12 months.
