Orsted’s impairment shock; UBS efficiency hopes

Key points in this equity note:

• Orsted has announced $2.3bn in impairments over higher offshore wind project costs and supply delays, lack of progress in additional US tax credit, and finally higher interest rates. Shares are down 22% extending the drawdown since early 2021 to 68%.
  
  
• Orsted has complex operating model and investors have liked come to the same conclusion with the risk factors to the business not understood well.
  
  
• UBS reports FY23 Q2 results tomorrow morning which will be the first results of the combined business since the forced takeover of Credit Suisse back in March. Investors are so excited about the outlook with the stock up 33% this year.

Orsted shares plunge 22% on $2.3bn impairment

Orsted, once the wonder child of the green transformation Europe, was down 60% as last Friday from its all-time high back in early 2021 when the technology bubble reached its zenit. As the pain had not been enough for shareholders the Danish utility and offshore wind project developer announced this morning impairments of $2.3bn driven by three factors, 1) supplier delays on US offshore wind projects, 2) high interest rates lowering the value of offshore wind farms, and 3) additional US tax credits to offset higher building costs that are not progressing as planned. Shares are down 22% on the news extending the drawdown to a horrible 68%.

While many of these problems were known the shareholder sensitivity to these factors was less known by investors and this comes back to Orsted’s complexity and lack of proper disclosures to key risk factors. We highlighted Orsted’s operating complexity earlier this month arguing that its valuation was too high given the various headwinds for the green transformation and especially offshore wind projects.

Several analysts have already been out saying that these impairments do not impact EBITDA. This is true, but equity valuation is done on EBITA and higher project costs and generally inflation will put pressure on EBITA over time. Orsted’s EBITA margin 1t 14.9% in FY22 was the lowest in more than five years. Investors are most likely worried about that these impairments reflect potentially lower long-term margins in the business.