Head of Equity Strategy
Summary: Orsted shares are down 22% as the utility and offshore wind project developer announced USD 2.3bn impairment related to higher construction costs of offshore wind farms, supplier delays, lack of progress in additional US tax credits, and higher interest rates. UBS reports FY23 Q2 results tomorrow morning which will be its first combined result since the forced takeover of Credit Suisse back in March. While some analysts are skeptical of the new UBS, investors seem to be bullish on the outlook and expect UBS to execute on cost savings and gaining a competitive advantage in global wealth management.
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.
UBS reports its first quarterly result of the combined group after its forced acquisition of Swiss competitor Credit Suisse back in March, which was completed on 12 June. The new CEO Sergio Ermotti is on a mission to quickly integrate Credit Suisse into the group and harvest the synergies expected from the merger which will include selling certain Credit Suisse assets and close non-core businesses.
Analysts are expected net revenue of $8.5bn down 9% from a year ago and adjusted net income of $1.32bn down 29% from a year ago. Investors are betting that Ermotti will deliver more details on the vision for the new Swiss bank and that targets for profitability will beat those of analysts. The estimated FY25 net income is only $8.4bn, which is more or less unchanged from the FY21 results, and seems too conservative given the reputation of Ermotti, but also the cost cutting potential there exists in the new combined business. Investors seem to agree wanting to be part of what could become a powerhouse in global wealth management, which is a high margin and predictable business, sending UBS shares up by 33% this year and 15% alone since 10 August when UBS ended the Swiss government loss protection seen by investors as a sign of strength and the improving outlook.
UBS is currently valued around 0.9x tangible net asset value expected for FY23, which is close the long-term average ending in December 2022. With higher interest rates, strategic benefits in wealth management post the merger, and potential cost savings, we believe investors may be willing to pay a premium over time on tangible book value, but it all comes down to cost execution by Ermotti and the management team. If UBS executes this merger well, then it may turn out to be jackpot of decade for UBS shareholders. First step in that long journey is tomorrow’s FY23 Q2 results.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)