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The future of energy: A look into Vestas and Siemens Gamesa
Summary: The wind turbine industry is an instrumental part of the green transformation and in today's equity update we take a look into Vestas and Siemens Gamesa as a warmup to tomorrow's release of our recent fireside chat with the Vestas CEO Henrik Andersen which will initially only be available to Saxo clients. The wind turbine industry has been through some years of margin pressure and 2020 caused Siemens Gamesa and GE's Renewable Energy division to swing into a loss, while Vestas managed to stay solidly profitable through the pandemic. This has been rewarded by the market with Vestas' valuation premium reaching a recent high relative to the industry.
Update as of 25 August 2021: The initial research note had an error in the final chart showing EV/Sales ratios of Vestas, Siemens Gamesa, and Goldwind. The currency on the fundamentals of the companies had not been harmonized leading to an error in Vestas's EV/Sales ratio. We have chosen to preserve the original text around valuation to not obscure the original research note. However, the conclusion is a bit different. One could argue that the valuation premium of Vestas is quite small given the performance on EBITDA margin and revenue growth. It is likely that the market is holding back on Vestas' premium due to its currently smaller offshore business which is where future installed capacity is going to come from.
Since early 2020 we have talked a lot about the green transformation and decarbonization with our green transformation basket being our main benchmark for how the market is pricing green transformation stocks. As of yesterday’s closing prices our green transformation basket was down 0.1% for the year making it one of the worst performing baskets in 2021 as the industry is experiencing a hangover from its superior rally last year. In the beginning of this year we argued that the green transformation segment was entering a new period where investors would increasingly put more weight on ‘green quality’ than ‘green speculative’.
We have recently talked to the CEO of Vestas Henrik Andersen within the topic “The Future of Energy” where we put focus on where the world is headed. Tomorrow, we will release our fireside chat with Henrik Andersen for Saxo clients only (public release is next week) where he provides unique perspectives on the challenges of climate change and how that drives the industry of wind turbines. As a warmup to this interview, we will go through Vestas and Siemens Gamesa, the two largest publicly listed companies manufacturing wind turbines (GE has a segment called Renewable Energy which is not purely focused on wind turbines), and make a smaller comment on Xinjiang Goldwind Science & Technology (often called Goldwind) which is China’s biggest wind turbine maker.
Commodity inflation has not made margins easier
Our comparison and analysis into the wind turbine industry is limited to a few years starting in Q4 2017 as the Siemens Wind and Gamesa merger was announced in April 2017. As the chart below shows the operating margin of the wind turbine makers has been under pressure for three years before bouncing a bit higher recently. However, as Vestas has communicated in their previous two earnings releases commodity inflation especially on steel is pressuring profitability a bit. In Q4 2017, Vestas had a 8.7%-point EBITDA margin lead over Siemens Gamesa which has since shrunk to a 7.4%-point lead as of Q2 2021.
While Vestas has seen a bit more margin pressure than Siemens Gamesa, the German-Spanish turbine maker had bigger problems in 2020 which caused profit margins to briefly turn negative while Vestas navigated the pandemic much better. This happened despite Siemens Gamesa has a larger services segment in percentage of revenue which has more stable earnings. What happened for Siemens Gamesa was a significant decline in onshore revenue which is more profitable than offshore turbines (GE’s Renewable Energy also saw negative operating profit in FY20 for the same reasons). The technology vector and planning of wind turbine farms suggest that offshore wind turbines are the future and here Siemens Gamesa is leading the game with €4.9bn in revenue in FY20 (ending 30 September 2020) while Vestas recognized €1.4bn in FY20.
Vestas is still the overall leader in terms of installed capacity and annual revenue and the high operating margins are based on good unit costs in its onshore turbine business. The slight margin pressure for Vestas relative to Siemens Gamesa looks acceptable when we see how Vestas has managed to grow revenue much more and profitable, something investors long term would like to see. Vestas has grown revenue by 46% since Q4 2017 while Siemens Gamesa has only grown revenue by 17%, but the growth champion is Chinese Goldwind with an impressive 108% growth driven by high growth in the Chinese market which is now the largest in the world in terms of installed capacity. Goldwind’s growth has come with lower EBITDA margin declining to 11.9% in 1H 2021 from 18.1% in 1H 2018 and through significantly increasing debt financing. Goldwind’s EBITDA to net-debt ratio has decreased over the past three years.
Valuations have come up and maybe too much for Vestas?
The EV/Sales ratio is a good estimate for how much expectation there is for growth and as the chart below shows the market has become very excited about Vestas. Maybe too excited as Vestas valuation premium to Siemens Gamesa and Goldwind has exploded over the past two years. The valuation premium has always existed because Vestas is the highest quality companies on operating metrics something that has happened in the wake of the company’s near death experience in 2012, which caused Vestas to transition into a much more disciplined company.
The current valuation premium reflects that Vestas is the industry’s leader in terms of profitability and has released this year their bid for the future offshore wind turbine beating competitors on many metrics. However, with a high valuation comes higher risks for investors and the ultimate question is whether Vestas is too expensive despite being the highest quality within the wind turbine industry.