Will Orsted’s complexity weigh on valuation?
There is no stock like Orsted that represent the downfall of the green transformation since early 2022. At its peak, Orsted was the largest stocks in many of the leading clean energy funds, and as our valuation chart below shows, its 2-year forward EV/EBITDA valuation hit 22.1x in January 2022 compared to 8.4x for the European utility sector. In other words, Orsted peaked at the same time as many bubble stocks peaked illustrated by Cathie Wood’s Ark Innovation ETF.
Since then Orsted has disappointed the market in terms of profitability as its EBITDA margin has declined from 24.6% in FY19 to 14% in the latest 12 months. Rising interest rates, higher material costs, and higher volatility in electricity prices have all contributed to the headwinds for Orsted, and as a result Orsted’s equity valuation has come back closer to the utility sector in Europe. When you observe the historical development in Orsted’s equity valuation is interesting to observe its volatility compared to the overall utility sector. This sector is significantly regulated and constrained making it typically a very predictable sector in terms of returns and growth, but the narrative around the green transformation, and especially offshore wind farms, catapulted Orsted to be valued like a technology company.
Our view is that the operating model of Orsted is quite complex and the timing of cash flows has a high degree of volatility. In addition, the operating model is constrained by many factors (as mentioned above) and with renewable energy, including offshore, becoming more expensive due to expensive storage needed over time to balance the grid, our view is that Orsted should not have a significant premium to the rest of the utility sector.