VWS.CPH - Vestas Wind Systems A/S

[John Hjorth]

I'm starting this topic - not with an "ordinary" starting post with thesis etc. - but for discussion for those fellow board members who might have an interest in discussion of investing in this company.

 

Personally, right now, I'm undecided about taking a position in the company. I have allocated serious time to this within the last week or so. I personally have been tracking Vestas since end of August 2016.

 

The stock is down about 30 percent within the last three months. This drop has been the reason for allocation of my time recently.

 

The company presents itself as a company involved in, and dedicated to [in the financials etc.]:

 

1. Wind turbine manufacturer [world leading in on shore wind, as a fact].

2. A service business for the wind energy industry [major player - no doubt].

 

After studying this company, basically I have come to another conclusion about how to perceive this company on overall level , intermediate and long term [please feel free to call it a variant perception, if you want - it actually is]:

 

1. Wind turbine manufacturer [world leading in on shore wind, as a fact].

2. A service business for the wind energy industry [major player - no doubt].

3. Incubator/startup for a fast growing player in off shore wind, based on Vestas technology, in cooperation with others. [More about "others" later in this post.]

 

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I'm in no way savy in technology. I understand that the driving force going forward is to produce energy [in this case, based on wind] cheaper. And it's done by scaling: Bigger wind farms and bigger wind turbines.

 

[A place to start: Ørsted A/S [formerly known as DONG Energy A/S, financial statement 2016, p. 37.][Here.]

 

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Off shore wind has primarily been expanding in the UK and the Benelux countries so far, but the potential going forward world wide looks good. On shore wind has limitations with regard to scaling on size of the wind turbines, which is not the case to the same extent for off shore wind.

 

Is this the automakers of this century, where it will be better just to short the horse? - I don't know.

 

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Now back to my bullet #3 above. [The off shore wind incubator/startup]:

 

From the 2014 financials for Vestas Wind Systems A/S:

 

MHI Vestas Offshore Wind, the joint venture between Vestas and Mitsubishi Heavy Industries Ltd. (MHI), was formally established on 1 April 2014. Dedicated to offshore wind power, the joint venture will combine Vestas’ technological capabilities and long-standing track record with MHI’s strong presence in global power markets and related technologies.

 

As part of the agreement, Vestas transferred the V164-8.0 MW turbine, the V112 offshore order backlog, and existing offshore service contracts to the joint venture. In return, MHI injected EUR 100m into the joint venture, with another EUR 200m to be injected based on certain milestone achievements, reflecting the natural early product life cycle of the V164-8.0 MW turbine. Based on the V164-8.0 MW turbine, the partnership between Vestas and MHI is expected to be a strong vehicle to win an expanding share of the global offshore market. Since 1 April 2014, all offshore installation activities have been and will be handled by the joint venture.

 

Attached are the 2016 financials for MHI Vestas Offshore Wind A/S. Before April 1 2014, the company was wholly owned by Vestas [and then called Vestas Offshore A/S], languishing, because Siemens [now Siemens Gamesa] ran with just about all of the offshore wind orders.

 

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Furthermore, to shed some light on the joint venture, attached are the 2016 financials of the non-Vestas partner in the joint venture, called MHI Holding Denmark ApS.

 

Furthermore, to shed some light on the ownership of the non-Vestas partner is attached a screen shot of the ownership for that partner according to Danish public records as of today.

 

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Thoughts?

offentliggorelse_MHI_Vestas_Offshore_Wind_AS_2016.pdf

offentliggorelse_MHI_Holding_Denmark_AS_2016.pdf

MHI_Holding_Denmark_ApS_-_Ownership_structure_-_20171212.docx

[DooDiligence]

I hope this thread gets some wind behind it.

 

I'm working on so much other original (financial & non-financial) stuff that I'm not sure I'll be able to contribute (even if I was, in reality ABLE to contribute.)

 

Looks compelling at a glance...

[kab60]

Okay, here we go;

 

Vestas' marketcap is 85b DKK (actually less so since they're buying back shares atm and have all autumn). There's some 18b net cash in the coffer.

 

Then you have a service backlog of 83b DKK. Slap a 18 pct. EBIT-margin on that and you're left with some 15b DKK pretax that one needs to discount as one sees fit since they'll earn it over some 7 years.

 

Remember, they target 50 pct. growth in service from FY16-FY20, so this stuff is growing nicely. Anyway, the value of the service biz (without discounting it) as well as the cash is "almost" half of the market cap today. The cash isn't really free, since they need it to show their customers they have the balance sheet to weather any storm, but it makes Vestas a decent takeover target and it provides nice downside protection.

 

Then you have the offshore segment. None of the analysts put any value on this segment, so it's a free option, but I believe it can become incredibly valuable over time. How much? Doesn't really matter. It's free today.

 

So, you have the best player in an Industry destined to grow in the mid to long term, a strong balance sheet, a free option (offshore), decent capital allocation, solid management as well as near term headwinds. There's pressure on margins due to more competitive auctions, but what the market may be overlooking is that there's overcapacity as the moment, since the change from fixed feed-in-tariffs to auctions meant developed pulled demand forward. The industry is struggling with that atm, putting pressure on margins, but it should concede over time.

 

Yes, price pr. megawatt is falling, but that means wind is getting more competitive and probably can do without subsidies in not too long. It also means more of the revenue will come from service over time (look at Finnish Kone - that's what Vestas should strive to become).

 

I don't believe this will be the new auto industry. Vestas is basically the only global players (thus it can better manage downturns on individual markets), and the Industry is consolidating. The Chinese players are behind, Siemens/Gamesa is struggling with integration, GE has its own issues, and then you have smaller players like Nordex and Senvion that will probably be gobbled up - perhaps Nordex makes sense for GE. So I think you'll be left with 3 players - Vestas, Siemens/Gamesa and GE that will become the only global players. All should stay pretty rational when they get their shit together (Siemens/Gamesa are desperate right now, so they're sacrificing pricing for growth hurting everyone, but that won't last forever).

 

So, I think it's a pretty nice deal, but you have a real risk in the US with the changes to the tax code. The US is the most profitable market for Vestas, so if BEAT tax gets passed earnings are gonna take a hit.

 

In the long term, I still think it's a winner, and I think it looks cheap.

 

Disclosure: No position.

[JRM]

So, I think it's a pretty nice deal, but you have a real risk in the US with the changes to the tax code. The US is the most profitable market for Vestas, so if BEAT tax gets passed earnings are gonna take a hit.

 

Even if the tax code doesn't change, the tax subsidies in the U.S. for installing wind generators will phase out in 2020.  These subsidies are production based, so the closer we get to 2020 the less incentive there is to install new generators (the tax credits are based on electricity actually generated).

 

The tax subsidies are what make wind energy lower cost than coal, nuclear, and even natural gas in many cases.  The presentation I was at last week said that the tax credits were essentially offsetting half the cost of the project.  For this particular project they estimated $23/MW for the 20 year life of the generator.  Without he subsidy they said it would be double.

[s8019]

A friend asked to have a look at it couple of weeks ago. It seems that there is a price war brewing in the industry (trigerred by the new auction system in some countries). Prices would stabilize at some point, no doubt, but I have no idea when and at a what level. Some people on the sell side look at the crystal ball and expect that the stabilization will take 12 months, but who knows, I'm not so smart to figure it out. During the previous cycle it took 4 years until wind turbine prices reached the bottom. So good luck with that, for me it is a "too hard" pile.

[kab60]

Costs are coming down fast, so I think it'll become competitive without subsidies. If the current regulation is in place I believe there are incentives all the way to 2022 in the US and the Industry has been quiet happy with the phase down (if it gets slashed it'll obviously be a big headwind, but lots of Republican states are quiet fond of the scheme since there's a lot of local jobs).

 

Obvious question is when (it can compete without subsidies), but I think the Industry can manage. I expect OEM's to move up in the value chain and take on the developer role where they don't just deliver turbines but a full site which might include a mix of turbines, solar panels as well batteries. Developers are still generating good margins, and I expect OEM's to take a part of that.

 

There's a lot of uncertainty in the short/mid term, but I don't think there's a ton of risk (for example, the service market is expected to grow at a 9 pct. CAGR towards 2025 so more and more #biz will be high margin, recurring revenue).

 

You do however need to have a long term perspective. No idea when price discipline gets restored, but either smaller players are gobbled up or they are competed out of business in a couple of years. Vestas has best in class margins and a ton of cash, so they're in the best spot.

 

Another thing: If one expects the world to combat global warming I think it's a pretty good bet to invest in the #1 wind player in an Industry that's consolidating and probably ends up with 3 global players as well as some smaller local ones.

[DooDiligence]

bump

[John Hjorth]

Press Release today from Norwegian Government: Opening of areas at sea for offshore wind.

[JRM]

I'm not sure it's safe to extrapolate out cost reductions too far into the future.  For the most part, the evolution of wind turbines has simply resulted in larger and lighter blades that can generate more torque.  There is a physical limit to the size of the turbine blades.  The generators aren't going to be any more efficient.  Its not going to cost less to install turbines in 10 years.  The cost to connect the turbines to the grid is essentially a fixed cost based on the location of the project. 

 

Perhaps the efficiencies come in manufacturing at scale which would require some consolidation. 

[John Hjorth]

The company is going really hard for lowering production costs by reducing BOM, by putting really hard price pressure on suppliers down the whole supply chain. I have read several articles locally within the last few years about it, where suppliers have been whining publicly about it. It goes on for all kind of components.

 

I have no idea about how this will evolve over time, medium or long term.

 

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Thank you to all posters so far in this topic. It's very much appreciated. I'll go through the topic the coming days for discussion. Already lots of good, relevant and interesting stuff brought up to talk about.

 

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US DOE & DOI: National Offshore Wind Strategy.

[kab60]

Costs keep coming down - and will for a long time. Vestas target at least 3 pct. cost reductions per MWh per year. A big part is better maintenance, leveraging +30 years of data to forecast when components needs replacement.

 

And regarding turbines; they're still growing - a lot. GE and Vestas used to sell 1,5-2 MW turbines in huge numbers in the US. Now they're selling +4 MW turbines which is a large leap.

 

Seems like there's decent news out this morning regarding tax reform in the US. As expected. Up 5 pct.

 

Bummer I can't own it.

[John Hjorth]

Ref. kab60's last post in this topic:

 

Finans.dk [December 14, 2017]: Vestas Chairman Bert Norberg: Our competitors are ruining it for themselves.

 

I discussed the company quite intensely with Tim [fellow board member TBW] when I met with Tim in Copenhagen yesterday. Several of Tim's points about the company are actually what is covered by the chairman in this interview, and also contained in the posts by kab60 so far in this topic.

 

It is about being best in class, industry leader, or even better - in this case - world industry leader. Here it is about being the lowest cost producer, combined with being in top on the technological side of things.

 

The more I think about it, the more impressed I get about those three Swedish industrialists [chairman, CEO & CFO], who grabbed the company wheel a few years back under the near death experience of the company. Absolutely incredible what they have accomplished in such short time span.

 

Less talk, more execution. [To the contrary of the former CEO Ditlev Engel.]

[JRM]

I've been to two utility presentations now within the past week.  Each utility (midwest located in US) is looking to invest about $1.5 billion in wind projects by 2020.  One has acquired land leases, but not selected a supplier yet.  The other has not even acquired land leases.  I'm wondering if the time frame is reasonable to complete these projects (especially the latter).

 

Assuming they can get the projects online before the tax credit start to phase out in 2020, I'm assuming other utilities are racing against the clock to make similar investments in the US.  Wouldn't this create a bow wave of demand up until 2020, then a big drop off?

[kab60]

Somewhat. You also saw it last year with developers rushing to secure turbines before end of 2016, since support is tapering off. But mitigating that is costs that are coming down. It's also important to remember that projects don't need to be done in 2020 to get support. I believe they just have to be started which means taking delivery of some 5 pct. of components or something like that. But sure, it will pull forward some demand. Which is why Vestas is a good bet since it's the only truly global player. Remember this industry has been used to stop and go - espescially in the US where berofore 2015 the support regime was up for debate every year. When wind no longer needs financial support it'll be feasible in a lot more markets and planning will be a ton easier.

[TBW]

Very good article, thanks for linking John.

 

Vestas is a fascinating company.  You can look at the decreasing cost of turbines per year (3%) and think it is a terrible business, but as costs drop the market gets bigger.  As market gets bigger, supply chains get better LCOE drops, market gets bigger etc.  What is interesting is that, according to Lazard, the LCOE of onshore has dropped 6% per year for last 6 years.  That is with Vestas ASP not really dropping all that much over past couple of years.  So the drop in turbine price, and increase in MW per turbine will further help them compete against other forms of energy.  I know some ppl in the industry who think solar will drop so much that it will be much preferred over wind projects.  I don't know myself, but thought that was interesting perspective.

 

I think Kab has nailed it on the competitive front.  Other than GE, the rest are a mess, lots of debt and slim margins.  He is also right that this will increasingly be a higher margin services company.

 

While I think the stock price is cheap, I am not sure it is crazy cheap.  If you take into account dropping turbine prices per year, the recent growth results maybe being demand pulled forward, the lack of expected growth overall in onshore wind (expect grow in onshore is only 3 to 4% per year), and the short-term effect the price war or tax changes may have.  It does have room to get a good bit cheaper.  And a if you pay with different assumptions give the risks above, its cheap, but not as cheap as it appears.

 

One mitigant to that lack of growth is that the drop in turbine prices have actually made it economic (and PTC encourages) older turbines to be replaced by new turbines.  That will be a source of growth for the likes of Vestas, even if overall market isn't growing. 

 

Offshore growth is expected to be in the 35 to 45% range, however its off a small base.  And that is a free option here, I agree with Kab on that as well.

 

Another thing to worry about is the GE lawsuit, that doesn't see all that trivial.  Seems like GE has used a similar tactic against MHI to great success in the US market.  Here is a good summary of this here https://www.greentechmedia.com/articles/read/ge-sets-its-sites-on-vestas-in-latest-ip-infringement-battle

 

All that said, I think it's a very well run company, best in class at a decent/good price.  Enough for me to look to take a small position and look to buy more if it gets cheaper.

 

 

 

 

[John Hjorth]

Ladies [if any] & gents,

 

Where do I find some hard core information [state of the Nation-like] about Siemens Gamesa? - stated by the company it self? [i.e. 2017Q3 numbers etc.]

 

The Company Website seems about useless to me - ... perhaps I'm just too tired right now, and don't look carefully & focused enough.

 

-Thank you in advance for any help.

[kab60]

Here you go John: http://www.siemensgamesa.com/en/investors-and-shareholders/financial-information/

 

So this thing has rallied lately when it was clear that all isn't lost in the US. I never thought the US would fail since a lot of republican states are dependent on the jobs it provides, but one could argue it has been derisked and might be even better value now. Did look more interesting around 360 kr. though.

[John Hjorth]

Thanks kab60!,

 

That helped a lot.

[tol1]

Has anyone come across Scopia Capital's short thesis on this one? Thanks

 

[John Hjorth]

Boersen.dk  2018.01.25 [not subscription protected right now]: American Money Manager increases short bet on Vestas.

 

Looked a bit around earlier today, to find info about Scopia Capital Management and found some info about total AUM in the area of USD 11 B. Last SEC reported portfolio around USD 6 B [ here ]. To me, they must have been burned by the runup recently in the DKK / USD pair [~ EUR / USD pair].

 

Personally, I'm not wired in any way to short. If I was, this company would not be on my watchlist to short either. I see P/E in the teens for an industry leader with solid financials and fairly strong cash flow, but also expected pricing pressure in the industry going forward. [10 bagger in 5 years after a near death experience].

 

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Welcome to CoBF, tol1!

[tol1]

Thanks for both. Has been on my watch list and will spend more time on the name.

[TBW]

Interesting, I too would like to read their short report.

 

There are definitely some near term concerns, pricing pressure, and that GE lawsuit.  And that may be reflected in upcoming earnings reports.

 

Longer term I think Vestas should be fine, the pricing pressure should be transitory given the margins of its competitors.  To me the price looks good here as an investment, not a great price.  Certainly the stock could drop 20% from here, but at this moment I think that would be a buying opportunity.

 

Would be interesting to see the opposite view point.

[John Hjorth]

Interesting, I too would like to read their short report.

 

There are definitely some near term concerns, pricing pressure, and that GE lawsuit.  And that may be reflected in upcoming earnings reports.

 

Longer term I think Vestas should be fine, the pricing pressure should be transitory given the margins of its competitors.  To me the price looks good here as an investment, not a great price.  Certainly the stock could drop 20% from here, but at this moment I think that would be a buying opportunity.

 

Would be interesting to see the opposite view point.

 

I have to agree with Tim here.

 

After kab60 gave me guidance to the financials of Siemens Gamesa just before Christmas, I took a look at it. The point here is, that the operating margin of Siemens Gamesa is materially lower than for VWS.CPH.

 

Especially kab60 has mentioned this earlier in the beginning of this topic. Thank you, finally, now I understand it to its full extent.

 

Thus - combined with the pricing pressure - I imagine this industry has a messy, bloody & violent future in front of it self, short to medium term. In short, somebody has to die. Not exactly the place for me - as the whimp I am - to go crazy. I'm more thinking of picking up a small position in the volatility going forward.

 

EnergiWatch.dk: Siemens Gamesa merger has caused far-reaching internal turmoil .

 

That does not exactly read as good, - especially when there are material external challenges, too.

 

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Somehow it's mindblowing to think about that one of the VWS predecessors - NEG Micon A/S - was actually a large Gamesa shareholder years ago. What a game.

[John Hjorth]

I hope this ... gets some wind behind it. [<- very manipulative editing here!, John]

 

We don't need any wind behind it here! -We need headwinds! - for all the turbines! [i couldn't help it ...]

[John Hjorth]

Okay, here we go;  ...

 

... Then you have the offshore segment. None of the analysts put any value on this segment, so it's a free option, but I believe it can become incredibly valuable over time. How much? Doesn't really matter. It's free today. ...

 

... So, you have the best player in an Industry destined to grow in the mid to long term, a strong balance sheet, a free option (offshore), ...

 

OK, time to get serious, by not fooling around with jokes in this topic. Lots of great stuff posted in this topic so far, and thereby lots of stuff to discuss, to get a better understanding of the company.

 

Thank you, all.

 

Above I have quoted kab60's initial post in this topic, and "shaved" it down materially, to focus on what's on my mind in this particular post. If you read this post, kab60, I hope you think that I've been fair in my condensed quoting. Otherwise, please feel free to object and comment.

 

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The MHI Vestas Offshore joint venture has been mentioned as a "free option" above. [Please note, that I try not to take it too literally here.] It might be true, to some extent, short or medium term. If this entity actually starts to deliver according to plans. That will be interesting to observe later this year, and I will post financials here, when I get notification about them being available.

 

Right now, I have my concerns about it. To me, long term growth of VWS is dependant on success with off shore wind.

 

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Somehow, I just happen to hate start ups. The world hasen't lost any potential by me not becoming a venture capitalist.