This article first appeared in The Telegraph magazine. Quaestor column.
One of the best litmus tests of a company’s long-term success is how well it handles a downturn. Get it right and the business will be stronger. Get it wrong and any existing problems will only get worse.
Vestas Wind Systems (DK:VWS) falls into the first of these two camps. As a wind turbine manufacturer, the Danish company has felt the full force of the downturn in the wind energy market that occurred just over two years ago.
The group suffered heavy losses in 2022 after soaring inflation and rising interest rates forced developers to put new wind projects on hold, while rampant cost increases meant existing contracts quickly became unprofitable.
To its credit, however, Vestas has moved quickly to fulfill its old contracts, prioritized new work with more sustainable returns and introduced a number of product improvements along the way. By the end of last year, the group had returned to profit, become more efficient and saw record growth in new orders.
Bet on recovery
With inflation finally under control and central banks preparing to cut interest rates, Vestas is now particularly well positioned to benefit from the long-awaited recovery in new wind power projects. Analysts are forecasting strong revenue and profit growth this year and over the next few years.
The group has secured the support of six of the most successful fund managers in the world. These professional investors are among the top 3% of 10,000 stock fund managers tracked by Citywire. Their conviction means that Vestas has a AAA rating from Citywire Elite Companies, which evaluates businesses based on their support from the world’s best investors.
Top Three Elite Sponsors
Sources: Citywire/Morningstar, latest asset data.
One of them is Jonathan Waghorn, manager of the Guinness Sustainable Energy fund.
“The wind market has been very difficult over the last 18 months,” says Waghorn. “Higher interest rates and the inflationary surge we have experienced have increased costs in what is already a capital-intensive business.
“But Vestas is undoubtedly the best leader among wind equipment manufacturers and if you look at its order growth and its book-to-bills ratio, [a measure of how strong demand is]they show that we are in for a very interesting wind energy recovery.”
There are several reasons why Waghorn may be right on both counts. An important one is the energy transition, in which most of the world’s economies will phase out polluting fossil fuels and increasingly produce energy using cleaner, renewable sources such as wind, solar and hydropower.
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Transitional treasure
Wind currently meets about 17% of Europe’s electricity demand, according to industry voice WindEurope. With the European Commission aiming to increase this figure to 50% by 2050, but still woefully short of it, new wind farms will have to be brought online aggressively and quickly – with installed wind capacity forecast to rise from 255 GW to as much as 1,300 GW. during the period.
As economic conditions become more manageable, Vestas could benefit significantly from renewed demand for its turbines. In doing so, it will be the beneficiary of generous wind energy subsidies not only from the EU, but also from the US, under President Biden’s Inflation Reduction Act, and other countries.
It is also worth noting some features of the company. To illustrate its ability to win business, in 2022, when the company made a loss, Vestas received orders equivalent to 11,189 MW of generating capacity and had a backlog of contracts worth €49.5 billion. By the end of last year, the company had added another 18,386 MW of orders, and its backlog of contracts reached 60.1 billion euros.
In addition to producing turbines, Vestas is also increasingly offering service contracts to maintain them. Not only does this translate into higher recurring revenue, but the Ebit margin (earnings before interest and tax) is much higher: just under 22% last year versus just 1.5% for the group.
Analysts say services will account for almost a quarter of this year’s expected sales of 18.6 billion euros and account for most of the 980 million euro profit.
A company that can succeed during a downturn should thrive when the market booms again.
| Key facts – Vestas Wind Systems | |||
|---|---|---|---|
| Market capitalization | DKK 193 billion | Price | DKK191 |
| Net debt | 69 million euros | Net Debt/Ebitda | 0.1x |
| 52 week high/low | DKK219 / DKK133 | Return on invested capital | 0.4% |
| Highest price per profit | thirty | First dividend yield | 0.8% |
| Fastest EPS Growth | 203% | share price for 12 months | -5.6% |
Source: FactSet. EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts for the next 12 months.