Morningstar | Initiating Coverage of Siemens Gamesa With EUR 15 FVE and No-Moat Rating
We are initiating coverage on Siemens Gamesa Renewable Energy, the result of the 2017 merger between Gamesa and Siemens Wind Power, with a no-moat and stable trend rating. We believe scale will become increasingly important for wind turbine suppliers. SGRE is well positioned to become Vestas’ main competitor and achieve margin expansion in the longer term, fuelled by its three-year cost-cutting program. We expect demand for renewable energy to continue to grow, leading to the expansion of the installed bases of Tier 1 turbine suppliers like SGRE and resulting in a higher portion of margin-enhancing service revenue. We expect SGRE to expand its operating margins by 150 basis points by the end of its cost-cutting program in 2020-21 and reach 10% EBIT margin by the end of our explicit forecast period in 2028, from its current 7.6% adjusted EBIT margin. We believe the shares are moderately undervalued, currently trading 12% below our EUR 15 fair value estimate and implying 2019 adjusted price/earnings and EBITDA multiples of 20.5 times and 7 times, respectively.We believe the wind turbine equipment segment is a no-moat business, given the wind auction mechanism to assign renewable energy projects to developers. In 2015-17, wind energy around the globe started the transition from a subsidized model to a competitive auction scheme. The competitive auction put cost pressure on industry players and led to market consolidation, which might continue. Currently, the top four players (Vestas, SGRE, Goldwind, and General Electric) hold more than 50% of the market. Technologically, all major players are well positioned and most of them are increasingly focused on strengthening their services offerings. The aftermarket offers several benefits: stable revenue streams, higher margins, operational involvement, stronger relations with asset owners, data gathering, and component performance insights.
Siemens Gamesa Renewable Energy is a holding company. Through its subsidiaries, Co. is engaged in the business of renewable energy sources, primarily wind power but also including solar energy where its acts as a supplier and manufacturer of technological products, installations and services. Co. is organized along the lines of: promotion, construction and sale of wind farms, engineering, design, manufacture and sale of wind turbines, manufacture of thermic and photovoltaic solar components, promotion and sale of photovoltaic solar farms. Co. also participates in both Spanish and European working groups aimed at establishing priorities for its sector's research & development work.
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