Morningstar | Best Idea Orsted Posts 3Q Results Above Expectations, Raises Full-Year Guidance; Shares Undervalued
We reiterate our fair value estimate of DKK 450 share for Orsted, which we added to the November Best Ideas list, after the group released third-quarter results above consensus expectations and raised full-year guidance for the third time this year, as we anticipated. We also maintain our narrow moat and stable trend ratings. The shares appear undervalued and, with our low uncertainty rating, offer an appealing risk/reward ratio for a European utilities firm.Third-quarter EBITDA increased 27% to DKK 2.2 billion, 15% above consensus expectations. Upside to consensus was driven by good performance of wind power and customer solutions divisions. The former was boosted by the commissioning of the Walney Extension and Race Bank farms in the United Kingdom. Also, EBITDA from power partnership agreements was above expectations due to good execution in completing the Borkum Riffgrund 2 farm in Germany. The customer solutions business was supported by higher liquefied natural gas margins due to high gas prices and temporary spreads between European and Asian markets, implying a positive read-across for highly LNG-exposed Naturgy. On the negative side, the power business’ losses deepened in the third quarter due to warm weather and higher maintenance costs.
Orsted increased its EBITDA guidance excluding new partnerships to DKK 13 billion-14 billion from the upper end of DKK 12.5 billion-13.5 billion. This is still below our DKK 15.6 billion assumption, and we plan to tweak our forecasts downwards on wind conditions below our expectations year to date, reflected by an average load factor of 39% at the end of September versus our full-year assumption of 48%, based on average wind conditions. This adjustment will not affect our long-term earnings estimates and valuation. Likely deeper power losses in 2018 should be offset by better performance of the customer solutions division.
Orsted is a renewable energy company based in Denmark. Co. is engaged in developing a renewables portfolio based on competences in offshore wind, bioenergy, and energy solutions. Co. is active in deploying offshore wind and converting existing coal- and gas-fired power stations to sustainable biomass, providing a heat and power supply which is both green and flexible. Co. divides its operations into four businesses: Wind Power, Bioenergy & Thermal Power, and Distribution & Customer Solutions. The Bioenergy & Thermal Power and Distribution & Customer Solutions businesses jointly constitute Co.'s Danish utility business. Co. maintains activities primarily in Northwestern Europe.
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