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Morningstar | Increasing Orsted's FVE to DKK 450 From DKK 430 and Stewardship Rating to Exemplary

We are raising our fair value estimate for Orsted to DKK 450 from DKK 430 per share, chiefly due to reassessing future projects' incremental value and anticipated premium from the sale of Danish distribution activities. We are also raising our stewardship rating from Standard to Exemplary on best-in-class capital allocation; Orsted is the only European utilities firm with an Exemplary rating. Our new fair value estimate implies a 12% total shareholder return, and with our low uncertainty rating, Orsted offers an appealing risk/reward ratio for a European utilities firm. On Nov. 28's capital market day, we anticipate the company to provide more details about the new projects' economics, which will help the market better value them, in our view.

Among identified but not yet sanctioned projects in Taiwan, the U.S. East Coast, and Germany, we estimate that Orsted will commission 2.87 gigawatts of capacity through 2025 and calculate a weighted average internal rate of return of 12.3% for those projects, creating more value than we previously estimated. Regarding the Danish distribution activities that are for sale, taking the average multiple from recent comparable transactions points to a significant premium to our DCF-based implicit value of this business that we incorporate into our valuation. Those positive drivers are mitigated by lower estimates at bioenergy and thermal and power division due to a lower base in 2018 owing to deeper losses than we expected in the second quarter.

Our new estimates point to underlying EBITDA and net income average annual growth of 9% and 21%, respectively, through 2027. Key growth drivers will be the commissioning of 5.7 GW of new capacity by 2025 and reduction in unit operating costs driven by increasing average turbine size.

We are raising the stewardship rating to Exemplary on best-in class capital allocation. After selling the exploration and production business in May 2017, the upcoming sale of Danish distribution and retail activities will enable the group to further refocus on offshore wind power, a moaty business with high returns on capital that the group pioneered in the early 2000s. Furthermore, recent farm-down of 50% of the giant Hornsea 1 project at a price well above expectations is in line with the group's ability to create value up-front, namely during the construction phase.