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Morningstar | Orsted Divests 50% of Giant Hornsea 1 Project at Price Well Above Expectations

Orsted has signed an agreement to sell 50% of its giant Hornsea 1 offshore wind farm at a price well above expectations. The price upside to our expectations will add DKK 15, or 3.5% to our fair value estimate. For the moment, we reiterate our fair value estimate of DKK 430 per share along with our narrow moat, stable trend ratings. Orsted will hold a capital markets day Nov. 28 to provide more clarity on its capital-allocation policy. The sale of the retail and distribution activities in Denmark could be another positive catalyst. The shares are slightly undervalued, in our view.

Orsted has agreed to sell 50% of its 1.2-gigawatt offshore wind farm Hornsea 1 under construction in the United Kingdom to Global Infrastructure Partners. The latter will pay GBP 4.46 billion or DKK 37.3 billion to acquire 50% of Hornsea 1. After deducting all projects' development costs that Orsted will bear, the transaction's net profit will amount to DKK 17 billion-18 billion. This is well above the DKK 10 billion that we and the market were expecting. Of this profit, 85% will be booked in 2018 as an equity gain, the balance in 2019-20 as a construction agreement. The equity gain is tax-free, unlike the construction agreement. The upside to our DKK 10 billion assumption will increase our 2018-20 net income estimates by 24% on average. Our 2018 EBITDA estimate will go up by DKK 4.9 billion to DKK 31.3 billion. Valuation-wise, the transaction will add around 15 DKK to our fair value estimate.

The transaction is expected to close by the end of 2018, in line with the guidance. This transaction is in line with the group's successful record of bringing a partner into big projects during the construction phase. The partner typically pays a premium to the net present value, driving value creation up front.