EUR 850.00 For Business Accounts Only

Morningstar | Orsted is Fit to Beat its Medium-Term Wind Capacity Growth Targets

Orsted pioneered the offshore wind business by building the first large-scale farm in Denmark in 2002, and it has strong know-how in this industry, which more and more countries intend to develop. This is evidenced by construction gains and share purchase agreements through which the group brings a partner into a project during the construction phase. The partner typically pays a premium to the net present value, driving value creation up front. With 90% of EBITDA coming from offshore wind farms and 10% from traditional utility businesses in Denmark, Orsted has a unique business mix among European utilities. Generous subsidy schemes granted to wind farms in operation and under construction have a weighted-average lifetime before expiry of around 15 years. This guarantees returns on capital comfortably above the weighted average cost of capital in the meantime, underpinning the narrow moat that we ascribe to the group. Still, a decline in subsidies will drive a drop in returns before 20 years, preventing us from granting a wide moat to the group.Our DKK 200 billion investments forecasts through 2025 are in line with the group's business plan. Nevertheless, we project 13.2 GW of incremental gross offshore wind capacity by 2025 involving gross installed capacity of 18.8 GW that year above the upper end of the group's guidance of 15 GW that we view as too conservative. Bottom line, we estimate that Orsted will achieve an IRR of around 8.5% for the incremental offshore wind capacity. This new capacity will support an underlying net income 2019-28 CAGR of 21%, the highest in our coverage. Orsted's ability to invest in value-accretive projects gives it a unique combination of high earnings growth, sustainable returns, and a low carbon footprint, which could entice shareholders seeking minimum carbon exposure. Cash allocation naturally favors investment over dividends, as evidenced by the by the low-single-digit yield, well below the sector average, which is not enticing for income investors.