Morningstar | Vestas' Sluggish Start to Year Should Not Worry Investors; Shares Slightly Undervalued
No-moat Vestas published first-quarter results a day after its main rival, Siemens Gamesa. Vestas seems to be lagging SG, given its reported 2% revenue growth and 490-basis-point EBIT margin decline from the first quarter of 2018. However, there is more in these quarterly results than meets the eye. We expect the main negative factor, pricing, to be redressed in the next quarters. We maintain our full-year forecast and DKK 640 fair value estimate.The culprit of the sluggish results was the power solution division. Unlike SG, Vestas' revenue and operating EBIT do not include offshore, which turned in an impressive 83% sales growth from a year ago but is accounted for at the MHI joint venture level. Power solutions' profitability was negatively affected by deliveries executed at low 2017 pricing, an effect expected to vanish in the next quarters. U.S.-China tariffs and raw materials were secondary headwinds. Services increased revenue 16% year over year and reached an impressive 26% EBIT margin due to the efficient cost management of contracts under service.
Activity levels were strong in the quarter. Order intake at 3 gigawatts achieved 84% growth, driven mainly by the U.S., Brazil, France, and Australia. Vestas' higher order average selling price at EUR 0.81 million/megawatt, compared with a reported EUR 0.67 m/MW at SG, is the result of favourable project and geographic mix in the quarter. Both firms confirmed stable price trends; our estimate is EUR 0.7-0.75 m/MW excluding these effects. Vestas' deliveries were up 34%, with the U.S. and Latin America as main drivers. In the U.S., production tax credits' gradual phase-out was the key demand driver while Latin America experienced high auction activity levels. Deliveries in Asia-Pacific were up 23% year over year with Australia, Thailand, and Vietnam as main drivers. The low level of deliveries in Europe, the Middle East, and Africa is not worrisome, given the back-end-loaded profile of the region.
Order intake and deliveries resulted in an all-time high service and equipment order backlog of more than EUR 28 billion, up 31% year over year.
Vestas Wind Systems is an industrial machinery and equipment manufacturing company based in Denmark. Co. is engaged in the production of wind turbines. Co.'s main activities comprise development, manufacture, sale, marketing and maintenance of installations that use wind energy to generate electricity. Co. supplies products, from individual turbines to the delivery of turnkey wind power installations globally. Co. supplies guidance services to its customers in connection with the development, financing and ownership of wind turbine projects. Co.'s main customers are utilities and energy companies.
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