Morningstar | We Have an Optimistic Stance on Wind Energy and Vestas; Shares Offer Moderate Upside
After taking a fresh look at Danish wind turbine manufacturer Vestas Wind Systems, we are maintaining our no-moat and stable trend ratings while increasing our fair value estimate to DKK 642 from DKK 570 and to EUR 86 from EUR 76. The valuation upgrade results from our view that systematic risk for the wind industry has declined. The shares are currently trading moderately below our fair value estimate, which implies 2019 adjusted price/earnings and EBITDA multiples of 25 times and 11 times, respectively.Vestas operates in two segments: wind turbine equipment and aftermarket services. We believe the wind turbine equipment segment is a no-moat business, given the wind auction mechanism to assign renewable energy projects to developers. During 2015-17, wind energy around the globe started the transition from a subsidized model to a competitive auction scheme. The competitive auction put cost pressure on industry players and led to market consolidation, which might continue. Currently, the top four players (Vestas, Siemens Gamesa, Goldwind, and General Electric) hold more than 50% of the market. Technologically, all major players are well positioned and most of them are focused on strengthening their service offerings. The aftermarket offers several benefits: stable revenue streams, higher margins, operational involvement, stronger relations with asset owners, and component performance insights.
In our model, we forecast Vestas to increase revenue at a 5% compound annual growth rate over the next five years, with services posting strong growth. We expect high top-line growth in the next two years followed by a market-pace slowdown since many governments do not yet have a post-2020 vision to encourage more renewables in the energy mix. After 2019, we expect gradual EBIT margin increases, with 200 basis points of expansion by the end of our 10-year explicit forecast period, due to reduced price pressure and operational efficiencies from ongoing cost-cutting.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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