Senvion : We initiate Senvion with a Negative credit opinion and a Reduce recommendation due to industry dynamics and the bond’s overvalued status

>Strengths / Opportunities - Growing, recurring and long-contract service segment (c.12% of external revenue) represents the juicy (razor blade) part of the business (2014-2017 renewal rate: 75-80%).CEO Jürgen M. Geissinger makes a real difference; he is the right person in charge.To outsource 30% (currently: c.5%) of assembly outside Europe in the medium-term is positive for Senvion’s cost efficiency, although exposing the company to quality risks.High share of variable costs (80%) and low working capital requirements.Additional tender volumes in Germany (1.4 GW to avoid potentially low wind installations in 2019 and 4 GW onshore plus undefined offshore volumes in 2019/2020).Market share gains in e.g. Australia, India, the Nordics and Germany.Established low to high onshore turbine portfolio; modularisation provides flexibility.Weaknesses / Threats - Industry-wide margin pressure stemming from high overcapacity (less than half of existing capacity is unutilised) and changing subsidisation schemes underline the vulnerability of the business model to regulatory change.Switch to auction-based tenders and formation of local citizen project entities in Germany are exposing manufacturers of wind turbine generators (WTGs) to higher project realisation risk and price pressure. Prices per sold megawatt (MW) in the industry have been declining since 2008; Senvion’s average price is in line with the industry (c.€ 1m per MW), but has been quite stable the last few years, occasionally supported by offshore sales.Further turbine price erosion cannot be ruled out.Limited product and price differentiation among WTG manufacturers; continuously increasing turbine efficiency and innovation cycle requirements by customers.Need for large warranty-related provisions – as seen in 2016 (€ 55m for 6XM WTG series) – cannot be ruled out going forward; technical risk still part of the immature industry.2019 revenue target of € 2.6-2.7bn (2016: € 2.2bn) mainly dependent on successful market re-entry in India and market development in Germany – to less extent on Nordics, South America and Australia market share gains.Credit Opinion: Negative Recommendation on SENGR 3.875% 10/25/2022: Reduce - Credit Opinion: Negative on the back of industry headwinds, including price pressure along the wind industry value chain, existing overcapacity, rating pressure and an opaque medium-term revenue outlook.Recommendation: We issue a Reduce recommendation for now. To simplify our recommendation, we asked ourselves why someone should hold or buy a ‘B’-rated bond (YTW: 5.5%) that faces rating pressure and negative industry sentiment? We see no real rating drivers that could clear all doubts, albeit Senvion could use the backwind from additional wind tenders in Germany to refinance the notes in e.g. 2020 (2020 YTC: 7.9%). However, this is speculative yet. The bond has re-priced quite significantly in recent months, but we still see some downside pressure when we compare Senvion’s bond with similar rated bonds, mainly those in the capital goods sector, and with similar workout/maturity dates (YTW: 5.9%); for instance with peer Nordex (02/2023 YTW: 6.7%).