- In FY20 revenues are up 22% and net profit is up 10%.
- Vestas Wind Systems had a solid liquidity position.
- DCF analysis shows a 15% potential upside.
In this article, I will analyze the key financial results of Vestas Wind Systems and I will provide a DCF valuation to support my BUY thesis.
Indeed, I believe that unlike its competitor Siemens Gamesa (which I analyzed in this previous article) Vestas has the potential to generate a 15% return.
About the Company
Vestas Wind Systems is a Danish company founded in 1945 that operates in the wind power industry. Today the Company is the global leader in onshore wind turbine production and in the service and management of wind farms. Vestas also operates in the offshore wind industry where it is the second-largest player, behind Siemens Gamesa.
About the stock
Vestas Wind Systems is trading at DKK1042.5 per share (as of 03/05/2021), with a market cap of DKK209.4 billion. The stock is up c. 66% year-on-year but, because of the recent sell-off, it is down ca. 28.8% year-to-date. The 52-week low is DKK473 and the 52-week high is DKK1605, therefore the stock is trading at 64.9% of its maximum value.
FY-2020 orders and operational results
Vestas Wind Systems managed to have a strong business performance in 2020 despite the impact of COVID-19 that affected markets where the company operates. Order intake for FY-2020 remained stable at 17.3 GW versus the record-high 17.9 GW of 2019. In economic terms, orders amounted at €12.7 billion versus the €13.8 billion of the previous year, with an average selling price of €740k per MW. Backlog increased of €9.1 billion year-on-year with a +€3 billion in the wind turbines business (overall backlog at €19 billion) and +€6.1 billion in the service business (overall at €23.9 billion).
In 2020, Vestas delivered new turbines for a total of 17.2 GW, with a 24% increase over the 12.8 GW of 2019.
FY-2020 financial results
Group revenues for FY-2020 were €14.8 billion, 22% higher than €12.1 billion of FY-2019 revenues: EMEA accounted for 36% of sales, Americas for 49% with the remaining 15% being generated in Asia Pacific.
In terms of business units, 86% of revenues comes from the wind turbines business while 14% from the service business, up 10% year-on-year.
However, gross profit was down 13% year-on-year, at €1.5 billion, due to a 28% increase in production costs, up at $13.2 billion from the €10.3 billion of 2019. According to the Company, the increase in production cost was mostly due to logistical challenges and supply-chain bottlenecks created by the COVID-19 situation.
Like gross profit, EBIT declined by 30%, from €1 billion in 2019 to €698 million in 2020. However, net profit showed a 10% increase thanks to the income from investments in joint ventures: indeed, Vestas has a €383 million positive contribution from its 50% stake in the MHI-Vestas joint venture.
In terms of profitability, all margins declined from FY-2019 with the gross margin setting at 10.4% and the EBIT margin at 4.7%.
Debt and liquidity
According to Vestas Wind Systems’ reports, at the end of the year 2020 the Company is cash positive: indeed, cash and cash equivalents amount at €3.03 billion while long-term financial debt is at €867 million. Cash flow from operations was €743 million and capex for the period was €659 million, resulting in a free cash flow before financial investments of €84 million. Overall, liquidity for Vestas looks strong.
I performed a discounted cash flow valuation in order to determine the intrinsic valuation of Vestas. The starting point of the process is the average of the Vestas Wind Systems’ guidance for FY2021 revenues: indeed, the Company provides a range going from €16 billion to €17 billion. For the next five years, from 2022 to 2026, I assumed revenue growth of ca. 7.9% per year, as forecast by a report from Mordor Intelligence. Free-cash-flows to the firm are derived from revenues through an FCF-to-sales ratio of 4.1%, which is the average of the FCF-to-sales of the last four fiscal years. Free-cash-flows are discounted using a 6% WACC and the long-term growth is assumed at 3.5%. The result is a target price of €160.8 per share or DKK1196.3 per share (exchange rate €/DKK of 7.44).
Considering the closing price of DKK1042.5 (as of 03/05/2021), the stock is offering a potential 15% upside.
I also run a sensitivity analysis on the long-term growth rate in order to understand the impact on the share price. An LTG of 3.8% leads to a DKK1328.5 share price (27% upside), a 4.0% LTG leads to a DKK1438.6 share price (38% upside) while a 3.2% LTG determines a 5% upside. Results are shown in the following table.
(Source: analysis on data from Reuters)
I believe that Vestas Wind Systems is a company with a solid business model and a strong operating performance. In addition, the Company will benefit from Governments setting energy sustainability targets and funds from central banks deployed on green projects. The recent sell-off of the stock offers an interesting entry point for those who want to generate a return while joining the green revolution.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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