Vestas Earnings: Operating Losses Persist, but Trending in the Right Direction

No-moat Vestas VWS delivered solid second-quarter results, reiterating our view that operational issues at Siemens Energy are idiosyncratic and will unlikely detract from Vestas’ financial performance. Its second-quarter operating loss of EUR 70 million was broadly in line with the company-compiled consensus for a loss of EUR 62 million, which is trending in the right direction (if we exclude nonrecurring income) as lower-margin orders from the backlog are executed. The average price of second-quarter orders increased sequentially to EUR 1.04 million per megawatt from EUR 890,000 per megawatt, and thus we wouldn’t be surprised if Vestas is able to report a quarterly profit by the end of the year, provided commodity prices remain stable. Management confirmed its full-year EBIT margin guidance of between negative 2% and 3%. Shares are marginally undervalued from our DKK 197 fair value estimate, which we maintain.

The order intake grew by EUR 400 million year over year to EUR 2.5 billion, but declined sequentially as permits and other regulatory challenges continue to hamper the transition to wind energy. Quarterly revenue grew 4% year over year, driven by 29% service revenue growth, whereas higher equipment pricing was able to offset lower volumes somewhat. EBIT improved by EUR 110 million year over year, although underlying profitability for the power solutions segment remains hit by the execution of low-margin projects from the backlog and also elevated warranty provisions. Vestas’ warranty provision of 5% of revenue and the operational issues at Siemens Gamesa can largely be attributed to the shorter development cycles of wind turbines, which are required to produce more efficient and thus larger turbines to keep the levelized cost of wind energy low.