Shares of leading wind energy companies (manufacturers and servicers of offshore and onshore wind turbines) Vestas (VWS.DK) and Orsted (ORSTED.DK) are again under intense selling pressure. Both companies are losing in the range of 5% today. Orsted shares still haven’t stopped their correction after comments by the CEO, who indicated that the company may withdraw from an on-shore offshore power project on the east coast of the US, losing billions of dollars on the venture. Adding to the sell-off has been Vestas for some time, although the company maintained forecasts for the full year 2023 in a weaker Q2 report, it lost €130 million in Q2.
Business model problems
- Analysts at UBS bank estimate that Orsted’s cyclical sensitivity to higher interest rates could cost the company between $709 and $1.42 billion. Its current valuation is about $22 billion. The current business models of wind energy companies were created at a time of low interest rates and attractive (low) debt financing costs. Companies are losing room to leverage scale with credit, and issuing shares will dilute the shareholder base and is unlikely to drive higher buyer interest.
- Looking at the EVA spread measure (return on invested capital less average cost of capital employed) for Vestas looks very weak with EVA at -28% (WACC is 12% with negative -16% ROIC). Generating positive cash flow in the current financing environment becomes all the more difficult. The profitability problem seems very real. In view of the difficulties in setting the US budget for 2024, there is a good chance that Washington will decide not to allocate funds for the energy transition that would support Orsted projects in the US.
Vestas (VWS.DK) W1 Chart
Looking at the stock chart of Vestas (VWS.DK) one of the world’s largest wind turbine manufacturers and service providers, we can see that the industry is extremely cyclical and historically has not been immune to economic downturns wiping out more than 90% of its market valuation in the 2000 and 2008 recessions. Currently, demand for energy transformation is still high and many asset managers are deploying capital to support the efforts of private companies, but high interest rates are negatively impacting the financing of unprofitable businesses.
