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Vestas manages the winds of change

The company's financial results and forecasts are positive, but falling energy prices and the global financial crisis may yet take their toll on Vestas

Vestas Wind Systems ended 2008 on a high, receiving large orders for its wind turbines from China. But with banks cutting their target prices for the Danish wind-turbine manufacturer's stock in December, there are fears that the company will not escape the gathering financial storms in 2009.

On 31 December, Vestas said it had received two orders for wind turbines, with a total capacity of 100 megawatts (MW), to be delivered to two projects in China – at the customer's request, further details were not disclosed. This followed a 29 December announcement that China Guangdong Nuclear Wind Power had ordered 116 of its 850 kilowatt (kW) V52 turbines, bringing the total capacity of V52 wind turbines sold to the company to 500 MW.

Before the China deals, Danske Bank analyst Henrik Breum claimed Vestas' order intake for fourth-quarter 2008 had almost doubled from the previous quarter, when it sold turbines with a total capacity of 550 MW. Earlier in December, Vestas received a 100-unit order from Vattenfall Wind Power to supply V90, 3 MW wind turbines for installation at the UK's Thanet offshore wind farm. Delivery of the turbines is expected to take place during 2009 and 2010, with installation in 2010.

Revenue and profits up ...

During the third quarter, the latest available results at the time of writing, Vestas reported considerably better-than-expected revenue of €1.759bn ($2.45bn) – higher than the €1.540bn consensus estimate and up by 53% from the third quarter of 2007. Scandinavian investment bank Fondfinans said sales were higher than its forecast for Europe (6% above) and the Americas (8% above), but 17% below expectations in Asia.

Third-quarter net profits were up by a healthy 47% from the year-earlier period, at €97m, but were 18% below the consensus forecast because of negative effects from exchange-rate hedging during a period when sterling and the dollar had moved markedly.

The third-quarter results prompted the chief executive, Ditlev Engel, to retain the firm's guidance for 2008 of €5.7bn in revenue with a 10-12% earnings before interest and tax (ebit) margin, an important measure of profitability. But recognising the deepening global financial crisis, Engel expects 2009 sales of €7.2bn and an ebit margin of 11-13%. But this is still "better than we had feared considering the escalation of the financial crisis over the past months", says Christian Nagstrup, an analyst at Danish investment bank Jyske.

Vestas is the world's leading supplier of wind energy, with around 35,500 turbines installed and a 23% market share, and is aiming to reach an annual production capacity of 10 gigawatts (GW) a year by 2010. "In 2007, we did about 5 GW. When we announced our second-quarter results, in August, the only question analysts asked was whether we could get to 10 GW by 2010. I said yes, we can," says Engel.

Analysts and the company itself are looking particularly to the US in 2009 and beyond to drive growth in demand for wind turbines. President Barack Obama's comprehensive energy strategy calls for $150bn to be invested in renewables over the next 10 years as part of a wider plan to increase US energy security, cut carbon emissions and create jobs during the recession.

Obama's New Energy for America plan aims for 10% of US electricity to come from renewable sources by 2012, and 25% by 2025. "Obama wants to create 5 million new jobs and has said energy independence and climate issues will be on the top of his agenda," says Engel. "All energy is politically driven and politically regulated. I have been the CEO of Vestas for the last three-and-a-half years and I have never seen such a positive political environment [for wind power development]."

Fondfinans calculates that if 25% of the US' total electricity demand is to be generated from renewable sources in 2025, then 950-1,100 terawatt hours (TWh) of renewable power must be generated, compared with 386 TWh in 2006. Of the roughly 700 TWh a year of new renewable electricity the US will need to produce by 2025, wind power should comprise 55-60%. "If such a nationwide [renewable power standard] is approved by Congress, it would create a healthy demand for renewable production capacity, particularly wind," the bank concludes.

Vestas says customers have not cancelled or renegotiated orders as a result of the financial crisis and producers such as Czech utility CEZ say they will continue expanding wind-power capacity. But at one point last year, the Danish firm's shares plunged by as much as 74% from the year's high – although they had recovered slightly as 2008 drew to a close, following Obama's election and sustained new orders. Investors fear the financial crisis will bite deeper than the firm is predicting as lower energy prices make wind and other renewable-power projects uneconomic.

... share price targets cut

On 17 December, Credit Suisse slashed its share price target on Vestas to DKr230 ($43) from DKr530 (the shares ended 2008 at DKr303). And as the growth rate of installing new capacity slows down, the bank expects players with large market shares, such as Vestas and Spanish rival Gamesa, to require an extra year to achieve their respective annual capacity targets of 10 GW and 6 GW. Other banks have also cut their share price targets: Piper Jaffray reduced its target to DKr360 from DKr485; UBS slashed its target to DKr370 from DKr590; and JP Morgan cut its target to DKr300 from DKr330.

There are also growing concerns about the company's important China business. BTM Consult, an independent consultancy specialising in renewable energy, said in a December report that Vestas faces a tough period in China because of state support for local companies. The authors of the report, Made in China, argue that Vestas will suffer from a growing number of Chinese firms – now more than 30 – some of which are producing turbines up to 20% cheaper than their foreign rivals.

Local companies held 57% of the Chinese market in 2007 and "are likely to lift their domestic market share to 70% in the next few years", according to one of the authors of the report, Birger T Madsen.

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