Offshore propelled Gamesa

Siemens Gamesa (SGRE) outlook appears brighter and presumably at sea as the industry is now offshore driven. Wind turbine manufacturers declined sharply in 2017 due to the introduction of the auction system in nearly all markets, thus exerting price pressure across the value chain.

This presumably cleaned up the market, gave it a firmer ground and made it simpler to project offshore wind farms. The excess supply picture has been turned upside down suddenly with strong orders and an encouraging stabilisation in pricing, triggering renewed interest from investors. SGRE is benefitting as would be expected from the second largest player in what looks like an oligopoly.

Although Vestas jointly with MHI has made a comeback in offshore turbines, SGRE has accumulated the right “at sea” expertise to battle on. In addition it offers the attraction of progress on its €2bn cost savings target for FY20. We see another 12% upside and most likely a potential for earnings revisions.

Orders back

Stronger order intakes and backlogs reflect the general dash for renewables spurred by governments’ targets and all manners of encouragement even though subsidies has essentially been binned now that wind MWh are converging with spot prices. SGRE’s backlog of €23.1bn including 46% in services suggests a revenue coverage of 92% and presumably comfortable margins of c.23%, provides good visibility for 2019 .

Order intake by business (in €m)

Source: SGRE company

Order backlog at end 2018 (in €m)

Source: SGRE company, AlphaValue

Firmer prices

Better order books inevitably percolate into firmer prices if not yet explosive ones. Onshore order ASP at €0.76m/MW (+1.5% qoq, +5.5% yoy) clearly shows that stabilisation trend over the last five quarters, including adjustments for scope, project and regional mix, and FX. So, going forward we see less pressure on prices and mechanical improvements in profitability as long as the industry is in a seller market.

Price stabilisation (ASP)

Source: SGRE and Vestas company, AlphaValue

What about those hoped for merger benefits?

The SGRE’s management seems more confident that it can meet its cost savings target and to improve its FCF generation. As a reminder, over the €2bn target for FY2020, €700m has been achieved (including €170m of synergies) and an extra €100m (one-off) has been gained in FY18.

That is after a difficult start. Cost savings are gaining traction thanks to the launch of new platforms which almost accounted for half of 2018 orders and should represent circa two-thirds of business in 2019. A 10MW turbine that can be installed offshore is a case in point: bigger means lower levelized costs of energy while it capitalises on an offshore market now expected to grow at c.25% annually through 2025 (vs. 15% previously).

 US tax benefits (PTC) reaching an end

SGRE’s management offered a weak outlook for the US market in 2020, with onshore wind market to decline to around 4GW compared to c. 8GW guided by Vestas, before increasing again in 2021. A potential air pocket in US volumes is very likely as manufacturers see a lack of enthusiasm of wind farm operators for projects initiated in 2019 with a production tax credit (PTC) now 60% lower than the pre 2017 levels. With 30% of its business in the US SGRE would be less impacted than Vestas (40%) but that cannot be a positive.

The prevalent view remains that beyond the much discounted PTC phasing-out, growth factors are still there for a wind industry that has reached cost prices competitive with other energies: i) the sustained pace of coal retirements (66GW of capacity out by 2027), ii) state push for ever more ambitious renewable energy targets, iii) the wake up of the offshore wind sector in Asia and (soon?) in the US and, iv) steady cost reductions for wind power.

2018 US wind turbine installations

Source: Bloomberg Intelligence, AlphaValue

More oomph

The ytd 34% gain leaves us with a remaining 12% potential upside. The whole industry is bound to see upgrades as it moves offshore which warrants higher prices and more servicing. The rising tide (and thus likely earnings upgrades) will help all but the cost cutting exercise and the size of SGRE have their idiosyncratic attractions.

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