On February 11th, Vestas Wind Systems (OTCPK:VWDRY) (OTCPK:VWSYF) published its FY 2021 financial results and provided full guidance for FY 2022. Results did not reveal any surprise and were quite in line with expectations. In this article, I will provide a review of Vestas’ 2021 results and I will update my DCF valuation. Indeed, this is not my first article on Vestas: here you can find the previous ones (November 2021 and August 2021). I have always been bullish on the stock but after a thorough analysis, I believe that it is time to take a more cautious approach: that is why my recommendation is a HOLD.
As of February 11th, 2022, Vestas Wind Systems is trading at 166.8 DKK/share, equivalent to a market cap of ca. 167.5 bn DKK or 25.66 bn$. The stock is down 17% year-to-date and down 36% year-on-year. When I wrote my last article, the stock was trading at 230.9 DKK/share (November 11th, 2021), after that, the price started a steady decline with some temporary rebounds. The 52-week maximum is 279 DKK/share (October 28th, 2021) while the 52-week minimum is 161 DKK/share which was recorded just some days ago (February 8th, 2022).
For the power solutions business unit (i.e.: wind turbines production), new orders showed a decline by ca 19% from 17.2 GW in FY2020 to 13.8 GW in FY2021. The trend is confirmed in almost all the geographical areas where the Company operates: in APAC the decline was about 51% and in the Americas of 29% (-1.7 GW and -1.8 GW respectively), only the EMEA managed to slightly increase new orders by 0.2 GW. According to Vestas, new orders have dropped due to an acceleration in cost inflation and to the timing of individual markets. In monetary terms, the decrease in new orders’ value was -9%, less than in GW terms, due to the rise in the average selling price of order intake, from 0.71 M€/MW in 2020 to 0.86 M€/MW in 2021.
The order backlog for wind turbines showed a reduction as well, going from 24.6 GW in 2020 to 21.9 GW at the end of 2021 (-11%) or, in monetary terms, from 19 bn€ in 2020 to 18.1 bn€ (-5%).
During 2021, Vestas managed to deliver 4,456 wind turbines – down 15% year-on-year – equivalent to 17.8 GW, 5% more than FY2020 due to the larger average size of the turbines.
Concerning the service business, Vestas managed to increase the GW under active service contracts by 9%, or 11 GW, with 6 GW added in the Americas, 3 GW in EMEA and 2 GW in APAC. This leads to a total volume of 129 GW in active service contracts with an average 10-year contract duration. Noteworthy, the newer contracts are being signed with a higher contract length of about 17 years. The overall backlog for service orders increased by 5 bn€ reaching the value of 29 bn€, the highest ever for Vestas.
Revenues were up 5% from 14.8 bn€ to 15.5 bn€ mostly driven by the growing service business and by some offshore activity. In particular, the service business unit accounts for 2.5 bn€ of sales, ca 16% of the total and 21% higher than FY2020, while the power solutions unit represents 84% of revenues (13.1 bn€, +3% year-on-year).
Production costs increased slightly more than proportionally if compared to revenues, from 13.2 bn€ in FY2020 to 14 bn€ in 2021, +5.6%. SG&A costs in 2021 were much higher than the previous year, 1.1 bn€ vs 0.8 bn€ (+39%): in particular, the highest increase is to be found in the administration costs (+126 M€) followed by R&D (+99 M€) and distribution expenses (+86 M€).
As a result, EBIT for FY2021 stands at 322 M€, down 54% from the 698 M€ of the previous year. The EBIT margin as well was 2.1 percentage points lower, from 5.1% in 2020 to 3.01% in 2021. Despite the increase in costs, Vestas managed to close FY2021 with a net profit of 176 M€, down 77% year-on-year.
Looking at the balance sheet, at the end of 2021, Vestas has cash and cash equivalents for 2.4 bn€ (down from 3.0 bn€ of the previous year) and a net cash position of 1.2 bn€.
As I already did in my previous articles about Vestas, I will perform a DCF valuation to determine a potential target price. In the model, I assume 15.7 bn€ revenues for 2022 – that is the mid-point of Vestas’ 2022 revenue forecast range – and I suppose a 4% sales annual growth rate in line with the research paper “Global Wind Report 2021” from the Global Wind Energy Council. Then, I derive free cash flows using an FCF-to-sales ratio of 7.2% which is the average of the last three quarters adjusted to take into account a potential future lower cash generation. Cash flows are discounted with a 7% WACC and, in the base case, I assume a 2% long-term growth rate. The result is a target price of 178 DKK/share, just 7% higher than the current stock price. Considering the strong impact of the LTG rate on the target price, I also perform a sensitivity analysis. In the table below, you can see the results.
Overall, I believe that Vestas managed to go through 2021 better than other peers did such as Siemens Gamesa (OTCPK:GCTAF) (here you can find my last article on Siemens Gamesa) but, for the time being, I’m not excessively optimistic about the stock future performance. The DCF valuation shows a potential 7% upside in the base case – that becomes even higher under more aggressive assumptions – however, I believe it is not enough to issue a “buy” recommendation. Indeed, one should also consider some risks that are difficult to factor in the valuation but that could appear in 2022 such as a further disruption of the supply chain and prolonged energy price increase.
In conclusion, I believe that the best recommendation for Vestas Wind Systems is a HOLD.