Vestas Earnings: Fair Value Lowered After Increased Losses
Matthew Donen - 14 August, 2024 | 11:26AM
![vestas](https://www.morningstar.co.uk/static/UploadManager/Assets/vestas_1.jpg)
We're marginally lowering our Fair Value Estimate to DKK 180 (£20.70) from DKK 186 for Vestas (VWS), the world's leading manufacturer of wind turbines, following the group's significant revenue and EBIT miss in the second quarter versus company-compiled consensus.
Key Morningstar Metrics for Vestas
• Fair Value Estimate: DKK 180.00
• Morningstar Rating: ★★★★
• Economic Moat: None
• Morningstar Uncertainty Rating: High
What we Thought of Vestas' Earnings
As announced in a trading statement on Monday 12 August, the driver behind its second quarter underperformance was an upward revision in planned costs required to service its existing wind turbine fleet to the tune of €300 million, which impacted both revenues and operating profits.
While the negative 15.9% EBIT margin earned in the second quarter for its service business will return to normalised levels during the second half of the year, we believe the impacts of higher wage inflation and rise in unscheduled callouts due to poor turbine performance require us to lower our medium-term profitability assumptions for the segment.
Shares screen as undervalued, trading at a 12% discount to our revised fair value estimate, but we would require a greater margin of safety before the valuation looks attractive.
Still on track to reach revenue target for 2024
Order intake grew 54% to 3.6 GW, supported by strong demand for onshore and offshore equipment in Europe and Asia-Pacific. Revenue declined 4% during the second quarter underpinned by the revision in the service business, but the group remains on track to reach approximately €17 billion in revenues for fiscal 2024. Pricing for its wind turbines remains robust further supporting the recovery in the Power Solutions segment.
Accounting standards require the hit to its service business be fully recognised in the current quarter and therefore, the remainder of the year should not resemble its disappointing second quarter.
That said, the impact was severe enough for the group to lower its full-year EBIT guidance by 0.5% to 4.5% at the midpoint. Looking beyond the noise surrounding Vestas' service business, the turnaround in its Power Solutions business is progressing ahead of expectations, which explains why the downward revision to its full-year EBIT guidance is likely to be below the €300 million impact incurred during the second quarter. The Power Solutions segment delivered its first quarterly operating profit since 2021 and we expect further EBIT margin progression as the execution of low-margin projects unwind.