Orsted Earnings: Good Results Obfuscated by Yet Another US Impairment

Orsted hit by another major impairment as green fuel project scrapped and US offshore wind farm delayed, shares look undervalued 

Preston Caldwell 15 August, 2024 | 1:27PM
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 wind energy at sea

We confirm our 540 DKK (£61.95) fair value estimate after no-moat Orsted (ORSTED) released second-quarter EBITDA well above company-compiled consensus while the bottom line came in below expectations because of an impairment from the US Revolution Wind project. The firm confirmed its 2024 EBITDA guidance. Shares traded around 7% lower on Thursday and are materially undervalued. 

What we Thought of Orsted's Earnings

Second-quarter underlying EBITDA jumped by 59% to DKK 5.27 billion, 21% above consensus and accelerating from the first-quarter's 8% growth. Orsted posted a net loss of 1.7 billion DKK, well below consensus' 1.6 billion DKK because of 3.9 DKK billion in impairments, of which 2.1 DKK billion was related to a delay in the construction of an onshore substation that postponed the commissioning of the US offshore wind project Revolution Wind from 2025 to 2026. Another 1.5 DKK billion impairment comes from the decision to scrap the FlagshipONE e-methanol project due to the slow development of the European e-fuel market. In June, Shell also pulled out of an e-fuel project.

We granted no value to any green hydrogen projects and already cautiously assumed a full-year contribution from the Revolution Wind project in 2027, so our valuation is unchanged. Still, the delay reveals that execution risks for US projects still persist after the cancellation of projects and massive impairments in 2023. This increases uncertainties and unnerves investors. Still, the material undervaluation of the shares offers a margin of safety.

Key Morningstar Metrics for Orsted

• Morningstar Fair Value Estimate: DKK 540.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

EBITDA-growth and Confirmed Guidance for 2024

Offshore wind farms' second-quarter EBITDA grew 40%—landing 12% above consensus—thanks to the ramp-up of Greater Changhua 1&2a and South Fork Wind, wind speeds above average last year, and higher prices of inflation-indexed contracts-for-difference.

Onshore's EBITDA increased by 26% thanks to new capacity and higher wind speeds.  Orsted confirmed its 2024 EBITDA guidance of 23 billion DKK -26 billion DKK, excluding new partnership agreements and cancellation fees related to ceasing Ocean Wind 1.

This is in line with our 24.6 billion DKK estimate. The group tweaked directional guidance versus 2023 for offshore from "lower" to "neutral" and bioenergy to "higher" from "significantly higher." Gross investments guidance for 2024 is reduced by 4 billion DKK to 44 billion-48 billion DKK due to phasing effects.

Second-quarter operating cash flow surged by nearly 150% to 6.1 billion DKK as EBITDA growth was supplemented by an increase in tax equity liability. The operating cash flow more than covered €5.3 billion of net investments, driving a 0.5 billion DKK net debt reduction during the quarter to 49.4 billionDKK .

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Orsted A/S399.90 DKK-5.35Rating

About Author

Preston Caldwell  is equity analyst at Morningstar.

 

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