Vestas Wind Systems: Not just hot air

Over the last few weeks, one particularly sustainable and long-term holding of ours has been responsible for the ripples of optimism within the research team. That holding is Danish wind turbine expert, Vestas Wind Systems. In Q4, Vestas was the biggest contributor to Mayar’s outperformance.

Built for the future

In business for over 40 years, Vestas covers the full life cycle of wind energy generation, including design, manufacture, installation and servicing. Its turbines are operational in 88 countries, which Vestas asserts has reduced emissions by 1.5 billion cubic tonnes of CO2.

Vestas is currently working on a new turbine, which it has named the “V236-15.0MW, of whose a single wind turbine has the capacity to generate enough energy for up to 20,000 households. Currently in a prototype phase, its’ blades will be significantly longer than existing models, totalling a whopping 115.5 metres and would also be the first ever 15-megawatt (MW) turbine to be introduced to the market outside China. .

Tackling macroeconomic pressures

Despite the indubitably difficult geopolitical and macroeconomic situation in which so many companies find themselves, the circumstances have benefited Vestas.

The company’s strong market position and management team, accompanied by a strategy for growth have helped Vestas to navigate the current macroeconomic environment.

In recent quarters financial performance has struggled largely due to inflationary pressures throughout Vestas’ supply chain. In addition, “slow permitting processes” – a topic which Vestas has been vocal about in the wake of COP27 - and tax uncertainties in Europe have had an impact on Vestas’ ability to deliver the number of planned installations. The impact of these factors has been mitigated by geographically diversified order book with the majority of new orders made in the U.S. and also Australia.

However, the stock price has suffered accordingly over this period.

Nevertheless, as long-term and patient investors, we forecast that these challenges are external, likely transient, and we believe that the underlying the business remains strong. We now have the evidence to prove what we thought we knew - in a world undergoing a huge energy transition, technology leaders like Vestas should have no problem passing through inflation.

Strong underlying demand

In the company’s Q3 results, Henrik Andersen, Vestas’ CEO, stated his satisfaction with the growing pipeline of orders driven by an increased focus in many economies on energy independence. In addition, the upcoming subsidies tied to the U.S. Inflation Reduction Act was signed into law in August 2022, which aims to promote clean energy generation in the USA. The latter lays the groundwork to support utilisation levels in Vestas’ U.S. factories and its long-term planning. Q4 2022 results showed a hefty 46.5% increase in order size, with order demand now exceeding pre-pandemic levels [see figure 1 below].

Figure 1.

Pricing power

While not blind to margin disappointment, management is encouraged by lowered US and European uncertainty, and also its ability to push through prices. In Vestas’ Q4 2022 preliminary results, new order average selling price increased by 31.8% YoY. This figure points to Vestas’s pricing power, further evidencing the return of the customer seen earlier in 2022, an appealing prospect for investors and climate advocates alike.

Discussing the company’s pricing power of late, Jefferies analyst Lucas Ferhani noted that average selling prices for the quarter were “extremely strong”, a sentiment echoed by Citi analysis.

Growth factor

Despite falling margins in the company’s Services business, which service more than 55,000 Vestas and non-Vestas turbines, services revenue has overall been growing strongly quarter over quarter in recent times and against its 2021 comparator.

The management team is confident that the recent bumps in the road will ease up this year making way for a step-up in installations in key markets in 2024. It has also expressed confidence that it has governance in place which is committed to strengthening the commercial discipline needed to navigate these short to medium term headwinds.

We’d imagine fundamental investors are cautiously rejoicing at these recent developments at Vestas. Order increases at the new price level are a step in the right direction and in our view positions the company for positive upward movements in its share price over the long term.

To find out more about our investment in Vestas, and the wider Mayar portfolio and investment process, reach out to ir@mayarcapital.com.

Disclaimer: Investors should be aware that with investing, capital is at risk. Past performance is not necessarily a guide to the future and that the price of shares and other investments and the income that is derived from them may fall as well as rise and the amount realised may be less than the original sum invested.

The opinions expressed are not personalised advice. If you are uncertain as to the suitability of an investment for you, please consult an independent financial adviser.