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Windicator: Manufacturer Vestas loses more than half its market value

WORLDWIDE: Wind turbine manufacturers' dismal year continued through the second quarter and beyond. The key listed companies all published disappointing figures and were hit by stock-price declines.

By the end of August, all the companies tracked in the Windicator had seen their share prices fall significantly for the year, with one leading European company losing more than half its market value.

Ironically, most of the weaker earnings came despite growth in revenue. Companies cited several reasons for this, including one-off expenditures, accounting adjustments and foreign-exchange losses. Gamesa highlighted significant downward adjustments relating to the profitability of wind turbines. Gamesa and Nordex both pointed to recurring Ebit [earnings before interest and taxes] in their statements, indicating one-off expenditures that affected profits. Vestas' earnings before interest, taxes, depreciation, and amortisation (Ebitda) was higher than last year but its Ebit was much lower, suggesting significant depreciation expenses. Suzlon's expenses were also much higher than last year, despite its rise in revenues, and it incurred foreign-exchange losses.

Analysts' negativity towards the sector was highlighted in July's Windicator. They have now become even more pessimistic: just 12.4% of all ratings for wind stocks were "buys" — down from 17.3% at the beginning of June — with 41.2% "holds" (down from 42.3%) and 46.4% "sells" (up from 40.4%).

Industry conditions were not favourable. The ongoing sovereign debt crisis, a reduction of state support for wind projects in key regions, falling orders and increased competition combined to make life very difficult for turbine manufacturers. Narrowly focused companies such as Vestas, Gamesa, Nordex, Suzlon and Goldwind are always going to find such conditions more difficult to cope with than rivals such as Siemens and GE, whose diversified business models provide them with some insulation from industry-specific headwinds.

Not for the first time, the fortunes of Denmark's Vestas typified those of the industry as a whole. Despite achieving a 14.9% increase in revenues over the same period last year, the company posted a 48% decline in Ebit before special items, and a 76.6% Ebit loss once special items were accounted for. Its overall net loss for the quarter of €8 million compared to a net profit of €55 million in the second quarter last year. Vestas was running a negative free cash flow of €338 million at the end of Q2, €275 million worse than at the end of Q2 2011.

The impact of the worse-than-expected figures was swift and brutal: at the same time as it published the quarterly report, Vestas announced that it would be cutting a further 1,400 jobs in addition to the 2,335 job cuts it revealed at the beginning of the year. The company made the decision, it says, to ensure it could meet an increased fixed-cost reduction to €250 million from the earlier stated €150 million, prompted by reduced forecast activity in 2013. From the beginning of the year until 31 August, Vestas' share price fell 33.3% and by September, only 14.2% of analysts rated Vestas a "buy", compared to 42.9% each for "hold" and "sell".

Vestas' Spanish rival Gamesa fared little better. It also reported a healthy increase in revenues, of 22.3%, but suffered heavy losses further down the balance sheet. The company's second quarter Ebit of €8 million was 76.4% down on Q2 2011, while its net loss for the quarter of €12 million compared to a net profit of €16 million for the same period last year.

Around the same time it announced its quarterly results, Gamesa cut its sales forecast for the second time this year, citing a delay in orders from Asia. It is currently forecasting 2012 sales of 2GW, down from 2.8-3.2GW in February, and is predicting an Ebit margin of 0% for the year. Just a month earlier, Gamesa announced 165 job losses at two factories in Pennsylvania, US.

The slew of bad news took its toll on the company's share price, which had slumped 54.6% for the year by the end of August. Some 23.1% of analysts rate the company as a "buy", with the same amount rating it a "hold" and 53.8% rating it a sell. Gamesa says it is in the process of reviewing its medium-term strategic initiatives "with a view to bolstering profitability and reducing debt". These efforts, it claims, "will materialise in a new 2013-2015 business plan to be presented to the market in October designed to enable it to operate profitably in an environment of moderate demand".

Nordex echoed Vestas and Gamesa in announcing increased revenues alongside depressed operating profits and an overall net loss. Its sales were up 1.2% year on year, underpinned by expanding business in its core European market. However, the company's €4.17 million Ebit loss was a big drop from its positive Ebit of €1.15 million in Q2 2011, while its overall net loss of €9.3 million compared to a net loss of €2.2 million in the equivalent period last year.

Nordex's share price fell 23.1% over the first eight months of the year, and analysts remain cautious about the company's prospects: at the beginning of September, 16.7% were urging investors to buy the stock, 50% advising to hold and 33.3% recommending to sell. However, Nordex remains bullish. "The Nordex Group is outperforming the wind-power industry as a whole, which sustained a decline of roughly 30% in new business," the company says in a statement. Nordex is maintaining its full-year sales guidance of €1-1.1 billion for 2012, compared to €921 million in 2011 ­— but warns that "the upper edge of this range will only be achieved in the event of acceleration in the pace at which projects are executed".

Suzlon's share price hit a record low after it announced a net loss of INR 8.49 billion ($153.7 million) for the quarter, significantly worse than the INR 3 billion loss it posted for the January-March period and its net profit of INR 600 million in the same quarter last year. The day after the announcement, the company's share price had declined to INR 16.10, its lowest value ever, and by the end of August had fallen 18.4% for the year. This was despite an 8.9% year-on-year increase in quarterly revenues.

Chairman Tulsi Tanti admits that the company had had a "disappointing" quarter. "The macroeconomic environment, policy uncertainties in some markets, along with other external factors such as the depreciating rupee, continue to impact us," he says. Suzlon incurred a foreign exchange loss of INR 915 million during the quarter, against a gain of INR 585 million in the same period last year.

However, Tanti insists that the company's core business fundamentals remain sound, and says he remains "cautiously optimistic" it will end the fiscal year in a "satisfactory position".

Analysts do not share his view: at the end of August, none were recommending investors buy Suzlon's stock, with 56.3% issuing a "hold" rating and the remainder a "sell". Suzlon says it is targeting a reduction of 20% of operational and manpower costs this fiscal year, indicating that job losses could be around the corner.

If Suzlon were looking for a crumb of comfort from somewhere, it may have found it in China, where Goldwind found itself even more unpopular with analysts. Like Suzlon, Goldwind had no "buy" ratings at the end of August, while the percentage of "hold" (46.7%) and "sell" (53.3%) ratings it attracted were marginally worse than its Indian rival.

Pessimism about Goldwind's prospects was fuelled by a 46.6% drop in quarterly revenues over the same period last year, while its net profit of CNY 74.1 million ($11.66 million) was down 71.3%. This was largely attributable to a policy change by the Chinese government last year, which slowed the commissioning of projects in the country. Goldwind's share price fell 28.5% by the end of August.

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