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Shock profit warning hits share prices -- Stock exchange investigation after NEG Micon's bombshell

An unexpected downgrading of its expected result for 2002 by NEG Micon was greeted with surprise and shock by stock market analysts last month. Only weeks previously, NEG Micon boss Torben Bjerre-Madsen has assured the market that his company would not be following in Vestas' footsteps with a profit warning for the just-closed year. But on January 23 NEG Micon reduced its profit forecast for 2002 from EUR 47 million to EUR 27-30 million. Share prices for both companies immediately fell by 29% for NEG Micon and by 10% for Vestas.

NEG Micon blames half the expected EUR 17-20 million profit shortfall on seasonal fluctuations on the German market. Furthermore, it cites unexpected extra costs associated with "the start-up and running-in of new productions of primarily wind turbine hubs" and with "deliveries for a few projects." The sudden profit warning came just a month before the company is due to present its annual accounts on February 25.

According to Bjerre-Madsen, it was only on January 20 that he realised "that the situation in the German market would result in a further considerable decline of the results for NEG Micon." As far back as July, however, NEG Micon's share of the German market had dropped to under 4% compared with 10% in the first half of 2001. Nonetheless, in September the company confidently stated that in 2002 it would retain the 11.4% slice of the German market it had achieved for the whole of 2001 (Windpower Monthly, October 2002).

In fact, by the end of the year it had lost 3.1% of its slice of the annual cake, ending up with just an 8.3% share of the 3247 MW installed in Germany in 2002. Two competitors boosted their German market shares between 2001 and 2002: Enercon, from 28.5% to 34%, and GE Wind, from 10.9% to 13.1%. Like NEG Micon, both Vestas and Nordex lost out in Germany.

Market losses

Market analyst JP Morgan says that while it accepts the shortfall on NEG Micon's expected profit is mainly due to delays in orders from Germany, it believes that "market share losses in Germany" are also to blame. It expects GE Wind to make further gains in Germany at the expense of its competitors "as the full benefit of the GE ownership" strikes home. JP Morgan also registers surprise at the lateness of NEG Micon's profit warning for 2002, saying it "raises questions on management control."

Bourse investigation

Indeed, the three day delay between NEG Micon discovering the shortfall and announcing it to the Copenhagen stock exchange is the subject of a stock exchange investigation. Also being investigated are the reasons for the heavy trading in NEG Micon shares during those three days: 700,000 NEG Micon shares changed hands, twice the normal volume, including a block of 333,600 shares for EUR 4.7 million -- sold by a foreign investor before their value suddenly dropped to EUR 3.5 million.

Despite the downturn in its German business, NEG Micon is retaining its forecast for 2002 turnover at about EUR 835 million -- raising still more eyebrows at JP Morgan. "This confirms one of our main arguments for the negative view in the sector that margins in the industry are under pressure," it says. JP Morgan is also concerned that NEG Micon could be forced to "access the capital markets once again as it has done in four out of the last five years," even though the company says it "does not see any problems in financing an annual growth of 20-30% in the coming years."

NEG Micon admits, however, that the "expected positive development on working capital in the second half of 2002" will not be realised and that there has been "a considerable drain on the working capital." It blames this drain on the delivery of 440 MW of capacity to Germany and Denmark during 2002, the payment for which will mainly take place at the end of the year or in 2003. This year's expected growth, adds NEG Micon, will come from markets "where payment takes place as milestones."

For 2002, NEG Micon says its earnings margin before interest and tax will now be 4.5-5%, based on sales of about 1030 MW of wind power generation equipment, an 18% increase on the volume sold in 2001.

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