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Stock price performance from the Windicator

Watch enough professional sports events on television and the phrase "the greatest ever" soon grates on the nerves. It also tends to lose its literal meaning with overuse. So to refer to the past quarter year as the "the greatest ever" for the wind sector is a step taken with some trepidation. But whether looked at in terms of share price performance, new issuance of company stock, or positive news flow, it was a beauty.

Vestas' share price was up 33.8% (chart above) and it ended the period with a market capitalisation of EUR 12.3 billion, over 25% up on its nearest peer, Suzlon (chart next page). Indian Suzlon saw a 49.2% rise in its share price for the same period (chart bottom right). Repower ended 27.7% up, while Clipper gained 15.5%. Combined, the European wind turbine manufacturer stocks tracked in Windpower Monthly's Equity Index (chart top right) solidly outperformed the broader market, which fell 1.2% over the same time. Suzlon, in another impressive performance by the company, outperformed the Indian market, which was up 27.1% (chart bottom right).

The quarter is perhaps most distinguished by the new issuances. December saw the Initial Public Offering (IPO) of two important companies in the wind sector, Hansen Transmissions, a leading supplier of wind turbine gearboxes, and Iberdrola Renewables, a division of Spanish utility Iberdrola. While neither are turbine manufacturers, they are both central to the turbine making industry. Hansen remains majority owned by Suzlon and Iberdrola Renewables' majority owner is a major shareholder and customer of Gamesa.

Eighteen months after boldly acquiring Hansen from its private equity owners, Suzlon listed it on the London Stock Exchange through the sale of around 25% of the company's shares to the public. At the IPO price, Hansen was valued at approximately EUR 1.6 billion, way up on the EUR 465 million Suzlon paid for it. Moreover, since the IPO the share price has risen more than 40%. Suzlon looks smart and must feel vindicated for sticking its neck out to win Hansen in the first place. Even the investment bankers look smart, with all their classic arguments for partially listing a subsidiary seeming to apply: raise capital while keeping control of the business, achieve a (higher) market valuation for the business, use that higher valuation to raise capital in future at a lower cost and, more importantly, use that valuation to cause equity analysts to raise their estimates of what the parent company is worth. Sure enough, Suzlon's analysts scrambled to increase their Suzlon price targets after the IPO. The increase in Hansen's share price following the IPO is icing on this cake.

Suzlon is now in an eye-catching position: the listed Indian parent company is materially outperforming the market and it has secured majority control of two European companies. The strategic purchases were clearly favoured by investors: Hansen was successfully listed and Repower logged a 27.7% share price increase for the period. Suzlon's credibility and international investor base have grown accordingly.

Sector wide rise

In terms of valuation, while some might express astonishment at the large increase in Hansen's value so soon -- and while Suzlon has clearly done well -- it is worth remembering where some of the other wind companies were trading on March 17, 2006, when Suzlon bought Hansen, compared with early last month. Gamesa moved from EUR 16.04 to EUR 30.50; Nordex from EUR 8.10 to EUR 32.58; and Repower from EUR 41.89 to EUR 142.50. The pattern demonstrates that to a large extent the uptick in value has been sector-wide, rather than company specific. Wind is booming, with company share prices following.

A key aspect of Hansen's listing is that there is now a way to invest directly in the turbine component supply business, at least in Europe. After hearing so much for so long about supply chain bottlenecks and the trials and tribulations of gearboxes, investors now have the chance to take a punt on a major gearbox company. It will be interesting to see how Hansen trades and how the analyst community continue to value it, both in terms of its own performance and in the context of the entire wind value chain. Should a key component supplier trade like a turbine company or like another industrial supplier? This question and more needs to be considered.

Iberdrola renewables

The spectrum of wind investment opportunities available to public investors increased further when, within days of Hansen's IPO, Iberdrola listed 20% of Iberdrola Renewables, creating the largest, listed, integrated wind farm owner and developer. Not only that, with a market capitalisation almost double that of Vestas' EUR 12 billion, Iberdrola Renewables is simply the largest wind company in the world.

With the full value chain of the wind sector now open to investors, from component supply to generation of megawatt hours, a new era is perhaps dawning. The investment market's hot topic of the moment is the next evolution of internet companies, dubbed Web 2.0. It could be argued that Wind 2.0 has arrived.

Even so, some commentators note that both Hansen and Iberdrola Renewables listed at the low end of the expected range for their IPO prices. In that light, the good days have perhaps already come to an end, they argue. For Hansen, its share price rise subsequent to the IPO has surely quelled any such concern. For Iberdrola Renewables, without even a short, post-IPO trading period from its listing in mid-December, it is too early to gauge performance, What is without question, though, is that over EUR 4 billion of new investor money flowed into Iberdrola Renewables at its IPO. That surely must be a record.

All in all it is hard not to argue that this has been the "greatest ever" quarter for the sector, even before taking account of the strongly positive news flow from the listed turbine suppliers. Vestas, Repower and Suzlon all reported particularly strong quarterly earnings during the period. Vestas' third quarter report appeared to be the most compelling. Not only did it set off a rally in the company's share price, but it hammered home the message that it is possible in the wind sector to achieve both profit margin and sales targets -- and most crucially Vestas stressed that profitability is more important than market share. This is what investors want to see, hear and believe. Not all companies so delighted the market, however, with Nordex announcing its targets would slip. Still the overall trend was clear.

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