Windicator: Share values up for all but Suzlon

WORLDWIDE: Wind power stocks built on their impressive performance last year with further gains in early 2014 as the industry continued to recover from the damage inflicted during the financial crisis.

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Four out of the five companies tracked by Windicator saw their share value rise over the first two months of the year. This pattern was mirrored by analysts' ratings: the overall proportion of "buy" recommendations is now 30.2%, with 34.0% "hold" and 35.8% "sell", compared with 20.8%, 41.5% and 37.7% last quarter.

However while sentiment has improved overall, there are signs of a growing disparity between turbine manufacturers that have adapted to the post-crisis environment and those that have not. India's Suzlon remains a laggard as it struggles to stem significant losses with no clear sign of improvements to come.

By contrast, Vestas is seeking to raise capital after its two-year turnaround programme pulled the company out of debt and delivered its first quarterly profit since mid-2011. Net income for Q4 2013 was EUR 218 million ($300 million), a figure that surpassed analysts' predictions and Vestas' own forecast. It came on the back of quarterly rises in revenues of 6.4% and earnings before interest and tax (EBIT) of 54.8%.

The massive improvement in EBIT is particularly significant in that it shows that the company's efforts to reduce fixed costs by reducing headcount and selling or closing factories have worked.

Its EBIT margin rose from 6.2% to 10.2% over the period, while free cash flow increased from EUR 416 million to EUR 816 million, providing further evidence of the firm's recovery. Vestas plans to sell 20 million new shares through a private placement at market price, equivalent to 9.99% of existing stock. The return to profitability created the perfect opportunity for such a move as it is far easier to go to market looking for money from a position of financial strength.

The company is recovering from a major slump during which its share price fell 96% from July 2008 to November 2012. The stock has recovered well since then, including a healthy bounce following the publication of the latest figures, but still remains more than 70% lower than its mid-2008 high and has been flat this year after first rising in January. Analysts have become slightly more positive about the company's prospects, with 46.7% posting a "buy" compared to 38.9% last quarter, making Vestas the most positively regarded turbine manufacturer stock among those followed by Windicator.

Suzlon's latest set of disappointing quarterly results came as it continued to seek an extension on defaulted debt. Its net loss of INR 10.75 billion ($173.5 million) was slightly less than its INR 11.5 billion loss a year earlier, while revenues and EBIT also improved.

But this will do little to reassure the markets as the company struggles to shake off the impression that it is in serious trouble. Suzlon defaulted on repaying around $209 million in unsecured foreign currency convertible bonds (FCCBs) in October 2012 after turbine prices slumped amid overcapacity. It is now seeking a five-year extension on the defaulted debt, according to reports.

The Indian company's ongoing struggles have prompted its auditors to raise red-flagged issues such as the turbine maker's ability to generate adequate cash flow to support operations. The auditors — SNK & Co and SR Batliboi — reportedly drew attention to "material uncertainty about the company's ability to continue as a going concern, which is in part dependent on the successful outcome of the discussions with the FCCB holders as well as the company's ability to generate adequate cash flows to support its operations".

The auditors reportedly also raised a red flag about "contingency related to compensation payable in lieu of bank sacrifice, the outcome of which is materially uncertain and cannot be determined currently". In other words, auditors question whether Suzlon has a plan for what to do should it fail to secure further extension of its debt.

Like Vestas, Suzlon suffered a precipitous drop in value during the financial crisis but, unlike its Danish rival, has failed to recover since - its share price remains almost 98% below its level at the beginning of 2008. Analysts remain uniformly gloomy about the company's prospects, with none recommending a "buy".

There was better news for Spain's Gamesa, which returned to profitability in 2013 after suffering major losses in 2012. Its full-year net profit of EUR 45 million came despite a 12.6% fall in annual revenues, showing that the company's extensive cost-cutting programme has worked. Its EUR 15 million Q4 net profit compared with a net loss of EUR 592 million a year previously, although the latter figure was largely due to write-downs.

Gamesa delivered profits in all four quarters last year, which it attributed to its success in sticking closely to its business plan. Its full-year EBIT margin, which measures operating profitability, increased more than threefold, providing further evidence that the company is back on a much firmer financial footing. It reduced fixed costs by EU R119 million, 19.1% more than projected, through cutting staff numbers by 1,307 and losing 50 corporate locations.

The company also exerted greater control over its working capital (reducing spend to 8.3% of sales in 2013 compared with 16% in 2012). Gamesa ended 2013 with net interest-bearing debt of EUR 420 million (-15%), equivalent to 1.5 times earnings before interest, taxes, depreciation, and amortisation (EBITDA), below the guidance ratio of 2.5x.

Still, analysts remain broadly negative on Gamesa's stock - if slightly less so than a few months ago. Nearly 19% currently recommend a "buy", with 25% advising "hold" and 56.3% "sell". This compares with figures of 6.7%, 33.3% and 60.0% last quarter. Gamesa's stock rose 343% during 2013 and was up 5.8% this year to 24 February.

Last year also marked a significant shift in fortunes for Germany's Nordex, which made a full-year net profit of EUR 10.3 million. This compares with a loss of EUR 94.4 million the previous year on the back of heavy non-recurring expenses related to the restructuring of group operations in the US and China. The firm's Q4 revenues were up 5.2% on the same period in 2012, helping it to achieve a quarterly net profit of EUR4.9 million. Nordex attributed its turnaround in operating performance to a combination of a surge in sales in EMEA and cost-cutting measures, focused mainly on structural expenses.

Following a broad industry trend, analysts' sentiment towards Nordex has improved: 28.6% of ratings are currently a "buy", up from 12.5% last quarter. The company's stock was up 7.4% on 18 February.

China's Goldwind almost tripled its annual profit after boosting sales and reducing costs. Its full year net profit was CNY 427.6 million ($69 million), compared with CNY 153.1 million in 2012. Revenue for the year came to CNY 12.2 billion, up from CNY 11.2 billion last year.

Analysts are more bullish on the firm than last quarter, with 30.2% now posting a "buy" rating, making Goldwind's stock the second most favourably viewed after Vestas.




The wind sector has licence to feel good. Shale gas appears less of a rival than last year, and onshore wind's economic position relative to nuclear has improved further. Turbine manufacturers' earnings are firming up amid a consensus that installations will likely bounce back in 2014. It is all cause for sustained optimism.

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