Short term doubts but future promise -- Gamesa results

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Spanish wind turbine supplier Gamesa reports a record after a tax profit of EUR 320 million in 2008, 45% higher than the previous year, on revenues of EUR 3.65 billion, mainly from turbine sales in Spain, the United States and China, 27% up on 2007. After discounting extraordinary gains, mainly EUR 145 million from the sale of Gamesa's solar division, consolidated profits were also 27% above the 2007 level, at EUR 155 million.

Despite the announcement of positive results, Gamesa's share price immediately dropped 7.25% to EUR 10.6, and to just over EUR 8.00 in the days following. The drop was mainly due to doubts about orders, given the global financial crisis. Market analyst Piper Jaffray pointed to falling orders in the last quarter of 2008, usually a busy period, and questioned whether the negative trend would continue into 2009. Longer term, however, analysts widely agree on the strength of Gamesa's business plan for 2009-2011, which relegates its project development arm and 21 GW development portfolio to the periphery of what has become its sole core business, manufacturing turbines.

Luis Merino of renewable energy publishers Energías Renovables believes the share price drop "has gone way and beyond analyst caution and ignores Gamesa's fortitude." Goldman Sachs, a shareholder in Gamesa, revised its target share price for Gamesa from EUR 17 to EUR 13, while Piper Jaffray removed Gamesa from its list of prime investment opportunities, though it maintained its buy recommendation, as did Deutsche Bank. ING Bank switched from buy to hold.

Of the EUR 3.65 billion in revenues for 2008, EUR 3.5 billion was earned on turbine sales, amounting to 3684 MW, a 12% increase on Gamesa's previous record, achieved in 2007. In the final quarter of 2008, Gamesa delivered 1375 MW, a new quarter-year record. Foreign markets made up 61% of sales, led by the US (21%) and China (13%). Spain accounted for 39%, the rest of Europe 17% and the rest of the world 10%.

The group's earnings before interest, taxes, depreciation and amortisation (EBITDA) came in at EUR 495 million, 40% more than in 2007, resulting in a 14% EBITDA margin, the same as a year earlier. Through cost control, production flexibility and an executive salary freeze, CEO Guillermo Ulacia aims to maintain the same margin in 2009.

Looking head, Piper Jaffray notes orders for 11.7 GW to 2012 with large strategic clients, a 46% leap on the figure in 2007. All strategic clients "have confirmed their intention to meet their commitments 100% within the agreed timeframe," says Ulacia. A large 4.5 MW chunk of the pre-ordered megawatts comes from Iberdrola Renovables, the renewables unit of utility Iberdrola, which is also Gamesa's biggest single shareholder. As part of that deal, Gamesa and Iberdrola are pooling their respective development portfolios in Europe and Spain, with Gamesa taking a 23-24% share. Ulacia says that retaining ownership will bring more added value than selling completed wind farms and he intends to extended the model to the US and China.

Those two boom markets host Gamesa's entire foreign manufacturing capacity -- an annual 900 MW in the US and 500 MW in China. They also account for 78% of Gamesa's increase in manufacturing capacity since 2005, which has gone from 1.8 GW to 3.6 GW. Ulacia maintains Gamesa's target for manufacture of 6 GW a year by the end of 2011, including construction of a 200 MW facility planned for India. With Gamesa's long-term revenue assurances and low debt rate -- currently at just 0.1% of EBITDA -- analysts widely view the target as credible and Gamesa's share price crept back to just under EUR 10.00 by the end of last month.

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