Negative response to half year reports -- Vestas and NEG Micon on target but share prices drop

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A fall in share prices immediately followed publication of the half yearly accounts for both Vestas and NEG Micon last month, even though results matched company expectations. Fears for the American market next year and concern over the relationship with its Spanish partner, Gamesa, appear to have prompted the run on Vestas shares, which fell from DKK 350 to DKK 310 for a single share in just two days late last month. For NEG Micon, general disappointment that the company failed to improve on its predicted loss of DKK 70 million seems to have been behind a 14% drop from DKK 335 to DKK 287 for ten shares.

The negative market response was despite Vestas raising its expectations for turnover in 2001 to DKK 10 billion, up from a predicted DKK 9.5 billion in April. Expected profit for the full year, however, remains at DKK 1.2 billion, while turnover for next year is not expected to exceed DKK 10.5 million. Once the American market picks up again in 2003 -- on the back of a likely extension to the federal production tax credit for wind at the end of this year -- Vestas expects turnover to reach DKK 14 billion.

So far this year Vestas has doubled its turnover compared to the same period last year, to DKK 4544 million from DKK 2267 million, with profit before tax of DKK 401 million, a 35% increase. The inability of profit to keep pace with turnover is owing to extraordinary investment during this year of DKK 700-750 million in running-in new products, new manufacturing capacity and staff, reports company head Johannes Poulsen. Although Vestas is not introducing a new turbine model in the short term, investment of nearly DKK 500 million in manufacturing facilities in Scotland and Germany is still to be made, along with continued investment in its Danish facilities.

In the first six months of the year, half of Vestas turbine sales -- 452 MW out of a total 995 MW -- went to North America, 225 MW to Spain, 121 MW to Germany and Austria and 100 MW to Italy. Just 16 MW was sold in Denmark, a market now described as "matured" by London analyst Roddy Bridge of mega bank Hongkong and Shanghai Banking Corporation (HSBC). Denmark is ahead of its development target for wind power on land and future sales are expected to be mainly for repowering old wind plant.

HSBC lowered its rating of Vestas shares from "hold" to "reduce," citing concerns about dwindling profit margins as wind projects get bigger and "worries on the Gamesa relationship." The margin on earnings before interest and tax against turnover (EBIT) was a disappointing 8% against the HSBC forecast of 9.3%. "It is disappointing to note that large contracts are being accepted at lower margin as this is the turbine business expected to become more focussed on large projects in coming years," comments Bridge.

Of more concern to HSBC is Vestas' future relationship with Gamesa. The maturing of the Spanish market suggests Gamesa will be seeking new overseas outlets for its turbines in competition with Vestas, which owns 40% of Gamesa, a stake expected to increase to 49% (Windpower Monthly, July 2001). "We believe that Gamesa's development agreement with Hellenic power could make Greece the first point of conflict," (page 27) fears Bridge. "A breakdown in the relationship would risk competition between the two and perhaps even a price war." Experts in Denmark, however, believe that Vestas has experience enough not to fall into this trap.

NEG Micon on track

The wind market's seasonal fluctuation, which traditionally sees more turbine sales in the second half of the year than the first, accounts for NEG Micon's continued expectation of a profit of DKK 200-250 million for 2001, despite the red figures for the first half year. The loss of DKK 70 million is DKK 11 million less than in the same period last year and puts the company on track to meet its own projections. The result, however, disappointed market analysts in Denmark who had expected a loss of just DKK 43 million. Turnover for the first six months increased to DKK 1757 million from DKK 1475 million in the same period in 2000.

NEG Micon cites delayed orders from Spain and the United States, the usual seasonal pattern of the German market, and the delay in introduction of regulations to spark the repowering market in Denmark, as reasons for its slow start in 2001. On the positive side, the 20% increase in turnover is accounted for by progress in the US, Spain, India, Greece and Germany. Furthermore, turnover for 2001 is projected at DKK 5.5 billion, up from DKK 4 billion in 2000. NEG Micon is aiming at an EBIT margin of 6-8% from 2002.

Better value

Compared with Vestas, HSBC considers NEG Micon shares a better buy. "We continue to believe that NEG offers better value because of its recovery potential, although this is a higher risk situation," notes Bridge. "Even after its recent weakness Vestas is on a very high valuation," he adds.

As part of a drive to reduce product cost and rationalise production processes, NEG Micon is pressing it suppliers to reduce their prices by up to 20% (page 62). "Some have accepted the requirement, others have said they can't meet it and others have asked for a negotiation," says product head Knud Andersen.

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