The energy transition is definitely underway and John Lynch writes a good article in the Irish Independent that there are good financial gains for all investors.
Sharewatch: Riches to be made on sustainable energy
Some of us are not quite as riveted by the ‘green agenda’ as perhaps we should be. Of course, when the Paris Climate Conference convened in December 2015 and brought an astonishing 195 countries together to agree a global climate deal, we all hailed it as worthy, if delayed, progress.
Then, for whatever reason, it tended to slip on to the back burner again. One way of not forgetting about ‘greenness’ is to have a look at your electricity bill and see a significant deduction under the heading: Public Service Obligation levy.
It is a monthly reminder that we have to fork out money every day of the week to buy sustainable and renewable energy – whether we like it or not.
The company we are looking at today is one of the international firms that benefits from this investment and while the planet expects to see the benefits of global change eventually, this company’s shareholders see their payback a lot earlier.
It is a Danish company that entered the wind turbine industry in 1979 called Vestas Wind Systems.
Vestas develops, manufactures and sells wind turbines that generate electricity. It also installs and maintains components for its final products.
To date, the company has installed 56,000 wind turbines in 75 countries, generating enough electricity for 80 million residential consumers.
Four years ago Vestas was under severe financial strain and was threatened with liquidation. Since then it has recovered, helped in part by the appointment of a former Ericsson executive, Anders Runevad.
His actions involved the traditional cost-cutting and slashing jobs. However, he has also been helped by a resurgent market, the falling cost of wind power, government subsidies (in the US) and new regulations.
Today Vestas’ financial performance continues to improve and they are confident enough to have a €400m share buyback programme. However, they face fierce competition.
Vestas operates worldwide, with production plants in the US, Europe, Brazil, China and India. The US, Canada and Brazil account for 40pc of Vestas total sales. However, market share in China is of concern. In the last two years Vestas’ market share has declined from 23pc to 1pc.
In the US, Vestas is reaping the benefit of a government subsidy for wind turbines, available to developers up to 2020. As a result of this deadline it is pushing wind energy developers into immediate action.
In its last full year, revenue increased 22pc to €8.4bn driven by the Europe/ Middle East/Africa region – Vestas’ largest with sales of €4.4bn. The US/Canada market, with sales of €3.5bn, is buoyant. The Asia Pacific region trails with €590m sales.
Profits were €685m, up from €392m, with margins inching up to 18pc. With its recent acquisitions of independent service companies in the US and Germany, the company is targeting growth of 30pc.
Vestas has a unique platform to grow its service business with its installed base. Given that most of its service contracts run from five to 10 years, this source of stable revenue stream will continue to expand.
Vestas’ share price (quoted in Danish kroner) in the last 10 years has been volatile.
From 2007 investors saw their shares rise from DKK238 to a record DKK692 in late 2008. A long decline saw it sink to DKK25 four years later. Since then they have slowly climbed to DKK550 earlier this year.
Today the stock trades at DKK551.50, valuing the company at DKK122bn (€16.37bn). Results for the first three months of this year pleased investors, with sales increasing 18pc and pre-tax profit rising from €2m to €76m year-on-year.
Overall Vestas is performing well. While its business in developed countries is flat – with the exception of the critical US market – demand for electricity is growing in Latin America and Africa and Vestas and wind power is competitive.
The company is in a good space, but I prefer solar power companies – they have no moving parts.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.