Mitsubishi
Heavy Industries interest sees wind producer’s share price soar
Vestas,
the troubled Danish wind-turbine producer, saw the value of its
shares jump 19 percent on Tuesday. The boost came after the company
was forced to admit it is developing a “potential strategic
co-operation” with Mitsubishi Heavy Industries.
The
ongoing discussions could result in the Japanese group owning a 20
percent share in Vestas and having access to off-shore turbine
technology. According to Berlingske, which broke the news, the
dialogue began in March.
Last
month, the new Vestas chairman, Bert Nordberg, said he was seeking a
significant shareholder who could take on a 10- 20 percent stake in
the company to “calm the banks”.
Over
the past two years, Vestas has struggled to remain the world’s
largest wind turbine manufacturer.
Second
quarter figures from last week showed a net loss of 8 million euros,
compared to a 55 million euro net profit in the same period last
year. First quarter losses had totalled 162 million euros, mainly due
to the costs associated with the introduction of new technology.
Next
year is predicted to be especially difficult for the whole industry
due to the contracting European and Chinese markets. Amidst an
uncertain future in the US as well, Vestas expects to ship just 5
gigawatts in 2013. The company recently also downgraded its 2012
turbine shipment estimate from 7.0 to 6.3 gigawatts.
And
it is also expecting to lower its potential production. Under chief
executive Ditlev Engel’s leadership in recent years, the capacity
has climbed to 9 gigawatts, far exceeding competitors like Chinese
firms Goldwind and Sinovel. But now Engel is resolved to
significantly reducing it.
Engel
has a track record of struggling to explain the company’s growth
strategy, and in November 2011, he was forced to announce cuts of 100
million euros, which have now increased to 250 million euros.
At
the AGM in March, Engel faced stern criticism from Claus Wiinblad,
the head of the ATP pension fund, a major shareholder in the
company.
“It
is remarkable that Vestas’s market value is at a historically low
level, while the order backlog is at a historically high level,” he
said.
“The
company has long been driven by potential future growth rather than
the current growth pause.”
Wiinblad
also criticised the Vestas management’s very slow decision to
abandon its ambitious Triple 15 level plan “long after everyone
else had set out on another reality”. The aim was to reach a 15
billion euro turnover by 2015 with an EBIT margin of 15 percent.
Last
Wednesday’s announcement of 1,400 job cuts, adding to the 2,350
lay-offs earlier in the year, was seen by analysts as a move to
reassure shareholders of Vestas’s ability to reduce its 2.275
billion kroner debt and return to profit.
Morten
Langer, the editor of financial newsletter Økonomisk Ugebrev,
believes Engel is on the right track. “Last month we recommended to
our readers to invest in Vestas stock as they are showing many
positive signs,” he told The Copenhagen Post.
Promising
second quarter figures have production up by 52 percent and service
revenue increasing 34 percent on 2011.
“Engel
should be more drastic, cutting more jobs and closing factories, in
order to deal with their over-capacity problem,” added Langer.
Three
months ago, Vestas’s bond value dropped to 63 percent, indicating a
huge risk of a possible default. Since the start of August, the value
has stabilised between 75 and 83 percent, offering less uncertainty
for investors.
Vestas’s
lenders recently postponed a biannual testing of debt covenants,
allowing them to continue borrowing (covenants exist to reduce the
risk a company takes with loans by setting operating limits; in
theory, creditors could demand immediate repayment if an agreement is
breached). The decision was based on the fact that the company is
sitting on a record backlog of orders and service agreements, valued
at 14.4 billion euros.
It
is, however, unclear how much profit can be made from the outstanding
orders. In a reduced market, the pressure from competitors tends to
force the price down.
In
the US, wind-energy production could fall by as much as 56 percent,
according to Bloomberg New Energy Finance, if the US Congress fails
to renew a tax incentive. The Production Tax Credit (PTC) deducts 2.2
cents from a company’s tax bill for every kilowatt-hour produced.
The policy, which also applies to the biomass, geothermal and
landfill-gas industries, is cited as fuelling a boom in wind-energy
production, helping the US to create the world’s second largest
market after China.
Uncertainty
over the future of the PTC exists: presidential candidate Mitt Romney
would let the policy expire, whilst President Obama wants to renew
it. The outcome of the November presidential election, therefore,
will influence at least 1,600 jobs at Vestas and have a huge impact
on its profits.
