Eight months ago Carax-Alphavalue held the view that Gamesa was fully priced ahead of it falling into the Siemens bag. This opinion proved correct only for the following two months. Another six months on and the Spanish wind-turbine manufacturer is looking decidedly expensive at €21.5, even though they have upgraded their target price on the back of a strong 2016 delivery.
Gamesa can be bought on a long view (DCF) but no longer on a NAV basis and it is seriously expensive vs. European peers even though we allow for a 20% premium to peer- based metrics. This premium reflects the benefits of being a market leader after the merger with Siemens’ wind-turbine business. So that we see nothing but a 3% downside potential on combined valuation metrics. The merger becomes effective on 6 April with the share price losing 3.5%. The special dividend of €3.6 awarded to Gamesa shareholders before the merger goes with payment on 11 April. The share price will duly adjust on that date.
It is indeed fair to say that 2016, its last year on a standalone basis, has been a runaway success with order intake up 21%, sales up 52% and profits of €300m or a 50% conversion rate on the €600m in EBITDA. This delivery is a year ahead of schedule. Gamesa’s share price has been pumped higher by a series of 2016 and 2017 upgrades stemming from a full and growing order book and the expected benefits from its merger with Siemens Wind Power. Such upgrades may continue in the short run so that the invisible hand would have been right.
Gamesa’s and Siemens’ wind businesses are remarkably complementary and, even though Siemens contributes a bigger chunk of the new company, it looks as if it is going to be a Gamesa-driven venture. The combined company has a €21bn backlog, pro forma revenues of €11bn and €1.1bn of adjusted EBIT in the fiscal year ended December 2016. Siemens will own 59% of the share capital of the merged company, 8% will be held by Iberdrola, and the rest will be free-floating shares.
The valuation ratio of the two companies was based on their respective order backlogs, revenues and adjusted EBIT. We believe that the large order backlog of Siemens helped reach its 59% stake in the merged company. On real EBIT, it would have been the other way round. This might also be the reason why Siemens has been paying an additional €1.05bn to Gamesa shareholders as a €3.75 one-off dividend (€3.6 paid 11/04/2017 and €0.15 in 04/07/2016).
Based on the reported order backlog (€20.2bn) and net additions (8.2 GW), the new Gamesa is the clear market leader followed by Vestas (Buy, Denmark). Around 41% of the order backlog is related to the service and maintenance business, 26% to onshore and 33% to offshore. A big chunk of the merger benefits will be stemming from a huge maintenance base that will help see through less good times. There are uncertainties though, starting with the true profitability of the Siemens Wind business being assessed only from Q1 17 onwards.
Can good times last?
There a perplexing background noise of falling prices for every significant new green power project. As biggish projects tend to be auctioned these days, it is obvious that the going rate of green MWh at which authorities will award a production licence is in free fall. Recent months were marred with drops to below €60/MWh (€26 in Morocco for a recent onshore project).
To what extent will such drops in prices percolate to equipment and maintenance suppliers? According to Carax-Alphavalue wind turbines may remain a suppliers’ market for a while as the context of low rates means that new money is chasing (illusory) returns on infrastructure projects.
But the reality will inevitably sink in that some of these projects will never see their money back and cut on maintenance, on upgrades or whatever else. These cuts would be a future opportunity lost to wind-turbine manufacturers. In addition, new projects may go for bigger wind turbines to try and cut on generation costs with plenty of related execution risks, as was experienced in a not so distant past. Gamesa is the new market leader so should cope better than peers but will not avoid a slowdown when it comes.
Another question is how much higher Gamesa can go. Experts believe:
It has been a perfect call as the wind-turbine market has gained fresh impetus from the US tax benefits for green energies being extended by another five years. In parallel, the industry itself has been consolidating, potentially contracting supply (Nordex (Buy, Germany) now part of Acciona (Buy, Spain), Gamesa becoming a subsidiary of Siemens (Add, Germany), Areva selling its bit of the Adwen JV with Gamesa to its Spanish partner, etc.). It may prove hard to sustain such a momentum and remain cautious up until Siemens gives a signal of what it intends to do with this listed subsidiary.