Company Reports

Investors welcomed wide-moat Wartsila’s stellar first-quarter results that featured a large uplift in order intake inspired by the significant uplift in global shipbuilding activity in early 2024. Wartsila shares are up 10% at the time of writing. Wartsila’s first-quarter order intake rose a substantive 17% organically—driving Wartsila’s order book to a record-high of EUR 7.3 billion—which should support elevated earnings growth in 2024 and 2025. With demand in 2024 for Wartsila’s suite of marine engines, systems, and equipment tracking significantly ahead of our prior forecast, we lift our fair value estimate by 18% to EUR 13. A swifter turnaround of Wartsila’s energy segment than we’d previously credited also contributes to our fair value estimate uplift, with the segment’s recovery in EBIT margin tracking ahead of our prior expectations. Wartsila shares screen expensively, trading at a 33% premium to our upwardly revised valuation.

Wartsila is an integrated provider of capital equipment and aftermarket parts and service in the global marine and energy markets. Accordingly, Wartsila reaps the benefit of sticky, high profit margin aftermarket sales that accrue under its installed base business model. Aftermarket maintenance and spare parts sales account for approximately 50% of group revenue, evidencing the extent to which Wartsila can exert control in the lucrative aftermarket for maintenance and original parts for its marine and energy systems and equipment.

Marine market conditions continued to normalize for wide-moat Wartsila in late 2023, spurring strong fourth-quarter new order intake that tracked largely in line with our full-year expectations. New orders grew 16% year on year in 2023 to EUR 7.1 billion as Wartsila’s marine businesses continued to rebound from the significant drop in demand experienced during the pandemic as the cruising industry was idled and seaborne trade volumes continued to grow. Equally, Wartsila’s energy segment benefited from strong demand for its energy storage solutions, helping offset weak new orders for gas-fired power plants. Full-year 2023 top-line growth of 3% was somewhat short of our forecast, with delivery of orders in late 2023 tracking slower than we’d anticipated. Notwithstanding, the firm’s order book stood at a healthy EUR 6.7 billion at year-end 2023—13% higher year on year—setting up a strong year for Wartsila in 2024. The group’s full-year 2023 EBIT margin firmed to 8.3%—up appreciably from a cyclically depressed 5.6% a year earlier—tracking ahead of our expectations with the energy business’ margins demonstrating swifter improvement than we’d factored in.

Wartsila’s order intake remains robust in late 2023, with new orders in the third quarter rising 11% year on year, supporting earnings growth in 2024. Order intake in the marine power segment was particularly strong as demand from the cruise segment continued to rebound from the impact of the pandemic. We raise our fair value estimate by 19% to EUR 11, reflecting both a change of analyst and Wartsila’s strong order intake in late 2023. Shares in Wartsila trade at a slim 4% premium to our revised fair value estimate.

Wartsila is an integrated provider of capital equipment and aftermarket parts and service in the global marine and energy markets. Accordingly, Wartsila reaps the benefit of sticky, high profit margin aftermarket sales that accrue under its installed base business model. Aftermarket maintenance and spare parts sales account for approximately 50% of group revenue, evidencing the extent to which Wartsila can exert control in the lucrative aftermarket for maintenance and original parts for its marine and energy systems and equipment.

Narrow-moat Wartsila delivered an impressive quarter, reporting organic order intake growth of 21%, comfortably ahead of company-compiled consensus. Service revenue grew 16% during the quarter, which led to a favourable sales mix, and combined with improving profitability within the fast-growing energy storage business, supported EBITA margin expansion of 130 basis points to 7.4%. While we commend Wartsila's improvement in profitability, it is still some way from its 12% operating margin target and our 9% medium-term margin expectation. We reiterate our EUR 9.20 fair value estimate and view shares as fairly valued.

Narrow-moat Wartsila delivered an impressive quarter, reporting organic order intake growth of 29% to EUR 1.7 billion, comfortably above company-compiled consensus of EUR 1.5 billion. Demand was broad-based across operating segments, but the energy segment continues to drive the outperformance, supported by a 3.5-fold increase in demand for the group’s energy storage solutions. However, the energy storage subsegment continues to have a dilutive impact on group profitability, and despite margins improving 70 basis points to 6.0%, remains well below our medium-term expectations and group targets. While the market is impressed with results, which sees the stock up 8% following its earnings release, we view shares as fairly valued to our EUR 9.20 fair value estimate, which we maintain.

Narrow-moat Wartsila reported a 41% decline in its comparable operating profit during fourth-quarter 2022, which took the total decline for the full year to 9%. The biggest contributor was its energy segment, where cost inflation on the group’s existing projects have led to an increase in provisions, combined with an unfavorable sales mix, driven by revenue more than doubling in its lossmaking energy storage business. Management has guided for demand to exceed 2022, entirely driven an increase in demand for the group's energy solutions. We anticipate that Wartsila will continue to deliver robust revenue growth, as its energy and marine customers seek to decarbonize their operations, but expect profitability to remain well below its 12% EBIT margin target. We maintain our EUR 9.20 fair value estimate and view shares as fairly valued, after a rally during the past three months.

Narrow-moat Wartsila felt the brunt of cost inflation and an unfavourable sales mix in the third quarter, which contributed to a 6% decline in operating profit despite revenue growing 30%. While we expect Wartsila’s top line to continue to deliver robust growth as energy and marine customers seek to decarbonize their operations, we anticipate a longer-than-expected recovery in profitability. Cost inflation on the group’s existing order book, as well as an unfavourable sales mix driven by strong demand for the group’s loss-making energy storage solutions, will remain a headwind entering 2023. To reflect this, we have reduced our five-year average EBIT margin forecast by 140 basis points to 7.4%, subsequently lowering our fair value estimate to EUR 9.20 per share from EUR 10.80. The shares remain compelling for long-term shareholders, in our opinion.

The decarbonization of the marine and energy market has created new business opportunities for Wartsila. The company has invested significantly in anticipation of these trends, ensuring its marine engines are compatible with a wide range of environmentally friendly fuel types, while also emerging as one of the top three players in the energy storage market. A broad range of solutions that help customers reduce their carbon emissions will help grow their installed base and provides a foundation to perform recurring aftermarket services, which is less susceptible to the highly cyclical marine newbuild market and mitigates the shift toward renewable energy, away from Wartsila’s traditional thermal engine business. Both the marine and energy segments have potential to increase the contribution of revenue from services by moving up the service ladder toward performance-based agreements.

The decarbonization of the marine and energy market has created new business opportunities for Wartsila. The company has invested significantly in anticipation of these trends, ensuring its marine engines are compatible with a wide range of environmentally friendly fuel types, while also emerging as one of the top three players in the energy storage market. A broad range of solutions that help customers reduce their carbon emissions will help grow their installed base and provides a foundation to perform recurring aftermarket services, which is less susceptible to the highly cyclical marine newbuild market and mitigates the shift toward renewable energy, away from Wartsila’s traditional thermal engine business. Both the marine and energy segments have potential to grow the contribution of revenue from services by moving up the service ladder toward performance-based agreements.

We are decreasing narrow-moat Wartsila’s fair value estimate to EUR 10.80 from EUR 11.50, which is attributable to a combination of a EUR 200 million impairment to exit its business in Russia and additional costs required to shut its engine manufacturing plant in Italy to centralize manufacturing. Order growth in the first half was 18%, driven by strong demand for services in the marine and energy segments, and is tracking in line with our expectations. We view shares as undervalued, but emphasize the group’s Morningstar Uncertainty Rating of High due to highly cyclical end markets, which is being exacerbated by current conditions.

Narrow-moat Wartsila was able to report a decent first quarter despite being hit heavily by the war in Russia. An impairment of EUR 200 million was recognized in the first quarter, which is required to downscale Russian operations whereas the indirect impact of sanctions has accelerated existing cost inflation, particularly in the group’s fast-growing energy storage value chain, which has caused customers to delay investments due to higher pricing. Order intake grew by 11%, supported by strong demand for marine equipment, which managed to offset slower demand from the historically faster-growing energy segment. Management cautioned of slower demand in the second quarter as cost inflation headwinds persist and the lockdown in China hampers the group’s ability to perform aftermarket marine services. We maintain our EUR 11.5 fair value estimate and view shares as undervalued. We emphasise the group’s high uncertainty rating due to highly cyclical end-markets, which are being exasperated by current conditions.

The decarbonization of the marine and energy market has created new business opportunities for Wartsila. The company has invested significantly in anticipation of these trends, ensuring its marine engines are compatible with a wide range of environmentally friendly fuel types, while also emerging as one of the top three players in the energy storage market. A broad range of solutions that help customers reduce their carbon emissions will help grow their installed base and provides a foundation to perform recurring aftermarket services, which is less susceptible to the highly cyclical marine newbuild market and mitigates the shift toward renewable energy, away from Wartsila’s traditional thermal engine business. Both the marine and energy segments have potential to grow the contribution of revenue from services by moving up the service ladder toward performance-based agreements.

Narrow-moat Wartsila reported an impressive 32% increase in order intake for the full year and 92% higher than the fourth quarter of last year, exceeding company-compiled consensus. Full-year operating profit grew 30% at an EBIT margin of 7.5%, which fell in line with our expectations. However, concerns remain on the path toward the group’s operating margin target of 12% set at its Capital Markets Day in November 2021. The strong order intake in the fourth quarter was driven by demand for new equipment and the group’s loss-making energy storage solutions, which will have a dilutive impact on profitability in the current year. We maintain our EUR 10.8 fair value estimate and view shares as fairly valued.

Narrow-moat Wartsila revealed new financial targets at its investor day, which does not materially differ from previous ambitions. Management aims to achieve 5% annual revenue growth over the business cycle at a 12% operating margin. However, management was unable to provide the timing of achieving the margin, which is partially dependent on uncontrollable factors such as decarbonization regulation and a recovery in the cruise segment. New EBIT margin guidance of 12% is at the midpoint of the group’s prior target of between 10% and 14%. We believe 12% is ambitious in the near term due to current cost inflation and a fast-growing but loss-making energy storage business. We slightly raise our fair value estimate to EUR 10.8 from EUR 10.2 to account for the rapid growth of Wartsila’s energy storage business, which we expect to persist but keep our margin estimates largely unchanged. Shares are currently fairly valued.

Wartsila's marine and energy end markets can go through deep cycles, but the company is able to maintain profitability by providing recurring aftermarket sales and services, which account for approximately one half of sales.

Narrow-moat Wartsila beat company-provided third-quarter profit estimates with revenue and order intake as expected. Wartsila’s energy storage solutions was the driver behind the outperformance, despite the group’s important cruise segment still being affected by the coronavirus pandemic. Management expects next quarter’s demand to be considerably better than last year's demand as cruise utilization rates and vessel contracting improves, which supports higher service activity. The market is impressed by these results and the favorable outlook, which sees the stock up 9% on the day. We maintain our EUR 10.2 fair value estimate and view shares as fairly valued.

Higher shipping and oil prices have seen order intake grow 6% year to date for narrow-moat Wartsila’s critical marine and energy products, which has topped our estimates. We raise our fair value estimate to EUR 10.20 per share from EUR 9.50 to reflect a better-than-expected recovery in marine and energy markets. We believe the beneficial macroeconomic factors are fully incorporated in the current share price, which has risen 50% year to date and thus view shares as being fairly valued.

Wartsila's marine and energy end markets can go through deep cycles, but the company is able to maintain profitability by providing recurring aftermarket sales and services, which account for approximately one half of sales.