Company Reports

On April 1, The Australian Financial Review reported that no-moat Neoen hired Bank of America to sell 30% of its Australian business with a price tag of $1.6 billion. This spurred an 8.5% rally in the shares between April 2 and April 5. The $1.6 billion that was reported implies a whopping valuation of EUR 2.4 million per megawatt of installed capacity versus EUR 1.1 million/MW implied in our fair value estimate. All in all, the reported price implies a gross valuation premium (before any taxes on capital gains) of EUR 2.8 per share or 9% of our fair value estimate. We confirm our fair value estimate of EUR 31.50 for Neoen. Due to its young asset base and suitability for a takeover, stemming from its shareholder structure, it's the least undervalued pure renewables developer we cover.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We confirm our DKK 540 fair value estimate for no-moat Orsted after its partner, Eversource Energy, announced on Feb. 13 that it agreed to sell its stake in two U.S. offshore wind projects it co-owns with Orsted to Global Infrastructure Partners, or GIP, for $1.1 billion. After multiple investments late in 2023 in U.K. offshore wind by Masdar, the clean energy subsidiary of the Abu Dhabi sovereign fund, the GIP deal confirms that financial players are still attracted by offshore wind assets despite the headwinds the industry faced since 2022. This bodes well for Orsted's future farm-downs that buttress its investment plan. All in all, shares look attractive.

With 8.9 gigawatts of gross offshore wind capacity and 5 GW of net capacity at the end of 2023, Orsted is the offshore wind leader: an industry that it pioneered in the 1990's.

No-moat Orsted has updated its business plan presented in June 2023 due to the massive impairments and cancellations of U.S. projects announced in the meantime. As we expected, the group is ruling out a rights issue. Instead, it will reduce its investments and costs and suspend the dividend in 2024 and 2025. We do not contend the latter as dividends have never been core in the equity story. The new investments and 2024, 2026, and 2030 EBITDA targets are in line with our estimates, so we confirm our DKK 540 fair value estimate, offering 40% upside to the current share price. The farm-down of the Hornsea 3 wind farm will be a positive catalyst. Furthermore, Orsted is less exposed to declining European wholesale power prices than most European utilities and will benefit from a decline in interest rates.

Orsted pioneered the offshore wind business and boasts strong expertise in this industry, which we expect to surge in the coming decades.

No-moat Orsted sanctioned the giant 2.9 gigawatts U.K. offshore wind farm Hornsea 3. This does not come as a surprise to us since the last U.K. autumn statement made capital allowances (tax deductibility of investments) permanent whereas they were supposed to expire in 2026 previously. Still, this decision is good news as the other option would have been to scrap the project, which would have driven a material impairment on top of the U.S. ones. We confirm our fair value estimate of DKK 540, still offering a nice upside after the 48% rebound since early November.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

With the U.N. Climate Change Conference, otherwise known as COP28, that started on Nov. 30, we are reasserting our view that the market underappreciates utilities' critical role in limiting global warming.

Orsted pioneered the offshore wind business and boasts strong know-how and a solid record in this industry, which we expect to surge in the coming decades.

We cut our fair value estimate for no-moat Orsted by 10% to DKK 540 after it booked DKK 28 billion of impairments on its U.S. projects, the bulk of which was for the cancellation of Ocean Wind 1 and 2 in New Jersey. Orsted highlights that its capital structure is significantly challenged. This could imply a future rights issue that explains the bulk of the Nov. 1 share price fall in our view. We view shares as materially undervalued and the likelihood of a rights issue below 50%, but pending more clarity on measures to shore up its balance sheet, shares will not rebound.

RWE and National Grid's joint-venture, Community Ocean Wind (73% owned by the former), was awarded a 1.3 gigawatt offshore wind project at the latest New York auctions. We reckon that the project's returns are above our estimates for offshore wind farms to be commissioned beyond 2030. However, Orsted's woes have shown that execution risk is high in the U.S. All in all, we confirm our fair value estimates of EUR 55 and GBX 1,040 for RWE and National Grid, respectively. The former is materially undervalued.

We confirm our DKK 600 fair value estimate for no-moat Orsted after the New York State Public Service Commission denied the firm's request for a hike of the subsidy for the 0.9-gigawatt Sunrise Wind project off the New York coast that it co-owns with Eversource. Shares are materially undervalued.

We downgrade Orsted's moat rating from narrow to none and cut our fair value estimate to DKK 600 from DKK 670. Our new fair value estimate offers 77% upside to the current depressed share price. The latter implies an EV/EBIDTA of 8.2 for 2024 and 3.7 for 2027.

Orsted pioneered the offshore wind business and boasts strong know-how and a solid record in this industry, which we expect to surge in the coming decades.

European utilities have underperformed the European market by 4% year to date with most of the underperformance occurring in the third quarter because of the rise in interest rates. This overshadowed strong second-quarter results driven by the easing of the energy crisis, persisting commodity price volatility, and the hedging improvement. These drivers have persisted in the third quarter. Moreover, some power price clawbacks expired at the end of June like in Germany and Belgium. On the flip side, the comparison basis will be tougher as of the third quarter.

At round 5 of the U.K. contract-for-difference auctions on Sept. 8, 3.7 gigawatts of renewable capacity were awarded, one third of the amount awarded last year—1.9 GW was solar and 1.5 GW was onshore wind. No offshore wind capacity was cleared. This a blow to the U.K. goal to grow offshore wind capacity to 50 GW by 2030 from 14 GW currently. Still, no surprise here as many developers had warned that the ceiling strike price of GBP 44/MWh in 2012 prices of these auctions was way too low given the 40% increase in construction costs over the last year. Overall, the absence of awarded capacity reflects price discipline from developers.

Narrow-moat Orsted announced potential massive impairments due to mounting woes for its U.S. offshore wind projects. This contradicts the message it has sent so far and therefore raises a confidence issue with management. We now assume most of the U.S. projects will be value-destructive, driving a DKK 30 reduction in our fair value estimate to DKK 670. Shares appear materially undervalued, but could remain dead money until U.S. projects are sanctioned.

Orsted pioneered the offshore wind business and boasts strong know-how and a solid record in this industry, which we expect to surge in the coming decades.

Orsted pioneered the offshore wind business and boasts strong know-how and a solid record in this industry, which we expect to surge in the coming decades.