Orsted: Downgrading Our Moat Rating From Narrow to None, FVE Cut to DKK 600, Shares Attractive

We downgrade Orsted’s ORSTED 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.

We downgrade Orsted’s moat rating to none on account of headwinds affecting the offshore wind industry, driving value destruction from the firm’s investments. Since the end of 2021, the offshore wind industry has been hit by rising construction costs and interest rates. With a lot of projects awarded between 2018 and 2021, especially in the U.S., Orsted is in the eye of the storm as most of those projects will be value-destructive. Due to the high amount of development costs incurred so far, it would be very costly for Orsted to scrap them. Therefore, we assume that they will be sanctioned. We calculate that they will account for nearly 50% of the investments of the next 10 years and weigh on the group’s returns on invested capital. This is a turnaround from the past decade, when Orsted benefited from high subsidies while construction costs and interest rates were falling, driving high-value accretion from offshore wind projects.

We already assumed that the U.S. projects would be value destructive. The moat rating downgrade leads us to reduce the value accretion from long-term projects. This drives a 10% reduction in our fair value estimate to DKK 600.

Current share price involves overly pessimistic assumptions. To justify it, we would have to grant no value to the onshore wind business and to any future offshore wind projects. Another way to justify it would be to use a WACC of 10% to value existing and future projects.

We see low likelihood of a rights issue. Despite the U.S. projects cost overruns, we project funds from operations/net debt to average 31% over the next five years, above the 25% threshold required to maintain the current BBB credit rating.