Wartsila Earnings: Rebound in Order Intake Persists in Late 2023; 19% FVE Lift on Analyst Transfer

Wartsila’s WRT1V 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.

We’ve upgraded our moat rating to wide from our prior rating of narrow, owing largely to a reassessment of the strength of Wartsila’s marine aftermarket business. We think Wartsila’s lengthy track record of delivering high performing, reliable, and safe marine engines, propulsion systems, and equipment represents an intangible asset that lowers search costs for its risk-averse shipbuilder customers and for the ultimate owners and operators of ships with Wartsila-installed equipment. Additionally, we think Wartsila’s marine businesses benefit from high customer switching costs that help perpetuate a steady stream of aftermarket spare parts and servicing revenue. Marine engines and propulsion systems benefit from very long service lives, yielding Wartsila a large installed base of equipment that requires periodic maintenance and spare parts. For context, the service life of a marine engine typically falls in the range of 100,000-200,000 operating hours, translating to a useful life of well over 25 years. In turn, the very long effective service lives of a marine engines and other equipment provide a long-dated aftermarket opportunity in spare parts and servicing. We retain our High Uncertainty and standard capital allocation ratings.

We forecast 10-year EBIT and EPS CAGRs of 11% and 13%, respectively, as the energy segment’s profitability improves and modest operating leverage benefits marine segment operating profits.