Ørsted: Seeing Some Stability And Upside From The Speculative 'Buy'

seekingalpha2024-10-24

Ørsted has faced significant profitability issues in wind projects, but recent developments, including Equinor's 10% stake acquisition, suggest the stock is undervalued.Equinor's investment indicates ...

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It's one of the reasons I have been on the fence and called rsted somewhat speculative in my last piece as well, found here. One of the challenges faced by rsted is the poor returns for Offshore  wind. It's what has thrown the company's calculations completely off, as these were based on entirely different interest rate scenarios and return rates for their projects. It is what drove the company to cancel several projects, simply because they were no longer profitable. Orsted IR  Since I reviewed the company last, we have 2Q24 results and are looking at soon getting 3Q24. The major piece of news that we have to look at is a shareholding item - namely tha","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"DNNGY":"Orsted A/S","BK4081":"电力公用事业","DOGEF":"Orsted A/S","BK4133":"新能源发电业者"},"translate_title":"Ø rsted：从投机性“买入”中看到一些稳定性和上行空间","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DNNGY":0.9,"DOGEF":0.9},"content_text":"Ørsted has faced significant profitability issues in wind projects, but recent developments, including Equinor's 10% stake acquisition, suggest the stock is undervalued.Equinor's investment indicates confidence in Ørsted's potential and a belief that the company won't need to dilute equity with a rights issuance.DNNGY could benefit from a decline in interest rates, especially with the derisked Hornsea 3 project resubmitted to UK renewable auctions.Equinor's strategic move enhances its renewable portfolio, making Ørsted a more attractive investment with potential for a turnaround in 2024-2026.   Justin Paget Dear readers/followers, Ørsted (OTCPK:DNNGY) is a company that I have been reviewing for a few years now - and also invested in both before the last portion of the significant crash in 2022-2023, but also afterwards. I called it a speculative \"Buy\" in my last article on the company which you can find here - and the performance since that article has at the very least been stable. This is a renewable player, with a focus on wind. It's also a player/company that has seen significant issues with profitability in many of its projects, which is fully reflected in the company's share price. However, there are certain changes and happenings that should be considered attractive and interesting here - and those, in conjunction with 2Q and a pre-3Q review is what I intend to give you and present you with here. Despite some of the issues we've seen for Ørsted, the company is not an unattractive potential at the right price. I've considered going the options route a few times over the last few months, but given the impact this had last time around where I got stuck above a price I wanted to get stuck at, given the impacts of the earnings, I've been more careful with Ørsted as an options play. At this point, we'll look at changing trends for Ørsted and where these could drive the company during 2024-2026E. When, if at any time, will the company turn around, and what would be the conceivable return if it did so? Let's look at what we have here. Ørsted and its performance - and future - in a changing and uncertain market To say that Ørsted has issues, or has had issues, would be underestimating the seriousness of what I would consider a deeply troubling situation in the last 2 years. It's one of the reasons I have been on the fence and called Ørsted somewhat speculative in my last piece as well, found here. One of the challenges faced by Ørsted is the poor returns for Offshore (and onshore) wind. It's what has thrown the company's calculations completely off, as these were based on entirely different interest rate scenarios and return rates for their projects. It is what drove the company to cancel several projects, simply because they were no longer profitable. Orsted IR (Orsted IR) Since I reviewed the company last, we have 2Q24 results and are looking at soon getting 3Q24. The major piece of news that we have to look at is a shareholding item - namely that the Norwegian company Equinor about 2 weeks ago announced acquiring nearly a 10% stake in Ørsted at an MV of $2.5B. This transaction can be viewed in several ways, but the way that I view it is that Equinor, a very strong player in the field, has been calculating that regardless of the outcomes in the next few years, the price that's being asked for Ørsted shares on the market today, are deeply undervalued - and consequently, good use of capital is buying shares. Why is this the case? Conceivably, Ørsted is one of the utilities that is best positioned to take advantage of a decline in overall interest rates. This is because a reversal in these things would inch the company back to scenarios similar to the ones where the company's shares were significantly valued compared to today. A considerable catalyst of a decline in interest rates would be the farmdown of the Hornsea 3 project. This project has recently been resubmitted to the UK renewable auctions and has been effectively \"derisked\" as a result of this. This transaction also turns Equinor, a company where I own shares, into the second-largest shareholder of Ørsted, with an ambition to increase its stake to 10% - but no higher than that. Equinor has also made it clear that it does not seek board representation. Orsted IR (Orsted IR) The strategic rationale for this move is a good one. Equinor's current renewable portfolio is somewhat choppy and, in my view, lacks a strategic direction and underlying logic for its goals and targets. With the addition of Ørsted, this goes from being a merely symbolic and somewhat greenwashed move to being an actual solid part of the company's goals and directions. So with that in mind, I view this as being a positive. This does not change my evaluation for Equinor, but it changes my valuation and estimation for Ørsted. It is now, to my mind, more attractive. The move that Equinor did is the less common move, but it implies that Equinor believes natively investing In Ørsted instead of developing more renewable assets is the cheaper option; ergo, the company believes Ørsted to be undervalued. I would also like to speculate in this article that Equinor's investment means that they believe they do not see Ørsted going to the markets to dilute their equity with a rights issuance. If they believed this to be a risk, it goes to reason that they would wait and see after such a development. Orsted IR (Orsted IR) Ørsted, as of the end of 2Q24A, has around 9 GW of gross offshore wind capacity, and 5 GW of net capacity, set to grow for the full year of 2024. The company is \"the\" leader in offshore wind, and 75% of the company's EBITDA comes from this. Previously, this sector has been under targeting from subsidies, and this enabled Ørsted to be a leader in this sector early on. The issue, to recap here, was a sharp rise in construction costs and interest rates since 2021, resulting in a situation where none of the projects met the group's returns threshold of 150-300 basis points over the weighted average cost of capital. This resulted in turn in sanctioning only a very small number of projects, and removing over 2 GW of gross capacity in November of last year, resulting in 36BDKK impairments and cancellation fees. This was the reason that the company suspended dividends, and increased divestment targets as well. I will say again that Ørsted is a very good example of overreaction not being a good investment strategy. Even I was prone to overreacting here, and in retrospect, I should have spent more time on my calculations rather than focusing on the fallout and media circus that arose after the news about a year ago. 2Q24 operational performance was in fact good. The company's EBITDA was up 59%, with offshore sites up 40%. Full-year EBITDA is expected at 23-26B DKK, with lower bioenergy earnings but otherwise in line. The company has started its commissioning of capacity again. It's 2 GW of renewables in Taiwan and the US, and the commissioning of the Eleven Mile project, and the solar part of the Helena Energy Center. The company also showcased progress in Hornsea 3, the battery system, and saw the reversal of some cancellation fees, due to better-than-expected settlement outcomes. These are all positives, and worth noting. Company debt coverage is up - 23% at this time, with interest-rate bearing debt in total down, so it's an uptick due to higher FFO - but the company's FFO coverage is expected to tick up over 30% by 2026E. As we see more competition in the offshore sector, the company has previously upped its guidance and ambitions, only to lower them this year to instead focus on balance sheet fortification. This is likely to be ongoing for at least 2 years. A number of positives to consider for 3Q24 exist. First off, the results from the recent US auctions are entirely positive. This also implies good pricing for future auctions. It also mirrors the 2024 development in the UK, with the extension of capital allowances. This capital allowance will, among other things, support value in Hornsea 3. However, I won't move forward without mentioning some of the risks that still exist in the company. This includes, but is limited to things like higher interest rates, which are one of the primary share price impacts that exist here. A delay in some projects in Europe is also likely, exemplified by the potential delay in Dogger Bank A - this is not due to returns, but due to supply chain issues. The biggest risk is the business plan presented 9 months ago, which is entirely dependent on the divestment of assets, including the farm-down of Hornsea 3. If the company does not do this, the company would likely have to do a rights issue. Let's look at the company valuation. Ørsted is attractive here, but it's currently very speculative indeed Ørsted's valuation is currently very distorted. I view the company's current P/E at almost 140x P/E normalized, but this is due to a negative 2023A result, that's expected to recover next year and the years after this. My current forecasts are for the company are for a normalized earnings level for 2024-2026E of around 25 DKK/share - lower than before, but still a decent level that implies a 17.2x P/E valuation based on the current price for the company today. That is a significant discount to the 5-year average of 28x, and even to the long-term average of 23x P/E. It is here that I see the upside for Ørsted, and why I remain positive in my stance on the company - albeit a speculative one. Using a 12x EBITDA multiple and around 23-24x P/E is the more conservative way to go here. Given current industry trends, I forecast no more than a 5.5-6% CAGR for the company's EBITDA, but excluding eventual farm-downs and cancellation fees, which are uncertain. Key drivers include new projects, and ramp-up of projects like GC1, South Fork wind, and Gode wind farms. But all of these things are to be impacted by things like wholesale power price reductions (which I have covered extensively previously in articles on utilities), and subsidy reductions - the entire reason why Equinor invested in Ørsted's instead of buying assets or doing their own - it's simply not as profitable anymore. In the end, I do believe that Ørsted's current share price represents a significant discount to what the company should be worth, and what it might be worth in the future. It is for that reason I consider the company to be a \"Buy\", and give the company the following target based on the following sort of thesis. Thesis  Ørsted is a now-speculative renewables company that remains one of the relevant market leaders in the entire segment. It is, in fact, a market leader in Wind. It's also state-owned, has a well-filled pipeline, and is one of the most conservative financing pipelines and maturities when it comes to utilities. However, a meager yield and premiums make valuation important - and I would only buy the company as long as it stays within its range. At current numbers, I would not buy it above 500 DKK per share and would put my PT closer to 440 DKK. The cut dividend and the changed outlook justify my cut in valuation, but also why I still believe the company is attractive here on a speculative basis. That means that as of right now, Ørsted is a \"BUY\" for me, but it's a speculative one, and the upside is highly dependent on how the market for the offshore market develops, and how the 2024-2026E period works out. As of now, and expecting for 3Q24, I see a continued upside here.  Here are my criteria and how the company fulfills them (italicized).  This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.  The company fulfills 2 out of 3 quality indicators, and 1 out of 2 valuation indicators. Based on this, and a valuation target of 440 DKK/share where I see a risk/reward-adjusted upside that's attractive enough for me, I give the company a \"Buy\" rating as of October 2024.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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