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August 31st, 2012

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Vestas, the troubled Danish wind-turbine producer, saw the value of its shares jump 19 percent on Tuesday. The boost came after the company was forced to admit it is developing a “potential strategic co-operation” with Mitsubishi Heavy Industries.

The ongoing discussions could result in the Japanese group owning a 20 percent share in Vestas and having access to off-shore turbine technology. According to Berlingske, which broke the news, the dialogue began in March.

Last month, the new Vestas chairman, Bert Nordberg, said he was seeking a significant shareholder who could take on a 10- 20 percent stake in the company to “calm the banks”. 

Over the past two years, Vestas has struggled to remain the world’s largest wind turbine manufacturer. 

Second quarter figures from last week showed a net loss of 8 million euros, compared to a 55 million euro net profit in the same period last year. First quarter losses had totalled 162 million euros, mainly due to the costs associated with the introduction of new technology.

Next year is predicted to be especially difficult for the whole industry due to the contracting European and Chinese markets. Amidst an uncertain future in the US as well, Vestas expects to ship just 5 gigawatts in 2013. The company recently also downgraded its 2012 turbine shipment estimate from 7.0 to 6.3 gigawatts.

And it is also expecting to lower its potential production. Under chief executive Ditlev Engel’s leadership in recent years, the capacity has climbed to 9 gigawatts, far exceeding competitors like Chinese firms Goldwind and Sinovel. But now Engel is resolved to significantly reducing it.

Engel has a track record of struggling to explain the company’s growth strategy, and in November 2011, he was forced to announce cuts of 100 million euros, which have now increased to 250 million euros. 

At the AGM in March, Engel faced stern criticism from Claus Wiinblad, the head of the ATP pension fund, a major shareholder in the company. 

“It is remarkable that Vestas’s market value is at a historically low level, while the order backlog is at a historically high level,” he said. 

“The company has long been driven by potential future growth rather than the current growth pause.”

Wiinblad also criticised the Vestas management’s very slow decision to abandon its ambitious Triple 15 level plan “long after everyone else had set out on another reality”. The aim was to reach a 15 billion euro turnover by 2015 with an EBIT margin of 15 percent.

Last Wednesday’s announcement of 1,400 job cuts, adding to the 2,350 lay-offs earlier in the year, was seen by analysts as a move to reassure shareholders of Vestas’s ability to reduce its 2.275 billion kroner debt and return to profit.

Morten Langer, the editor of financial newsletter Økonomisk Ugebrev, believes Engel is on the right track. “Last month we recommended to our readers to invest in Vestas stock as they are showing many positive signs,” he told The Copenhagen Post. 

Promising second quarter figures have production up by 52 percent and service revenue increasing 34 percent on 2011. 

“Engel should be more drastic, cutting more jobs and closing factories, in order to deal with their over-capacity problem,” added Langer.

Three months ago, Vestas’s bond value dropped to 63 percent, indicating a huge risk of a possible default. Since the start of August, the value has stabilised between 75 and 83 percent, offering less uncertainty for investors.

Vestas’s lenders recently postponed a biannual testing of debt covenants, allowing them to continue borrowing (covenants exist to reduce the risk a company takes with loans by setting operating limits; in theory, creditors could demand immediate repayment if an agreement is breached). The decision was based on the fact that the company is sitting on a record backlog of orders and service agreements, valued at 14.4 billion euros.

It is, however, unclear how much profit can be made from the outstanding orders. In a reduced market, the pressure from competitors tends to force the price down.

In the US, wind-energy production could fall by as much as 56 percent, according to Bloomberg New Energy Finance, if the US Congress fails to renew a tax incentive. The Production Tax Credit (PTC) deducts 2.2 cents from a company’s tax bill for every kilowatt-hour produced. The policy, which also applies to the biomass, geothermal and landfill-gas industries, is cited as fuelling a boom in wind-energy production, helping the US to create the world’s second largest market after China.

Uncertainty over the future of the PTC exists: presidential candidate Mitt Romney would let the policy expire, whilst President Obama wants to renew it. The outcome of the November presidential election, therefore, will influence at least 1,600 jobs at Vestas and have a huge impact on its profits.