Orsted
The latest investment analysis on Orsted
Group Research - Equities9 Sep 2024
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Company Overview
Orsted A/S, formerly Dong Energy A/S, is the world’s largest developer of offshore wind energy. The Denmark-based energy company operates through three segments: Wind Power (development, construction and operations of wind farms; ~58% of revenue); Bioenergy and Thermal Power (generation of electricity and heat from thermal power stations; ~6% of revenue); and Distribution and Customer Solutions (purchase, sale and distribution of energy; ~26% of revenue). As at 2022, Orsted has 13.7 gigawatts (“GW”) in total gross renewable capacity, which includes an offshore capacity of 7.5GW, onshore capacity of 4.1GW and other (including biomass and PtX) capacity of 2.1GW.


Investment Overview
Well positioned to tap on Europe’s energy-transition story, with its market leadership and proven operational track record in offshore wind. In 2022/23, European utilities are forecasted to invest EUR 95-100 billion in capex per year in renewable energy, which represents a 21% increase from 2021 levels, based on Bloomberg’s estimates. EUR 35 billion is expected to be invested into wind energy alone, according to Statista estimates. We believe Orsted is well positioned to tap onto the broader renewable growth trend given that Orsted is the world's largest and most experienced developer of offshore wind farms with over 30 years of experience. 

2Q24 results a mixed bag, could see more impairments going forward. Orsted reported 2Q24 EBITDA (excluding new partnerships and cancellation fees) of DKK5.3bn (-30% q/q, +59% y/y) on firm offshore results (which contributes 80% of group EBITDA), driven by (i) ramp-up generation with 2GW of newly commissioned capacity, (ii) higher prices and improved power trading activities, as well as (iii) above-average wind speeds. However, Orsted saw bottom-line net loss of -DKK1.7bn (-166% q/q, +212% y/y), a miss below estimates of DKK1.6bn on steeper-than-expected impairments at DKK3.9bn (net of reversals). Orsted ceased operations of its FlagshipONE (liquid e-fuels) project due to high project costs amid an undeveloped offtake liquid e-fuels market which resulted in cancellation fees of DKK0.3bn and impairments of DKK1.5bn. Orsted also saw impairments of DKK2.0bn related to delayed revenue profile from its Revolution Wind offshore wind project as it pushed back its commissioning date to 2026 on the back of delayed onshore substation construction by its partner Eversource, as well as impairments of DKK0.6bn related to Ocean Wind 1 project impairments on its seabed valuation. Going forward, Orsted has guided for potential further delays for its Sunrise offshore wind project which could result in further impairments, with impairments subjected to (i) project schedules, (ii) changes in construction cost and (iii) interest rate movements. 

2024 guidance unchanged; Volatility around impairments and US projects remain as headwinds but we note Orsted is trading at undemanding valuations; Watch for asset recycling and rate cuts. Orsted's installed capacity stands at 17.6W, with an additional 7.6GW capacity under construction, on track to meeting its long term targets for renewable capacity at 35-38GW by 2030. For 2024, Orsted reiterated its EBITDA guidance at DKK23-26bn, with 1H24 results at 49% - 55% of guidance, but have lowered its gross investment guidance to DKK44bn (previous DKK48bn) as it pushes capex spending into 2025 on the back of ongoing construction issues (especially for US offshore/onshore installations). On a positive note, Orsted's asset recycling activities (e.g., Changhua 4 transaction) and continued focus on its core renewable business (e.g., deprioritising non-core e-fuels projects) can act as a positive catalysts for its share price. 

We maintain BUY with lower TP of DKK475 (previous DKK525) given near-term catalysts amid its compelling valuation. Orsted is currently trading at undemanding valuations of forward EV/EBITDA of 7.9x, at -1.4SD of its historical ranges, which could suggests that most downside risks are priced in. Rate cuts in 2H24 could also catalyse an upwards re-rating of the renewables sector. Our TP is based on forward EV/EBITDA of 8.7x, at -1.25SD (previous 9.8x, at -1SD).


Risks
Key risks include ongoing supply-chain woes which could lead to further project delays. Supply chain challenges related to raw materials, wind turbine components and more continue to persist. Further project delays could increase energy-procurement costs and lead to further losses.

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