Breakingviews - Green energy valuations could use stiffer tailwind

A model of a wind turbine with the Siemens Gamesa logo is displayed outside the annual general shareholders meeting in Zamudio, Spain, June 20, 2017.

LONDON (Reuters Breakingviews) - The switch from fossil fuels to renewable energy is putting wind in turbine makers’ sails. Combined, Denmark’s Vestas Wind Systems and Spanish-German rival Siemens Gamesa Renewable Energy now boast more than 60 billion euros of orders. Even so, with share prices up 70% this year, their valuations may imply a bigger gust of wind than is actually likely.

Right now, 31 billion euro Vestas and 18 billion euro Siemens Gamesa’s valuations are as high as you would expect of a sector favoured by the vogue for sustainable investing. Vestas trades at more than 30 times 2021 earnings, using Refinitiv estimates, while Siemens Gamesa is valued at 60 times. A more conventional industrial group like Siemens, by comparison, trades at less than 18 times.

That may be justifiable if the green duo can grow fast. Siemens Gamesa boss Andreas Nauen said on Thursday he reckons he can hike a lowly 1% operating margin in the most recent quarter to 10% by 2023. Imagine he does, and assume he also grows revenue at 8.5% a year – in line with forecasts for the overall wind market by consultancy GWEC Market Intelligence. On that basis, Siemens Gamesa would only be trading at just over 20 times 2023 earnings, compared to Siemens’ 15 times. Vestas, whose higher valuation reflects its healthier margins right now, would also trade on around 20 times using the same assumptions.

Given the increasingly important role for wind energy as countries ditch carbon, it’s possible that manufacturers of its most important piece of kit can achieve these growth rates. If both companies completely shot the lights out and grew at 30% a year, the implied 2023 price-earnings multiple would be the same as Siemens.

Still, the average Refinitiv forecast only pencils in 15 billion euros of revenue for Vestas in 2023, against the 18 billion euros it would make by growing at 10% annually. And the prospect of sky-high growth rates in the sector has taken a knock from the Democratic Party’s possible failure to gain control of the U.S. Senate. If Joe Biden ultimately does win the presidency, he will have less scope to pursue a $2 trillion green investment plan.

Shares in both Vestas and Siemens Gamesa fell 10% on Wednesday, before recovering. Given the sensitivity of growth rates to political decisions, they will continue to be buffeted around at exalted levels.


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