Robur link for Nordex SE: here
ISIN: DE000A0D6554 FT Ticker: NDXX.A:GER
Nordex makes wind turbines, currently for onshore projects only. It recently acquired Acciona wind business, which gives it two things it did not have before: a much easier path to sales in Latin America, and a greatly increased revenue stream from servicing plant.
Here is the point: the share price graph bears no sensible relationship to the growth chart below it. Although – as is to be expected in a rapidly growing company – earnings per share (EPS) is erratic, the trend is clearly upwards; and revenues and operating income show exemplary growth. (The numbers on the growth chart are rebased to 100). What is going on?
Nordex is a company that, given its North German base, is rather surprising. Despite wonderful growth in the last four years, it has had a high turnover of senior executives; just recently, the CEO resigned, handing over to an ex-Acciona executive (with a long and impressive track record in wind power, including time at Gamesa as well as Acciona). The ostensible reason for the departure of the current CEO was his inability to manage corporate communications.
This is an unusual reason for the resignation of the CEO of a successful engineering company in a growth industry. Still stranger is that, following excellent 2016 financial year results, the shares tanked, falling to their current level of a little under EUR 13 per share, a level last seen in 2014 when revenues were half their current levels, from about EUR 20 per share in January and EUR 33 at their peak late in 2015. The reason is a lot of gloomy warnings about negative growth in 2017 and increased pressure on margins and prices.
The question then is: who is right: the gloomy prognostications of the ex-CEO, or the company’s forecasts of actual sales and income going forward?
Above is the record to the end of 2016. For 2017, the company forecasts revenues (at the low end of their forecast) of EUR 3.1 bn, with operating income about EUR 240M; for 2018, a return to the 2016 levels.
The reasons for this cessation of growth are complex, but here are some:
- bureaucratic delays on Indian orders;
- troubles with Trump:
- Mexico is unsure of how its economy will look if NAFTA is scrapped or renegotiated;
- US operators may place fewer orders for wind turbines given the new administration’s commitment to coal and dislike of anything to do with mitigating climate change;
- an inflated 2016 final quarter as:
- German contracts were placed ahead of a regulatory change which affects the feed-in tariffs of plant ordered after 31 December 2016;
- US “Safe Harbor” contracts were place in the final quarter of 2016, again in anticipation of tax credit change.
Let’s take the forecast revenues and operating income for 2018 and 2017: EUR 3,400M and 3,100 M.
Although that shows the numbers reaching a dip and then a plateau after the very strong 2016 results, that is still a 4-year compound annual growth rate (CAGR) of18.3% for revenues, and 35.8% for operating income – numbers which many companies can only dream about. But there remains the question – will the plateau remain? Will Nordex then stay still, while others take its market share?
Global market trends
The global onshore wind market is forecast to show only 3.7% CAGR between 2016 and 2020. But this masks big differences:
- Europe: -7.6%
- North America: +6.9%
- Latin America: + 8.9%
- Rest of World (excluding China): +14.2%
It is true that the Rest of World includes the notoriously difficult market of India; but Nordex is already well advanced in India, despite bureaucratic delays. The Acciona Wind acquisition is already helping the company win orders in Latin America. It is by no means certain that all US generators will heed Trump’s call to reopen coal-fired stations. Trump may not be there in four years’ time, and the costs of then switching back to less polluting generation may well frighten utilities, which have to take a long term view of investments. We see no reason why Nordex should not achieve 10% revenue growth for 2019 and 2020.
Meanwhile, the service business, looking after ageing existing installations as well as new plant, should grow by at least 9% CAGR from 2017 – 2020.
Nordex is (by its own ranking) #5 in the world for turbine generator manufacturers; they carefully exclude Goldwind, in China. We think they are #6 in the world. Siemens has a similar deal with Gamesa to the Nordex deal with Acciona and are now a serious competitor in the #7 position. Siemens also has access to capital and engineering resources on a scale much larger than the resources available to Nordex.
Enercon remains a very strong competitor; it is not listed, so we cannot make direct comparisons, and now that its founder, Aloys Wobben, has retired, Enercon’s future direction is hard to predict. Vestas, with roughly three times Nordex’s revenues, retains the top spot in the world. Goldwind (Xinjiang Goldwind), the largest Chinese manufacturer, is expected to turn in 2016 revenues of approximately CNY 31 bn, say EUR 4.2 bn. So far, Goldwind has shown little appetite for sales outside China though this may well change. But apart from the new Siemens-Gamesa tie-up, there is nothing startlingly different in the competitive line-up to make us feel that Nordex is facing unusual headwinds.
R&D and Capex
This is perhaps not Nordex’s strongest point, with capex for 2017 forecast at EUR 150M. However, recent R&D efforts have resulted in up to 30% improvements in the generating capacity of turbines with constant size, and significant reductions in noise, both of which are very important competitive selling points. For this business, capex at 4.4% – 4.8% of sales seems a little low to us, particularly given the low cost of funding available to German companies.
Comparison with Vestas, and conclusion
Vestas is trading right at the top of its share price range. It might be instructive to compare the two companies, even though Vestas sells three times as much equipment:
Comparing the CAGR rates:
|Revenue||Op. Income||Net income||Ops. cash||Capex||Equity|
and the typical valuation ratios:
|P/E||P/FCF||Price:Book||Graham||52-wk Hi-Lo||Robur Score|
We have two companies in the same market, with rather similar indicators, except that Vestas has grown net income twice as fast as Nordex, and Nordex trades at a much lower price:book ratio than Vestas. Yet Vestas is right at the top of its share price range, and Nordex is right at the bottom.
So far this year, news is good: there have been follow-up orders, in February, to the US “Safe Harbor” orders in the last quarter of 2016, suggesting that not all is gloom on the US front for 2017. The new CEO is a seasoned wind-power executive from the Acciona business and is surely the person to drive Latin American sales, a vital part of the company’s future.
Buying Nordex now is, however, clearly a bet against strong market sentiment to the opposite conclusion. There is no guarantee that, just because the business is doing OK, that the share price will recover in the near or even medium future. Of course, at the current levels, Nordex must look reasonably attractive as a takeover target, and there is plenty of free float to ensure that any takeover approach is unlikely simply to be blocked by vested interests.
Acknowledgments: FT for share price graphs, BNEF Top Global Onshore Wind Turbine Manufacturers report.