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Credit: Courtesy of Vestas Wind Systems A/S


Tarjei Lode

Tarjei Lode has been an analyst on our Nordic Equities team since 2019.

Tarjei started his professional career in 2014 as an equity research analyst in the ITP Program in Norges Bank Investment Management (NBIM) covering Banks, Insurance and Diversified Financials. As part of the ITP Program he then moved on to Morgan Stanley where he continued working as an equity analyst covering Capital Goods

Mr. Lode holds a M.Sc. in Finance from the University of Warwick – Warwick Business School. He has also passed CFA Level 3.


The wind has been used as a resource by humans for several thousands of years. One example is sailing, dating back to a disc found in Kuwait from 5000-5500 BC. For me personally, growing up in a flat landscape close to the sea, I developed a rather annoying relationship with the wind during my youth. However, I became fascinated by the wind as a source of energy when a wind farm was built not far from my hometown. One company in our portfolio, both closely related to the wind and contributing to the renewable shift, is Vestas Wind Systems. We will take a closer look at the company in this article.

A brief history of the wind industry

The industry was born in the 1970s by producers of agriculture equipment. The first years of the industry were characterized by trial and error in order to develop a viable windmill, while the growth phase first took off in the 1980-1990s. When countries started prioritizing developing renewable resources, they typically set a goal for the number of gigawatts (GW) developed by a specific year and supported this development by subsidies due to high Levelized-cost-of-energy (LCOE) in the industry. LCOE is the minimum constant price at which electricity must be sold for the project to break-even over its lifetime. LCOE has decreased over the years, in part due to contributions from the manufacturers of equipment (OEMs) such as Vestas, and new wind projects onshore in developed markets are now typically auctioned without subsidies. This is a tendency, as of recently, also seen in the most highly developed offshore wind markets. Seen from an LCOE standpoint, onshore wind and solar photovoltaic (PV) are among the most cost-efficient energy sources, as can be seen by Exhibit 1 and Exhibit 2. However, as one support mechanism has been phased out, countries have on several occasions extended the existing mechanism or phased-in a new mechanism in order to support new development goals.

EU's Green Deal

EU has introduced the Green Deal aiming to reach net-zero greenhouse gas emissions by 2050, and a 750 EURbn recovery plan where 30% of all spending will be earmarked for green investments. The European Commission says Europe needs up to 450 GW of offshore wind by 2050, and Wind Europe has estimated Europe needs to install 20 GW of wind capacity per year to stay on track for the European Green Deal, compared to 2018 cumulative installed offshore wind capacity of 22 GW. Exhibit 3 and Exhibit 4 shows cumulative installed wind capacity for onshore and offshore wind.

Levelized-cost-of-energy in Germany

Levelized-cost-of-energy in Germany
Exhibit 1 (Source: BNEF)

Levelized-cost-of-energy in the USA

Levelized-cost-of-energy in the USA
Exhibit 2 (Source: BNEF)

Cumulative installed capacity offshore wind

Cumulative installed capacity offshore wind
Exhibit 3 (Source: BNEF)

Cumulative installed capacity onshore wind

Cumulative installed capacity onshore wind
Exhibit 4 (Source: BNEF)

Vestas - leading the pack

Vestas is a Danish manufacturer and developer of wind turbines with a history dating back to the late 1800s. The company transitioned through trial and error from a blacksmith to become an agriculture equipment manufacturer, and in the 1970s, Vestas started its journey into wind turbines. The company is divided into three divisions: Power solutions, service, and offshore.

Power solutions
Power solutions is the leading producer (18% global market share and 118 GW installed capacity) globally of onshore wind turbines and has a product offering ranging from smaller turbines (2 megawatts) to larger turbines (5.6 MW). The company has increased its focus on complete solutions, from delivering the turbines to the construction of the wind farm, with higher return potential than mainly delivering the turbines in the past. This is in line with the industry trend in recent years due to a change in the regulatory environment where forming consortiums of OEMs and wind developers bidding on auctions is starting to become the new normal. Vestas presented an all-time high order backlog for its onshore turbine business in 2019 due to the expected phase-out of the subsidies in the US. Still, with the extension in the US and intense focus on renewable resources in the rest of the world, we believe this is only the beginning of the green shift. Vestas spends over 2% of sales on R&D every year (outspending everyone else) and launched its V150-5.6MW turbine in 2019. Thus, they set the stage for a new normal for turbine size onshore, a shift previously seen by the transition away from 2MW and towards 4MW turbines as the most popular product in the company’s order book. The strong focus in the Vestas organization on developing solutions for the future puts the company in the perfect spot to increase its market share and contribute to the green shift.

Service division
The service division provides service (with 104 GW under service), upgrades, spare parts, and solutions to optimize the production of the turbine. It is a high margin division (typically mid-twenties) and growing in relevance as the life expectancy of wind turbines increases. A wind turbine has a life expectancy of 20 years, but with upgrades, it is possible to extend life with 25-50%. Vestas offers an extensive range of different service packages to customers ranging from pay-as-you-go all the way to taking part in the risk-sharing of the wind farm. The company also provides a variety of different monitoring and surveillance products, which gives the wind farm owner access to necessary performance data. After refocusing the company to become the leading service provider for wind turbines in the world, Vestas is in the perfect spot to reap the benefits of both more GW in operation in the world, optimizing the production of the assets in operation and extending their life expectancy. Through acquisitions of third-party service providers Upwind (2015) and Avalion (2016), Vestas also offers service for non-Vestas turbines.

Offshore division
The offshore division is a 50-50 joint venture (JV) with Mitsubishi Heavy Industries (MHI) created in 2014 and is one of the top players (with 5 GW installed capacity) in offshore wind turbines. In late 2018 MHI Vestas launched its new 10 MW platform for offshore wind with compatibility of up to 12 MW. The number of turbines required for a specific project decreases as the MW per turbine increases, thereby decreasing the LCOE due to the relatively expensive foundations needed for offshore projects.

Business overview
Exhibit 5 (Source: Vestas)

The investment case

We find Vestas to be an appealing investment for the long term due to several reasons:

  1. Even though supporting investment in renewable infrastructure is not a new concept for countries around the world, a common notion towards a net-zero greenhouse gas emissions target in the world has taken a stronger foothold in recent years by agreements such as the Paris Agreement and EU Green Deal. Phasing out all the fossil and nuclear power generating assets and replacing them with renewable assets, such as onshore and offshore wind, puts Vestas in a very attractive position as the leading wind turbine manufacturer and service provider in the world. Electrification of society by renewable assets and the use of hydrogen-storage to store energy produced by these assets will also contribute to increased demand for turbines above current estimates.
  2. As both the leading wind turbine manufacturer (18% global market share in onshore turbines) and service provider (servicing more than 47 000 turbines) in the world, Vestas has the highest margins (8.3% before special items in 2019), spends more on research (above 2 % of sales) than any other competitor and can offer turbines at lower prices (0.8 EURm per MW). In effect, this causes Vestas to consistently increase its market share around the world.
  3. The higher margins (mid-twenties) service business is growing faster than the equipment business, causing both increased profitability and stability in the company. The duration of service contracts is increasing (average duration currently at 19 years for new contracts signed), and the highest profitability service agreement packages are the most popular, as can be seen from Exhibit 6. The increasing stability of the company is also demanding a higher multiple for the company overall, similar to other capital goods peers with a high proportion of service in their business (Kone, Assa Abloy, Atlas Copco).
  4. Vestas has access to more performance data than any competitor due to its leading position in service, with over 47 000 turbines under service. This gives the company an edge in developing its service offering for the future. With the acquisition of Utopus, a platform for future digital solutions, Vestas is gaining the characteristics of a big data company in the renewable space. The combination of tech and renewable sounds like quite a good catch to us.
  5. The company has a strong focus on R&D and is spending over 2% of sales on research and development every year. The continuous research into both larger turbines and modularization of components contributes to lower LCOE in the industry, something wind farm developers rely on to maintain a given return (internal rate of return) on a given project when subsidies are discontinued. In addition, standardizing components and building wind turbines, much like LEGO bricks, provides simplicity from factory to factory and the ability to increase utilization.
  6. A disciplined capital allocation where organic growth and bolt-on acquisitions are prioritized over dividends and share buybacks. Vestas has since 2014 both paid out dividends and bought back shares and has the potential to provide investors with a decent dividend yield when the growth phase in the industry subsides.

All in all, Vestas is a company with high and stable growth, with higher margins than competitors which will re-rate to a higher multiple as stability grows.

Signed service agreements by type

Signed service agreements by type
Exhibit 6 (Source: Vestas)

Share price development and key events

Share price development and key events
Exhibit 7 (Source: Bloomberg)

*End of 2019 lots of orders in the USA due to expiry of subsidies
*Dec 2019 extension of subsidies in the USA
*March 2020 EU Climate Law presented
*July 2020 EU Recovery Plan agreed on

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