Company Reports

While wholesale power prices stabilized, government bonds’ yields fell on weak economic indicators and lower inflation in the US and Europe. Second-quarter results were boosted by very favorable hydro conditions that led to some guidance upgrades. This goldilocks scenario bolstered a rally in European utilities, enabling them to massively outperform the market and recover much of their earlier underperformance.

We confirm our DKK 540 fair value estimate for no-moat Orsted after the group's success in round 6 of the UK contract-for-difference auctions for a good chunk of its giant 2.9-gigawatt Hornsea 3 project sanctioned in December 2023. This success should facilitate the farm-down of the project, which is crucial for funding the group's future investments and avoiding a rights issue.

We confirm our DKK 540 fair value estimate after no-moat Orsted released second-quarter EBITDA well above company-compiled consensus while the bottom line came in below expectations because of impairments from the US Revolution Wind project. The firm confirmed its 2024 EBITDA guidance. Shares are materially undervalued.

With 8.9 gigawatts of gross offshore wind capacity and 5 GW of net capacity at the end of 2023, Orsted is the offshore wind leader: an industry that it pioneered in the 1990's.

No-moat Orsted is down by 6% at the time of writing, which we believe is because of reports that Donald Trump’s chances to be reelected president of the US have improved after the assassination attempt on July 13. We believe the market is overestimating the impact of Trump's anti-offshore wind stance on Orsted. Therefore, we confirm our DKK 540 fair value estimate, offering a material valuation upside.

Utilities have reversed part of their first quarter’s fall, thanks to a strong rebound in power prices. Moreover, the deep undervaluation of renewables developers has driven takeovers by big investment firms at very high multiples. Neoen’s main shareholders accepted an offer at 18 times the EBITDA. The sector is still significantly lagging the market in 2024 because of high interest rates. Should they fall, it would boost the sector.

No-moat Neoen's main shareholders, together holding 53.3% of the shares, have agreed to sell them at EUR 39.85 per share to Brookfield Asset Management. Neoen's board has unanimously accepted the offer. Upon completion of the block acquisition, Brookfield will file an all-cash tender offer. The transaction is subject to regulatory approvals, which are expected to be obtained in the fourth quarter; clearing the tender offer that would occur in first-quarter 2025. We see the offer as attractive and raise our fair value estimate to EUR 39.85 from EUR 31.50, in line with it.

We confirm our DKK 540 fair value estimate after no-moat Orsted released first-quarter EBITDA in line with company-compiled consensus and confirmed its 2024 EBITDA guidance, but missed the bottom line because of a deferred tax liability. The current enterprise value/EBITDA of 9.2, despite the high upcoming earnings growth, reflects the material undervaluation of shares stemming from the overreaction to the 2023 US issues and overdone concerns about the execution risk of projects like Hornsea 3.

On April 1, The Australian Financial Review reported that no-moat Neoen hired Bank of America to sell 30% of its Australian business with a price tag of $1.6 billion. This spurred an 8.5% rally in the shares between April 2 and April 5. The $1.6 billion that was reported implies a whopping valuation of EUR 2.4 million per megawatt of installed capacity versus EUR 1.1 million/MW implied in our fair value estimate. All in all, the reported price implies a gross valuation premium (before any taxes on capital gains) of EUR 2.8 per share or 9% of our fair value estimate. We confirm our fair value estimate of EUR 31.50 for Neoen. Due to its young asset base and suitability for a takeover, stemming from its shareholder structure, it's the least undervalued pure renewables developer we cover.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We confirm our DKK 540 fair value estimate for no-moat Orsted after its partner, Eversource Energy, announced on Feb. 13 that it agreed to sell its stake in two U.S. offshore wind projects it co-owns with Orsted to Global Infrastructure Partners, or GIP, for $1.1 billion. After multiple investments late in 2023 in U.K. offshore wind by Masdar, the clean energy subsidiary of the Abu Dhabi sovereign fund, the GIP deal confirms that financial players are still attracted by offshore wind assets despite the headwinds the industry faced since 2022. This bodes well for Orsted's future farm-downs that buttress its investment plan. All in all, shares look attractive.

With 8.9 gigawatts of gross offshore wind capacity and 5 GW of net capacity at the end of 2023, Orsted is the offshore wind leader: an industry that it pioneered in the 1990's.

No-moat Orsted has updated its business plan presented in June 2023 due to the massive impairments and cancellations of U.S. projects announced in the meantime. As we expected, the group is ruling out a rights issue. Instead, it will reduce its investments and costs and suspend the dividend in 2024 and 2025. We do not contend the latter as dividends have never been core in the equity story. The new investments and 2024, 2026, and 2030 EBITDA targets are in line with our estimates, so we confirm our DKK 540 fair value estimate, offering 40% upside to the current share price. The farm-down of the Hornsea 3 wind farm will be a positive catalyst. Furthermore, Orsted is less exposed to declining European wholesale power prices than most European utilities and will benefit from a decline in interest rates.

Orsted pioneered the offshore wind business and boasts strong expertise in this industry, which we expect to surge in the coming decades.

No-moat Orsted sanctioned the giant 2.9 gigawatts U.K. offshore wind farm Hornsea 3. This does not come as a surprise to us since the last U.K. autumn statement made capital allowances (tax deductibility of investments) permanent whereas they were supposed to expire in 2026 previously. Still, this decision is good news as the other option would have been to scrap the project, which would have driven a material impairment on top of the U.S. ones. We confirm our fair value estimate of DKK 540, still offering a nice upside after the 48% rebound since early November.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

With the U.N. Climate Change Conference, otherwise known as COP28, that started on Nov. 30, we are reasserting our view that the market underappreciates utilities' critical role in limiting global warming.

Orsted pioneered the offshore wind business and boasts strong know-how and a solid record in this industry, which we expect to surge in the coming decades.

We cut our fair value estimate for no-moat Orsted by 10% to DKK 540 after it booked DKK 28 billion of impairments on its U.S. projects, the bulk of which was for the cancellation of Ocean Wind 1 and 2 in New Jersey. Orsted highlights that its capital structure is significantly challenged. This could imply a future rights issue that explains the bulk of the Nov. 1 share price fall in our view. We view shares as materially undervalued and the likelihood of a rights issue below 50%, but pending more clarity on measures to shore up its balance sheet, shares will not rebound.

RWE and National Grid's joint-venture, Community Ocean Wind (73% owned by the former), was awarded a 1.3 gigawatt offshore wind project at the latest New York auctions. We reckon that the project's returns are above our estimates for offshore wind farms to be commissioned beyond 2030. However, Orsted's woes have shown that execution risk is high in the U.S. All in all, we confirm our fair value estimates of EUR 55 and GBX 1,040 for RWE and National Grid, respectively. The former is materially undervalued.