Vestas future questioned after profit forecast cut twice since October

Vestas Wind Systems A/S (VWS), the biggest wind-turbine maker, fell to its lowest since 2003 in Copenhagen after cutting its sales forecast, prompting analysts to say management's future and chances to avoid a bid may be in doubt.

Reducing its revenue and profit outlook for the second time in two months yesterday was "another blow to investor confidence" in the Aarhus, Denmark-based manufacturer, which already was at an "all-time low," said Sean McLoughlin, vice president of clean technology research at HSBC Bank Plc.

Vestas, whose shares have lost 92 percent from a 2008 high, blamed higher costs and delayed wind farms, helping drive down shares in rivals Gamesa Corp. Tecnologica SA of Spain and India's Suzlon Energy Ltd. (SUEL) Its plan to unveil a restructuring on Jan. 12 without giving a hint of its nature left analysts questioning management's credibility.

Chief Executive Officer Ditlev Engel may face investor pressure to resign as stumbling in the second half of 2011 was related to "bad execution" rather than turbine demand, said Julien Desmaretz, an analyst at investment bank Bryan, Garnier & Co., who lowered his rating to "neutral" from "buy."

Michael Holm, a spokesman for Vestas, brushed aside takeover speculation, saying, "We are for sale every day on the stock exchange." He said questions about the impact on management will be answered next week by Engel.

‘No More Credibility'

"Investors are willing to see a new management on board because the current one has no more credibility," Desmaretz said. "Vestas struggled to deliver according to its plan and that is the main problem."

The stock closed down 19 percent at 56.25 kroner. Vestas's 600 million euros ($777 million) of 4.625 percent bonds that mature in 2015 fell 3.2 percent to 84.50, the lowest price since the bonds were sold in March 2010.

"The cheaper it gets the more attractive takeover target it becomes," McLoughlin said. The possibility of a bid on Vestas is "modest" at the current price, and increases "as the shares drift towards 50 kroner," Arnaud Brossard, an analyst at Exane BNP Paribas, wrote in a note.

Vestas and U.S. rival General Electric Co. (GE) are suffering from slower demand growth and narrowing margins caused by subsidy cuts in Europe and rising competition from Asian turbine makers such as China's Sinovel Wind Group Co., the world's second biggest, according to a BTM Consult ranking.

Restructuring Plan

The Danish company said yesterday it would announce a "significant change of the whole organization" on Jan. 12, giving no details except that it wouldn't involve tapping equity markets or seeking a strategic investor.

"Only a large group would be able to handle the required R&D investments and the likely continued price war in the wind industry in the coming years," Brossard said. He cited General Electric, Siemens AG (SIE) and United Technologies Corp. as large industrial groups already involved in wind.

The company has "a good product portfolio and customer base, which is always attractive for a bidder," Desmaretz said. "I still see a lot of value in Vestas."

Vestas said it would defer 400 million euros in 2011 revenue to this year because of delays in connecting wind farms to power grids and bad weather stalling construction of several projects. Its forecast for earnings before interest and tax for last year was reduced to zero from about 255 million euros. Ebit margin forecasts were cut Oct. 30.

The restructuring "could actually be a damp squib rather than necessarily a new beginning," McLoughlin said today by phone. It will likely increase volatility in the stock while investors speculate over its nature, he said, downgrading his rating to "underweight" from "neutral."

Cost Cuts

The company will probably announce a cost-saving program to help boost 2012 margins, Desmaretz said in an interview. Vestas may choose to locate more of its production facilities outside Europe, in Asian or South American markets, he said.

Rupesh Madlani, an analyst in London at Barclays Capital, was more positive, saying today in an e-mail that it may be a "turning point" for the company.

"The restructuring will involve a leaner, more customer focused business model with fewer operating regions and a more globalized approach to managing customer relationships, the supply chain and capacity," Madlani said.

Delays at the company's Travemuende generator factory in Germany during the third quarter led to late delivery and commissioning of projects, meaning Vestas had to push revenue into this year.

Wind Rivals

Gamesa fell 6.8 percent in Madrid trading today. Haakon Levy, an Oslo-based analyst at DNB Markets, has a "sell" recommendation the Spanish turbine maker because of its loss of market share and weakening earnings.

"Vestas's very high order intake in 2011 that was announced yesterday confirms our view that Vestas is actually gaining market share at the expense of smaller and mid-sized European players such as Nordex and Gamesa," Levy said today by e-mail. Suzlon fell 2.4 percent in Mumbai.

Vestas announced cost overruns of 125 million euros linked to development of the company's V112-3.0 megawatt turbine model and GridStreamer technology for its 2-megawatt design.

Both Gamesa and Nordex are boosting output of new products, according to Desmaretz. "Market may fear similar cost overruns for them too," he said.

"The only read-across from yesterday to other stocks is in the negative commentary on the renewal of the production tax credit in the U.S.," Martin Prozesky, an analyst at Sanford C Bernstein Ltd., said in an e-mail. The so-called production tax credit that gives an incentive to turbine operators is due to expire at the end of this year. Engel said in November U.S. turbine sales may "fall off a cliff" unless it's extended.

Sales Outlook

Vestas now expects sales of about 6 billion euros for 2011, down from the 6.4 billion euros it forecast on Oct. 30, which itself was a reduction from 7 billion euros.

About 130 million euros of the shortfall in Ebit is due to last year's delays and revenue deferral, while the development costs of the V112-3.0 model and GridStreamer would absorb 100 million euros, according to Vestas.

As a result, the company's Ebit margin will be "approximately zero percent," down from about 4 percent, with cash flow remaining positive in 2011.

Delays relating to weather, connecting wind plants to the grid and "other disruptions" meant some projects would not be counted as revenue until the first quarter of this year.

Orders Increase

Vestas said it had orders last year for turbines totaling 7.4 gigawatts of capacity, valued at 7.3 billion euros, in step with its forecast of 7 gigawatts to 8 gigawatts. Some customers postponed signing contracts for a "number of major orders from 2011 to 2012," according to the statement.

The company may become a takeover target, according to Desmaretz. Potential bidders could include a large electrical company. Alternatively, a Chinese or Korean company seeking European or U.S. markets may be tempted by Vestas's track record in the biggest wind markets.

The delayed turbine orders mostly were from customers in Europe, the company said during the call yesterday, and most fourth-quarter sales originated in Europe.

Vestas is scheduled to announce full-year orders data in its annual report on Feb. 8.