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Page 95 of 162 After 2025, the number of offshore wind FIDs will be the most important driver. In other words, the number of additional projects Ørsted will win in Europe, the US and Taiwan over the years. At this point in the time, the level of LCoE, as well as the subsidies for offshore wind will be the most critical parameters. As shown in figure 18 in the PESTEL, subsidies have continued to decrease while capacity increases. Lower LCoE is assumed to be the driver in this equation, which is determined by the technology, which was highlighted in figure 15 of the PESTEL.
Ørsted has and will be dependent on subsidies, so the question for post-2025 is whether technology has driven the LCoE to a level where subsidies are no longer needed. On the other hand, if the LCoE stays at current levels, Ørsted will still be dependent on subsidies. This is critical as new entrants are keen to be a part of the offshore wind industry by bidding low at the auctions to capture market shares. Now, these new entrants come from related industries, such as oil & gas, and bring a larger financial capacity.
Therefore, to forecast Ørsted’s financial performance post-2025, the LCoE needs to be forecasted as well as politicians’ willingness to pay subsidies. There is a high degree of uncertainty around these forecasts. The easiest way to forecast this is by looking at the future size in wind turbines. These are expected to steadily increase over the years (see figure 15). The subsidy trend seen in Germany, the Netherlands and the UK of wanting to lower their prices means zero subsidies can be expected to stay. This makes it increasingly difficult for Ørsted to run a profitable offshore wind business in Europe.
New markets as a solution
One way that Ørsted can overcome the obstacle of low profitability is by shifting to more towards complex markets where they can utilise their sustained competitive advantage and know-how. For the reasons stated, the key focus will be on tenders outside of continental Europe (such as the U.S. East Coast in 2018-19 and Taiwan later this year), where the competition is less fierce and earnings are more predictable (PPAs in the US, CFDs in Britain). Ørsted was a first mover in the UK and now has the first mover advantage in Taiwan and the US. This could justify a premium like the premium received in the UK. As a result, there is potential for double-digit returns outside Europe. After purchasing a 35% stake in Taiwan’s 128-megawatt Formosa 1 offshore wind farm, Ørsted sees about 2 gigawatts of additional capacity being available in the country (Ørsted, 2017c). Generous feed-in tariffs in Taiwan, compared to the recent zero-subsidy tender results in Europe, may enable Ørsted to preserve margins.
Page 96 of 162 The worst-case scenario in terms of Ørsted’s high dependence on
Taiwan and US would be if the two countries decide to mimic Europe’s zero-subsidy trend, which by definition means that Ørsted’s investment case has a high degree of political risk and uncertainty.
Since 2007, Ørsted’s revenue has a CAGR of 3.72%. Looking forward to 2028E, this rate is expected to slow down as competition is expected to increase, but also because the historical high growth rates reflect a profitable and less matured offshore
wind industry. Ørsted’s position today is far more mature, and a lower growth rate is a natural consequence.
In the next 10 years, a revenue CAGR of 1.6% is assumed, which equals a c2% growth in revenue year-on-year. In the terminal year, Ørsted’s revenue will grow at 1%, less than the risk-free rate and hence the economy, which is a consequence of the negative outlook for Ørsted post-2025. Offshore wind is maturing, and this means, as in any other industry, a declining internal rate of returns, exemplified by Innogy expecting a 5.75%
IRR (Warburg Research, 2017).
While farm-down gains add complexity to the clean earnings and sustainable growth rate of the company, Ørsted has guided CAGR of 13-14% in underlying EBITDA from wind power towards 2023, which is a fair estimate when looking at the historical EBITDA with CAGR of 42.3% from 2007 and its build-out plan (Ørsted, 2017a). Since 2014, the CAGR has been 12.27%, reflecting strong recent performance in Wind Power.
The farm-down of Hornsea 1 will have a positive impact on EBITDA in the following years. With the expansion in the US and Taiwan, there are higher expected cost levels with a different climate and less matured renewable politics; therefore, the EBITDA margin will be lower in the years after 2025. However, by 2024, Ørsted expects turbines of 13-15MW in size to be available, enabling it to increase power production and reduce installation time, which will have a positive effect on the EBITDA margin (Ørsted, 2017c; Ørsted 2017f). It is assumed that the EBITDA margin of 38% in 2017 will be relatively stable until 2024E, when it will gradually decrease to 23% in the terminal year. The costs associated with the revenue will be implied based on the forecasted EBITDA margin.
Source: Authors’ own creation from (Ørsted, 2017e)
Figure 59 – Ørsted’s markets Established
Markets
New Markets
Emerging Markets
Market maturity
Page 97 of 162 Figure 60 – Ørsted’s Revenue, EBITDA margin forecast
Source: Authors’ own creation from Ørsted’s annual reports from 2007-2017
7.2. CAPEX, Depreciation & Net working capital
Ørsted’s ambition of reaching 11-12GW installed capacity by 2025 will naturally increase their CAPEX requirements. They expect more 85% of their gross investments towards 2023 will be within offshore wind (Ørsted, 2017a). Therefore, the key drivers for CAPEX the coming years will be larger turbines, larger sites, faster installation cycles and increased supply chain competition. Ørsted has lowered the CAPEX guidance given at the IPO of DKK 22-24m. per MW to around DKK 20m. per MW for the six projects in the IPO build-out plan, reflecting the cost reductions (Ørsted 2016a; Ørsted, 2017a). Ørsted’s historical levels of CAPEX since 2012 are a reliable proxy for future CAPEX levels, as they want to continue expanding. CAPEX will be driven by revenue growth as top-line growth must be supported growth in Ørsted’s asset base. CAPEX is sat equal to depreciation in the terminal year to ensure that Ørsted’s CAPEX base remains steady in perpetuity.
Otherwise, the valuation would be influenced by an expanding or diminishing asset base, which would not be representative of a steady-state business. Depreciation will be a function of CAPEX instead of revenue, as it should increase only following an expenditure (Damodaran, 2012).
The net working capital to revenue ratio has followed an increasing trend in the last years, as Ørsted has a greater activity in turnover and, simultaneously, there was an effort to better control the operating liabilities illustrated in the days-on-hand analysis. The reported revenue dropped in 2017, which made the ratio between NWC and sales increase to 12%. Going forward, the ratio will stay at 12% growth, with the increase in revenue reflecting that Ørsted will increase its spending on inventory to support revenue growth.
47%
-18%
4%
18%
-8%
6%
-14%
-3%
2% 2% 2% 2% 2% 2% 2% 1% 1% 1% 1%
-20 -10 0 10 20 30 40 50 25.000
20.000
5.000 0 10.000 15.000
2008 2010 2012 2014 2016 2018E 2020E 2022E 2024E 2026E 2028E
10% 9%
Revenue Growth Wind Power EBITDA margin Ørsted EBITDA margin
Page 98 of 162 Figure 61 – Ørsted’s Depreciation, CAPEX and NWC forecast
Source: Authors’ own creation from Ørsted’s annual reports from 2007-2017
7.3. Invested capital
The invested capital is expected to increase steadily throughout the years until it reaches a steady state in 2028.
Ørsted has already divested most of their non-core businesses, which held invested capital constant in the historical period. Should Ørsted ever face bottlenecks, offshore wind would still be their strategic core and, presumably, they would divest their other two divisions, holding the turnover rate of invested capital constant.
This way, Ørsted will harvest the full potential of the offshore wind industry. Invested capital is calculated by using the primo invested capital and adding reinvestments, which is a sum of CAPEX, change in net working capital, capitalised operating leases minus depreciation. This way, invested capital will increase since Ørsted must reinvest to grow, which can be expensive depending on the spread between ROIC and WACC. Note that operating leases are included in reinvestments as consistency between free cash flow and the cost of capital is paramount (Koller et al., 2010). As stated in the theoretical review, the DCF was inspired by the EVA-model.
By calculating the invested capital with use of the increase in reinvestments, ROIC can be defined. This enables the strategic analysis to be story behind the valuation since, according to Koller et al. (2010), ROIC in combination with WACC, can determine the competitiveness of an industry. Therefore, by using parts of the EVA model, the valuation will be coherent with the strategic and financial analysis.
Figure 62 – Ørsted’s invested capital forecast
Source: Authors’ own creation from Ørsted’s annual reports from 2007-2017 43
29 37
5 4
-8
19 20 22 24 26 25 22 19
15 13
-20 -10 0 10 20 30 40 50
-200 -100 0 100 200 300 400
2008 2010 2012 2014 2016 2022E
6
2018E 2020E 2024E 2026E 2028E
4 10 10
16
Change in NWC/Revenue
Depreciation/CAPEX CAPEX/Revenue
0,0 0
50.000 1,0
100.000 150.000 0,5
2024E 2018E
2008 2010 2012 2014 2016 2020E 2022E 2026E 2028E
+4,2%
Invested Capital excl. Goodwill
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