6. FINANCIAL ANALYSIS AND VALUATION
6.2. F ORECAST ASSUMPTIONS
6.2.4. Tax rate
As Vestas operates in a complex multinational tax environment, it is relatively difficult to estimate a tax rate based on the geographic distribution of revenue. Moreover, companies in general have flexibility in managing their tax expense through the application of transfer pricing. Consequently, revenue earned in a country might be transferred to another country due to a lower corporate tax rate. Thus, in this forecast, the authors applied the effective tax rate, which equals to tax expense divided by net profit before tax (EBT), to estimate the tax expense level of the company. The effective tax rate has decreased gradually from 25% to 23%
in the past few years, except for 2020, where the effective tax rate decreased to 17%. This is said to result mainly from the non-taxable gain from the acquisition of MHI Vestas Offshore Wind joint venture (Vestas, 2020). As it is impossible to foresee the potential non-taxable gain from other joint ventures in the future and the magnitude of the impact on tax expense, the low effective tax rate in 2020 would be regarded as non-recurring. Thus, the effective tax rate for the forecast and terminal period were estimated to be at 23.5% (Table 6).
83
Value driver Historical period
2016 2017 2018 2019 2020
Effective tax
rate -25.0% -25.0% -24.9% -23.0% -17.5%
Value driver Forecast period
2021 2022 2023 2024 2025
Effective tax
rate -23.5% -23.5% -23.5% -23.5% -23.5%
Table 6: Effective tax rate (the authors’ own creation)
6.2.5. Net borrowing rate
The net financial expenses have shown an upward trend during the historical period, which could be explained by the increasing use of short-term debts in 2019 and 2020. With the company’s green bond maturing in 2022 and Moody’s recent issuance of a Baa1 long-term credit rating (Moody's, 2021), it was speculated that Vestas would issue more long-term debts in the near future. On the other hand, with investors’ high appetize for ESG funds and the observed phenomenon of oversubscription of green bonds over the last few years (Laidlaw &
Taqi, 2020), it was believed that Vestas would secure a low interest rate for its green bonds when refinancing. Thus, the authors estimated that the increasing use of long-term debt and a low interest rate from green bonds issuance would decrease the net borrowing rate of average financial asset gradually to –1.5% (Table 7).
Value driver Historical period
2016 2017 2018 2019 2020
Net borrowing rate (NFA at year start)
-1.4% 0.1% -1.5% -3.0% -3.6%
84
Value driver Forecast period
2021 2022 2023 2024 2025
Net borrowing rate
(NFA at year star) -3.6% -3.0% -2.0% -2.0% -1.5%
Table 7:Net borrowing rate (the authors’ own creation)
6.2.6. Intangible and tangible asset ratio
A firm can gain competitive advantage by utilizing and investing in its intangible assets and tangible assets. By looking at the ratio level in the historical period, intangible and tangible asset ratio experienced a significant jump due to the acquisition of MHI Vestas, which was mainly the result of Vestas recognizing the 896 million euro of goodwill from the acquisition.
The average level of the ratio from 2016 to 2019 was at 24.3%. However, the ratio was projected to be above the average level in the historical period, as the launch of the new V236-15.0 MW™ offshore wind turbine would require investment in new manufacturing capacity in the next few years, before the actual revenue boost. Further, with the newly established Vestas Venture, it was believed that the company would make more investment in clean technology through joint ventures or associates for a higher future growth in wind energy deployment. Consequently, the intangible and tangible asset ratio was forecasted to increase in the near future before decreasing to 26% due to an increased level of revenue (Table 8).
Value driver Historical period
2016 2017 2018 2019 2020
Intangible and tangible assets as %
of revenue
23.0% 23.1% 26.1% 25.1% 33.5%
85
Value driver Forecast period
2021 2022 2023 2024 2025
Intangible and tangible assets as %
of revenue
28.5% 28.5% 29.0% 27.0% 26.0%
Table 8: Intangible and tangible asset ratio (the authors’ own creation)
6.2.7. Net working capital ratio
Vestas’ net working capital has remained negative in the last five years, whereas the absolute value of the new working capital has not followed the growth of revenue. A negative level of net working capital implies that a company is operating its business by leveraging its vendors’
assets, which lowers the financing need of the company. It was projected that Vestas’ net working capital ratio would remain negative in the future, as a low supply chain disruption risk and good collaboration with suppliers would continue to secure Vestas a relatively favorable payment term. However, as profit margin of all players in the value chain would be further pressured by the shift to auction tendering, supplier would inevitably need to reduce liquidity risk by tightening its relatively lax payment terms. Thus, it was forecasted that net working capital would decrease gradually to a level of –7.5% (Table 9).
Value driver Historical period
2016 2017 2018 2019 2020
Net working capital as % of revenue
-24.0% -26.7% -27.3% -19.4% -17.5%
86
Value driver Forecast period
2021 2022 2023 2024 2025
Net working capital as % of
revenue
-15.0% -13.0% -11.0% -9.0% -7.5%
Table 9: Net working capital ratio (the authors’ own creation)
6.2.8. NIBL/IC ratio
Net interest-bearing liabilities as a percentage of invested capital is showing how much the invested capital is financed by capital with net debts. During the historical period, the interest-bearing liabilities has remained negative, which means there was net financial assets. For the ease of estimation, the authors have calculated the financial assets and liabilities as % of revenue for the historical period (Table 10). There was an apparent trend of increasing use of financial liabilities versus decreasing financial assets reserve. Despite the trend, financial assets were substantially higher than financial liabilities.
As aforementioned, due to increasing investment need in the research and development of clean energy solutions and the buildup of manufacturing capacity for the recently launched new offshore turbine model, Vestas would need to secure adequate funding for those investments in the near future. While the company has a high cash balance, it is unlikely that the company would fund all its investment with cash, as it appears that the company implicitly prefers to maintain a relatively high liquidity. Thus, it was anticipated that the investments would be funded partially with cash and partially with long-term debts, such as green bonds, at an attractive interest rate. Nevertheless, concerning Vestas’ “obsession” with liquidity, the financial assets were expected to remain at a higher level than interest-bearing liabilities. Thus, the total interest-bearing liabilities was forecasted to reach 16% of revenue, while financial
87
assets were estimated to decrease to 25% of revenue. This leads to an expected level of net financial assets at 9% of revenue, which would equal to roughly half of the long-term mean of invested capital (Table 11). Thus, net financial assets were estimated to attain a constant capital structure of 50% of invested capital in the forecast period (Table 12).
Items Historical period Long-term
estimate
2016 2017 2018 2019 2020
Financial debts 496 497 498 820 1354
Financial /
liabilities 139 29 123 185 393
Revenue 10237 9953 10134 12147 14819
FD+FL as % of
revenue 6% 5% 6% 8% 12% 16.0%
Financial assets 3909.503 3988.5 3862.011 3647.139 4108.066 / FA as % of
revenue 38% 40% 38% 30% 28% 25.0%
NFA as of revenue 32% 35% 32% 22% 16% 9.0%
Table 10: Breakdown of NFA ratio (the authors’ own creation)
Value drivers
Forecast period
2021 2022 2023 2024 2025
Intangible and tangible assets as % of revenue
28.5% 28.5% 29.0% 27.0% 26.0%
Net working capital as % of revenue
-15.0% -13.0% -11.0% -9.0% -7.5%
Invested capital as % of revenue
13.5% 15.5% 18.0% 18.0% 18.5%
Table 11: Invested capital as % of revenue (the authors’ own creation)
88
Value driver Historical period
2016 2017 2018 2019 2020
NFA as % of
invested capital -3341.3% -951.2% -2656.6% 383.5% 99.6%
Value driver Forecast period
2021 2022 2023 2024 2025
NFA as % of
invested capital 50.0% 50.0% 50.0% 50.0% 50.0%
Table 12: NFA as % of invested capital (the authors’ own creation)
6.2.9. Summary of forecast assumptions
Lastly, Table 13 summarizes the material effects of the strategic value drivers on financial value drivers based on the proposed sustainable fundamental analysis model.
Financial value driver
Strategic value drivers
Material impacts
Time spectrum
Revenue growth
Ambitious political
climate commitment + Higher share of renewable energy in future power mix &
more tendering
Long-term Economic recovery from
the pandemic - Less tendering Short-term
Regarded as the new safe haven, high appetize for
ESG funds
+
Funding from institutional investors to wind farm
projects
Short to long-term The millennial effect + Higher social acceptance Long-term
89
Financial value driver
Strategic value drivers
Material impacts
Time spectrum Commercialization of
energy-storage solutions + Increase deployment of wind energy
Long-term, around
2050 Commercialization of
floating offshore wind platform
+ Increase deployment of offshore wind energy
Long-term, from 2025
Global diversification
strategy +
More political support due to more local job creation and stable growth as less reliant
on the growth of major markets
Long-term
A lower supply chain
disruption risk +
Perceived as preferred turbine maker from the wind farm
developers
Short to long-term Vestas venture on
Power-to-X technologies + Accelerate the deployment of
wind energy Long-term
Increase social well-being by providing access to electricity in remote or less
developed areas
+
More political support and NGO projects in less
developed areas
Long-term
Low environmental impact +
More preferred renewable energy source comparing to hydro power plant, thus more political support, high growth
Long-term
EBITDA Margin
Shift to a more centralized tendering approach with
auction mechanism
- Less subsidy on electricity price
Short to long-term Demand for social equity
and public funding in education and training
+ Lower cost on employee
training Long-term
Porter's five force analysis - no new entrant, intense
competition, low substitute, market consolidation in upstream
supply chain, slightly decreased buyer barging
power counteracted by
N/A Minimal to zero aggregated
impact N/A
90
Financial value driver
Strategic value drivers
Material impacts
Time spectrum turbine maker's increasing
need to improve economies of scale, especially in service
business Global diversification
strategy - Negative, higher
administration cost
Short to long-term Ethical business practice
and Vestas Venture on sustainable materials
+ Lower operational and
production cost Long-term Low job security and poor
management -
Low value creation from employees and higher labor
cost
Short to long-term High eco-efficiency + Lower production cost Long-term Supply chain circular
economy, e.g.
DecomBlades
+ Gain competitive advantages
Short to long-term, from 2025 Maturity in Power-to-X
technologies + Higher demand for electricity,
higher electricity price Long-term
Depreciat ion and amortizat
ion ratio
Intense competition within the industry and accelerated technological
advancement due to excessive public funding
in research and development of clean energy technologies, e.g.
in Denmark, USA and China
- Technology would obsolete at
a higher pace Long-term
Effective tax rate
Global diversification
strategy N/A
Minimal impact, as company can manage tax expense through transfer pricing
N/A