Valuation of Vestas Wind Systems A/S Master Thesis – Cand. Merc. EBA/Msc. in Applied Economics & Finance Copenhagen Business School January 2012 Jonas Schlesinger Counsellor: Carsten Kyhnauv STUs: 178.669 = 78,5 standard pages Executive Summary The purpose of this thesis is a valuation of Vestas Wind Systems A/S. It was conducted based on theory obtained at “Cand. Merc. Applied Economics and Finance” at the Copenhagen Business School. In order to evaluate if Vestas is priced correctly a strategic and financial analysis were conducted. Subsequently forecasts about Vestas’ future ability to create Value for its shareholders were made. Finally, using the previous sections’ findings as input, the discounted cash flow model (DCF) and the economic value added model (EVA) were used to derive Vestas’ fair equity value. Ultimately, to give some perspective on the assumptions used, a sensitivity analysis was provided. The strategic analysis consists of a macroeconomic and an industry analysis. Within the former, special attention was given to the political framework, as it was judged to be of paramount importance. The main finding of this section was, that despite of the current situation being characterised by high uncertainty due to the aftermath of the financial crisis, the European debt crisis and the US economy struggling, overall political commitment and support is good and levels of planned and expected wind energy capacity increases are high. The industry analysis revealed increasing competition within the industry. Vestas’ market share is believed to decrease to some extent, which in light of expected high market growth, was deemed unproblematic. Especially the prospects of the offshore segment were found to be a major opportunity for Vestas. By and large Vestas’ strengths were assessed to outweigh its weaknesses. Furthermore, Vestas was seen to have recognized and be working on its shortcomings. The financial analysis showed Vestas – like its peers – to be primarily affected by the external conditions. However, it was determined that Vestas is taking the right measures to adapt to the changed framework. The valuation yielded a fair share price of 155,5 DKK, which compared to the observed share price of 79,65 DKK on November 9th 2011 was deemed a distinct undervaluation of Vestas. However, the estimated share price was derived with a long-term perspective and it is recognised, that due to the current high levels of uncertainty, the short-term could see stagnating or falling share prices. Thus, provided a value investing paradigm, a buy recommendation was given. 2 | P a g e Table of Contents Executive Summary................................................................................................................2 Table of Contents ...................................................................................................................3 1.0. Introduction .....................................................................................................................6 1.1. Problem Statement .......................................................................................................7 1.1.1. Presentation of Vestas ............................................................................................8 1.1.2. Strategic Analysis ..................................................................................................8 1.1.3. Financial Analysis .................................................................................................8 1.1.4. Budgeting and Prognosis .......................................................................................9 1.1.5. Valuation ...............................................................................................................9 1.2. Models and Method .................................................................................................... 10 1.2.1. Presentation of Vestas .......................................................................................... 11 1.2.2. Strategic Analysis ................................................................................................ 11 1.2.3. Financial Analysis ............................................................................................... 11 1.2.4. Forecasts and Budgets.......................................................................................... 12 1.2.5. Valuation ............................................................................................................. 12 1.3. Delimitation ............................................................................................................... 13 2.0. Presentation of Vestas .................................................................................................... 13 2.1. Historic Overview ...................................................................................................... 13 2.2. Organisation and Ownership ...................................................................................... 16 2.2.1. Corporate Governance ......................................................................................... 16 2.2.2. Organisational Structure ...................................................................................... 18 2.2.3. Supervisory Board Composition .......................................................................... 18 2.2.4. Management Board Composition ......................................................................... 19 2.2.5. Ownership Constellation ...................................................................................... 19 2.3. Strategy ...................................................................................................................... 20 2.3.1. Mission ................................................................................................................ 20 2.3.2. Vision .................................................................................................................. 21 2.4. Markets ...................................................................................................................... 21 2.5. Products ..................................................................................................................... 22 3.0. Strategic Analysis .......................................................................................................... 22 3.1. External Analysis ....................................................................................................... 22 3.1.1 Political Factors .................................................................................................... 23 3 | P a g e 3.1.2. Economic Factors ................................................................................................ 33 3.1.3. Social Factors ...................................................................................................... 34 3.1.4. Technological Factors .......................................................................................... 35 3.2. Industry Analysis ....................................................................................................... 37 3.2.1. Threat of New Entrants ........................................................................................ 37 3.2.2. Threat of Substitutes ............................................................................................ 38 3.2.3. Bargaining Power of Buyers ................................................................................ 40 3.2.4. Bargaining Power of Suppliers ............................................................................. 41 3.2.5. Competitive Rivalry Within the Industry.............................................................. 42 3.3. SWOT ........................................................................................................................ 44 3.4. Conclusion ................................................................................................................. 46 4.0. Financial Analysis ......................................................................................................... 48 4.1. Accounting Principles ................................................................................................ 48 4.2. Accounting Reclassification ....................................................................................... 49 4.3. Key Ratios ................................................................................................................. 49 4.3.1. ROIC ................................................................................................................... 49 4.3.2. Profit Margin and Turnover Rate ......................................................................... 51 4.3.3. ROE and Gearing ................................................................................................. 53 4.3.4. Growth Rates ....................................................................................................... 54 4.3.5. Cash Flow Analysis ............................................................................................. 56 4.3.6. Financial Risks .................................................................................................... 57 4.5. Peer Group Analysis................................................................................................... 58 4.5.1. EBIT Margin ......................................................................................................