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Investment Research

2 May 2012

Q1 12: Profitability suffers
Vestas Q1 report was weak from a credit perspective. Higher order intake and revenues were clearly overshadowed by an increasingly weak profitability in the Group. Tough competition has driven down prices to below break-even levels, matching poorly with Vestas relatively high production cost level. Vestas credit metrics deteriorated due to negative free cash flow. The group maintained its 2012 outlook, still guiding for positive FOCF. We maintain our HOLD recommendation as this weak names come with an attractive yield.

Sector: Industrials, Capital Goods Corporate ticker: VWSDC Equity ticker: VWS DC Market cap: DKK9.4bn Ratings:
S&P rating: NR Moodys rating: NR Fitchs rating: NR

Margins remain stressed

Vestas delivered yet another disappointing quarterly report. While order intake rose to 1.27GW from 0.6GW in Q1 last year, the profitability on executed orders continued to be weak. Q1 revenues rose 4.3% y/y due to a ramp up in deliveries. The rising revenues were not, however, nearly enough to offset a high production cost level. As such, Group EBTIDA fell to negative EUR90m compared to EUR0m in Q1 11. The weakened margins are a consequence of the tough competition in the wind-turbine market that has driven down average selling prices to levels that are not sustainable given the high cost profile. Vestas continues to address this issue through extensive cost cutting efforts, aiming to reduce annual costs by EUR150m in 2012. Vestas has maintained a high level of R&D spending in its outlook for 2012, indicating that costs will be cut primarily in the production part of the business. Net income of negative EUR166m was somewhat weaker than market expectations of negative EUR61m. The miss was also fuelled by some extra EUR40m in provisions for warranty claims relating to faults on the gearboxes on the Vestas 3MW V90 turbine. Vestas plans to seek compensation from its sub-supplier of the gearboxes.

Jakob Magnussen, CFA +45 45 128503 Asbjrn Purup Andersen +45 45 148886 Profitability
EURm 2,500 2,000 14% 12% 10% 8% 6% 4% 2% 0% Q1 11
Net sales

Credit metrics keep deteriorating

Vestas presented a weak free operating cash flow figure of negative EUR297m in spite of a sequential drop in capex of 65%. This caused Group net debt to surge 56% during the quarter. Coupled with the weak cash flow at Vestas, the toll on credit metrics was brutal. Adjusted net debt to LTM EBITDA rose to 3.9x, from 2.0x last quarter. Adjusted LTM FFO to net debt fell to 4%, from 17% in Q4. While a 3-year average on metrics suggests that the Group should be BB+ rated, we take a more holistic approach to the Group now seeing it at as a weak BB-. Overview (EURm)
EURm Net sales EBITDA EBIT Net income CAPEX Total debt Net debt Equity (incl. minorities) FFO
Source: Danske Markets

1,500 1,000 500 0 -500 Q2 11 Q3 11 Q4 11 Q1 12


LTM EBITDA-margin (rhs)

Source: Company data, Danske Markets

Q1 11
1,060 0 -69 -85 172 1,205 1,000 2,677 -29

Q4 11
2,038 154 24 -97 262 920 545 2,576 99

Q1 12
1,105 -90 -245 -162 93 1,160 850 2,378 -113

4% nm. 255% 91% -46% -4% -15% -11% 290%

-46% -158% -1121% 67% -65% 26% 56% -8% -214%

Debt metrics
EURm 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Q1 11
Net debt

X 5 4 3 2 1 0 Q2 11

Q3 11

Q4 11

Q1 12

net debt/LTM EBITDA (rhs)

Source: Company data, Danske Markets

Important disclosures and certifications are contained from page 4 of this report.


Following two profit warnings in 2011, Vestas last year decided to reduce the level of transparency on its guidance. As such, the group will no longer provide guidance on order intake. Instead of providing specific P&L targets, it will provide ranges. For 2012, the group maintains its guidance of an EBIT margin between 0% and 4% and revenues of EUR6.58bn. (For reference, the LTM revenue number after Q1 12 stands at EUR5.9) Vestas also maintains its guidance for positive FOCF in 2012. Vestas ability to fulfil on this ambition is crucial from a credit perspective, as liquidity will otherwise be an issue. For 2012, Vestas guides for some EUR550m in capex.
Q1 12 external sales by division
Service 18% Production 1% Asia/Pacific 7% Europe/ Africa 48%

Reduced political support for renewable energy

One of our main concerns surrounding Vestas has long been the risk of politicians reducing subsidies for renewables. In the wake of the current economic backdrop with ailing government budgets, we are seeing more and more countries flagging reduced subsidies for future renewable investments. Examples include the US considering removing the PCT (tax subsidy on green investments), Spain reducing feed-in tariffs for new green power and the Netherlands removing support for offshore wind. Such developments are very worrying for a company such as Vestas, delivering a product that is not economically self-sustainable.

Americas 26%

Source: Company data, Danske Markets

Vestas short-term liquidity profile is currently not worryingly, provided that the company is able to live up to its ambition of positive free operating cash flow generation in 2012. Vestas cash position stood at EUR310m after Q1, clearly covering short term debt maturities of EUR4m. This allows Vestas some leeway in disappointing on its free operating cash flow guidance before it will need to come to the capital markets. Should such a need arise, this would definitely be challenging at current equity prices and bond yields.

Vestas to be acquired?
During Q1, there have been unofficial reports on several occasions of potential acquirers of Vestas. First Alstom was mentioned as having an interest in Vestas, followed by similar stories about Sinovel and Goldwind being interested. The Alstom story was founded in Suzlon facing creditor pressure to divest REpower, where Alstom was mentioned as a white knight looking for a bargain. This was interpreted in the market as Alstom being on the lookout for a company like Vestas. Sinovel and Goldwin, who both struggle with reduced profitability, are likely to find it hard to raise the cash for a Vestas acquisition. Even if they could acquire Vestas, it would be hard to obtain consent from more than 90% of Vestas disperse shareholder base. Hence, we are currently hesitant to buy into the Vestas acquisition story. Even so, an acquisition of Vestas would be very positive for Vestas bondholders, as the Vestas 2015s contain CoC put to par language.

The bleak outlook for 2012 in terms of margins, underscores our bearish view on Vestas. We continue to see several short- and long-term risk factors in the group. Currently, we fear that both order intake and, in particular, profitability are under pressure, which is a lethal cocktail for Vestas one-stringed business. That said, Vestas is currently the market leader in a growth market, with strong order intake. Despite our overall negative fundamental view on Vestas, we believe the current spreads make the Vestas bonds risk/reward profile look fair, as we think investors should require a healthy premium for the very low liquidity and unrated status. Coupled with the relatively short maturity and the bonds coming with a CoC put to par, this makes us maintain our HOLD recommendation. We caution that the VWSDC 4.625% 2015 yielding some 10.4% is a high beta play and should be preferred by investors with a certain risk tolerance.
2| 2 May 2012


Fixed Income Credit Research

Head of Credit Research Thomas Hovard +45 45 12 85 05 thomas.hovard

Utilities & Energy Jakob Magnussen +45 45 12 85 03 jakob.magnussen

TMT Louis Landeman +46 8 568 80524 louis.landeman

Financials & Strategy Thomas Hovard +45 45 12 85 05 thomas.hovard Henrik Arnt +45 45 12 85 04 henrik.arnt

Pulp & Paper Asbjrn Purup Andersen +45 45 14 88 86 asbjorn.andersen

Industrials Asbjrn Purup Andersen +45 45 14 88 86 asbjorn.andersen

email addresses end


2 May 2012


This research report has been prepared by Danske Research, a division of Danske Bank A/S (Danske Bank). The authors of the research report are Jakob Magnussen, Senior Analyst, and Asbjrn Purup Andersen, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analysts personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Vestas and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to Vestas and have whatever rights as are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding Vestas that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. Danske Bank is a market maker and may hold positions in the financial instruments mentioned in this research report. As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Vestas in the next three months. Danske Bank has made no agreement with Vestas to write this research report. No parts of this research report have been disclosed to Vestas. No recommendations or opinions have been disclosed to Vestas and no amendments have accordingly been made to the same before dissemination of the research report. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text.


2 May 2012


Expected updates Credit Update: This research report will be updated on a quarterly basis following the quarterly result statements from Vestas. Scandi Handbook: This research report will be updated biannually, usually in September and April. See the front page of this research report for the date of first publication. Recommendation structure Investment recommendations are based on the expected development in the credit profile as well as relative value compared with sector and peers. As at 31 March 2012, Danske Research had investment recommendations on 51 corporate bond issuers. The distribution of recommendations is represented in the Distribution of recommendations column below. The proportion of issuers corresponding to each of the recommendation categories above to which Danske Bank provided investment banking services in the previous 12 months ending 31 March 2012 is shown below.

Investment Distribution of Rating Buy Hold Sell Anticipated performance Outperformance relative to peer group Performance in line with peer group Underperformance relative to peer group 3 months 29% 27% 3 months 39% 25% Time horizon 3 months recommendations 31% banking relationships 25%

Changes in recommendation within past 12 months Date Old recommendation New recommendation 7 Dec 2011 Sell Hold


2 May 2012


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2 May 2012