Orsted: Bears Taken Aback by Positive Announcements on Capital Markets Day; Shares Cheap

We confirm our DKK 780 fair value estimate after narrow-moat Orsted ORSTED held a capital markets day. It confirmed its 2030 capacity targets, stepped up investments because of high inflation, as expected, and raised targets for EBITDA and return on capital employed due to high power prices, the Inflation Reduction Act, and positive impact of high inflation on indexed revenue. All this was less anticipated as the market overly focused on headwinds. Accordingly, the target of 150- to 300-basis-point spread of returns over WACC is maintained despite the rise of the latter. Orsted also confirmed it will not resort to a rights issue to fund its investments, an option which is priced in the current depressed share price. The derating of Orsted since 2021 has eliminated its valuation premium over other pure renewables players like EDP Renovaveis, which is unjustified due to its undisputed leadership in offshore wind where barriers to entry are way higher than in onshore wind and solar.

Orsted guides for an average ROCE of 14% over 2023-30 versus 11%-12% targeted previously over 2020-27 and for 2023-30 EBITDA CAGR of 13%-14% versus a previous 10%-12% CAGR over 2020-27. This implies 2027 EBITDA of DKK 45 billion from onshore and offshore assets versus DKK 35 billion-DKK 40 billion before, EUR 35 billion in our estimates, and 2030 group EBITDA of DKK 50 billion-DKK 55 billion, above our DKK 49 billion. We calculate the firm’s new targets involve 2030 net income of about DKK 18.5 billion, below our DKK 20.6 billion as EBITDA upside is more than offset by higher finance costs and depreciation from larger investments. Still, this involves a high 2022-30 net income CAGR of 30% when restated from large capital gains in 2022.

The 5 GW of awarded U.S. offshore wind projects that account for 10% of investments by 2030 are not out of the woods yet. Orsted targets 2030 capacity of 3-5 GW, implying the possibility of more delays to the 1.1 GW Ocean Wind 2 project is due to start in 2029.