One-Off Costs dent Wartsila’s Profitability Despite Strong H1 demand; FVE reduced to EUR 10.80

Business Strategy & Outlook

The decarbonization of the marine and energy market has created new business opportunities for Wartsila. The company has invested significantly in anticipation of these trends, ensuring its marine engines are compatible with a wide range of environmentally friendly fuel types, while also emerging as one of the top three players in the energy storage market. A broad range of solutions that help customers reduce their carbon emissions will help grow their installed base and provides a foundation to perform recurring aftermarket services, which is less susceptible to the highly cyclical marine newbuild market and mitigates the shift toward renewable energy, away from Wartsila’s traditional thermal engine business. Both the marine and energy segments have potential to grow the contribution of revenue from services by moving up the service ladder toward performance-based agreements. Wartsila has increased its level of research and development expenditure as well as making significant investments into the Energy Storage business to help offset the declining demand for its thermal energy engines resulting from the shift to renewable energy sources.

The energy storage business has yet to achieve scale and is loss-making and thus the path toward Wartsila’s 12% operating margin target seems difficult to achieve in the short term, as the shift in product mix toward energy storage has a dilutive impact on margins. A recovery in marine markets has supported strong demand for Wartsila’s equipment and services. Demand is expected to remain robust due to regulatory pressure aimed at reducing the carbon footprint of the marine sector, which will create a wave of shipbuilding and retrofit activity. In addition, Wartsila’s important cruise vessel category market stands to benefit from the reactivation of vessels due to the easing of travel restrictions that will support the service business. Working capital efficiencies have placed Wartsila in a healthy financial position, ensuring the majority of profits are returned to shareholders through dividends, helping to mitigate the potential downside for shareholders if new business opportunities fail to transpire.

Financial Strengths

Wartsila is currently in a stable financial position and only has EUR 4 million of net debt. Net Gearing of 0.0 falls comfortably below the company’s target of 0.5 times. Wartsila’s conservative balance sheet has allowed the company to consistently return the majority of profits to shareholders irrespective of the cyclicality of its end markets and without compromising on investments in growth initiatives. Wartsila’s healthy balance sheet allows the company to continue to invest into the fast growing but loss-making energy storage business to help it achieve scale.

Bulls Say

Regulatory requirements are likely to spark a new wave in shipbuilding activity and decarbonization retrofits, which, combined with Wartsila’s investments in fuel agnostic engines, would see an increase in demand.
Approximately half of the group’s sales are from aftermarket activities, which are more predictable, thus reducing the cyclicality of demand from its marine and energy end markets.
The reactivation of cruise vessels driven by the removal of travel restrictions will support demand for Wartsila’s services and spare parts.

Company Description

Wartsila is a global manufacturer of critical equipment and services for the marine and energy markets with operations in over 70 countries. Approximately one half of the group’s sales are derived from the sale of services and spare parts through its network of 258 sales and service network locations. Wartsila is listed on the Nasdaq Helsinki exchange in Finland. Approximately 1 in 3 oceangoing vessels has a Wartsila solution on board, translating into an installed base of over 50,000 vessels and 10,000 customers.

(Source: Morningstar)

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