We Maintain Our EUR 17.50 Fair Value Estimate on Possible Takeover Offer From Siemens Energy

Business Strategy & Outlook

Competitive pricing pressure among wind turbine manufacturers and cost inflation have placed a large emphasis on cost-saving programs to increase Siemens Gamesa’s profit margins, which have consistently lagged its closest competitor, Vestas. Following an operating loss in 2020 and 2021, Siemens Gamesa have once again turned to a new CEO (the third in two years) tasked with turning around the onshore equipment business through cost-cutting measures and solving the ramp up challenges of its latest 5.X onshore turbine that have caused project execution delays.

Despite the trend toward decarbonization, profiting from manufacturing turbines has proved difficult due to a combination of both industry and internal challenges. Wind turbines are the largest cost for customers and thus tend to be price sensitive. In the short term, Siemens Gamesa will turn to inflation mechanisms in customer contracts to better manage commodity risk given the significant increase in raw materials such as copper and steel. Longer term, however, an element of product differentiation is required to replicate the returns of other razor/blade models. Cost savings are limited in nature, whereas innovation has largely focused on taller towers and bigger rotors, which competitors subsequently replicate. Shorter innovation cycles can also lead to ramp up challenges as evidenced by Siemens Gamesa’s latest onshore turbine. That said, Siemens Gamesa’s offshore turbine is the most efficient in the market and the challenges in the onshore business have not filtered to their leading position in offshore.

As growth matures for onshore turbines amid regulatory changes, greater reliance is placed on Siemens Gamesa to maintain its leading position in the offshore market, which is expected to double between 2025 and 2030. Rectifying the challenges in the onshore business will be required so that Gamesa can harvest the growth in offshore to invest in product innovation and expanding capacity to satisfy demand. A shift in the product mix toward offshore will improve profitability. Improved operations may pave the way for Siemens Energy to take over the remaining 33% stake in Siemens Gamesa.

Financial Strengths

Siemens Gamesa is in a sound financial position with EUR 207 million of net debt (including lease liabilities) at the end of its 2021 financial year. The company also has access to additional funding of EUR 4.4 billion of which EUR 1.3 billion has been drawn. The Siemens Gamesa’s balance sheet allows the company to navigate the challenges of a new restructuring program and provides a cushion for another year of forecast free cash outflow. Siemens Gamesa’s target net debt/EBITDA ratio is a conservative 1.0 times. Siemens Gamesa has EUR 2.0 billion of cash and equivalents and the option to drawdown on its syndicated loan, which is sufficient to cover short-term debt maturities of EUR 382 million as well a ramp-up in capital expenditures and restructuring-related costs. However, we forecast another year of free cash outflow in fiscal 2022, and with a credit rating only a few notches above investment-grade, this limits the company’s potential to use its balance sheet to perform mergers and acquisitions to help further consolidate the industry and capital return to shareholders.

Bulls Say

Siemens Gamesa is well positioned to benefit from the structural trend toward decarbonization through its leading position in offshore turbines and global footprint, as renewables contribute more to the global energy mix.

The implementation of inflation mechanisms into contracts will improve the management of commodity risk and help turnaround profitability in the onshore business.

The hiring of a new CEO tasked within improving operations from Siemens Energy, which owns 66% of Siemens Gamesa, may pave the way for the parent company to acquire the remaining 33% stake.

Company Description

Siemens Gamesa is a leading manufacturer of onshore and offshore wind turbines. The company is the product of the merger between Siemens Wind Power and Gamesa in 2017. The firm operates in two business segments: wind turbines and services. Siemens Gamesa retained its position as the leading installer of offshore turbines in 2020. Siemens Energy (a recent spinoff from Siemens AG) owns 67% of Siemens Gamesa’s shares.

(Source: Morningstar)

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