Vestas Earnings: Losses in Service Business Offset Turnaround Progress; Lower Our Fair Value

We’re marginally lowering our fair value estimate in no-moat Vestas to DKK 180 from DKK 186 following the group’s significant revenue and EBIT miss in the second quarter against company-compiled consensus. As announced in a trading statement on Aug. 12, the driver behind its second-quarter underperformance was an upward revision in planned costs required to service its existing wind turbine fleet to the tune of EUR 300 million, which hit revenue and operating profits. While the service business' negative 15.9% EBIT margin in the second quarter should return to normalized levels during the second half of the year, we believe the impact of higher wage inflation and the rise in unscheduled callouts due to poor turbine performance requires us to lower our medium-term profitability assumptions for the segment. Shares are trading at a 14% discount to our revised fair value estimate, but we would require a greater margin of safety before the valuation looks attractive.