Reducing Orsted’s FVE by 15%; Shares Cheap

We cut our fair value estimate for narrow-moat Orsted ORSTED from DKK 920 per share to DKK 780 per share on higher development costs than we previously estimated, lower returns from the U.S. offshore wind projects due to cost inflation, and the rise in decommissioning provisions during 2022. Our new fair value estimate implies a 2023 EV/EBITDA of 16.8. We still see the shares as undervalued.

Investors have overly punished the group for the issues encountered in 2022 as they had been used to a company exceeding its targets thanks to solid execution. Consequently, some attractive features of the company are not priced in. Its solid pipeline of projects makes the 2030 capacity targets largely within reach. Stabilization of interest rates and renewables construction costs will support the equity story. The sanctioning of the U.S. offshore wind projects should be a positive catalyst. It depends on their eligibility to the 40% investment tax credit of the Inflation Reduction Act that will prevail, in our view. Orsted will also significantly benefit from the Inflation Reduction Act thanks to its high onshore wind and solar footprint in the U.S. 2022 earnings were hit by losses related to an overly conservative hedging strategy that the group has largely amended paving the way for an earnings rebound in 2023. The indexation of revenue to inflation will also boost 2023 earnings.

We project EBITDA excluding farm-downs to grow by 12% to DKK 23.7 billion, above the DKK 21 billion-DKK 23 billion guidance. Our new estimates involve a 2022-32 CAGR of 10.1% and 22% for EBITDA and net income excluding farm-downs, respectively, thanks to the commissioning of new capacity.

We lower our capital allocation rating from exemplary to standard on the issues encountered by the U.S. offshore wind projects. None of them will meet the group’s returns target of 150-300 basis points above WACC because of the rise in construction costs and interest rates since they were awarded.