Friday, September 3, 2010

>Is it all over for the global wind markets?

Weak electricity demand resulting from energy efficiency measures
and recessionary forces have made national wind installation targets
easier to achieve. We have therefore cut our five year wind industry
global demand CAGR to 7.0% from 7.5% previously and our 10-year
CAGR to 5.5% from 6.7%. We remain cautious on the wind OEMs,
and see few near term catalysts for share price performance. Our
favourite part of the value chain remains the wind farm developers
as we feel that that the developers offer a more compelling
combination of earnings visibility and valuation and our preference
for this part of the value chain has now increased. Acciona and EDP
R, both rated OW(V), are our highest conviction investment ideas

What’s going on with the markets?

Why has the wind sector been so weak?

The wind sector has been weak since the start of the credit crisis in September 2008. Until this point it had held up pretty well, when most other sectors had already been selling off. However, in the two months following the collapse of Lehman Brothers, the sector more than halved in value; the wind farm developers lost 50-60% and the wind turbine manufacturers lost 60-70%. The focus at this time was lack of availability of project finance.

The sector then recovered some of its share price losses during the March 2009 bear market rally, but subsequently spent a year in the doldrums, with share prices moving sideways. The main reason for this was lack of order flow during 2009 due to US regulatory uncertainty and only a modest improvement in project finance markets throughout the course of 2009. Order flow has finally started to pick up in H1 2010, double the H12009 level, but importantly it remains around 70% below H12008, and the recovery is less strong than we had hoped for due to the Sovereign debt concerns in Southern Europe, increasing the possibility of tariff reductions (see our note dated 21 June 2010, entitled ‘Carbon default – real of imagined?’), and at the same time the Clean Energy regulatory rollercoaster in the US Senate started heading for derailment. From mid-April onwards, the sector sold off along with the wider Southern European markets, but whereas the Southern European markets have recovered some 20% since early June, the wind sector has not; some stocks have recovered slightly but most have not. This, we believe, is due to continued uncertainty over clean energy legislation in the US, which is now unlikely to pass the Senate before mid-term elections in November.

To read the full report: GLOBAL WIND MARKETS