Nordex stock analysis: Will the German wind power company take off without its debt weight?

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Nordex stock analysis: Will the German wind power company take off without its debt weight?

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Matthias Krey

Since its founding in 1985, Nordex has developed, manufactured, and distributed multi-megawatt onshore wind turbines. The company obtains 100 percent of its revenues from infrastructure development for wind power system construction, and undoubtedly, makes the cut as a Pure Climate Stock. However, despite its position as one of the world’s primary manufacturers, its record of growth is mixed.

With continuous negative margins and debt pressure, the company is in a tough spot. Are recent restructuring measures, against a backdrop of some positive future prospects for the industry, enough for success? Read on for my in-depth analysis – including strategy, risks and opportunities – and my personal opinion on buying Nordex shares now.

Table of Contents

Table of Contents

Business Overview

Let’s first get an overview of the company and understand why Nordex SE is a Pure Climate Stock.

Basics

Nordex (XTRA:NDX1), founded in Germany in 1985, develops, manufactures, and distributes multi-megawatt onshore wind turbines worldwide.

With the acquisition of Acciona Windpower in 2016, Nordex solidified its status as a global player and became one of the world’s largest wind turbine manufacturers. Currently, the company has offices in more than 30 countries worldwide, with production facilities in Germany, Spain, Brazil, the United States, and India.

However, over the past few years, Nordex has had a mixed record of growth. Its revenues remained below their 2016 level until 2020, when they began to improve significantly.

Additionally, since its IPO in 2001 – the point at which the stock price reached its all-time-high – the share value has dropped a precipitous 80 percent, tumbling 20 percent over the last year alone.

In 2017, José Luis Blanco was appointed as the company’s CEO.

 

Business model

Nordex designs, manufactures and markets onshore wind turbine systems worldwide. In addition, the company offers services that range from basic installation to turnkey project construction. Its comprehensive network of service units across its key markets ensures total support for the maintenance of turbines over their entire lifespan. In select markets, the Nordex Group also serves as a wind farm project developer.

The centerpiece of the company’s product portfolio is the Delta4000 series, with its output ranges from 3MW to 6MW and rotor diameters between 133 and 163 meters.

The Delta4000 series is comprised of seven different turbine types that, collectively, are operable in every wind class. Catered specifications make these turbines suitable for use all over the globe, even in markets where limited grid and land availability are the norm.

The Company operates its own production sites in Germany, Spain, Brazil, India –and, since 2019, in Mexico – as well as a partnership production site in Argentina.

 

At its core, Nordex’s focus is the continuous reduction of the cost of energy (COE) from newly-installed wind power turbines. To do so, it develops turbines with greater efficiency and offers cost-effective project management across the wind farm life cycle. With more than 28 GW under contract in over 40 countries – and a market cap of 2.3 billion EUR – Nordex remains one of the top 10 wind turbine manufacturers globally.

Why is Nordex a Pure Climate Stock – Nordex Stock Analysis?

Nordex enables renewable electricity generation from wind power projects that are powered by its own wind turbines, a crucial ingredient for a climate-friendly economic transition. Today, wind energy has already attained its status as the most economical electricity source in many regions, and while its popularity continues to grow, the cost continually drops. Since Nordex obtains 100 percent of its revenues from infrastructure development for wind power system construction, it makes the cut as a Pure Climate Stock.

Factsheet

Share price development

In April 2001, Nordex went public with an initial share price of around €80, reaching an all-time high of €110 by July. In 2015, it hit its all-time low when it dipped below €3. The stock has peaked at various points over the years but never reached its initial level. At present, stocks trade at around €16.

Nordex stock analysis

Key figures

Unless otherwise stated, all figures are USD and trailing twelve months (TTM). Addition ‘(e)’ = expected in the current year.

Key data:

  • Market Capitalization: 2,313 million EUR
  • Revenue: 5,444 million EUR
  • Profit: -230 million EUR
  • Free cash flow: -25 million EUR
  • Country: Germany

Rating:

  • P/S ratio: 0.43
  • P/E ratio (excluding extra items, annually): -9.8

Growth & debt

  • D/E ratio: 34.2
  • Gross margin: 6.49 %
  • Revenue growth (from 2019 – 2021): 31 %

5 Facts about Nordex

  1. Globally, Nordex stands tall as the 8th largest player in the wind turbine industry.
  2. By focusing solely on onshore turbines, Nordex leaves all of the offshore business to the competition.
  3. Nordex has shown continuous sales growth, reaching 5.4 billion EUR in sales in 2021 – a 17 percent YoY increase.
  4. At the end of 2021, the company was hit with a 230 million EUR loss, against a backdrop of increasing material costs and fierce price competition.
  5. Importantly, Nordex has freed itself from a high debt load while fear of shareholder dilution has receded.

Business breakdown: business model & strategy analyzed

How strong is the sales growth?

Nordex’s sales decreased from 2017 to 2019, but then picked up significantly in 2020.

  • 2017: 3,078 million EUR
  • 2018: 2,459 million EUR (- 20%)
  • 2019: 3,285 million EUR (+33.5%)
  • 2020: 4,651 million EUR (+ 41.6%)
  • 2021: 5,444 million EUR (+17%)
  • 2022: 5,497 million EUR (+1%) (estimated)

The company’s largest markets reside in Europe and North America, with a share of 58 and 23 percent, respectively, in installations by 2021. New orders have picked up significantly in Latin America, a region that accounted for 22 percent of its new orders in 2021.

Although Nordex is again gaining steam in its sales, the EBITDA hasn’t been growing in proportion to those sales.

nordex revenue profit development.png

Since 2017, EBITDA margins have suffered from fierce price competition. However, the full year results for 2021 were hit even harder by high material price increases, particularly following post-covid recovery and subsequent supply chain constraints.

 

In recent years, the company has not been able to turn a profit. The operating and net margin decreased further in 2021 dropping to -2 and -4 percent.

Nordex Margin development

The significant difference between EBITDA and the net margins can be explained by Nordex’s debt load. Depreciation and amortization, when combined with interest payments, add up to nearly 5 percent of total revenues.

 

Through passing costs on to customers, the company hopes to compensate for rising prices’ impact on the margin. Nordex predicts that, in the mid-term, a return to normalized margin levels will be feasible.

What is the business model and strategy?

How does the company make money?

The cornerstone of the Nordex product portfolio is the Delta4000 series, spanning the 3 to 6 MW+ classes. Currently, the series is comprised of seven distinct turbine types that operate in all wind classes. Their respective configurations are suitable for use in diverse environments across the world, including in markets with limited grid and land availability.  

Nordex product portfolio

Beyond the design and manufacture of turbines, Nordex offers numerous other services to wind power project developers and operators.

Nordex offers numerous other services to wind power project developers and operators.

Notably, service sales share is
significant, amounting to 8.6 percent of total consolidated sales in 2021. Though this segment grows slowly – 7 percent growth in 2021 – the EBIT margin was positive and expanded by 16.7 percent in 2021. The growing contribution of service activities can be expected to continue in future years, given that the service backlog currently totals almost 3 billion EUR.

 

Areas of application and relevance of the product/service

To understand the wind turbine market, it must first be split into onshore and offshore segments. Depending on whether it’s for offshore or onshore, turbines have distinct technical requirements. By choosing to concentrate on the onshore segment, Nordex has been able to not only serve more than 90 percent of the global wind power market, but it simultaneously has avoided significant offshore technology investment costs.

Over recent years, Nordex added considerable debt to its books. At the end of 2020, the debt load totaled nearly 590 million EUR, representing more than five times the EBITDA. The significant debt level was cause for growing concern in 2021, even as the company continued to see negative cash flows and company leadership was doubtful about staying afloat. But in the second half of 2021, Nordex successfully restructured its finances, lowering its debt and, by extension, its future interest costs. Its capital increase brought 389 million EUR into the company coffers, a move that drove the debt-equity ratio down to a manageable 34 percent.

Deep dive mechanisms of the business model

 The goal of cost reduction

In the coming years, Nordex’s primary goal is to drive down costs while increasing its revenue. Such a motivation guided one of the most significant strategic moves of Nordex in recent years: the merger with Acciona Wind Power in 2016, a move that helped establish Nordex as a global player in the market.

Nordex as a global player in the market.

Strong price competition in the market, and the resulting drops in wind turbine costs over recent years, have hurt manufacturer profitability. Nordex’s move to focus on cost reduction is certainly strategic. The company must improve its margins, in order to make a dent in its high debt level.

The firm announced in February that the production plant in Rostock, Germany, will be shut down. Nordex leadership attributes the move to the plant not being competitive within the Nordex Group’s production network. Notably, the change is accompanied by a significant plan for capacity expansion, driven by the construction of a brand new plant in India.

NORDEX INDIA FOR GLOGALI4G INITIATIVE

In the mid-term when supply chain pressures diminish, is planning an EBITDA margin of between 1.0 and 3.5 percent for 2022. Less than a year ago, Nordex was planning according to an 8 percent EBITDA margin, which, given the persistent supply chain challenges in 2022, turned out to be unrealistic. However, the company says that in the mid-term it hopes to reach 8 percent.

But it’s an open question how robust the business model is. Are there particular strengths that could help Nordex get out of its money-burning cycle quickly?

Evaluation of the Business Model
  • Network effects

No, there are none. Buyers of wind turbines don’t profit when buyers purchase Nordex’s wind turbines.

  • Sales with lock-in

A certain lock-in effect exists for servicing wind turbines. Nordex actually obtains around 9 percent of revenue services after the sale of its turbines.

  • Economies of scale

Nordex seeks to reduce costs and increase its capacity. In Germany alone, the company sources from around 5,000 suppliers, many of which are highly dependent on Nordex’s purchasing power. The situation allows the company to take advantage of economies of scale, and with its size and global position, it likely receives similar benefits in other countries where it operates.

  • Proprietary technology (moat)

Nordex´s technology is not significantly different than, or superior to, other wind turbine producers.

  • Branding

As one of the main players in the wind turbine market, Nordex demonstrates some brand awareness. However, brand itself is generally not a critical factor for competitive advantage in the wind turbine market.

Summary:

Nordex has continuously grown its sales and has a strong order backlog for future growth. However, given issues in the supply chain and rising material costs, margins have remained low and continued to decrease in recent years. Though the situation is undoubtedly still worrisome, at least the company has chipped away at its heavy debt levels.

Nordex’s business model does not show any unique strength to support a turnaround as compared to its competitors. Improved margins and increased profits can only come from lower material costs, costs passed on to customers, and further economies of scal

Market analysis :Is the onshore market growing sufficiently for Nordex?

Market size and competitors

Despite the disruptions brought on by COVID-19, 2020 was the best year in history for the global wind industry. During this time, year-over-year (YoY) growth was 53 percent, and another 93 GW of wind power was added – all despite the challenges of significant disruption to both global supply chains and project construction. This trend demonstrates the resilience of the wind industry overall. In the onshore market, 86.9 GW was installed, an increase of 59 percent over 2019. China and the U.S. remained the world’s largest markets for new onshore construction. On the regional level, 2020 was also a record year for onshore installations in Asia-Pacific, North America, and Latin America. In Europe, however, Germany’s slow recovery of onshore installations last year contributed to a mere 0.6 percent YoY growth in new onshore wind installations across the continent.

NORDEX new onshore wind installations across the continent

The top markets for wind energy are China, US, Brazil, Netherlands, and Germany.

In recent years, new installations grew on average at a rate of 8 percent annually.

The top markets for wind energy are China US Brazil Netherlands and Germany.

After an unusual and challenge-ridden 2020, global wind market growth is likely to slow in the near term. This is primarily due to an expected drop in onshore installations in China and the U.S., following the expiration of incentive schemes for new wind park investments. Nevertheless, the market outlook for our forecast period still remains positive. The CAGR for the next five years is 4.0 percent.

The top markets for wind energy are China US Brazil Netherlands and Germany. NORDEX CAGR for the next five years is 4.0 percent.

However, for onshore wind – again, the sole focus of Nordex – the CAGR is estimated to grow only 0.3 percent over the next five years. And in the realm of new power, GWEC expects an annual installation of 79.8 GW.

Among the top players in the market – which include Vestas, Siemens Gamesa (SGRE), General Electric (GE), Goldwind, Envision, Ming Yang, and SE Wind – Nordex is ranked 8th.

top players in the market WIND ENERGY

Source: GWEC Global Wind Report, 2021

Since Nordex still earns most of its revenues in Europe, the firm’s main competitors in the market are Vestas and Siemens Gamesa. Therefore, let us compare the key financial figures for the three companies.

 

Nordex

Vestas

Siemens Gamesa

Revenue projection 2021 (in million EUR)

5,444

15,587

10,198

Net income projection 2021 (in million EUR)

-230

167

-627

Operating margin (2021 estimated, in million EUR)

-107 (-1.93%)

461 (2.96%)

-96 (-0.94%)

Free Cash Flow  (2021 estimated, in million EUR)

-25

57

 

Global share of installed capacity

3.8%

14.8%

12.8%

Market capitalization (in billion USD)

2,213

27,682

12,097

Of the three, Nordex is the smallest player. Notably, Siemens also struggles with its margins. For its part, Vestas – despite the distinctly challenging market environment – has proven to be profitable and therefore stands as the best positioned of the three.

Drivers and outlook for the onshore wind turbine market

Nordex’s main markets are Europe, North America and Latin America, so it is beneficial to take a close look at the current trends in these markets.

Customers of wind turbine manufacturers are wind power project developers. Such developers build wind farms that they then either run themselves or sell to another operator. For this reason, the demand for Nordex wind turbines depends greatly on the economic attractiveness of investment in, construction of, and the operation of new wind energy plants. In addition, demand is driven by support policies and continuous cost reductions, as well as a rising appetite for renewable energy globally.  

For investment in new wind production, economic incentives vary across national borders and their markets. However, some of the most common and consistent support mechanisms are clear:

  • Government-set tariffs

There are two types: (i) A feed-in tariff (FIT) provides a guaranteed, above-market price for producers with long-term contracts. (ii) A feed-in premium (FIP) scheme, allows electricity producers to receive a premium on top of the market prices for electricity.

  • Auctions

Competitive process primarily issued by governments for procuring future electricity generation through long term contracts. Project developers submit a bid price per unit of electricity production, and the cheapest supplier is awarded purchase agreement (PPA) from the state.

  • Corporate PPAs

Direct power delivery contracts between corporate electricity customers and wind power project owners. 

In Europe and Latin America, auctions are the main remuneration scheme for the owners of wind power projects. In the North American market, however, corporate PPAs are the most common instrument by which wind power projects generate revenue.

Globally, the transition from administrative to competitive remuneration schemes is expected to speed up over the next five years. If electricity prices are on the rise, the wind industry could stand to benefit from this change. Since carbon pricing will help drive this trend worldwide, the entire wind industry stands to gain. On the other hand, the expansion of auctions has boosted price competition, since contracts go to producers offering the lowest bids. All wind turbine manufacturers, therefore, have to reduce costs if they hope to generate positive margins, a dynamic that continues to present a challenge.

Despite a promising outlook that is driven by growing policy support and high demand, there are still barriers to scaling wind power capacity – and especially onshore in Europe.

In particular, slow social acceptance and cumbersome permitting processes across Europe have stymied project growth. Despite their high cost-effectiveness as a source of renewable electricity, wind energy projects often face public opposition, especially from nearby residential areas. Wind projects can spark outrage, protests, and lawsuits from local communities. Meanwhile, regulatory issues have been shown to limit the number of permits granted for wind project construction. In Germany alone, about 10 GW of turbine capacity was held up by slow licensing processes in 2021.

Furthermore, slow development rates of electrical grids create bottlenecks when integrating wind capacity into existing power grids. Such grid congestion continues to slow installation and onshore wind development. Therefore, more grid infrastructure and investment are necessary to facilitate faster growth of wind energy projects.

Updating or replacing older onshore wind turbines, or repowering, is a key industry trend to follow in Europe and North America. Given an average lifespan of wind turbines of 20 to 25 years, turbines built before 2000 will soon face operational and efficiency issues. Over the next few years, it’s estimated that a full 12 percent of wind turbines in the U.S. will require repowering. Within the European market, Germany, the UK, and Denmark will have the highest number of aging turbines in need of repowering.

Although the wind onshore market is predicted to keep growing at a low level globally, significant barriers to increasing wind power capacity onshore still exist – particularly in Europe and (somewhat less so) in the U.S.

Nordex, for its part, is only one among many wind turbine suppliers without a particular edge that would allow a significant jump in sales growth. Therefore, it should be expected that the company will continue to grow sales in the mid-single-digit range.

Asset 4

SWOT analysis: strengths, weaknesses, opportunities, and threats analyzed

Let us now turn to the various strengths, weaknesses, opportunities, and threats in Nordex’s current business model.

Strengths

  • Constant revenue growth: despite challenges in recent years, Nordex has managed to continue increasing its revenue faster than average industry-wide onshore market growth.
  • Strong order backlog: Nordex had an order intake of 7.95 GW during 2021.  
  • Well-positioned for growth:
    • Presence in key markets in Europe and North America
    • Promising growth rates in Latin America
    • Other emerging markets, including India and Australia.
  • Strong R&D and operational capabilities: Nordex keeps up to date with current market trends and maintains a robust product portfolio. It also has strong operational capabilities due to its substantial years of experience in the market, granting the company a strong standing in the eyes of potential clients.

 

Weaknesses

  • No differentiating technology or brand:
    Every major player in the industry has similar technologies while others, such as Vestas, have the strongest brand recognition.
  • Margin pressure:
    Due to growing costs, price competition, problems along the supply chain, and debt interest repayments, the company remains in the red with high operating costs and negative net profits.
  • High debt:
    Excessive debt has created a situation where cost reduction is Nordex’s primary objective. Typically, in such a state, the R&D budgets and strategic initiatives that pay off in the long-term are scaled down. High debt can therefore hold back the speed of technological innovation, as well as Nordex’s competitiveness in the long run.

Opportunities

  • Repowering:

Nordex is wellpositioned to capture a significant market slice in the repowering of aging turbines in Europe and North America.

  • Growing markets in emergent economies:

In Latin America and Asia, several countries have laid out ambitious renewable energy targets, along with some substantial policies to help achieve those goals.

Threats

  • Strong price competition:

The field is becoming increasingly crowded with new competitors. Meanwhile, the auction mechanism has led wind turbine producers into fierce price competition that has had detrimental impacts on companies’ margins. Simultaneously, Chinese turbine producers have been gaining market power in recent years and therefore pose a significant threats to producers elsewhere.

  • Supply chain challenges:

As mentioned above, the pandemic created supply chain bottlenecks and raw-materials price increases that, in light of the war in Ukraine, have grown even more challenging. This confluence of problems could potentially serve to depress Nordex’s margins for years to come.

Scenario analysis: Nordex trading at its fair value?

Calculating the fair value of any company is always tricky business. To do so, several core predictions and assumptions need to be made. Armed with our comprehensive overview of Nordex, as outlined above, let us now take a look at the stock, compare quality and valuation, and draw some conclusions.

The fair value of the share

To determine Nordex’s fair value, based on data and analysis, I made the following assumptions for the next 10 years:

# 1 sales growth

My valuation model works with growth estimates for 2022-2026 (short-term) and 2027-2031 (long-term). This is how I determined growth for the two periods:

  • After a sales slump in 2018 and a subsequent recovery in 2019, revenue development has been positive for Nordex. From 2019 to 2020, sales grew in 41.6 percent, followed by a more modest growth of 17 percent last year. The company released its guidance for 2022 with expected sales between 5.4 (+1% YoY) and 6.0 billion EUR (+10% YoY), an unusually wide range.
  • Analysts’ current expectations for 2022 stand in the lower end of the guidance range with around a one percent growth. Market experts estimate a growth rate of four percent in wind installations over the next five years, with a lower expectation of 0.3 percent for onshore wind.
  • My short-term prediction for Nordex is that the cautious one percent estimate for 2022 is justified, given that Nordex is shutting down its blade production in Rostock while ramping up production in India this year. However, I predict that Nordex will grow along with the market by four percent in the next five years, as it’s well-positioned in the industry’s onshore sector.
  • My long-term prediction for Nordex: three percent sales growth per year, with the expectation that market demand for onshore turbines will slow down.
# 2 net margin

Nordex’s net margin has stayed negative and kept falling last year, hitting
-4.2 percent in 2021. However, analysts estimate that the net margin will break even and become positive within the next two years. I am convinced that Nordex management will work hard to achieve eight percent EBIDTA margin as they announced, but I’d be surprised if the company could achieve a higher net margin than three percent in the long-term.

# 3 evaluation level

Today, the stock is valued with a negative P/E ratio of -9.8, but the ratio is expected to become positive over the coming years. I predict that the share, based on the other considerations, will be valued at an average P/E ratio of seven.

My return expectation

According to the yield calculator, the stock currently looks significantly overvalued. 

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IMG 20220406 WA0061

Conclusion: Buy Nordex? Pro Contra

Pro

  • Nordex has exhibited continuous sales growth with a strong order backlog.
  • The company has managed its debt well, resulting in the mitigation of a significant debt burden.
  • Nordex is well-positioned in the onshore wind turbine market, and it’s expanding to emergent markets in India and Latin America.

Contra

  • Nordex margins stayed negative in recent years, and it remains to be seen if the company can turn margins around as expected.
  • Strong industry-wide price competition, as well as material price increases, are expected to continue. With other players better positioned in the industry – and without a significant edge in its business model as compared to other players – Nordex could be outcompeted in the future.
  • The market for onshore wind turbines is expected to diminish over the coming years.
  • The stock currently appears to be overvalued.

My opinion

An investment in Nordex is a hope for turnaround, given that the company operates in an essential market sector that supplies carbon-free electricity to households, industry, and transportation systems. Although the wind sector overall is widely expected to undergo high growth over the next decade, wind turbine manufacture is a highly cyclical business with historically low margins. Nordex in particular finds itself in a tough spot at the moment. The company will not join the coming offshore boom and will therefore find it difficult to grow. Margins will remain negative and afterward become wafer-thin for some time.

All told, I see the industry remaining attractive over the long-term. However, for the reasons outlined above, my personal view is that now is not the ideal time to buy Nordex stock. I do have an older position in Nordex that I intend to hold long-term, but I’m not considering buying any more Nordex shares at the moment.

 

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In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.