Gamesa is one of those stocks that I’ve always wanted to own but have never been able to, due to its sky-high rating. But after the two-year sell-off across the renewable energy sector, its shares are at all-time lows of €6, compared to €35 back in 2008.
The firm is a top-five player in the design, manufacture, installation and maintenance of wind turbines, with a global market share of around 13% (so it lags industry giants Vestas of Denmark and Germany’s Siemens). The main reason for its demise has been that its clients, particularly in its home market, have struggled to raise finance to construct on-shore wind farms. This, together with recent carbon-subsidy changes in Italy and Spain, which quashed demand, forced the board in July to cut its top line guidance for 2010 and 2011 by -14% and -17% respectively.
But despite these temporary hiccups, wind power is a good long-term bet – after all, we need to reduce greenhouse gas emissions drastically over the next 40 years. Indeed, more environmentally friendly energy should drive 15%-plus growth for the foreseeable future.
The sluice gates are already beginning to open. Gamesa bagged a prestigious contract earlier in August to build a large wind farm in Honduras. Trading in the third quarter of 2010 has started positively, with the Spanish and Italian governments both favourably resolving their positions on carbon rebates.
And Gamesa is also a compelling emerging markets play. China and India combined represented 34% of sales in the first half of 2010, up from 13% only a year ago.
Gamesa (Spanish IBEX: GAM)
In relation to the numbers, analysts are forecasting 2010 sales and underlying EPS of €2.7bn and €0.36 respectively, rising to €3.1bn and €0.52 cents in 2011. That puts the shares on undemanding p/e ratios of 16 and 11.1. The balance sheet is solid with net debt of €345m, representing a debt/Ebitda ratio of 1.1. However, I would value the group on a through-cycle Ebita multiple of ten, assuming sustainable margins of 10%. That generates an intrinsic worth of some €9.5 per share.
Fine, but what could upset the apple cart? Well, the firm is subject to the usual sector-related risks of regulatory uncertainty, the suspect economy, and price pressure. Also, following the termination of negotiations in July with Germany’s Bard, Gamesa will not have an offshore turbine in its portfolio before 2014. However, I’m not deterred because, at these depressed levels, there’s plenty of upside, together with the outside chance of a take-over approach from a large industrialised group.
Recommendation: SPECULATIVE BUY at €5.75
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments