siemens gamesa - banco bpi

Siemens Gamesa Renewable Energy

ST pain, LT gain? Buy (YE18 Price Target cut from € 26.00 to € 17.50; Recommendation upgraded from Neutral to Buy)

High-Risk

5 Sep. 17 (16:32)

3Q17 results and guidance for 4Q17: A weak performance in Q3, a 60% slash

in the order intake and low indications for Q4 triggered a severe market correction

with the stock down c30% in one week. YTD, the stock is down 23%. Although the

reasons behind the disappointment - halt in the Indian market, delays in US Safe

Harbor contracts conversion and offshore volatility - could be temporary, in the ST

the stock should remain pressured. November could enhance visibility with Q4

results disclosure (7th) and a CMD presentation.

Synergies >€ 230mn: Annual € 230mn synergies in a steady state would mean a

c.2pp EBIT margin boost but such a margin increase is unlikely given the mounting

pricing pressure. We are assuming an Underlying EBIT margin uplift from 8.1% in

2017 to 9.2% by 2020, driven by a recovery in WTG brought on by the

appropriation of synergies and some normalization in market conditions.

Long term gain? We set a YE18 Price Target of € 17.50/sh, after revising our

estimates. The industry continues to face important challenges such as pricing

pressure from auctions, growing competition from solar PV or ongoing

overcapacity but the growth outlook for wind power remains buoyant. On an

underlying basis, the stock trades at a minor discount to Vestas while the upcoming

CMD may bring upside risks on synergies execution and EBIT margin expectations

in the medium-run. 2020 FCF Yield ex-growth would stand at c12%F (vs. 10%F)

and in such a no-growth scenario (from 2020), our DCF valuation would still

provide a c15% simple upside to current market prices. Although in the ST, the

stock should remain pressured by the lack of visibility, for those patient to endure

a tough Q4 and a weak 1H18, Siemens Gamesa is an enticing play. BUY.

Spain Siemens Gamesa vs. IBEX35 vs. DJ Stoxx 600

Source: Bloomberg.

XIV IBERIAN CONFERENCE

6-8 September, Cascais, Portugal

Full details and registration now at https://www.bpiequity.bpi.pt/Conference/

Historical Recommendation Date Recommendation

29-Jan-16 Neutral

29-Jun-16 Buy

06-Sep-16 Neutral

Note: Historical recommendation for

Gamesa and Siemens Gamesa.

Source: BPI Equity Research.

Stock Data

Price (1st Sep): 12.38 Price Target (YE18): 17.50

# shares (mn): 681.1 M. Cap (€ mn) / F. Float: 8 433 / 33%

Reuters/Bloomberg: SGREN.MC/SGRE SM Avg. Daily Vol. [€'000]: 61 302

Major Shareholders:

Siemens (59%), IBE (8%)

(1) EV is fixed with current market cap and MV of remaining items.

Estimates 2014 2015 2016 2017F 2018F 2019F 2020F

PE Adj. 32.7 23.9 11.6 13.0 12.8 11.4 10.5

Dividend yield 0.0% 0.7% 1.3% 12.7% 1.1% 0.9% 1.5%

FCFE Yield 3.9% 2.5% 13.1% n.s. 2.2% 6.0% 7.8%

FCFF Yield 4.0% 1.7% 15.7% n.s. 5.8% 8.7% 10.1%

PBV 6.1 5.5 1.3 1.3 1.2 1.1 1.1

EV/EBITDA (1) 23.7 16.7 6.4 6.1 5.6 5.3 5.0

EV/Sales (1) 3.0 2.5 0.8 0.8 0.8 0.7 0.7

Available on our website:

www.bpiequity.bpi.pt, BPI Online,

and Bloomberg at NH BPD.

Analysts

Flora Trindade, CFA [email protected]

Phone 351 22 607 4377

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Sep-16 Mar-17 Sep-17

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Siemens Gamesa

DJStoxx 600

IBEX

https://www.bpiequity.bpi.pt/Conference/

mailto:[email protected]

148792

Link Site

https://www.bpiequity.bpi.pt/others/fileHistoricRec.aspx?emp=00026753

2

Equity Research Siemens Gamesa September 2017

Consensus and Stock Momentum

BPI estimates/Consensus EBITDA Consensus (€ mn) EPS Consensus (€/sh.)

2017 2018 2019

Revenues 8% 3% 2%

EBITDA -5% -16% -1%

EBIT 7% 7% 6%

Net Profit 29% 20% 15%

ND/Cash -49% -62% -48%

Market Price Rating (€/sh.) Fair Value Comparison (€) Market Recommendations

Source: Bloomberg and BPI Equity Research.

Main Assumptions

0

400

800

1 200

1 600

17Y 18Y 19Y

31-07-17 31-08-17

0.00

0.40

0.80

1.20

17Y 18Y 19Y

31-07-17 31-08-17

4

9

14

19

24

29

Sep/15 Sep/16 Sep/17

Price

Price Target Consensus

13.17

32.87

16.74 17.50

0

10

20

30

40

P/E P/BV Consensus BPI

Current Market Price

Positive36%

Negative36%

Neutral28%

2013 2014 2015 2016PF 2017F 2018F 2019F 2020F

Global new cap. (GW) 47.4 51.0 63.1 54.1 53.0 63.7 65.5 64.3

Volumes (GW) 1 953 2 623 3 180 7 929 9 200 9 700 10 400 11 000

Price/MW (€) 1.01 0.92 0.95 1.25 1.08 1.02 1.01 1.01

NWC/sales 8.1% 2.2% -0.3% -5.5% 1.8% 1.1% 1.0% 0.5%

Capex/Sales 5.2% 3.8% 4.8% 1.9% 6.3% 5.0% 3.5% 3.5%

Sales (€ mn) 2 336 2 846 3 504 11 024 11 170 11 197 11 872 12 503

WTG 1 971 2 411 3 033 9 885 9 965 9 934 10 549 11 117

O&M 365 435 471 1 139 1 205 1 263 1 323 1 385

Underlying EBIT (€ mn) 123 181 294 1 065 906 914 1 062 1 151

WTG 80 126 231 915 707 705 844 923

O&M 43 55 63 150 199 208 218 229

Underlying EBIT mg 5.3% 6.4% 8.4% 9.7% 8.1% 8.2% 8.9% 9.2%

WTG 4.1% 5.2% 7.6% 9.3% 7.1% 7.1% 8.0% 8.3%

O&M 11.8% 12.6% 13.4% 13.2% 16.5% 16.5% 16.5% 16.5%

Source: Siemens Gamesa, BPI Equity Research.

3


Siemens Gamesa at a Glance

Shareholder structure Order Book (GW)

Annual wind installations per region (GW) Annual wind installations onshore vs offshore (GW)

Onshore - Suppliers market-share in 2016 Offshore - Suppliers cumulative market-share (YE16)

Historical EBIT (€ bn) and Underlying EBIT mg Estimated Revenues (€ bn) and EBIT mg

Source: Gamesa, BNEF, BPI Equity Research.

Siemens59%Iberdrola

8%

Others33%

12.7

9.210.2 10.2

0

4

8

12

16

WTG Services

3Q16 3Q17

0

20

40

60

80

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Onshore Europe Onshore N. AmericaOnshore Asia Onshore OthersOffshore

35 40 4532

4859 53 54 59 58 57

1.30.3

1.4

2.1

0.9

4.21.9 6.0

4.9 7.4 7.3

0

20

40

60

80

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Onshore Offshore

Vestas16.5%

GE12.3%

Goldwind12.1%

Gamesa7.0%

Enercon6.6%

Nordex5.0%

Guodian4.2%

Siemens3.9%

Ming Yang3.7%

Envision3.7%

Others25.0%

Siemens63%

MHI Vestas15%

Senvion7%

Areva5%

Bard3% Sinovel

2%

Others5%

8.7%9.2%

>8%

0

5 000

10 000

15 000

LTM Jun16 LTM Jun17 Guidance LTMSep17

WTG Services Underlying EBIT mg

0%

4%

8%

12%

0

4

8

12

16

2016P

F

2017P

FF

2018F

2019F

2020F

2021F

Revenues EBIT mg

Underlying EBIT mg

4


INVESTMENT CASE WIND INDUSTRY IN CONSOLIDATION MODE The merger between Siemens and Gamesa followed a wave of M&A or JV deals in the sector, including GE and Alstom, Nordex and Acciona as well as Vestas and Mitsubishi, to name a few. The trend has also expanded across the value chain with GE acquiring LM, the leading provider of blades, late last year. The industry consolidation has improved the positioning of the involved parties – including Siemens Gamesa - which has consequently increased the competitive pressure in the market.

WIND POWER GAINING RELEVANCE At the end of 2016, worldwide wind installed capacity reached 487GW (GWEC), after adding 54GW during the year. This showed a deceleration from 2015 when over 60GW were installed, mostly due to China. Still, since 2001, average annual growth reached 22%, boosted in the onset by attractive regulatory incentives and more recently by the growing competitiveness of wind power.

Wind installations 2001-2016 (GW) Wind capacity additions 2006-16 (GW)

Source: GWEC.

In offshore alone, installed capacity reached 14GW by YE16, with the UK maintaining the leadership, securing around 36% of worldwide offshore installed capacity followed by Germany. China surpassed Denmark after adding 592MW, and is now the third largest country in offshore installed capacity. After a dull 2016, with c2GW installed, wind offshore capacity additions are expected at around 6GW in 2017, mostly in Europe (mainly Germany, UK and Netherlands) and Asia (mainly China).

Offshore cumulative capacity (GW) Offshore new capacity (GW)

Source: BNEF.

Wind capacity additions forecasts 2017-2021 (GW)

Source: BNEF.

YE16 Offshore Wind by region

Source: GWEC

0

100

200

300

400

500

600

2001

2003

2005

2007

2009

2011

2013

2015

+22% CAGR

1520

25

3835

4045

4751

63

54

0

20

40

60

80

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

10

20

30

40

2009

2010

2011

2012

2013

2014

2015

2016

2017F

2018F

2019F

2020F

0

2

4

6

8

2009

2010

2011

2012

2013

2014

2015

2016

2017F

2018F

2019F

2020F

56

58

60

62

64

66

2017 2018 2019 2020

UK36%

Germany29%

China11%

Denmark9%

Netherlands8%

Belgium5%

Sweden1%

Others1%

5


In 2017, new wind installations (onshore + offshore) are expected at around 59GW, mostly supported by growth in emerging markets (although

India has been a disappointment so far which may drag down final figures) and offshore (where Siemens is one of the main players). 2018 is expected to show a modest 3% yoy growth in capacity additions mostly due to flat additions in Europe and Asia. These areas should return to growth from 2019 (5-6% average), combined with LatAm and the US. In the US, despite doubts following the new administration comments, RPS in several states, growing demand for PPAs and bi -partisan support for PTCs phase-out scheme should help to support market expansion.

YE16 Installed Wind Capacity by region Wind capacity additions 2017 by region

Source: GWEC, BNEF.

AND IN THE LONGER TERM, WHAT’S THE FUTURE FOR RENEWABLES? The IEA estimates a 30% rise in global energy demand to 2040. In this scenario, renewable energy is the one facing the strongest growth forecasts. By 2040, the IEA estimates that c.40% of all power generation capacity will come from renewables and that by that time the majority of the renewable energy generation will be competitive without subsidies. Solar PV costs are expected to decline by 40-70% by 2040 and onshore wind by 10-25%. Over the period to 2040, renewables account for almost 60% of all new power generation capacity additions leading wind and solar combined to have more installed capacity than any other source of generation by 2040. This will obviously bring some challenges including the strengthening of electricity grids and management of the availability and interruptibility of renewables power plants.

Share of global demand met by renewable energy

Note: New Policies Scenario: takes into account existing energy policies and announced

intentions such as those submitted for COP21. Current Policy Scenario: considering

only policies firmly enacted as of mid-2016. 450 Scenario: pathway to limit long-term

global warming to 2ºC above pre-industrial level. Source: IEA.

In the more optimistic scenario, renewable energy share in generation increases to around 60%. Under this scenario, wind alone is expected to represent some 18% of total generation by 2040 vs. c3% back in 2014.

N. America

20%

Europe33%

Asia42%

Latam&Caribbean3%

Africa & ME1%

Pacific region

1%

N. America

17%

Europe24%

Asia49%

Latam&Caribbean6%

Africa & ME3%

Pacific region1%

2014 2040New Policies Scenario

2040450 Scenario

Total demandRenewables

Indirect renewables

Electricity(Thousand TWh)

Heat(Thousand Mtoe)

Transport(Thousand Mtoe)

24

23%

39

37%

3458%

5.0

9%

6.1

15%

5.322%

2.6

3%

3.4

7%

2.7

20%

6


Evolution of the power generation mix in the “450 Scenario” 2014 2040 23 800TWh 34 100TWh

Source: IEA.

The growth outlook for wind power is buoyant and Siemens Gamesa following the merger are clearly better positioned to take advantage of these trends. The industry however continues to faces some challenges ahead such as the growing competition from solar PV, the ongoing overcapacity or the lack of storage capacity and grid integration issues. As time goes by, repowering should also represent a new stream of opportunities.

SIEMENS GAMESA RELATIVE POSITIONING In 2016, Siemens Gamesa was the fourth largest player in onshore installations with a combined market-share of 10.9%, behind Vestas (#1; 16.5%), GE and Goldwind.

Wind onshore capacity additions market-share

Source: BNEF.

In offshore, Siemens is the market leader with a cumulative market -share of over 60%, followed by MHI-Vestas with around 15%. New offshore capacity is expected to accelerate in 2017 to c6GW (c2GW in 2016, mostly in Europe).

Global power sector investment in 2016-40 ($ tr, 2015)

Source: IEA.

Wind offshore cumulative market-share (2016)

Source: BNEF.

Nuclear11%

Hydro

16%

Wind3%

Solar PV1%

Otherrenewables

2%

Unabatedfossil fuels

67%

Nuclear18%

Hydro

20%

Wind18%

Solar PV9%

Otherrenewables

11%

Unabatedfossil fuels

16%

CCS8%

13.5% 12.6%10.2%10.0% 5.3% 5.2% 4.8% 4.7% 3.4%

30.3%16.5%12.3% 12.1% 10.9%

6.6% 5.0% 4.2% 3.7% 3.7%

25.0%

0%

10%

20%

30%

40%

Ve

sta

s

GE

Gold

win

d

Sie

me

ns G

am

esa

En

erc

on

Nord

ex

Guodia

n

Min

g Y

ang

En

vis

ion

Oth

ers

2015 2016

2.7

1.3 1.42.1 2.4

3.90.8 CCS

1.8

2.51.7

2.3

0.6

0.9

0.5

1.4

0

2

4

6

8

10

12

NPS 450 NPS 450 NPS 450

Fossil fuels Nuclear Renewables

Wind

Solar PV

Hydro

Bioenergy

Other

Siemens64%

MHI Vestas15%

Senvion7%

Areva5%

Bard3%

Sinovel2%

Others5%

7


MAIN INDUSTRY TRENDS (i) Industry Overcapacity

Average onshore WTG prices have been under pressure due to overcapacity in the sector and strong competition. Bloomberg New Energy Finance (BNEF) estimates a total turbine nameplate production capacity of c.123GW this year vs. demand of 59GW, implying a capacity utilization of 48% vs. 54% in 2015. Overcapacity is mainly witnessed in China and Europe.

Wind Turbine Nameplate capacity (GW) Nameplate capacity vs. Demand

Note: LatAm+RoW demand forecasts include offshore.

Source: BNEF.

(ii) Increasing number of auctions

Additionally, after years of generous premium tariffs, several countries have started to introduce competitive auctions for new capacity awards. According to IRENA (International Renewable Energy Agency), the number of countries opting for auctions has increased from 6 in 2005 to at least 67 by mid-2016. This has fostered competitive pressure whilst removing the burden of incentives over a country’s electricity system budget as in the past. Average prices in recent auctions stand well below previous regulated tariffs, ultimately putting pressure also on turbine providers.

Average prices in auctions (2010-16) (USD/MWh)

Source: IRENA.

(iii) Bringing pricing pressure Pricing pressure has been mainly witnessed in markets where overcapacity is more significant such as China but also in markets where auctions are the main award mechanism. Competition is coming also from solar PV, which is competing directly with wind power for new capacity in capacity auctions.

Wind Turbine Price Index (€mn/MW)

Source: BNEF, Bloomberg.

110116 119 123 124

0

20

40

60

80

100

120

140

2014 2015 2016 2017 2018

China North AmericaEurope LatAm+RoW

123

59

0

40

80

120

160

Capacity Demand

China North AmericaEurope LatAm+RoW

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016

US

D/M

Wh Solar prices

Wind prices

0.5

0.75

1

1.25

1.5

Dec-0

9Ju

n-1

0D

ec-1

0Ju

n-1

1D

ec-1

1Ju

n-1

2D

ec-1

2Jun

-13

Dec-1

3Ju

n-1

4D

ec-1

4Jun

-15

Dec-1

5Ju

n-1

6D

ec-1

6Ju

n-1

7

8


Auctions prevail in markets where Gamesa standalone is a key player, such as India or Brazil. India hosted the first wind auction in February 2017 (1GW). A total of 1GW was awarded in this auction. The auction brought tariffs down to USD 51.9/MWh (IRN 3.46/KWh), below the feed-in tariffs prevailing in any Indian state (c. IRN 5/KWh). There has been a clear slowdown in the market with no further visibility on new MWs on top of the auctions launched by the government . Two additional auctions could take place in the remainder of the year, each totalling 1GW. Some industry sources are pointing to capacity additions of 1-3GW this year in India vs. initial expectations of 4-5GW.

(iv) Mitigated by ongoing cost reductions

Technological progress alloyed to the ongoing effort to reduce costs of wind turbines has been allowing the industry to mitigate the impact from pricing pressure, protecting margins. In fact, wind is now cost competitive with conventional energy sources in several markets driven by technological advancements and the trend is expected to continue (IEA estimates a further 10-25% cost reduction in wind onshore).

Levelized Cost of Energy ($/MWh)

Source: Lazard.

Although there are other drivers, further cost reductions are expected to come in a great part from the use of larger and more efficient turbines with increased hub heights and rotor diameters. Increasing rotor diameter and height is believed to be the best way to access more power from wind turbines.

Turbine size evolution - onshore

Source: Berkley Lab, Nature Energy.

Wind Turbine Price Index (€/MW) and SGRE

Source: BNEF, Bloomberg.

32

46 48

97

60

62 61

78

136 143

0

40

80

120

160

Wind Solar PV CCGT Nuclear Coal

0

0.4

0.8

1.2

1.6

0

5

10

15

20

25

Dec-0

9

Jun

-11

Dec-1

2

Jun

-14

Dec-1

5

Jun

-17

Wind Turbine

SGRE

9


Turbine size evolution - offshore

Source: Berkley Lab, Nature Energy.

(iv) And growing weight of the services division

Turbine manufacturers are working to expand their services/O&M units which bears higher margins and more stable CFs. An aging fleet, with several wind farms already out of the warranty period, opens an expanding market for O&M services and specific offerings for improved efficiency, life extension or reconditioning products. Vestas services a fleet of 71GW vs. 54GW for Siemens Gamesa, including 7.7GW from offshore. We estimate Siemens Gamesa O&M revenues at € 1.2bn in FY17 (11% of total sales), with a margin of 16.5%. Vestas has boosted its exposure to the services business through the acquisition of two independent service providers UpWind (>3GW) and Availon (>2.6GW) in late 2015/early 2016 , which should help it to have some margin cushion going forward . Notwithstanding, the O&M/services business also faces some challenges as large utilities are trying to increase the share of in -house maintenance. (v) Offshore reducing costs and requiring lower tariffs

The offshore industry had a targe t of reducing prices to around € 100/MWh by 2020. However, in 2016 several tenders in Northern European markets were already set below the € 100/MWh mark – Netherlands € 72.7/MWh (July) and € 54.5/MWh (Dec.); Denmark – € 64/MWh (Sept.) and € 49.9/MWh (Nov.). According to GWEC, these prices do not include transmission costs, which could add up some € 6 -12/MWh and still stand clearly below the € 100/MWh mark. Although these prices have to be analysed considering the characteristics of each specific market (such as location, access to grid, etc.), it shows a clear downward trend and may lead some countries to accelerate their offshore growth plans. Offshore is one of the main growth axis in wind power, with installed capacity expected to grow at a 30% CAGR16-20.

Fleet under maintenance (MW)

Source: SGRE.

Siemens Gamesa Services: Revenues and EBIT (€ mn)

Source: SGRE, BPI Equity Research.

0

20 000

40 000

60 000

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

Onshore Offshore

0%

5%

10%

15%

20%

0

500

1 000

1 500

2 000

2016P

F2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

2025F

Revenues EBIT mg

10


FINANCIAL ESTIMATES Visibility on strategic guidelines, portfolio rationalization and capex plans are still relatively scarce. A strategic presentation will be hosted in November. Until then, we detail below the main assumptions behind our financial model. Disappointing 3Q17 – the first quarter for the combined group

Q3 (Apr-Jun) sales reached €2693mn, down 7% yoy, impacted by a decline in WTG sales (-9%). Sales were impacted by the downturn in the Indian market following the introduct ion of auctions. Excluding India, sales would have increased 1.6% yoy. Underlying EBIT margin pre-PPA (or excluding € 36mn integration costs and € 124mn amortization of intangibles fair value from the PPA) came at 7.8%, down 1.3pp yoy (8.6% excluding India). India was the main individual market for Gamesa on a standalone basis, representing 38% of volumes in 2016 and 29% in 2015, which would be equivalent to some 20% of the combined group. In 3Q16, India was responsible for sales of € 273mn and € 38mn EBIT, with an implicit margin of 13.9% (vs. average 9.6% margin for Gamesa group). This compares with a negative EBIT contribution of € 18mn in 3Q17. The introduction of auctions has led to a freeze in the market that is still adapting to the new tendering rules. There are further auctions scheduled, which considering the typical lag between the auction award and the materialization of orders may extend the volume pressure for Siemens Gamesa in the short -term. Siemens Gamesa also recognised some delays in the US market with developers postponing the conversion of orders included in the Safe Harbor contracts (the phase-out of PTCs started in 2017 - projects that started construction before the end of 2016 were entitled to 100% of the PTC; projects are considered to be under construction if a minimum of 5% of the capital cost has been incurred). Management expects these orders to be more concentrated in 2019-20. Again this seems to be a temporary issue that should also affect other WTG providers. Order intake down 40% and implicit Q4 EBIT margin guidance at 4%

On top of the weak financial performance during Q3, Siemens Gamesa already reported a relevant slash in the order intake. At the end of June, the order intake reached 693MW, from 1662MW a year before. On top of the halt in the Indian market (450MW in 3Q16), the de lays in US Safe Harbor contracts, orders in markets such as EMEA and Europe also shifting towards 2H of calendar year as well as volatility in the offshore market are pointed out as reasons behind the order intake disappointing performance. Siemens Gamesa believes these are temporary issues, expected to be recovered in the coming quarters. LTM Sept17 EBIT margin is expected to stand at or above 8%, implicitly meaning an EBIT mg for Q4 of c.4%, which is clearly a very low level. We would have to go back to 2011-12 to see EBIT margins of 4% (or below) in one quarter for Gamesa standalone.

Stock price (€/sh) and EBIT mg evolution

Source: Gamesa, Bloomberg.

India contribution

Source: Siemens Gamesa.

Guidance


-12%

-8%

-4%

0%

4%

8%

12%

0

5

10

15

20

25

30

2008 2009 2010 2011 2012 2013 2014 2015 2016

GAM

EBIT mg

(€ mn) 3Q16 3Q17

Sales 273 25

EBIT 38 -18

EBIT mg 13.9% -72.0%

(€ mn) LTM Sep17PF LTM Sep16PF

Rev enues 11 000-11 200 10 441

Underly ing EBIT

(pre-PPA)c.900 945

Underly ing EBIT mg

(pre-PPA)> 8% 9.1%

NWC/sales -3% to +3% 3.2%

Capex 704

11


Main modelling assumptions: - Sales up 4% in 2017-20F

We estimate onshore volumes of 8.1GW by 2020 and offshore of 2.9GW, implying total volumes of 11GW by 2020, from 9.2GWF in 2017F. This implies volumes 2017-20F CAGR of 6%, of which 3% for onshore and 18% for offshore, which we believe is relat ively conservative considering industry estimates of 10% CAGR for onshore and 26% for offshore. Volume growth of 6% compares with sales growth of 4%, mainly impacted by an assumed 2% decline in average selling prices. For the services division which includes the maintenance of 54GW currently and some 59GW estimated by 2020, we are assuming a sales 2017-20F CAGR of 5%.

Volumes (GW) Sales assumptions (€ bn)


- 2018 still tough... Underlying EBIT margin of 8%-9% in 2017-20F

Annual synergies of € 230mn in a steady state would be equivalent to a c.2pp EBIT margin boost. In our estimates however, we are assuming that Siemens Gamesa will have to use part of these synergies to have a more competitive offering, sharing a part of the synergies with clients, trying to preserve its “base EBIT margin”. As such, we are assuming an Underlying EBIT margin (excluding PPA amortization and integration costs) uplift from 8.1% in 2017 to 9.2% by 2020 (9.5% by 2023), driven by a recovery in WTG following an expected normalization in the Indian, US and offshore market and the appropriation of synergies. Considering integration costs (0.8%, 0.9% and 0.2% of sales in 2017-19, respectively), average EBIT margin in 2017-20F (ex-PPA amortization) stands at 7.8%. 2018 will still be a tough year impacted by pricing pressure. EBIT margin is therefore expected to remain roughly flat in 2018 with the incorporation of synergies roughly offsetting the expected pricing pressure and integration costs. In the initial plan, over 50% of synergies were expected to be extracted already by year 2. In our forecasts, we are assuming c.€160mn synergies in 2018 vs. € 105mnF of integration costs. Assumed synergies represent some 1.4% of total sales which should be used to offset integration costs and to be more competitive in the current context of pricing pressure and therefore not bringing a meaningful contribution to margin expansion in 2018.

Sales and Average Selling Price

Source: Siemens Gamesa, BPI Equity

Research.

0

4

8

12

16

2017F

2018F

2019F

2020F

2021F

2022F

2023F

Onshore Offshore

0

4

8

12

16

2017F

2018F

2019F

2020F

2021F

2022F

2023F

WTG Onshore WTG Offshore

Services

0.8

1.0

1.2

0

5

10

15

FY

16P

F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

Sales (€ bn)

Avg prices (€mn/MW)

12


EBIT / EBIT mg (reported and underlying)


- Higher capex in 2017-18 on commitments assumed; 3.5%F of

sales from 2019

The merged entity should continue to use a flexible and modular capex approach, dependent on the pace of growth. For 2017PF, we are assuming the capex guidance given by the company of € 704mn (6.3% of sales), impacted by commitments already assumed. In 2018, capex should still be slightly above the LT average at an assumed ratio of 5% of sales or € 560mn. Considering the modular capex approach, we have assumed a capex/sales ratio of 3.5% from 2019 onwards, consistent with a low-single digit revenue growth.

- NWC/sales... assuming conversion towards 0%

In 2016, PF NWC/sales stood at -5.5% and we are assuming the group should be working towards a c.0% ratio unt il there is further visibility on guidance. We are modelling a NWC/sales ratio of +1.8% for 2017 vs. a guidance of -3%/+3%, +1.1% for 2018 and c.0% in the long run. - Average FCF of € 350mn in 2018-20F

As a consequence of the assumptions detailed above, we expect Siemens Gamesa to see its net cash position of € 236mn at the end of June declining to € 77mn by YE17, with a Q4 CF consumption of c€ 159mn, of which €189mn from capex and € 56mn from working capital. Going forward, a normalization of NWC and capex as well as the incorporation of synergies implies an average FCF of around € 350mn in 2018-20F (still impacted however by the cash outflow related with Adwen and SWP quality provisions), equivalent to an average FCFE yield of 5%. We estimate ROCE to surpass our WACC assumptions only after 2020.

FCF estimates (€ mn)


ROCE vs. WACC


3%

6%

9%

12%

0.0

0.4

0.8

1.2

1.6F

Y1

6P

F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

Reported EBIT (€ bn)

Reported EBIT mg

Underlying EBIT mg after integration costs

Underlying EBIT mg

-3000

-2000

-1000

0

1000

2000

2017F 2018F 2019F 2020F

EBITDA NWC

Financials&Taxes Capex

Dividends Others (incl Provisions)

0.0

0.4

0.8

1.2

1.6

2.0

0%

4%

8%

12%

16%

20%

2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

2025F

ROCE/WACC

WACC

ROCE

13


VALUATION & RECOMMENDATION Siemens Gamesa will hold a Capital Markets Day in November, when the group is expected to share with the market the main strategic guidelines, the progress of integration and financial targets. In the meantime, Q3 results (Apr-Jun) already reflected the combined company financials. The fiscal year was changed to October- September to align with Siemens’ reporting. Market Performance

Siemens Gamesa is down 23% YTD vs. a 27% hike of its closest peer, Vestas. The stock was up by c.30% until mid-May and started correcting since then, mostly triggered by concerns around profitability levels after recognising pricing pressure brought on by auctions, specially the one in India (first one in February) which is a key market for Gamesa on a standalone basis and a major market for the combined group. The correction has accelerated following Q3 results as the combined group reported disappointing EBIT margins and a weak guidance for Q4 as well as a strong decline in the order intake. The low visibility on the combined group strategy and targets has also played its role, we believe.

WTG players performance

Source: Bloomberg.

According to our estimates, Siemens Gamesa is now trading at an EV/EBIT17-18F of 15-19x on reported figures or 9.5x-9.6x on an underlying basis, at a slight discount to Vestas (10.2-9.7x). € 17.50/sh YE18 Price Target

We value Siemens Gamesa through DCF, with an explicit period until 2030, and a WACC of 8.5%. We revised our estimates following Q3 results, with an average 18% underlying EBIT cut driven by more conservative sales assumptions (on average prices and volumes). We have also adjusted our valuation for the provisions at Adwen and SWP quality provisions. These provisions total € 1.1bn currently (€ 498mn NPV in our SoP), and we have assumed that c50% would be expensed in 2017-18. We set a YE18 Price Target of € 17.50/sh

Sum of Parts

(€ mn) EV Method

WTG EV 11 848 DCF

Adj. Net debt YE18F (1) 328

Financial Investments 416 @ BV

Equity Value 11 936

# shares (mn) 681

YE18 Price Target (€/sh.) 17.50 (1) YE18F Net cash of € 170mn adjusted for € 498mn provisions NPV.

0

40

80

120

160

200

240

Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

Siemens Gamesa

Vestas

Nordex

GoldwindSuzlon

14


Source: BPI Equity Research. India... temporary or not?

According to GWEC, the main WTG suppliers in India are Suzlon, WindWorld, Siemens Gamesa, Vestas and Regen. The manufacturing capacity is estimated at 9.5GW and during 2016, capacity additions reached 3.6GW, the fourth largest in terms of capacity additions worldwide (behind China, the US and Germany) and a record for the country. The acceleration in new capacity additions was driven by the end of the GBI (Generation Based Incentive) by 2016/17 and the cut in Accelerated Depreciation benefits. Expectations that new orders in the non-auction market could help to compensate the slowdown brought on by the new auction system ended up not materializing leading to a freeze in the market. This year, new installations could range from 1-3GW vs. initial expectations of 4-5GW. On top of the 1GW auction back in February, India has announced two additional auctions of 1GW each. The country has a target of reaching 175GW of renewables by 2022, of which 60GW of wind power by 2022 from c.30GW currently, which would put average annual additions at 5-6GW! Hence, although not clear how long it will take to see the market normalising on the volumes front, we believe this slowdown should mainly reflect the adaptation of the market to the new auction system, not putting at stake the strong growth prospects in a wider timeframe. This said, we are likely to see much lower prices going forward and therefore, some margin pressure following the strong levels witnessed in the latest years (10-15%), the impact of the new auction system and the competition for new orders. Better positioned following merger

Gamesa and Siemens Wind Power lacked the scale to compete in an increasingly demanding industry context, on a standalone basis. The combined group is now much better equipped to weather the sector challenges with (i) a diversified geographic footprint; (ii) a wider product range with exposure to the growing offshore segment and (iii) r oom to grow in O&M services (incl. offshore) supported by a (iv) healthier financial backup (Siemens). But not without risks

Integration and execution risks are the most obvious in the initial stage of the merger process. Portfolio rationalization could be a challenge as well as harmonising the groups’ components strategy (blades, gearbox/direct drive,...). Synergies are targeted at € 230mn, from year 3, representing some 2pp of current sales. The growing number of countries making a transition to an auction system, the growing competitiveness of solar and the overcapacity in the industry should increase the pressure to lower the LCOE (Levelized Cost of Energy) and consequently turbine prices. As such, we are unlikely to see a 2pp EBIT margin increase since Siemens Gamesa is likely to use this cushion to improve its product offering competitiveness and preserve the 8-10% target EBIT margin. Upgrading to Buy

The last quarter of 2017 and the first semester of 2018 are likely to mirror EBIT margin pressure brought on by tough pricing trends. However, in a wider timeframe, Siemens Gamesa is well placed to benefit from the industry’s resilient growth prospects. 2020 FCF Yield ex-growth would stand at c.12%F (vs. 10%F) and in such a no-growth scenario (from 2020) our DCF valuation would still provide a c15% simple upside to current market prices. For those willing to endure the short term hiccups, the recent correction offers an interesting entry point. BUY.

Changes in estimates


Changes in valuation


Sensitivity to LT EBIT mg and WACC (€/sh)


2017F 2018F 2019F

Rev enues -1% -9% -11%

Underly ing EBIT -11% -21% -18%

Underly ing EBIT mg -1.0pp -1.2pp -0.8pp

EBIT -44% -61% -43%

EBIT margin -4.0pp -5.4pp -3.5pp

Underly ing NP -7% -17% -17%

NP as reported -45% -62% -43%

Net debt/Cash -94% -89% -69%

Now Before Chg

WTG EV 11 848 16 162 -27%

Adj ND 328 1 147 -71%

Fin Inv 416 416 0%

Equity Value 11 936 17 725 -33%

YE18 PT 17.50 26.00 -33%

7.0% 9.0% 11.0%

9.5% 14.75 15.45 17.60

9.0% 15.65 16.45 18.80

8.5% 16.65 17.50 20.20

8.0% 17.75 18.75 21.75

7.5% 19.05 20.15 23.55

Perpetuity EBIT mg

WA

CC

15


SIEMENS GAMESA MERGER Main terms

Gamesa and Siemens announced their merger in June last year, following the confirmation of negotiations in the beginning of February. The merger was effective last April. Siemens received shares representing 59% of the merged entity and Gamesa’s shareholders retained the remaining 41% (Iberdrola 8%). The exchange ratio valued Gamesa at € 4bn equity value (market cap pre-deal) and Siemens at € 5.8bn. As part of the deal, Siemens paid a DPS of € 3.75/sh to Gamesa’s shareholders. The merged company remains listed and headquartered in Spain. #4 wind onshore player; #1 in offshore

Siemens Gamesa secured an 11% market-share in 2016, the 4 th largest player in wind onshore. Both companies have a combined backlog of € 21bn (€ 5.7bn Gamesa + € 15.2bn Siemens), a combined installed base of over 70GW (Vestas 82GW) and a fleet under O&M of 54GW (Vestas 71GW). Strong complementary fit

Gamesa and Siemens show a strong geographic fit with Gamesa stronger in LatAm and Asia Pacific regions whilst Siemens has a stronger foothold in North America and Europe. The client type of both groups is also different with Gamesa mainly focussed on Southern European utilities and local IPPs in emerging markets whilst Siemens mostly focussed on Northern European and US utilities as well as local IPPs in developed markets.

Siemens and Gamesa geographical footprint

Source: MAKE, Gamesa.

The complementarity extends to the product range. The wide product portfolio range should be under revision in an effort to rationalize the group’s offering.

Gamesa’s product range is basically onshore (offshore through Adwen), in markets with capacity restrictions (limited transmission capacity, “unlimited” land), which are typically emerging markets such as India or Brazil. Siemens on the other hand, has a strong position in offshore whilst in onshore it is mainly focused in land constrained markets/position limited (areas where there is a fixed amount of land, not limited by the capacity that can be accepted by the grid), such as Europe. On top of this, in the onshore segment Gamesa has a strong offering in the low-wind and medium-wind segments (but also for high-wind segment capacity

Gamesa Key Market

Siemens Wind Power key market

Market served by both

Siemens Wind Powerexisting factory

Siemens Wind Powerfactory under construction

Gamesa existing factory

Gamesa factory under construction

GamesaStronghold

Siemens WPStronghold

Siemens WPStronghold

GamesaStronghold

16


constrained markets such as Brazil) while Siemens is mainly stronger in medium-wind and high-wind segments. Larger turbines (>3MW) are typically suitable for land-constrained markets while capacity-constrained markets typically use turbines with a capacity of 1.5 -3MW.

Siemens and Gamesa product portfolio

Source: Gamesa.

Better equipped to face sector trends

Although obviously not immune, Siemens Gamesa is now better prepared to face the pricing pressure and overcapacity in the industry as the merger provides scope for synergies appropriation and a complementarity of their geographic footprint and portfolio of products. Additionally, with several players in the industry embarking in consolidation moves, Gamesa would be in a much weaker competitive position in relative terms on a standalone basis and would most likely be forced to sacrifice margins in order to be price-competitive. Cost and Revenue synergies: € 230mn in 3 years

Gamesa expects run-rate synergies of € 230mn , pre-tax, in 3 years (vs. an initial plan of 4 years). Cost synergies are expected to represent some 80-90% of total, while the remaining should come from revenue synergies. The majority of the synergies should be extracted in the onshore business (c70%). Total synergies of € 230mn represent some 2.1% of 2016PF revenues, which compares with c.3% in the Nordex/Acciona deal. Still, as we have mentioned before, we believe that an EBIT margin increase of this magnitude (2pp) is unlikely given the growing competitive pressure.

Synergy target by function


Revenue synergies should come mainly from the product and market complementarity mentioned above, both in the turbines (onshore/offshore) and services (widening service offering to more MW and additional services).

Siemens Gamesa

Chairwoman Rosa María García

CEO Markus Tacke

CFO Andrew Hall


Offshore

OnshoreMainstream

Positionlimitedproduct

Capacityrestrictedproduct

High wind

Mediumwind

Low wind

High wind

Mediumwind

Low wind

Siemens Wind Power Gamesa

D3SWT-3.3-130

G2

G4 + D7SWT-7.0-154

2.0 + 2.5G114-2.0 MW

5.0 (1)

1

1

1

30-40%

10-20% 10-20%

10% 10%

10-20%

Procurement Supply Chain Technology ProjectManagement

G&A andother

Sales

17


Cost synergies are the most relevant ones and comprise: - Procurement: optimising the insourcing/manufacturing capacities,

taking advantage of scale in the purchase of components and consolidating the logistics and supplier base.

- Supply chain: rationalization of the product portfolio with limited

expansion requirements expected. - Technology: streamline R&D costs and avoid overlap of efforts in

some areas with a balanced product portfolio. - Project management: identifying overlap in operations and

optimization of resources ’ allocation. - G&A and other: reducing structure costs and grouping resources in

markets where both companies are present. Integration costs on the other hand are expected to amount to some €200-220mn during the first 3 years. We are assuming that integration costs are mainly concentrated in the first two years (€ 189mn vs. € 210mn total). Shareholders Pact

Siemens and Iberdrola signed a shareholders pact last June. The most relevant points of the Pact are included below:

- CFO: Siemens appointed the CFO for a maximum period of 18 months. Beyond that period, Iberdrola has the right to appoint the CFO. - As long as the shareholders pact is in place, the following resolutions will not be passed (i) increase in share capital more than 10%; (ii) any acquisition, disposal or contribution to another company of assets worth more than 15% of Gamesa’s total assets; (iii) any merger, demerger or global assignment of assets and liabilities which entails a change in assets of more than 15%; (iv) winding-up and liquidation of Gamesa and (v) change in the number of Board members. - Squeeze-out and/or delisting of Gamesa: if in a period of 18 months, Siemens formally launches a takeover bid for all shares of Gamesa in which a squeeze-out is implemented or the GSM resolves the de-listing of the shares or Siemens/Gamesa formally initiate a delisting offer: the Floor price to be offered will be € 18.15/sh (to be adjusted if there are dilutive operations in the meantime); the consideration shall be entirely in cash. - If Iberdrola intends to sell more than 1% of Gamesa it has to issue a written notice to Siemens. If Siemens wants to buy it must send a written notice to Iberdrola within 10 business days. - In the event that Siemens breaches determined the obligations contained in the Pact, Iberdola has the right to sell its shares of Gamesa. Siemens is obliged to purchase such shares at the higher of € 22/sh or closing price of Gamesa on the day of the Breach plus a premium of 30%. - The agreement may be terminated at any time if there are material breaches or if Iberdrola’s stake in Gamesa falls below 5%.

18


P&L (€ mn) CAGR 2014 2015 2016PF 2017F 2018F 2019F 2020F 16-20F

Revenues 2846 3504 11024 11170 11197 11872 12503 3% EBITDA 364 520 1361 1090 1077 1326 1451 2% EBITDA adj. 366 520 1361 1422 1542 1647 1751 7% EBITDA adj. mg. 12.8% 14.8% 12.3% 9.8% 9.6% 11.2% 11.6% -2% Depreciation & others 183 197 296 516 629 585 600 19% EBIT 181 323 1065 574 449 741 851 -5% EBIT adj. 191 294 1065 906 914 1062 1151 2% Net financial results -47 -69 -23 -30 -30 -26 -20 -4% Income tax 38 77 304 157 121 206 240 -6% Others -5 -7 -9 0 0 0 0 n.s. Minority Interests 1 0 -1 0 0 0 0 -62% Net Profit reported 92 170 728 387 298 508 591 -5% Net Profit adj. 101 144 728 647 659 742 804 3%

DCF assumptions

Re 11.0%

Rf + CRP 4.0%

Beta Equity 1.17

Market Premium 6%

Rd 4%

Tax rate 30%

D/EV 30%

WACC 8.5%

Perpetuity EBIT mg 9.0%


Balance Sheet (€ mn) CAGR 2014 2015 2016PF 2017F 2018F 2019F 2020F 16-20F

Net Intangibles 622 388 5 820 6 870 6 870 6 870 6 870 4%

Net Fixed Assets 334 495 1 395 1 583 1 514 1 345 1 182 -4%

Net Financials 97 274 416 416 416 416 416 0%

Inventories 564 803 3 359 3 366 3 296 3 319 3 327 0%

ST Receivables 1 120 1 113 1 459 1 723 1 727 1 831 1 929 7%

Other Assets 704 698 1 310 1 278 1 254 1 212 1 163 -3%

Cash & Equivalents 811 869 2 102 2 102 2 195 2 624 3 158 11%

Total Assets 4 252 4 641 15 861 17 338 17 272 17 618 18 045 3%

Equity & Minorities 1 385 1 527 6 631 6 744 6 946 7 379 7 843 4%

MLT Liabilities 900 870 2 906 4 802 4 522 4 300 4 106 9%

o.w. Debt 581 445 505 1 740 1 740 1 740 1 740 36%

ST Liabilities 1 966 2 244 6 324 5 792 5 805 5 938 6 096 -1%

o.w. Debt 93 103 285 285 285 285 285 0%

o.w. Payables 1 687 1 938 3 680 3 148 3 161 3 294 3 452 -2%

Equity+Min. + Liabilities 4 252 4 641 15 861 17 338 17 272 17 618 18 045 3%

Cash flow (€ mn)

2014 2015 2016PF 2017F 2018F 2019F 2020F

+ EBITDA 364 520 1361 1090 1077 1326 1451

- Chg in Net W.C. -122 -60 -593 803 -78 -6 -53

- Income Taxes 31 58 240 125 96 164 191

= Operating Cash Flow 455 521 1 714 163 1 059 1 167 1 313

- Growth Capex 59 118 161 592 448 297 313

- Replacement Capex 50 50 50 112 112 119 125

- Net Fin. Inv. -5 203 142 0 0 0 0

= Cash Flow after Inv. 351 150 1 361 -541 499 752 875

- Net Fin. Exp. 47 43 23 30 30 26 20

- Dividends Paid 0 23 46 1 074 97 75 127

+/- Equity 233 0 69 0 0 0 0

Other 22 100 -371 411 -280 -222 -195

=Change in Net Debt -559 -184 -990 1 235 -93 -430 -534

Net Debt (+)/Net Cash (-) -138 -322 -1 312 -77 -170 -600 -1 133

Growth, per share data and ratios

2014 2015 2016PF 2017F 2018F 2019F 2020F

Sales growth 22% 23% 215% 1% 0% 6% 5% EBITDA Adj. growth 27% 42% 162% 5% 8% 7% 6% EPS Adj. growth 92% 37% 107% -11% 2% 13% 8%

Avg. # sh (mn) 267 279 681 681 681 681 681 Basic EPS 0.35 0.61 1.07 0.57 0.44 0.75 0.87 EPS Adj. Fully diluted 0.38 0.52 1.07 0.95 0.97 1.09 1.18 DPS 0.00 0.08 0.16 1.58 0.14 0.11 0.19 Payout 25% 27% 148% 25% 25% 25% 25% ROCE (after tax) 8.7% 16.5% 20.5% 5.7% 4.0% 6.7% 8.0% ROE 7.7% 11.7% 17.8% 5.8% 4.4% 7.1% 7.8% Gearing (ND/EV) -2% -4% -18% -1% -2% -8% -15% Net Debt/EBITDA -0.4 -0.6 -1.0 -0.1 -0.2 -0.5 -0.8

Source: Company data and BPI Equity Research (F).

19

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CaixaBank, S.A. has not been involved in the preparation and issuance of this report, not being therefore responsible for its content. INVESTMENT RATINGS AND RISK CLASSIFICATION (12 MONTH TOTAL RETURN): INVESTMENT RATINGS STATISTICS : Low Risk Medium Risk High Risk Buy >15% >20% >30% Neutral >5% x < 15% >10% x <20% >15% x < 30% Underperform x < 5% x < 10% x < 15%

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Oporto Office Madrid Office

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As of 31st August BPI Equity Research investment ratings were distributed as follows: Buy 26% Neutral 48% Underperform 22% Accept the Bid 1% Under Revision/Restricted 3% Total 100%

siemens gamesa - banco bpi

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