Too Late To Catch a 20% Yield: Siemens Gamesa

Siemens Gamesa Renewable Energy appears to be promising


Stock: Siemens Gamesa Renewable Energy SA 0H4N, GCTAF, GCTAY 

Siemens Gamesa Renewable Energy, a €7.2 billion 40-year-old Europe-based company, is the world’s fourth-largest Original Equipment Manufacturer (OEM) in the onshore wind industry.

The company has had an unimaginable 20% trailing dividend yield.

In further observation, however, the dividend appeared to be unsustainable given that the Zamudio, Vizcaya, Spain-based company has just provided a little more than €1 billion in payouts while having generated just €176 million in profits in the recent 12 months of its operations.

As it turned out, Siemens Gamesa Renewable Energy (Siemens Gamesa) paid out €1.07 billion in extraordinary and ordinary dividends just in the period between April to September 2017 secondary to its recent merger agreement.

The company paid out (€3.6/share) and an ordinary dividend (€0.11/share) in the recent six months.

According to filings, Siemens Gamesa is the result of merging Siemens Wind Power, which is the wind power division of Siemens AG, with Gamesa Corporación Tecnológica (Gamesa).

As reported in 2016, Siemens Gamesa Renewable Energy is to be 59%-owned by Siemens AG and 41%-owned by Gamesa Corporacion shareholders.

Siemens Gamesa engages in wind turbine development, manufacture and sale (Wind Turbine division) and provides operation and maintenance services (Services division).

As reported by the Wall Street Journal, the Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Xinjiang Goldwind Science & Technology, Denmark’s Vestas Wind Systems, and General Electric, according to FTI Consulting.

Meanwhile, Siemens-Gamesa reported poor €135 million losses on revenue of €5 billion in its April to September operations.

*Statement of Simens-Gamesa (highlights by author)

The group’s financial results in the second half of 2017 (the first six-month period in which the merged company was operational) reflect the impact of higher volatility in some of the company’s main markets, such as India and the US. That volatility is the result of the transition towards fully competitive wind energy models, which has resulted in a decline in onshore sales volume and also in an inventory impairment, with no cash impact, as a result of price pressure in those markets.

Consequently, sales in the six-month period declined by 12% with respect to the pro-forma sales figure for the same period of the previous year, and the underlying EBIT margin, excluding the impact of the PPA, stood at 3.8% , and at 6.5% excluding the inventory impairment. Excluding the impact of the hiatus in the Indian market, which was main cause of the decline in sales volumes, group sales fell by 2.4% year-on-year, mainly due to the currency effect, and the underlying EBIT margin pre-PPA and before the inventory impairment was 7.3%. The company ended the period with a net cash position of €377 million, after paying out a €3.6/share special dividend in April as part of the merger agreement, and a €0.11 ordinary dividend out of 2016 earnings.

Although all of these business reduction results seemed disappointing and obviously unappealing, Siemens Gamesa reported that excluding the halt in the Indian market business, the company would have had a 2.4% revenue reduction instead.

The company also stated that it experienced a temporary suspension in the Indian market, but also the reduction in installations in the UK.

Siemens Gamesa also expects that its business in the Indian market will normalize in 2019.

In September 2017, the company also bagged a project to develop India’s first large-scale commercial hybrid wind-solar project.

 “Siemens’s offshore [wind business] is a world market leader, but offshore alone is not enough to become profitable,” said Christoph Niesel, a portfolio manager at Union Investment, a Siemens investor. Mr. Niesel said the deal with Gamesa would allow Siemens to fill this hole in the business (The Hindu Business Line)

As of September, Siemens Gamesa had nearly €7 billion in goodwill and intangible assets, €1.28 billion in debt, €1.7 billion in cash and cash equivalents, and €6.45 billion in book value (vs. market cap  €7.2 billion).

Buying shares of the Siemens Gamesa as of the moment may be a little late if one is trying to have that 20% yield payout, and maybe a little early in anticipation of improved results in the coming future.

In addition, having negative cash flow and having increased its overall debt by €230 million since March of this year may indicate a pass. Some speculative investors may want to capture the newly merged wind company’s shares as it already had provided -11.7% total losses so far this year.

There’s no telling when Siemens Gamesa may deliver healthy positive free cash flow and consistent earnings, but somehow the company sees its operations better by the year 2019.

Meanwhile, the company is a pass.

Disclosure: I have GE notes.

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