Retrofit activity driving growth in the short term

Windar Photonics 1 July 2019 Update
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Windar Photonics

Retrofit activity driving growth in the short term

FY18 results

Alternative energy

1 July 2019

Price

44.5p

Market cap

£20m

€1.11/£

Net cash (€m) at end December 2018 excluding Growth Fund Loan and restricted cash

1.7

Shares in issue

44.5m

Free float

51%

Code

WPHO

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(12.8)

(44.8)

Rel (local)

(1.9)

(15.1)

(43.0)

52-week high/low

101p

44p

Business description

Windar Photonics is a UK-registered, Copenhagen-based developer and manufacturer of an innovative low-cost light detection and ranging system. Approaching wind direction and speed is measured ahead of a wind turbine, allowing appropriate yaw alignment, increasing efficiency.

Next events

AGM

22 July 2019

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Windar Photonics is a research client of Edison Investment Research Limited

Windar Photonics posted record revenues and got close to EBITDA break-even during FY18. Management expects current customer projects with Vestas and continued demand in Asia to drive further growth in the retrofit segment during FY19. It also expects volume deliveries to OEMS to commence in the near future, but we exclude these from our estimates.

Year end

Revenue (€m)

EBITDA
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

EV/sales
(x)

12/17

2.2

(1.2)

(2.0)

(5.0)

0.0

9.2

12/18

3.5

(0.3)

(0.8)

(1.7)

0.0

5.8

12/19e

6.0

0.6

0.2

0.4

0.0

3.4

12/20e

8.1

1.5

1.1

2.0

0.0

2.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY18 growth dampened by supply chain issues

As flagged in the February trading update, FY18 revenues increased by 58% year-on-year to €3.5m, as Windar shipped a substantial proportion of the 300 units required for the Chinese order announced in December 2017. Supply chain issues, which have been resolved, meant that not only was Windar unable to complete all of the deliveries under this contract by the year-end, but follow-on orders from the customer were delayed. Nevertheless, the improvement in revenues enabled Windar to get substantially closer to its goal of reaching break-even (€0.3m adjusted EBITDA loss as flagged in February). Following a subscription raising £2.2m (gross) at 82.5p/share, net cash (excluding restricted cash and Growth Fund Loan) increased by €0.6m during the year to €1.7m at end FY18.

Vestas agreement underpins FY19 growth

Management is confident that the global distribution agreement with Vestas announced in June 2018 will help deliver further revenue growth in FY19. Vestas is the largest maintenance provider in the industry with, we estimate, around 31 thousand turbines under service. Management also expects continued demand from its Asian partners for retrofit applications. Windar continues to work on turbine integration projects with OEMs, some of which are in the final turbine type verification stages. We do not include any volume deliveries to OEMs in our FY19 estimates (which are unchanged) or our FY20 estimates (which are new) so technology adoption by one or more OEMs in H219 represents substantial upside.

Valuation: Long-term value from OEM volumes

Management’s stated target is to retrofit 2% of the installed base each year and equip one-third of all new turbines with its LiDAR by 2021. Our scenario analysis shows the company generating c €102m revenues and c €36m PAT if this goal is achieved (see page 3 for details), which would justify a share price substantially higher than the current level. However, the drop in share price from 101p in October 2018 shows that Windar needs to close another major retrofit order and announce its first OEM integration if investors are to believe that ‘one LidAR per turbine’ is a reality and management’s goal is consequently achievable.

Financials

Record volumes of product shipped in FY18

FY18 revenues increased by 58% year-on-year to a record €3.5m (in line with our estimate) despite supply chain issues, which have now been resolved. Gross margin rose by 8.9pp to 50.2%, reflecting the full year benefit of the second-generation LiDAR, which was released in early FY17. Administrative costs (excluding amortisation and depreciation) decreased by €0.3m to €2.1m despite the impact of the new sales and service office in China, investment in wind analytics software and support for OEM turbine integration. This demonstrates the beneficial effect of cost-saving initiatives in FY17. The combination of higher revenues, better gross margin and reduced operating costs enabled Windar to get substantially closer to its goal of reaching break-even. EBITDA losses (excluding warrant costs and exceptional items) narrowed from €1.2m to €0.3m (also in line with our estimate).

Subscription strengthens balance sheet

As noted above, the increase in revenues helped cut EBITDA losses to €0.3m. The beneficial impact on cash flow of higher revenues could have been wiped out by higher levels of trade receivables, but the invoice discounting arrangement meant that the increase in trade receivables was only to €0.3m and the €0.6m decrease in trade payables actually had a more marked impact on cash flow. The decrease in trade payables arose because levels were unusually high at the end of FY17 and returned to normal during FY18. Investment in capitalised R&D (net of grants) was higher than FY17 (€0.3m vs €0.2m). Free cash outflow was almost double at €1.3m. This was offset by a subscription in the summer, which raised £2.2m (gross) at 82.5p/share. Net cash (excluding restricted cash and Growth Fund Loan) increased by €0.6m during the year to €1.7m at end FY18.

Cautious approach to OEM adoption

Since the company has yet to announce that an OEM is going to integrate Windar’s LiDAR into new turbines, we model a cautious approach to OEM adoption, with minimal revenues from this segment in either FY19 (where our estimates are unchanged) or FY20. This is despite the news that the world’s largest new wind farm in China, with 1,440 turbines planned, stipulates deployment of LiDAR meeting Windar’s specification on each turbine. Management believes that it has the only solution meeting the technical specification and desired price-point because it uses solid-state lasers. Moreover, several OEMs that have been working with Windar on direct integration of LiDAR will be supplying turbines for this project. The project is scheduled for completion by the end of 2020, which means the first LiDAR units will need to be delivered in early FY20 so that they can be integrated into turbines prior to installation and commissioning at the wind farm. Management is consequently confident that multiple turbine OEMs will eventually adopt the technology; the uncertainty is whether this will happen in FY19 or FY20, with timing dependent on how quickly each OEM completes its internal certification process. We will revise our estimates when Windar announces certification of the first OEM integration.

Our revenue projections therefore focus on the retrofit market. We assume that the Chinese distributor that placed the order for 300 units in December 2017 places a follow-on order of similar size to the first one later this year to satisfy demand for retrofit installations in the country and that the Vestas relationship begins to convert interest from wind farm operators in North America into orders during H219. This is more likely following the appointment of a sales manager in April 2019 to nurture the Vestas relationship. The Vestas activity is currently focused on two specific projects in the US with a collective estate of over 300 turbines. One of the independent power providers (IPPs) involved operates a further 900 turbines in North America. Based on these assumptions we model deliveries of c 500 LiDAR units in FY19 compared with an estimated 300 units in FY18, rising to c 850 units in FY20. This generates 71% revenue growth in FY19 and 35% in FY20.

Progress against strategic objectives

Global distribution agreement with Vestas

In June 2018 Windar signed a global distribution agreement with wind turbine manufacturer Vestas Wind Systems. Following this, Vestas has begun to market and sell Windar’s two-beam LiDAR system as a retrofit aftersales solution to the wind industry. This was an exciting development for Windar because Vestas is the largest maintenance provider in the industry. It has more than 78GW of assets under service, of which more than 8GW are non-Vestas turbines. According to Global Wind Energy Council statistics, 78GW is 13% of the global cumulative installed wind capacity. Assuming an average turbine size of 2.5MW, this 78GW represents around 31 thousand turbines. The agreement is consistent with the strategy adopted in 2016 of using external distribution partners in retrofit markets. It connects Windar to a service network of more than 10,000 people in 63 countries.

Expansion of retrofit capabilities

In April 2019 Windar entered into an exclusive agreement with the Technical University of Denmark (DTU) to incorporate software from DTU that can deliver extreme load reductions on turbines of 5–10% and thus increase the expected operational lifetime of a turbine by the same amount. This improvement can be achieved without requiring changes to be made to existing controller systems. Windar anticipates that the new software will be launched during 2020, complementing its existing yaw alignment optimisation technology.

Valuation

Since there remains considerable uncertainty on when volume sales to OEMS are likely to begin, and these could be at least as large as retrofit sales, we continue to present a scenario analysis rather than a formal DCF-based valuation. This analysis shows what revenues and profits could look like at different levels of market penetration, without being specific as to the year in which the company will reach that level. Noting that management’s stated targets for penetration of the retrofit and OEM segments are 2% and 33% in 2021, respectively, we adopt these levels as the higher bound of our analysis (Exhibit 1). For the lower bound of our analysis, we adopt the level of market penetration, ASP, gross margin and operating costs used in our FY19 estimates, while excluding £150k interest as we have no visibility of what this could be in future years. The rate of growth required to meet management’s stated target is substantially higher than the growth profile adopted in our estimates, which model segmental penetration of 0.3% (retrofit) and 0.1% (OEM) in FY20.

The retrofit section of our analysis assumes that a meaningful percentage of existing turbines will be equipped with Windar’s LiDAR over time. This can only be achieved if wind farm operators move to a ‘one turbine per LiDAR’ methodology, using LiDAR to increase power output and turbine lifetime as well as reducing maintenance costs. Windar is well placed to benefit from this trend as it is the only established company (two Chinese companies recently entered the market) able to offer systems at a cost-point where it is possible to mount LiDAR on individual turbines to give real-time monitoring of the speed and direction of incoming wind. Moreover, it is already in trials with the majority of wind turbine OEMs and has access to 14% of global installed wind capacity through its distribution agreement with Vestas Wind Systems. There is no certainty in the retrofit sector either of when widespread deployment will commence. The order for 300 units received in December 2017 indicated that the industry was beginning to adopt the methodology, but since the supply chain issues affecting FY18 have meant that there are a few of these 300 units still to be shipped, there have been no follow-on orders to confirm that the transition to volume deployment will be sustained. The agreement with Vestas has yet to have a material impact on revenues. However, the fact that the tender for the largest wind fam in China so far specifies one LiDAR per turbine is a good indication that this methodology has started to be adopted.

With regards to direct integration by OEMs into new turbines, once one OEM starts to offer turbines with integrated LiDAR, it is highly likely that others will follow so they too can offer equipment with enhanced efficiency and lifetime.

Exhibit 1: Scenario analysis

Retrofit segment

Wind turbine installed base end 2018 (GW)*

591

Estimated number of turbines under service

244,259

% turbines under service retrofitted with LiDAR in one year

0.2%**

0.5%

1.0%

1.5%

2.0%

Number of turbines under service retrofitted with LiDAR in one year

503

1,221

2,443

3,664

4,885

ASP (€k)

11.5

11.3

11.0

10.0

9.0

Revenues (€m)

5.8

13.7

26.9

36.6

44.0

Gross profit per unit (€k)

5.8

5.0

5.0

5.0

5.0

Gross profit (€m)

2.9

6.1

12.2

18.3

24.4

Share of operating costs (€m)

(2.5)

(3.3)

(4.6)

(5.6)

(6.3)

Tax rate

0%

22%

22%

22%

22%

Profit after tax (£m)

0.4

2.2

5.9

9.9

14.1

OEM segment

New wind turbine installations 2018 (GW)*

51.3

Estimated number of turbines

20,520

% new turbines shipped with LiDAR in one year

0.10%**

5.0%

10.0%

20.0%

33.0%

Number of new turbines shipped with LiDAR in one year

19

1,026

2,052

4,104

6,772

ASP (€k)

11.5

11.3

9.0

9.0

8.5

Revenues (€m)

0.2

11.5

18.5

36.9

57.6

Gross profit per unit (€k)

5.8

5.0

5.0

5.0

5.0

Gross profit (€m)

0.1

5.1

10.3

20.5

33.9

Share of operating costs (€m)

(0.1)

(1.3)

(2.0)

(3.8)

(5.9)

Tax rate

0%

22%

22%

22%

22%

Profit after tax (£m)

0.0

3.0

6.5

13.0

21.8

Source: Edison Investment Research, Global Wind Energy Council. Note: *Global Wind Energy Council data. **Rate of market penetration adopted in our FY19 estimates.

At present, Windar is trading on prospective multiples that are in keeping with a company on the cusp of profitability, with FY19 EV/sales of 3.4x and P/E of 123x. Once the company starts to report further sizable orders in the retrofit market or its first OEM integration, this will demonstrate to investors that it can potentially achieve its market penetration goals. The profits that may be realised in this event are shown in Exhibit 2. Applying even a modest 10x P/E to the profits achievable from either a 1.0% penetration of the retrofit segment or 5.0% penetration of the OEM segment (both of which are lower than management’s stated target) would justify a share price substantially higher than the current level.

Exhibit 2: Financial summary

€000s

2017

2018

2019e

2020e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,214

3,500

6,000

8,103

Cost of Sales

(1,301)

(1,745)

(2,985)

(3,971)

Gross Profit

913

1,755

3,015

4,132

EBITDA

 

 

(1,199)

(324)

645

1,494

Operating Profit (before goodwill amortisation and exceptionals)

 

 

(1,750)

(578)

395

1,244

Intangible Amortisation

0

0

0

0

Exceptionals

(20)

(39)

0

0

Warrants

(235)

(26)

(26)

(26)

Operating Profit

(2,006)

(643)

369

1,218

Net Interest

(286)

(270)

(190)

(95)

Profit Before Tax (norm)

 

 

(2,037)

(848)

205

1,149

Profit Before Tax (FRS 3)

 

 

(2,292)

(913)

179

1,123

Tax

66

120

0

0

Profit After Tax (norm)

(2,037)

(727)

160

896

Profit After Tax (FRS 3)

(2,226)

(793)

179

1,123

Average Number of Shares Outstanding (m)

41.1

43.0

44.5

44.5

EPS - normalised (c)

 

 

(5.0)

(1.7)

0.4

2.0

EPS - normalised fully diluted (c)

 

 

(4.8)

(1.6)

0.3

1.9

EPS - (IFRS) (c)

 

 

(5.4)

(1.8)

0.4

2.5

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

41.2

50.2

50.3

51.0

EBITDA Margin (%)

N/A

N/A

10.8%

18.4%

Operating Margin (before GW and except.) (%)

N/A

N/A

6.6%

15.4%

BALANCE SHEET

Fixed Assets

 

 

1,014

1,140

1,390

1,440

Intangible Assets

869

983

983

983

Tangible Assets

107

111

361

411

Investments

39

46

46

46

Current Assets

 

 

2,767

3,975

3,865

6,058

Stocks

740

727

953

1,619

Debtors

676

1,008

1,068

1,202

Cash

1,117

1,722

1,325

2,719

Other

235

518

518

518

Current Liabilities

 

 

(1,504)

(1,180)

(992)

(1,991)

Creditors

(1,499)

(1,175)

(986)

(1,985)

Short-term borrowings

(5)

(5)

(5)

(5)

Long-Term Liabilities

 

 

(1,096)

(1,214)

(1,464)

(1,464)

Long-term borrowings

(16)

(11)

(11)

(11)

Other long-term liabilities (including loan from Growth Fund)

(1,080)

(1,203)

(1,453)

(1,453)

Net Assets

 

 

1,182

2,721

2,799

3,921

CASH FLOW

Operating Cash Flow

 

 

(414)

(861)

170

1,694

Net Interest

(36)

(67)

(67)

0

Tax

0

0

0

0

Investment in intangible & tangible assets

(225)

(375)

(500)

(300)

Acquisitions/disposals

0

0

0

0

Financing

1,334

2,308

0

0

Dividends

0

0

0

0

Net Cash Flow

659

1,005

(397)

1,394

Opening net debt/(cash)

 

 

(758)

(1,096)

(1,706)

(1,309)

HP finance leases initiated

0

0

0

0

Other

(321)

(395)

0

0

Closing net debt/(cash)*

 

 

(1,096)

(1,706)

(1,309)

(2,703)

Source: Company data, Edison Investment Research. Note: *Excludes restricted cash and Growth Loan Fund.


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This report has been commissioned by Windar Photonics and prepared and issued by Edison, in consideration of a fee payable by Windar Photonics. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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