Supply chain issues dampen FY18 growth

Windar Photonics 28 February 2019 Update
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Windar Photonics

Supply chain issues dampen FY18 growth

Trading update

Alternative energy

28 February 2019

Price

72.5p

Market cap

£30m

€1.14/£

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

1.7

Shares in issue

41.8m

Free float

51.1%

Code

WPHO

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.4)

(14.2)

(13.2)

Rel (local)

(12.9)

(15.5)

(10.8)

52-week high/low

106.5p

76p

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

FY18 results

May 2019

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Windar Photonics is a research client of Edison Investment Research Limited

Windar’s revenues from product sales grew by 80% year-on-year during FY18, enabling it to reduce EBITDA losses from €1.2m to €0.4m. Growth was slower than expected because of supply chain issues. Although these issues have now been resolved, they have a knock-on effect on follow-on orders for FY19, so we reduce our estimates for both forecast years.

Year end

Revenue (€m)

EBITDA
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

EV/sales
(x)

12/16

1.2

(2.4)

(3.0)

(7.6)

0.0

27.1

12/17

2.2

(1.2)

(2.1)

(5.0)

0.0

14.8

12/18e

3.5

(0.4)

(0.8)

(1.5)

0.0

9.3

12/19e

6.0

0.6

0.2

0.4

0.0

5.4

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

FY18 growth dampened by supply chain issues

FY18 revenues increased by 59% 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, despite incurring additional operational costs relating to the Shanghai sales and service office, investment in wind analytics software and support for OEM turbine integration. In July and August Windar raised £2.2m (gross) through a subscription 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 verification stages. Noting delays in achieving OEM certification, we remove any volume deliveries from our FY19 estimates, so certification during the year could generate 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 within three years. Our scenario analysis shows this generating c €100m revenues and c €35m PAT at the top end of estimates (see page 2 for details).

Revisions to estimates

We revise our FY18 and FY19 estimates to reflect:

Lower retrofit sales in FY18 caused by delays in completing deliveries for the major Chinese contract received in FY17 because of supply chain issues, which management notes have now been resolved.

Lower retrofit sales in FY19 reflecting the knock-on impact on follow-up orders from the major Chinese customer, as well as it taking longer than originally expected for Vestas to close contracts with IPPs. We note from discussions with management that equipping two of the sites in North America where discussions are currently ongoing represents total unit sales of around double the number shipped during the whole of FY18.

Lower OEM sales in both FY18 and FY19. We had previously assumed that one OEM would start integrating Windar’s LiDAR into one of its commercial models by the end of FY18, followed by a volume ramp-up during FY19 as other turbine manufacturers followed suit. Since it is difficult to predict when one or more of the OEMs currently evaluating Windar’s LiDAR will move to integration of units in commercial turbines, we now model volume ramp-up as starting after the end of the forecast period, though there remains scope for this to commence later in FY19. This represents upside to our FY19 forecasts.

Exhibit 1: Changes to estimates

FY17

FY18e

FY19e

€m

Actual

New

Old

% change

New

Old

% change

Revenue

2.2

3.5

4.5

-21.3%

6.0

18.6

-67.7

EBITDA

(1.2)

(0.4)

0.1

N/A

0.6

7.6

-92.1

PBT

(2.1)

(0.8)

(0.3)

130.7%

0.2

7.2

-97.2

EPS (c)

(5.0)

(1.5)

(0.6)

130.7%

0.4

12.6

-97.2

Net cash*

1.1

1.7

1.8

5.7%

1.0

4.6

-77.6

Source: Edison Investment Research, Windar Photonics accounts. Note: *Excluding restricted cash and Growth Fund Loan.

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 are dropping the use of a DCF valuation. Instead, we present a scenario analysis showing 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. We note however, that management’s stated targets for penetration of the retrofit and OEM segments three years from now are 2% and 33% respectively. We adopt these levels as the higher bound of our analysis (Exhibit 2). 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.

Windar is the only established company 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, 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. Consequently it is extremely well placed to benefit from potential industry-wide adoption of “one turbine per LiDAR” methodology. As discussed above however, there is no certainty 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 supply chain issues have meant that not all of these 300 units have been shipped yet, there have been no follow-on orders to confirm that the transition to volume deployment will be sustained. In September 2018 management was confident that the first OEM would begin commercial integration by the year end, resulting in OEM sales being at least as big as retrofit sales in FY19. While this certification process is taking longer to complete than management had expected, it remains confident that multiple turbine OEMs will adopt the technology; the uncertainty is whether this will happen in FY19 or FY20.

At present, the company is trading on prospective multiples that are in keeping with one on the cusp of profitability, with FY19 EV/sales of 5.4x and P/E of 170x. Once the company starts to gain market penetration and generate meaningful profits as shown in Exhibit 2, applying even a modest 10x P/E would justify a share price substantially higher than the current level.

Exhibit 2: Scenario analysis

Retrofit segment

Wind turbine installed base end 2017 (GW)

540*

Estimated number of turbines under service

216,000

% 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

478

1,080

2,160

3,240

4,320

Revenues (€m)

5.5

12.2

23.8

32.4

38.9

Gross profit per unit (€k)

5.6

5.0

5.0

5.0

5.0

Gross profit (€m)

2.7

5.4

10.8

16.2

21.6

Share of operating costs (€m)

-2.4

-3.1

-4.2

-5.1

-5.8

Tax rate

0%

22%

22%

22%

22%

Profit after tax (£m)

0.3

1.8

5.1

8.7

12.4

OEM segment

New wind turbine installations 2017 (GW)

53*

Estimated number of turbines

21,200

% new turbines shipped with LiDAR in one year

0.20%

5.0%

10.0%

20.0%

33.0%

Number of new turbines shipped with LiDAR in one year

43

1,060

2,120

4,240

6,996

ASP (€k)

11.5

11.3

9.0

9.0

8.5

Revenues (€m)

0.5

11.9

19.1

38.2

59.5

Gross profit per unit (€k)

5.6

5.0

5.0

5.0

5.0

Gross profit (€m)

0.2

5.3

10.6

21.2

35.0

Share of operating costs (€m)

-0.3

-1.4

-2.1

-4.0

-6.2

Tax rate

0%

22%

22%

22%

22%

Profit after tax (£m)

0.0

3.0

6.6

13.4

22.5

Source: Edison Investment Research. Note: *Global Wind Energy Council data.

Exhibit 3: Financial summary

€000s

2016

2017

2018e

2019e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,196

2,214

3,500

6,000

Cost of Sales

(627)

(1,301)

(1,787)

(3,063)

Gross Profit

569

913

1,713

2,937

EBITDA

 

 

(2,422)

(1,219)

(357)

605

Operating Profit (before goodwill amortisation and exceptionals)

 

 

(2,850)

(1,770)

(607)

355

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Warrants

(317)

(235)

(100)

(100)

Operating Profit

(3,167)

(2,006)

(707)

255

Net Interest

(107)

(286)

(200)

(150)

Profit Before Tax (norm)

 

 

(2,957)

(2,057)

(807)

205

Profit Before Tax (FRS 3)

 

 

(3,274)

(2,292)

(907)

105

Tax

128

66

0

0

Profit After Tax (norm)

(2,957)

(2,057)

(629)

160

Profit After Tax (FRS 3)

(3,146)

(2,226)

(907)

105

Average Number of Shares Outstanding (m)

39.0

41.1

42.9

44.5

EPS - normalised (c)

 

 

(7.6)

(5.0)

(1.5)

0.4

EPS - normalised fully diluted (c)

 

 

(7.6)

(5.0)

(1.5)

0.4

EPS - (IFRS) (c)

 

 

(8.1)

(5.4)

(2.1)

0.2

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

47.6

41.2

49.0

49.0

EBITDA Margin (%)

N/A

N/A

-10.2%

10.1%

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

N/A

N/A

-17.3%

5.9%

BALANCE SHEET

Fixed Assets

 

 

1,357

1,014

964

1,714

Intangible Assets

1,184

869

819

819

Tangible Assets

119

107

107

857

Investments

54

39

39

39

Current Assets

 

 

2,705

2,767

3,432

3,303

Stocks

994

740

749

953

Debtors

898

676

767

1,068

Cash

783

1,117

1,682

1,046

Other

31

235

235

235

Current Liabilities

 

 

(1,276)

(1,504)

(676)

(991)

Creditors

(1,271)

(1,499)

(671)

(986)

Short-term borrowings

(5)

(5)

(5)

(5)

Long-Term Liabilities

 

 

(961)

(1,096)

(1,346)

(1,596)

Long-term borrowings

(21)

(16)

(16)

(16)

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

(940)

(1,080)

(1,330)

(1,580)

Net Assets

 

 

1,825

1,182

2,375

2,430

CASH FLOW

Operating Cash Flow

 

 

(1,549)

(271)

(1,284)

414

Net Interest

(10)

(36)

(50)

(50)

Tax

(22)

0

0

0

Investment in intangible & tangible assets

(462)

(225)

(200)

(1,000)

Acquisitions/disposals

0

0

0

0

Financing

1,995

1,334

2,250

0

Dividends

0

0

0

0

Net Cash Flow

(48)

801

716

(636)

Opening net debt/(cash)

 

 

(564)

(758)

(1,095)

(1,661)

HP finance leases initiated

0

0

0

0

Other

242

(464)

(150)

0

Closing net debt/(cash)*

 

 

(758)

(1,095)

(1,661)

(1,025)

Source: Windar Photonics accounts, Edison Investment Research. Note: *Excludes restricted cash and Growth Loan Fund.

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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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