Windar Photonics — Technology deployments intensifying

Windar has a significant number of trial installations with utility companies in Asia, Europe and North America. These are providing results that confirm the attractive business case for the adoption of its low-cost LiDAR systems. Management is currently focused on development projects with IPPs in North America and Asia. The 300 units ordered under the transformational contract received in December 2017 from a Chinese partner are primarily for retrofit deployment. Other orders received over the past year include a repeat order of four units from a French IPP for direct integration into turbines, a 15-unit order through a Chinese distributor, an order for five LiDAR units with associated WindTIMIZERs for integration into Vestas turbines from a Mexican IPP and an order for nine units from a Central American IPP, also for integration into Vestas turbines. This sequence of orders highlights the success of Windar’s revised strategy, adopted in H216, of developing its network of distributors, which now totals 14, rather than investing in a costly direct sales team. Management’s target is to retrofit LiDAR systems across the turbine portfolio of four of the top 25 IPPs over the next one to three years. Management estimates that partnership with a single one of these IPPs could represent 100–300 LiDAR sales.

Windar continues to work with turbine manufactures to get its LiDAR units integrated into turbine control systems during production. In April 2017, Windar announced an order for 25 LiDAR units for delivery, some of which were for Chinese OEMS. In December, it issued two announcements regarding orders related to OEMs. One was from a Chinese OEM manufacturer for five LiDAR systems. The other was from a Chinese distribution partner for five units, which will be delivered to two wind turbine OEMs. Management’s target is for Windar’s LiDAR units to be designed-in to four or five turbine systems in the next two to three years, with the current focus on OEMs in Asia. It is confident of being awarded one or more design-in contracts in the near future. Once one OEM adopts the technology, it is likely that the others will follow, so as not to lose competitive advantage. Management estimates that integration into a single turbine model could typically represent 300–500 LiDAR sales annually, although for some models the volumes would be substantially higher.

Typically, wind turbines are located in groups, so the wind flow round each turbine is modified by its neighbours, reducing the amount of power that can be generated. Similarly, neighbouring hills may modify wind flow, causing turbulence. During FY17, Windar continued to work with the Danish Technical University on the two-year Energy Development and Demonstration Programme, which commenced in October 2016. This programme expands the capabilities of Windar’s analytics to include wake detection and turbine optimisation. This programme has generated renewed interest from several major wind turbine OEMs keen to address these issues, leading to a record number of ongoing OEM turbine integration projects at the end of 2017. In addition, Windar successfully completed some product cost reduction programmes, which enabled it to secure some of the higher volume orders during FY17 without impairing margins.

As flagged in the pre-close trading update, FY17 revenues rose by 85% y-o-y to €2.2m, supported by orders for at least 120 units. The strong revenue growth was primarily driven by demand from IPPs. Growth was particularly strong in China where sales trebled to €1.8m, 81% of the total. The OEM segment accounted for only a small proportion of total revenue. There was also €0.2m revenue deferred from FY16 due to the timing of deliveries. Management undertook a thorough review of operations during H216, part of which was the switch away from reliance on a direct salesforce. The number of sites was cut, leaving only the production facility in Copenhagen and a sales and service office in China, but investment in product development was increased. The cost base realignment resulted in a 28% reduction in operating costs to €2.2m and a halving in 2017 EBITDA losses to €1.2m.

The cost savings made during H216 have helped the company approach EBITDA break-even. Cash consumption during FY17 totalled €0.5m, €0.3m of which related to capitalised R&D costs (before netting against grants). Capitalised R&D costs were lower than the €0.5m reported for FY16, because the MEMS (micro-electro-mechanical systems) development taking place in FY16 was completed during that year. Cash flow benefited from a €0.3m reduction in inventory as finished goods ready at the end of FY16 were shipped out and stocks returned to a normal level. Additionally, trade receivables reduced by €0.2m to €0.4m, despite substantially higher revenues because of the ability to finance some sales through Denmark’s export credit agency. In July, Windar completed a subscription raising £1.25m (gross) at 82p/share, which resulted in the company having cash holdings of €1.1m (excluding restricted cash and the Growth Fund loan) at the end of December 2017. The funds from the placing are being used to support growth, as some of these retrofit test projects with IPPs convert to volume roll-outs across wind farms and ongoing test programmes with wind turbine OEMs complete successfully.

Order intake in FY17 of €5.9m represented a fourfold increase on FY16. The order backlog at the end of December 2017 for deliveries in FY18 was €3.9m (€1.4m end-FY16). This is substantially higher than the total revenues achieved in FY17 and excludes any potential follow-on orders in H218 from the transformational Chinese contract. Our estimates model FY18 sales of 450 LiDAR units (a combination of WindEye and WindVISION units) generating €5.6m revenues. This volume ramp-up is partly supported by deliveries of the remaining 250 units scheduled for delivery in FY18 under the transformational Chinese contract but does require the company either to secure an OEM design-in or a follow-on order to the transformational Chinese contract awarded in December 2017, with sufficient leeway to make meaningful unit deliveries by year-end. We assume that the increase in volumes shipped will enable Windar to secure better pricing for components and outsourced manufacturing services, resulting in improved gross margins, and that operating costs will be retained at FY17 levels. We expect this volume ramp-up to result in Windar posting its first year of EBITDA profit. Interest payments include a loan from the Danish Growth Fund, bearing interest at 12%, which is shown as ‘other long-term liabilities’ in the financial summary table.

Our estimates model shipments rising to 2,200 units in FY19, delivering an increase in revenue to €25.3m and €8.8m EBITDA. This level of shipments requires the technology to be designed-in to several turbine models and be deployed by multiple IPPs. The announcement in December of a transformational contract for 300 LiDAR units, primarily for volume installation in wind parks in China gives greater confidence that the industry is beginning to adopt Windar’s proposition of integrating LiDAR systems into individual wind turbines. It is not, in our opinion, conclusive and we await announcements of a follow-on order to the transformational Chinese contract and OEM design-ins. Windar is reducing the working capital required for this volume ramp-up, and the potential requirement for external funding, through two mechanisms. Around half of the units sold will be supported by the Danish Export Credit Agency. The other units will be sold under a factoring arrangement. The details are explored in our February note.

We continue to use a DCF valuation, rolling it out to 2027, based on modest assumptions regarding the rate of market penetration, ie 15% of the OEM market and 4% of the larger retrofit market in the longer term, and an average selling price of <€15k. These are the same growth rates that underpin our financial estimates. As profitability is particularly sensitive to the rate of market penetration, we also present a ‘low’ scenario, in which we assume 10% lower penetration than in our base case (on the same cost base) and a ‘high’ scenario, in which market penetration is 10% higher than in our base case (also on the same cost base). Exhibit 1 shows our assumed expansion rates in each scenario using GWEC market forecast data.

Running our financial model for each of these scenarios, and assuming a tax rate of 22%, a terminal growth rate of 2%, and a discount rate of 40% to reflect that we are still waiting for an announcement confirming that an OEM has decided to design-in Windar’s LiDAR system into one or more of its turbine models, gives an indicative value at current levels of risk of 125p/share. Our February note had an indicative valuation of 121p/share. This was based on FY17 as Year 1, while our current model treats FY18 as Year 1. We have applied a higher discount for risk this time (40% rather than 25%) because of the delays in announcing either an OEM design-in or a follow-on order from the major Chinese customer. Management is confident that Windar will be awarded one or more design-in contracts in the near future. This would justify a more moderate discount for risk. A 20% discount, which is slightly less the rate applied in our last note, would imply an indicative valuation of 350p.