Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Orsted’s impairment shock; UBS efficiency hopes
Peter Garnry
Chief Investment Strategist
Summary: Orsted shares are down 22% as the utility and offshore wind project developer announced USD 2.3bn impairment related to higher construction costs of offshore wind farms, supplier delays, lack of progress in additional US tax credits, and higher interest rates. UBS reports FY23 Q2 results tomorrow morning which will be its first combined result since the forced takeover of Credit Suisse back in March. While some analysts are skeptical of the new UBS, investors seem to be bullish on the outlook and expect UBS to execute on cost savings and gaining a competitive advantage in global wealth management.
Key points in this equity note:
- Orsted has announced $2.3bn in impairments over higher offshore wind project costs and supply delays, lack of progress in additional US tax credit, and finally higher interest rates. Shares are down 22% extending the drawdown since early 2021 to 68%.
- Orsted has complex operating model and investors have liked come to the same conclusion with the risk factors to the business not understood well.
- UBS reports FY23 Q2 results tomorrow morning which will be the first results of the combined business since the forced takeover of Credit Suisse back in March. Investors are so excited about the outlook with the stock up 33% this year.
Orsted shares plunge 22% on $2.3bn impairment
Orsted, once the wonder child of the green transformation Europe, was down 60% as last Friday from its all-time high back in early 2021 when the technology bubble reached its zenit. As the pain had not been enough for shareholders the Danish utility and offshore wind project developer announced this morning impairments of $2.3bn driven by three factors, 1) supplier delays on US offshore wind projects, 2) high interest rates lowering the value of offshore wind farms, and 3) additional US tax credits to offset higher building costs that are not progressing as planned. Shares are down 22% on the news extending the drawdown to a horrible 68%.
While many of these problems were known the shareholder sensitivity to these factors was less known by investors and this comes back to Orsted’s complexity and lack of proper disclosures to key risk factors. We highlighted Orsted’s operating complexity earlier this month arguing that its valuation was too high given the various headwinds for the green transformation and especially offshore wind projects.
Several analysts have already been out saying that these impairments do not impact EBITDA. This is true, but equity valuation is done on EBITA and higher project costs and generally inflation will put pressure on EBITA over time. Orsted’s EBITA margin 1t 14.9% in FY22 was the lowest in more than five years. Investors are most likely worried about that these impairments reflect potentially lower long-term margins in the business.
Could UBS’ forced acquisition of Credit Suisse become jackpot of the decade?
UBS reports its first quarterly result of the combined group after its forced acquisition of Swiss competitor Credit Suisse back in March, which was completed on 12 June. The new CEO Sergio Ermotti is on a mission to quickly integrate Credit Suisse into the group and harvest the synergies expected from the merger which will include selling certain Credit Suisse assets and close non-core businesses.
Analysts are expected net revenue of $8.5bn down 9% from a year ago and adjusted net income of $1.32bn down 29% from a year ago. Investors are betting that Ermotti will deliver more details on the vision for the new Swiss bank and that targets for profitability will beat those of analysts. The estimated FY25 net income is only $8.4bn, which is more or less unchanged from the FY21 results, and seems too conservative given the reputation of Ermotti, but also the cost cutting potential there exists in the new combined business. Investors seem to agree wanting to be part of what could become a powerhouse in global wealth management, which is a high margin and predictable business, sending UBS shares up by 33% this year and 15% alone since 10 August when UBS ended the Swiss government loss protection seen by investors as a sign of strength and the improving outlook.
UBS is currently valued around 0.9x tangible net asset value expected for FY23, which is close the long-term average ending in December 2022. With higher interest rates, strategic benefits in wealth management post the merger, and potential cost savings, we believe investors may be willing to pay a premium over time on tangible book value, but it all comes down to cost execution by Ermotti and the management team. If UBS executes this merger well, then it may turn out to be jackpot of decade for UBS shareholders. First step in that long journey is tomorrow’s FY23 Q2 results.
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