ENAKF - E.ON Continues Its Positive Earnings Trajectory

2023-05-12 05:00:07 ET

Summary

• E.ON recorded a strong performance in both Customer Solutions and Energy Networks.
• Stable net interest expenses but higher debt evolution.
• Year-to-date, E.ON was up by 30% outperforming the sector. 2023 guidance was left unchanged.
• The company's valuation is now in line with peers. Therefore, we are back to a neutral rating.

We just finished the E.ON Q&A analyst call and going back to our initial investments, we are pleased to report that we almost reached our target price set at €12 per share. When we started to look into E.ON (EONGY), we were in the midst of the EU energy crisis. With a publication called ' Worst-Case Scenario Already Priced In ' suggesting a neutral rating, and then a ' 20% Upside ', confirming a buy case, we delivered a stock price appreciation of 28.49% (including the company's dividend payment).

Q1 results

Looking at the company's quarterly performance, the first quarter EBITDA reached €2.71 billion and was above consensus estimates by 5% (guidance was set at €2.59 billion). Going down to the P&L results, the company's adjusted net income delivered a plus €1.03 billion and was approximately 6% ahead of the consensus estimate at €983 million. Cross-checking Wall Street analyst numbers, the beat was mainly recorded for lower-than-expected depreciation and amortization.

Concerning the company's divisional basis, E.ON energy networks' EBITDA was up by 30% on a yearly basis to €1.90 billion. The company benefitted from Regulatory Asset Based growth and a non-recurrence of network losses recovery. In line with our thesis called ' Investments Acceleration Will Likely Drive Earnings Growth ', Customer Solutions' EBITDA reached €814 million from €415 million recorded in the same quarter last year. This was due to margin recovery, and better procurement in the Netherlands and Germany. On a negative note, there was a negative one-off of a loss in Hungary and Romania in addition to adverse weather conditions and higher bad debt evolution. This was due to higher energy bills. This latest topic is worth deeper consideration. In detail, bad debt increased to €1.8 billion from €1.5 billion and €1.3 billion in 2022 and 2021 respectively. Despite this, E.ON has not reported any changes in clients' behavioral payments. This is given by direct government support and price caps.

Economic net debt reached €35.1 billion at the Q1 end compared to the €32.7 billion recorded at the end of 2022. Despite stable interest rates (net interest expenses were flat on a yearly comparison), debt evolution increased; however, we should note that cash flow conversion is usually lower in the first quarter. E.ON confirmed its 2023 debt targets and secure a solid rating (despite an important higher debt in abs value). As a reminder, in Q2, there is the dividend payment with an expectation to distribute approximately €1.3 billion.

Conclusion and Valuation

Here at the Lab, we positively see these results. We rated E.ON with an outperforming rating and the stock has been the best-performing large European utility year to date. In detail, E.ON was up by 30% outperforming the sector by 18%. The German utility company successfully navigated the energy crisis turmoil over the last winter which has led to an increase in the asset base value. The company is currently trading at 8.6x 2025E EV/EBITDA and is now in line within the sector. E.ON decided to reiterate its 2023 outlook confirming that the energy crisis is not over yet. However, the company expects to reach the 2023 top-end outlook. Here at the Lab, we still see an elevated risk for the remainder of 2023. Therefore, implying a price earnings of 13.5x and an EV/EBITDA of 10.5x, we confirmed our €12 target price on a twelve-month estimate, moving the E.ON rating to neutral. Risks included in our target price are 1) 10-year German government bonds prices changes (RAB is calculated on the country risk-free rate); prolonged and higher interest rates; 2) higher bad debt provisions; 3) 2023/2024 colder winter (given the unresolved Russian evolution and Ukraine conflict) and a few E.ON's businesses which operate on contracts that are not disclosed to the public.

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