EONGY - E.ON: Downside Already Priced In

• E.ON writes down its 15.5% stake in Nord Stream 1.
• The company maintains its 2022 guidance unchanged.
• E.ON delivered a mixed quarter but we reaffirm our positive long-term view.

This year, we already covered E.ON twice ( OTCPK:EONGY ). In our initiation of coverage (before Ukraine's invasion from Russia), we emphasized the long-term prospect of the German transmission provider. We were positive on higher CAPEX requirements (due to grid modernization and new renewable projects coming online), a higher pre-tax ROE for grids, and a dividend policy visibility until 2026. In the Q1 update , we analyzed E.ON's Russia exposure and the support from the European Union energy transition providing some relief to the company's current investors.

In light of the just-released half-year performance , today we again comment about E.ON. Our readers might also be interested in our follow-up notes on Engie (ENGIY) and Uniper (UNPRF).

Q2 results

In the first half of the year, E.ON reported a 15% year-on-year decline in adjusted EBITDA to €4.06 billion and a net profit of €1.43 billion, 20% less than the €1.75 billion recorded in the same period of 2021. Looking at the divisional level, the network EBITDA was 3% down compared to last year's results. This was due to milder weather and higher cost in the Turkey and Sweden region network. The customer solutions EBITDA decreased by 8%, in detail, there was a positive effect thanks to favorable weather conditions that were totally offset by higher energy procurement costs that were not fully passed through to B2C and B2B end-customers. As already mentioned in the Uniper note, starting from the 1st of October, the gas price increases can automatically be collected in the bills. This will provide some relief to E.ON's future accounts. In addition and as expected, the German nuclear division was significantly down due to the absence of the government's extra compensation.

Through the company's pension fund, E.ON holds a 15.5% equity stake in Nord Stream 1 of which Gazprom holds the majority. In March, the group had recorded the investment with a book value of €1.2 billion, warning that any devaluation would affect pension provisions and net debt. Looking at the half-year financial statements, the investment item was around €700 million below the previous value. The company clarified that the write-off is recognized in equity among other non-operating income citing the " growing uncertainty " of geopolitics. After the news, gas prices are currently rising again in the EU.

Conclusion and Valuation

However, thanks to the desire of the European Union to transform its energy supply system, the German player has reaffirmed its guidance for 2022 which forecasts an adjusted EBITDA between €7.6 and €7.8 billion and an adjusted net profit from €2.3 to €2.5 billion.

When we initiated to cover E.ON, we assigned a hold rating. After the energy shock, E.ON is trading at a depressed valuation with a P/E 2023 at 9.9x compared to the average European peers at 14x. This is not justified given the dividend yield which is now almost at 6%. Buy rating confirmed .

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