ESOCF - Enel: All In Line Still A Buy

2023-07-28 07:04:08 ET

Summary

• Strategic plan is ongoing with disposals and lower earning volatility. Enel also announced a partial exit in Greece.
• Revenue fell due to lower commodity prices, while EBITDA increased thanks to the grid and renewable energy division.
• Enel confirmed its 2023 outlook (with positive guidance on debt development). Our buy rating is reaffirmed.

Our most devoted readers know we have a buy rating on Enel (ENLAY). This is well supported by 1) a growth story in renewable energy space with supportive earnings from grid division, 2) a deleveraging process with ongoing disposal, 3) compelling valuation vs Iberdrola , and 4) lower earnings volatility with lower FX and execution risks, and 5) and a juicy DPS. Before the Q2 results, we anticipated a few highlights:

1. Q2 Ordinary EBITDA of €4.9 billion with a plus 28% on a yearly basis;
2. Despite disposal, we forecasted a higher debt evolution at €62 billion and an H1 pro-forma debt of €57 billion. This is due to M&A cash collection, which has not yet occurred (exp in Q3 and Q4);
3. We also confirmed our 2023 debt development with an estimate of €51/52 billion with higher confidence in Enel's debt target achievements.

Since early Jan 2023, stock price performance has been excellent, and we hope you get on board with us. Total Enel's return reached almost 40% (including the interim and final dividends already paid).

Q2 Results

Looking at our estimates, we were almost correct at the decimal level.

1. Enel delivered an H1 net profit of €3.3 billion and an ordinary EBITDA of €10.7 billion with a plus 29.4%. The company also exceeds Wall Street consensus expectations but not our internal estimates. Top-line sales were down to approximately €47 billion; however, this is a well-priced effect due to lower energy commodities prices. The EU energy context is now characterized by greater stability. Ordinary EBITDA increase is attributed to Enel grid improvement and better performance in renewable energy (Fig 1);
2. As expected, net financial debt increased to €62.15 billion, with a pro-forma net financial position of around €57 billion (this was very much in line with our numbers). This negative evolution was due to CAPEX investment, dividend payment, and social contribution. In H1, Enel invested around €6 billion in its Enel Green Power arm and Enel Grids for its distribution network development (Fig 2);
3. Again, as anticipated, 2023 guidance was confirmed. The CEO strategic plan was reiterated, and the company forecast a 2023 ordinary EBITDA between €20.4 and €21 billion with a net financial debt of €51 and €52 billion, with an improvement in the group's credit profile and a net financial debt/EBITDA ratio down from 3.1x to 2.5x in 2023 (Fig 3).

Fig 1

Fig 2

Fig 3

Conclusion and Valuation

Looking at our investment thesis, we decided to leave unchanged our 2023 estimates and confirmed our buy. Additional supportive news is:

1. As expected, Endesa is not for sale (Enel owns 70% of the Spanish integrated utilities, which recently paid a generous dividend)
2. The company is advancing with disposals and completed 60% of the CMD strategic plan (Fig 4)
3. Rising interest rate development is a minor concern given the fact that 82% of Enel's debt is at a fixed rate (Fig 5)
4. With ongoing disinvestments, Enel is lowering its human resource complexity. We noted that there is an operating cost reduction with lower C-levels. Disposals in EM will not only reduce Enel's earnings volatility but also reduce its workforce costs. This is still not priced in by our team
5. The company sold its Greek green assets to Macquarie Asset Management yesterday. Enel anticipates a debt reduction in line with the transaction value, which will be accounted for in Q3

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