ENIC - Enel Chile: Capitalizing On Chile's National Energy Policy

2023-08-22 12:32:12 ET

Summary

• Chile's GDP is projected to grow at a rate of 2.6% per year and electricity demand is expected to grow 25% in the decade 2021-2030.
• Enel Chile, the largest electricity generation company in the country, is a solid business with a sound growth plan.
• Enel Chile's potential valuation could approach $6 billion, offering a 25% margin of safety and a potential dividend yield of 7% in 2024.

Chile, a long and narrow country located along the western edge of South America, has a population of approximately 19 million people; it is a nation renowned for its diverse landscapes, vibrant culture, and growing economy.

Chile's economy has demonstrated resilience and consistent growth over the years. In 2022, the country's Gross Domestic Product ((GDP)) reached $456 billion dollars and, looking ahead, the Organization for Economic Cooperation and Development ((OECD)) estimates that Chile's GDP is poised to continue its upward trajectory, projecting it to soar to $549 billion by the year 2030, growing approximately 2.6% per year.

In 2021 the Energy Minister of Chile released a preliminary document outlining the objective to achieve a renewable energy contribution of 80% to the nation's electricity generation by the year 2030, with the aim of reaching carbon neutrality before 2050. Furthermore, the nation has set a target for exclusive electric vehicle sales by the year 2035.

Energy demand is expected to grow 25% in the decade 2021-2030 from 80 Twh in 2021 to approximately 100 Twh in 2030.

This growth bodes well for the electric utilities sector, which stands to reap significant benefits from the country's increasing economic activity and the accelerating trend towards vehicle electrification.

Enel Chile

The largest electricity generation company in Chile is Enel Chile ( ENIC ), a subsidiary of Enel (ENLAY), an Italian company trailing only China's State Grid in the list of the largest utility companies in the world, with revenues in 2022 amounting to US$ 156 billion.

Utilizing a diverse range of energy sources including wind, hydro, solar and thermal power installations, Enel Chile has established a comprehensive energy portfolio that, among many assets, comprises the construction of South America's inaugural geothermal facility situated in the Antofagasta region and several photovoltaic plants located in the northern regions of the country, that capitalize on some of the most intense solar radiation found on the planet.

The company declares it has a consolidated production capacity of 8.5 Gigawatts, a quarter of the total installed capacity in the country, catering to 2.1 million households and businesses. Remarkably, a substantial 76% of this installed capacity derives from renewable sources, highlighting Enel's resolute dedication to diminishing carbon emissions and the reliance on fossil fuels. In September 2022 Enel Chile became the first company in the electricity sector to eliminate coal from its generation mix, and in so doing achieved eighteen years sooner than agreed the objective of the National Decarbonization Agreement signed by the Company in 2019.

The company is committed to further expanding the production from renewable sources, with a planned production capacity in 2025 of 9.5 Gigawatts by 2025, with 79% of this energy stemming from green sources.

Earnings

Between 2016 and 2021 the company has posted revenue that fluctuated between 3.4 and 3.7 billion dollars; in 2022 it grew to 5.9 billion, in part due to an increase in energy sales and electricity prices but mostly due to one-off events such as the sale of transmission lines for $1.4 billion and the sale of LNG assets for $500 million. The proceeds were used to reduce the debt of the company to healthier levels.

Excluding these one-time items, net income from energy sales grew from $172 million in FY 2021 to $393 million in FY 2022.

As at June 30, 2023, the company reported net income for the first half of 2023 of $141 million, a 90% increase in relation to the $74 million earned in the corresponding period in 2022; it also reported that it had $533 million in cash and total debt amounting to $4.5 billion, mostly due after 2026.

Enel Chile has released a very detailed and sound strategic plan from 2023 to 2025, with the goal of achieving net income between 500 and 700 million dollars in 2024 and in the 300 to 500 million dollars range in 2025; currently it pays a dividend corresponding to 30% of net income and has the objective to increase the payout to 50% of earnings in 2023, 2024 and 2025.

Charging stations

In addition to residential and business clients, in 2022 the company expanded into the electric mobility sector and entered into a strategic partnership with Petrobras ( PBR ) to establish a network of charging stations across 150 Petrobras gas stations nationwide by 2025. Additionally, Enel Chile has forged agreements with MercadoLibre ( MELI ), and as of July 2023, it had successfully deployed 114 charging points strategically positioned within various Mercado Libre logistics centers across the country, facilitating the recharging of its electric fleet.

Valuation

As of 2023, the electric utilities sector maintains an average price-to-earnings ratio of 15. While acknowledging the inherent limitations of this valuation metric, it can serve as a useful tool for assessing the worth of a relatively steady enterprise like an electric utility. Based on an assumed 2025 earnings figure of $400 million and upon adjusting to a P/E multiple of 15, Enel Chile's potential valuation could approach $6 billion. In this context, the current market capitalization of $4.6 billion offers a substantial 25% margin of safety. Furthermore, at current market prices, the anticipated $300 million dividend in 2024 and $200 million in 2025 translates to an appealing 7% and 5% yield respectively. Lastly, should the company succeed in aligning its earnings growth with the projected trajectory of the country's GDP and energy demand expansion over the coming years, acquiring shares at the present valuation levels could indeed represent a highly rewarding long-term investment opportunity.

Competitors

Enel Chile currently generates approximately a quarter of the nation's total energy production. Its primary contenders in the market are Colbún S.A. and Engie Energía, with comparatively modest annual revenues ranging from 1 to 2 billion dollars per year. While Enel currently enjoys a commanding position, it's important to keep in mind that circumstances in the industry may change over time.

Risks

As with all business ventures, Enel Chile faces some specific risks to take into account and that may have a significant impact on the company's revenue:

• Variability in mean rainfall, temperatures, solar radiation and wind levels can influence hydroelectric, solar and wind generation, thereby inducing fluctuations in energy output.

• The company's financial stability is vulnerable to risks associated with interest rates that may exert a significant influence on debt obligations and electricity production costs.

• Potential health, safety and environmental hazards present the prospect of legal entanglements and unanticipated expenses.

• The company faces cybersecurity and information technology risks capable of disrupting operations for extended durations or necessitating expensive hardware and software upgrades.

Country-specific risks should also be considered: Chile faces a range of economic and sociopolitical factors requiring vigilant monitoring. The Central Bank has already responded by raising interest rates to combat elevated inflation. Further restrictive measures could jeopardize the ongoing economic rebound. Additionally, risks include the country's substantial debt accrued during the COVID-19 pandemic and uncertainties stemming from the Constitutional process and proposed tax law amendments, contributing to political instability.

Conclusions

Given Chile's projected GDP, energy demand growth and the company's solid structure and sound plans for expansion, those pursuing medium to long-term investment horizons might find Enel Chile an appealing addition to their portfolio at current market prices, providing effective diversification and the potential for reasonable growth, complemented by a safe dividend.

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