ESOCF - Enel: Impressive Results And (Still) Cheap

2023-05-25 04:42:14 ET

Summary

• Solid growth from EBITDA in Q1.
• Biden enlists Enel X Way with 2 million columns for US electric cars.
• Lower debt, dividend confirmed, and a positive outlook for renewable energy players. Our Enel buy rating is reiterated.

Here at the Lab, we recently analyzed Enel's corporate governance issue with a publication called " Not The Expected CEO " (ENLAY). Despite that, we reiterated our buy rating investment thesis supported by: 1) lower debt evolution with ongoing portfolio optimization, 2) lower earnings volatility due to LATAM disinvestments, 3) a compelling valuation with a " once-in-a-decade dividen d" yield opportunity, and 4) Citi argument counterbalance .

Starting with the last point, Citi recently changed its view and promoted the Italian flagship utility company. After an asset quality comps analysis, the investment bank believes Iberdrola and Enel's large valuation discrepancy is not justified. Here at the Lab, we are not surprised, and in our analysis titled "We Still Prefer Enel After Earnings", we emphasized how Iberdrola is trading at a 60% price-earnings premium compared to the Italian energy conglomerate. In our valuation, if we are looking at Enel's 2024 EBITDA in the renewables sector, we arrived at €4.5 billion, and applying an EV/EBITDA multiple of 12-15 times, in line with pure renewable players such as Orsted and EDP, we derived a valuation in the €54-68 billion range which is equivalent to Enel's current market capitalization (€62 billion).

Despite the governance turmoil with Covail's new list and the final appointment of Scaroni and Cattaneo, respectively Enel's President and CEO, the company's stock price is up by an additional 2.37%. 2023 will be another important year for Enel and here at the Lab, we believe that will narrow the sector discount.

Before going to our upside, Enel closed Q1 with a clean net profit of €1.5 billion, up 1.9% year on year, and strong progress from ordinary EBITDA to €5.5 billion (+21.8%). Net debt decreased by approximately 2% to €58.9 billion.

Starting with the bottom-up analysis, revenues were down to €26.4 billion at minus 22.6%. This change is attributed to the progressive energy decline due to the energy context normalization. Returning to the EBITDA, the positive result was attributed to its integrated business and operating income also grew, rising to almost €3 billion. The cash flows from operations fully covered the investment requirement for the period as well as the interim dividend. In addition, CAPEX grew by double digits to €2.9 billion with strong support from Grid and Enel's renewable arm called EGP. The guidance previously disclosed at the 2023-2025 Strategic Plan was confirmed with an EBITDA between €20.4 and €21 billion and a net profit in the €6.1 and €6.3 range. More important to note is the lower debt evolution which is now forecasted at €51/52 billion.

Enel's Upside

Following our last detailed analysis of Enel's business plan, we believe that the market is focusing only on disposals; however, with the last 5 deals concluded, the company is self-sufficient in new investments. In addition, Wall Street analysts are missing the new simplified company structure, dividend sustainability, and also a lower risk profile.

Moreover, it is important to empathize with the latest development:

1. In the USA, there are currently just three million EVs and about 135,000 public charging points which are mainly concentrated in California. The White House with the Biden administration admitted Enel C to the short list of eligible companies by the PCA (Purchasing Cooperatives of America). It means that all the US public administration (state, regional, and federal administrations and governments, as well as hospitals, schools, and public companies) will be able to purchase Enel X Way technologies and services without complex tender procedures. This is supportive of Enel's X accounts. Here at the Lab, already in 2020, we were the first ones to report the " Superchargers And Electric Vehicles: Chickens And Eggs " problems;
2. Still in the USA, Enel will build a new solar panel plant in Oklahoma with an initial investment of $1 billion, also thanks to the agreements on economic incentives with the US Inflation Reduction Act. Enel North America, through its subsidiary 3Sun USA, will start an industrial-scale production plant for innovative and sustainable solar cells and panels. The plan is expected to have a yearly production capacity of 3GW and create about 1,000 jobs in the next two years. This follows the Solar facility already completed in Italy ( the biggest in the EU );
3. Enel Green Power also signed an agreement with Nippon Gases Operations a company specializing in atmospheric and process industrial gases. In a JV, they will start a new factory for the purification, reuse, and liquefaction of Carbon dioxide for food purposes. Enel was again showing a clear sign to be on the cutting-edge technology on the electrification front in various end-markets.

Conclusion and Valuation

Ahead of the past CMD, Wall Street was concerned about a DPS cut, which did not materialize. And also, the Italian company reiterated its progressive dividend policy implying an 8% increase over the period. Without even comparing Enel with Iberdrola (which is the closest peer), the company is currently trading at a 30% discount to the sector on a 12-month forward consensus PE versus a 17% on its historical average. 2023 guidances were confirmed, and so we reiterated the company's valuation between €7.2 and 8.6 per share. Additional risks include hydro levels (especially in Spain and Italy). In detail, the 2022 water emergency left its mark on 2022 accounts, Enel Green Power Italy, Enel's green arm in the national market, was no exception and reported a loss of approximately €584 million. With the river dry, last summer there were periods in which the national hydroelectric lacked something like 2,300 MW per day, counting the prolonged closures of some of the major hydro plants in Northern Italy, such as Sermide (765 MW), Moncalieri (two units of 373MW and 381 MW) and Ostiglia (373 MW). A similar situation was recorded also in Spain with Endesa (ELEZF). We should also mention interest rate evolution risk due to Enel's debt development linked to M&A activities (especially in disposals). Stickier inflation could hit the company's cash flow and profitability.

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