ESOCF - Enel Is Set To Outperform In 2023

Summary

• Enel just announced the Brazilian Celg Distribuicao sale.
• Debt will be reduced by €1.5 billion, but we should recall a negative net profit effect.
• We see greater visibility on debt reduction and better-integrated margins. Our valuation is then confirmed.

Two weeks ago, we analyzed Enel's (ENLAY) new strategic plan and we published a follow-up note called 8.2% Dividend Yield In 2023 . It is key to report our last conclusive paragraph:

Enel is exiting the riskiest countries, reducing its debt, maintaining and increasing its dividend, and investing in renewable energy projects and also in more stable assets such as the network. Our buy rating is then confirmed.

No sooner said than done

Today, the Italian energy conglomerate player announced the sale of its Brazilian Celg Distribuicao to Equatorial Energia. The price paid was 8.5 billion Brazilian reals equal to approximately $1.6 billion (€1.51 billion) - this figure is also subject to post-closing adjustment. Looking at the detail, at the closing, Equatorial will pay 1.5 billion Brazilian reals and Enel Goißs will repay the intercompany loans for an amount of approximately 7 billion Brazilian reals within 12 months of the closing. In 2021, Celg Distribuicao recorded an EBITDA of $160 million, so we implied an EV/EBITDA value of approximately 10 times. It should be recalled that in December 2016, Enel was awarded the tender for the acquisition of Celg Distribuicao for 2.2 billion reais (equal to approximately $640 million). At that time, the company's net debt was $500 million, for an EV of approximately $1.2 billion. So, a good multiple that fully confirmed Enel's asset and is in line with Mare Evidence Lab's sum of the parts valuation. Furthermore, the parties have agreed on an earn-out mechanism based on the future company's performance. In our calculation, this transaction will generate a positive effect on the group's consolidated net debt of €1.5 billion, but also a negative effect on the reported net income of €850 million, of which €693 million already accounted for in results for the first nine months of 2022.

This operation is part of the disposal plan for a total of €21 billion announced by the energy giant. The maximum level of reduction will be reached in 2023, when the contribution is expected to exceed €12 billion, lowering the company's debt in a range of €51-€52 billion from the €58-62 billion estimated for the end of 2022. The economic impact of the sale will have no effect on ordinary results, the company assured, specifying that these amounts do not include the possible effects of the earn-out mechanism mentioned above.

This Brazilian transaction is fully in line with Enel's current strategic plan, as it contributes to the objective of constantly improving and optimizing the risk-return profile of the group and its asset base, focusing on core businesses.

Not only Brazil, the company also entered into an exclusivity agreement with the Greek company Public Power Corporation ((PPC)) in relation to the potential sale of all the equity investments held by the Enel group in Romania. During the exclusivity period, until the end of January 2023, PPC will carry out adequate due diligence on Enel's assets. Based on our estimates, the Romanian assets are worth circa €1.8 billion.

Other relevant news

Aside from the disinvestment plan, Enel's retail re-pricing campaign is now completed. We estimated a 40/50% increase in B2B and B2C energy prices and renew contracts for up to 24 months. This will lead to a significant recovery of the company's integrated margin and this will also be supported by lower procurement costs. In our numbers, we foresee that Enel will recover €4 billion in working capital requirements anticipated in the last months (especially in Italy and in Spain). On a negative note, we are forecasting an impact for the Italian extra profit tax of €400 million for 2022.

Finally, it is key to report that debt cost projection will remain stable at 3.5%, in fact, no significant issues are expected next year. Furthermore, on the customer credit front, no deterioration is to be reported even if the plan assumes, in any case, a " significant " unquantified worsening of the company's credit risk.

Conclusion and valuation

We suggest our readers check our previous publication called: A Follow-Up Note On One Of Our Top Picks For 2022 . As already mentioned in our initial paragraph, Enel is moving forward with its strategy. Last time, we decided to lower our target price to €8 from €8.5 per share, confirming our overweight valuation. We really believe that Enel is set to outperform in 2023. Our buy rating is confirmed .

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