ESOCF - Enel: Not The Expected CEO

2023-04-13 14:02:37 ET

Summary

• Enel sold its assets in Romania and Peru for a total value of €1.26 and €3.1 billion respectively. This is in line with the company's debt-cutting plan.
• In addition, there are rumors for a €2 billion buyback to support Enel's stock price.
• Not the greatest change with the new CEO; however, we still see the company as very much undervalued. Our buy is confirmed.

The Enel ( OTCPK:ENLAY ) stock price is currently suffering at the Italian stock exchange with a minus 4% to €5.75 per share and approximately 44.4 million shares changed compared to an average of 28.4 million stocks exchanged over the last 30 days. What has happened? Yesterday night (April 12), the Italian government (Enel's main shareholders with an equity stake of 23.59%) decided to change its CEO. If this change was expected, the choice of Flavio Cattaneo as the new managing director and Paolo Scaroni as president was a real surprise. The former was Terna's CEO for three consecutive terms, while the latter returned as president to Enel, but between 2002 to 2005, he was the CEO. Scaroni was also at Eni's helm from 2005 to 2014.

According to Reuters Breakingviews , given Scaroni's background, it seems a good idea to a potential merger combination between Enel and Eni in order to build a zero-emissions global star. This could make Enel less attractive to international investors than in the past. Here at the Lab, we believe this is not an option. What is important to verify will be Cattaneo's strategy in the current Enel's disposal strategy. The company's business plan foresees disposal for €21 billion and investments for the energy transition in Italy with development in key international markets. Cattaneo's nomination comes as a surprise, with his name only starting to circulate in the very last few days, surpassing Donnarumma's candidacy, who seemed to be in pole position. And although Starace's departure was already discounted in the share price, Cattaneo's appointment is the least apt among the names that have leaked in recent weeks, especially as regards to the sectoral background.

Enel's debt and recent disposals

In line with Mare Evidence Lab's estimates, these past few weeks have been full of positive events.

1. Two days ago , the Italian integrated player sold its Peruvian assets to the Chinese group CSGI (China Southern Power Grid International). Enel Perú, controlled through the Chilean listed company Enel Américas, signed an agreement for a total consideration of approximately $2.9 billion, corresponding to approximately $4 billion in terms of enterprise value. This deal is still subject to value adjustments and the deal completion needs the approval of certain conditions, including the ODI green light (Outbound Direct Investments which is the Chinese authority in matters of foreign direct investment) and the Peruvian regulatory authority . In numbers, we are estimating a double positive effect on Enel's 2023 accounts: 1) a reduction in consolidated net debt of approximately €3.1 billion and 2) a positive impact on reported net income of approximately €500 million;
2. Recently, Enel also signed an agreement to sell its activities in Romania. The Greek Public Power Corporation will pay a total of €1.26 billion, which corresponds to approximately €1.9 billion in terms of enterprise value. This price is subject to value adjustments and to an earn-out mechanism on a possible additional payment based on the retail division's future value. According to our calculation, we expect that this transaction will have a positive effect on the group's consolidated net debt of approximately €1.7 billion, and a cumulative negative impact in 2022-2023 on the net profit of approximately €1.4 billion, of which €0.6 billion related to foreign exchange reserve release;
3. Not only disposals, according to the latest rumors, but Enel is also evaluating the possibility of a new buyback plan. In numbers, the share repurchase will be up to 500 million shares, considering a maximum disbursement of €2 billion with a duration of 18 months. From June 2022 to today, Enel purchased just 2.7 million treasury shares, a negligible percentage of the total share capital (0.027%). These shares were only used for long-term incentive plans. The new program will go far beyond the internal remuneration plan and offers to the current shareholders a further tool for monetizing their investment. In addition, in the event of the program's completion, Enel would hold approximately 4.92% of the share capital and it might be used to finance potential M&A targets.

Conclusion and Valuation

Last time, we emphasized how our team was confident in the short-medium term horizon of Enel's investment. We reported how the " pro-forma net debt could be down 20%-20% from current levels ", and we were supportive of higher " investments in European and US renewable energy ". These latest exits allow Enel to maximize its asset value and continued the strategic plan announced last November. Enel will focus its activities on six core countries: Italy, Spain, the United States, Brazil, Chile, and Colombia. From the recent disposals that are part of the debt-cutting plan, Enel has so far collected around €5.9 billion, rationalizing its portfolio and its geographical presence. These disposals have also the benefit to reduce Enel's earnings volatility due to FX fluctuations. This totally confirmed our thesis on less exposure to emerging markets. Therefore, even if we expect a negative impact on the stock with the current CEO change, we decided to maintain our buy rating target. Looking at Enel's valuation, debt-cutting, and interest rate savings will accelerate the company's EPS growth and could lead to a positive re-rating. Here at the Lab, considering a P/E multiple of 13x, we value Enel between €7.2 and 8.6 per share . In line with our previous note called Enel Is Set To Outperform In 2023 , our buy is then confirmed.

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