ESOCF - Enel: Ongoing Deleveraging Buy More

2023-07-20 03:19:02 ET

Summary

• Enel's 2023 disposal plan is advancing well, with two additional deals concluded in July.
• The new CEO continues to increase his Enel equity stake.
• Renewables exposure, retail margin stabilization, and a positive regulatory framework support our overweight target.

Countdown to Q2 Enel results scheduled for July 26th (ENLAY). This semester is the first release under the new CEO and CFO . Wall Street undoubtedly appreciated the smooth continuation of the disposal plan presented in 2022, aiming for a debt target reduction of at least €21 billion in the next three years.

Looking ahead, there are a few updates to report that fully support our buy rating. Enel has always been a Mare Evidence Lab top pick and is finally delivering on a stock price appreciation (Fig above). Here are the company's latest milestones:

1. Enel's 2023 disposal target is around €12 billion. Last week, after the Romania, Perù, and Argentina sales, the company signed an agreement with Sonnedix to sell its Chilean assets for €504 million ($550 million). This represents 100% of the company's enterprise value and will generate a €500 million benefit on the company's net debt development. The solar plants are located in northern Chile's Atacama and Antofagasta regions and have approximately 416 MW of installed capacity. The sale is subject to certain conditions, such as the green light of the Chilean antitrust authority called Fiscalía Nacional Económica (FNE);
2. Not even 24 hours after the Chilean disposal, Enel closed a new sale in Australia. The company signed an agreement with Inpex Corporation, one of the major Japanese groups active in oil extraction and processing, to sell 50% of its Australian group activities. On a 100% enterprise value basis, this deal is valued at approximately €400 million. In our calculation, considering a 50% disposal, this led to a positive effect of around €145 million on consolidated net debt. However, this disposal is not part of the debt reduction plan but follows Enel's strategy to focus on partnerships in certain geographical areas to increase the company's value creation. Once the transaction is finalized, Enel and Inpex will jointly manage Enel Green Power Australia, overseeing the existing renewable generation portfolio and continuing to develop Enel's pipeline. At an economic level, the transaction is expected to generate a positive impact of approximately €87 million on the group 2023 EBITDA, in addition to the already mentioned positive impact on net debt;
3. In early July, Endesa paid Enel its 2022 dividend of €1.17 billion. This is the most generous coupon among Spanish utilities. However, there is still uncertainty in Spain's political context (and consequently the regulatory one), given Sanchez's resignation , which will lead to early elections (next week). Here at the Lab, Endesa remains a pillar in Enel Strategy, with an estimated profit of €19.9 billion between 2023 and 2025;
4. To support Enel's stock price development, we should mention that the new CEO, Flavio Cattaneo, continues increasing his equity stakes. The manager, who has been at the group's helm for less than three months, purchased 500,000 Enel stocks in May and an additional 200,000 shares in June . He now owns a million stake with over €6 million package value.

Valuation and Conclusion

Although we expect a full strategy update only with the Capital Market Day in November, here at the Lab, geographic streamlining and balance sheet improvements will be key points for Enel's H1 Q&A call. Furthermore, we expect strong results from the Italian core retail division thanks to higher tariffs with lower production costs and good profits from the renewables business, driven by the hydroelectric recovery in Italy and Spain, partially offset by lower wind generation.

In Q2, we forecast an ordinary EBITDA of €4.9 billion (signing a plus 28%), up from the €3.8 billion achieved last year. As a reminder, Q2 2022 was penalized by lower hydro production and retail margin contraction. Related to the net debt development, even if it is counterintuitive, given the company's recent disposal, we anticipate higher debt to €62 billion (in line with last year's financial figures) compared to Q1 2023. This is due to tax payments and the natural working capital trend that usually grows in Q2 and Q3. Disposals were concluded, but M&A cash collection has not yet occurred. In our numbers, the total value of disposed assets is approximately €5.5 billion, with a pro-forma net financial position of around €57 billion. We are not changing our 2023 debt evolution estimate at €51/52 billion; however, we are now more confident in Enel's debt target.

In H1, our ordinary EBITDA is set at 10.3 billion with a plus 25% year on year and a group net income at €3 billion (+44% year on year). Therefore, we confirm our buy rating target . On a valuation basis, Enel is trading at a P/E of 9.5x with an EV/EBITDA of just 6x for 2024. As a reference, Iberdrola 's current P/E is at 16x, with an EV/EBITDA of 8.5x in 2024. In our numbers, Enel dividend yield is at 6.9% (Iberdrola: 4.58%), with a net debt/EBITDA ratio of 2.6x for next year. This means a clear overweight valuation. Here at the Lab, Enel's profile is still interesting thanks to renewables exposure, retail margin stabilization, and a positive regulatory environment. On the upside, Enel has pre-qualified in the tender offer for Noor Midelt II power plant construction in Morocco. This is a 400 MW complex with a concentrated solar power plant with possible storage.

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