ESOCF - Enel: We Double Down

Summary

• Enel's top-line sales were up by 64%. The company is managing energy price increases for its end clients. Core EBITDA was beyond guidance and signed a plus 2.6%.
• Debt was down by €10 billion on a quarterly basis. New disinvestment in Brazil.
• Enel is trading at a 6x P/E with a dividend yield of 7.5%. Disposals are in place with EBITDA diversification in top-tier 1 countries. Our buy target is fully confirmed.

Here at the Lab, we have a long buy rating on Enel SpA (ENLAY) (ESOCF) and yesterday, after the stock exchange closing bell, the integrated energy conglomerate released its 2022 preliminary results. Since our initial recommendation (March 2022), the company is down by 2.81% (not the greatest results); however, it is managed to outperform the S&P 500 returns. Looking at the financial press release , Enel's strategic moves are the catalyst that we have been waiting for. As a reminder, our internal team fully confirmed Enel's investment thesis, and this is also supported by historical analysis. Indeed, Enel traded at around 6x its P/E multiple on two occasions only - during the financial crisis and at the height of the sovereign debt crisis.

In 2022, we also published a comps analysis versus City bank called 'A Follow-Up Note On One Of Our Top Picks For 2022'. We suggest our new readers have a look at our previous publication, in detail, our main highlights were debt reduction, lower emerging market exposure (with less volatile earnings on FX development), and positive evolution on Enel's core EBITDA. Keeping these facts in mind, let's have a look at the company's preliminary update. Full disclosure will be released on March 16th.

Q4 and FY results

Top-line sales increased to €140.5 billion signing a plus 64% versus 2021. This sharp increase was mainly due to higher energy prices, but also thanks to growing volumes (especially in Italy and Spain). Benefits have also come from exchange rates as well as thanks to sales proceeds coming from the Chilean transmission business. Excluding these positive one-offs, the ordinary core EBITDA reached €19.7 billion and was up +2.6% on a yearly basis. This confirmed Mare Evidence Lab's thesis on Enel (even in a turbulent market) and was higher than the management guidance previously communicated to the financial markets (€19-19.6 billion). Aside from the financial consideration, it is important to note that Enel protected its end customers from the energy shock crisis.

Key to emphasize is the company's debt evolution. The over €21 billion debt-cutting plan is starting to bear some fruits. From the 2022 preliminary numbers, there is a €10 billion decrease from €69.7 billion recorded at November end to the €60.1 billion achieved at 2022 year-end. However, we should also note that on a yearly basis, Enel's net financial debt increased by 16%.

Meanwhile, the asset disposal program continues. Here at the Lab, we already commented about Enel's EM disinvestments. According to market sources , it is the turn of the electricity distributor called Ceará. The Brazilian company is the third largest in the Northeast, serving 184 municipalities with 4.38 million customers.

Currently, Enel's activities extend over a total of thirty countries. During the capital market day, the energy conglomerate player declared its intention to concentrate its future investments in what it considered Tier 1 countries (core and scalable regions): Italy, Spain, Brazil, the United States, and Chile, among others. We estimate that Tier 1 operations could represent approximately 90% of the group's estimated EBITDA for 2023. The remaining 10% of the group's EBITDA comes from the smallest and least scalable regions: Peru, Argentina, Colombia, and Romania, equal to more than €2 billion for 2023.

Conclusion and Valuation

We see several potential benefits from this evolution. Pro-forma net debt could be down 20%-20% from current levels, and investments in European and US renewable energy could accelerate, confirming our thesis on less exposure to emerging markets. In numbers, this could accelerate EPS growth over the medium term which could lead to a sharp re-rating for the stock. According to our estimates, at a price/earnings multiple of 13x by 2023, Enel would be worth in a range between €7.2-8.6 per share on a diluted basis. On the negative side, the recent hike in interest rates, concerns about energy prices impact, bad loans, CAPEX needs, and growing liquidity represent headwinds that could not be unnoticed. However, the company is trading at a 6x P/E and a confirmed dividend yield of 7.5%. This is a clear buy and we double down our investments.

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