IBDSF - Iberdrola: Supportive Fundamentals

• The next positive catalyst is the new plan that Iberdrola will report in November.
• Iberdrola's main risk is political.
• Given the strong results, we continue to see Iberdrola as a long-term pick.

Early this morning, the Spanish energy conglomerate Iberdrola ( IBRRF ) disclosed its full Q2 report . Iberdrola was one of the first Mare Evidence Lab's buy ratings , and since then, it was a positive call. However, following our recent update on the Q1 performance in which we emphasized seven key takeaways , the stock price declined. This was mainly due to the ongoing energy crisis and the future uncertainty on the macroeconomic outlook. Q2 results were positive, and we continue to see Iberdrola as a long-term pick, reiterating our buy target of €12 per share based on a 14x P/E 2023 . Our internal team believes that the next positive catalyst will be the new business plan that the company will report in November 2022. In the meantime, we are confident that the Spanish energy company will beat the analysts' expectations in line with its plan presented in November two years ago. Given the strong underlying performance achieved also in the second quarter, we believe that Iberdrola's main risk is linked to politics, and we highlight that government intervention remains the major downside risk.

Q2 Result

Looking at the accounts, we see that revenue increased by 30.3% compared to the first six months of 2021 and reached €24.4 billion. We should note that the strong growth was mainly recorded in Q1, especially in the USA, Brazil, and the United Kingdom, and this was offset by the adverse result of the Spain area. EBITDA also grew by 18.4% to €6.4 billion, thanks to the positive evolution in all geographies, except for the national one. EBITDA was impacted by positive and negative one-offs:

1. (+) currency effect for almost €400 million;
2. (-) impact on distribution in the home country for almost €200 million;
3. (+) effect on accounting in the US network for a total consideration of $550 million.

Adjusting our internal number, we concluded that EBITDA grew by 5.8%.

Taking advantage of the conference call, the CEO defended the electricity companies pointing out that they are not taking advantage of the current upward energy gas spiral to increase their profits as shown by " the gas and oil majors ". In addition, Iberdrola speaks of " negative impact " in terms of regulatory decisions and court rulings, referring to the different measures developed by the Government to clamp down on the benefits of electricity companies. The last one is a tax on profits , recently approved by the Council of Ministers and which plans to collect €10/11 billion in the next two years.

Looking at Iberdrola's Spain result, the company has maintained electricity prices for end customers, lowering its profit by 26%. This was due to two main factors: a 17% reduction in renewable production and a 32% increase in gas price.

Despite the drop in activity in the home country, the good results abroad and the increase in investments contributed to the increase in profits. Thus, the Spanish energy company recorded a net profit of €2.075 billion in the first half of the year, signing a plus 36% compared to the same period of 2021. Investments in the period grew by 5.3%, and the company now expects to end the year with a net profit forecast of €4.2 billion. Compared to the plan presented in November 2020, we believe that analysts will need to increase future estimates. Given the strong performance, financial targets are achievable, and as we mentioned in the first paragraph, we reaffirm our valuation.

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