IBDSF - Iberdrola: Updating The Valuation After The Capital Markets Day

Summary

• We were impressed by Iberdrola's Capital Markets Day, and the company remains one of our favorite utilities.
• The most important message shared was that Iberdrola plans to invest €47 billion in energy transition assets during the period 2023-2025.
• We have updated our estimated valuation for the shares, and continue to believe there is an attractive potential upside.

We started covering Iberdrola ( OTCPK:IBDSF )( OTCPK:IBDRY ) by saying we estimated that it was trading at a ~20% discount to fair value. So far, the market appears to be agreeing with us, with shares already up ~15% since then, despite the S&P 500 being basically unchanged.

Since then Iberdrola held its Capital Markets & ESG Day in November 2022, in London, where the company presented its strategic plan for the period 2023-2025. After reviewing the information shared with investors at this event, we have increased our estimated fair value, and we remain very optimistic about the company and the shares. The most important message shared was that Iberdrola plans to invest €47 billion in energy transition assets during the period 2023-2025, and this drives an increase in the estimated EBITDA and net profit outlook for 2025. Importantly, these investments are going to be mostly organic in nature, not acquisitions, and the company does not expect a capital increase to finance them. Iberdrola expects to finance these investments mostly through asset rotation and maximizing the use of green financing. It should help that Iberdrola is the private company leader in green bonds issued, with more than €16 billion outstanding. Iberdrola also shared that it targets to become carbon neutral by 2030 in scopes 1 and 2 and to reach net zero in all three scopes by 2040.

Of the €47 billion planned investment, approximately 57% or ~€27 billion is planned for electricity networks. While regulated assets, investments in networks are critical to be able to integrate new renewable energy capacity. The rest of the planned investment, or approximately €17 billion, is planned to go to renewables to deliver ~ 52 GW of renewable installed capacity by 2025. The company shared that ~50% of new capacity is secured and ~95% of 2025 production is contracted.

Growth

Thanks to this ambitious new investments EBITDA and profits should grow nicely the next few years. EBITDA is estimated to reach between €16.5 billion and €17 billion by 2025, which would represent an 8-9% CAGR. Net profit should increase slightly faster, growing at an 8-10% CAGR to reach between €5.2 billion and €5.4 billion.

The company is not planning to stop in 2025. It estimates it will make investments of €65 billion to €75 billion between the years 2026 and 2030.

Balance Sheet

What we particularly like about the growth plan the company shared is that it does not consider equity issuance. Instead it plans to finance the new investments through partnerships, asset rotation (selling mature assets), and debt. Despite planning to use debt to finance much of the new investments, the company believes it can maintain very healthy credit metrics and rating agencies ratios to maintain its current BBB+/Baa1 rating.

The company's financing strategy revolved around fixed-rate financing with long-term maturities. It is planning for an average debt maturity of 6-7 years, and for improved credit metrics compared to the previous November 2020 plan. The company therefore believed it will be comfortably within the rating agencies' thresholds. It is forecasting, for example, a 2025 net debt / EBITDA ratio of only ~3.4x.

Valuation

Although shares have rebounded a little from their recent low, they remain very attractively priced, with the EV/EBITDA about two turns lower compared to the ten year average.

We believe this to be an attractive multiple considering that EBITDA is now expected to grow at a ~8-9% CAGR from now until 2025.

Similarly the P/E ratio remains quite reasonable at ~15x, with net profit expected to grow slightly faster than EBITDA with a forecasted CAGR of between 8% and 10%.

Net profit is expected to reach between €5.2 billion and €5.4 billion by 2025. This means there will be lots of available profits to distribute as dividends. The company is promising to grow the dividend in line with net profit while maintaining a 65% to 75% payout ratio. This is expected to result in a dividend of between €0.55 and €0.58 per native share in 2025, with a floor of €0.46 in 2023-24 and €0.50 in 2025.

Our updated net present value estimate for the shares is ~$13.9, which is about 18% above the current price of $11.76. Note that this is for the shares trading as Iberdrola ( OTCPK:IBDSF ), and would be equal to $55.8 for the ADRs trading as Iberdrola ( OTCPK:IBDRY ) that represent 4 ordinary shares. The increase in the estimated net present value for the earnings stream is mostly the result of using slightly higher growth rate assumptions resulting from the information shared during the company's Capital Markets Day.

Risks

We believe new regulations and political stability remain the biggest risks for the company, especially given that it operates in a large number of countries. During the Capital Markets Day the company shared that permitting has been the main bottleneck for new renewable deployment, but that prospects are improving based on regulatory willingness. There is also a risk that returns on investment could trend down if significant amounts of capital start competing for renewable energy projects.

Conclusion

We were impressed by Iberdrola's Capital Markets Day, and the company remains one of our favorite utilities. The company is planning massive investments in electricity networks and renewable energy assets, that should result in higher earnings, dividends, and EBITDA. We believe there is still significant potential upside for the stock based on our updated fair value estimate, as well as an attractive dividend yield. There are some risks to consider, including regulatory risks and the potential for project returns to trend down. Still, given the attractive valuation, we are maintaining our 'Strong Buy' rating.

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