UNPRF - Uniper SE's Stock Price Implied Its Value Doubled From Previous Highs Which Does Not Make Sense

2023-06-23 17:44:52 ET

Summary

• Uniper SE reported strong Q1 numbers with a profit of €6.7 billion, leading to a significant recovery in its share price.
• I believe the stock is overvalued due to massive dilution, long-term headwinds, and a historically high valuation.
• Therefore, I conclude that Uniper is a sell, with a downside potential of 50% or more.

Uniper SE ( UNPRF ), the German listing is more liquid ( UNSE01 ) reported remarkably strong Q1 numbers, including a profit of €6.7 billion. Given the dire straits Uniper found itself in just a year ago, that is certainly good news. For those unfamiliar with the company, here is a brief recap: Uniper, a German energy producer generated, giant losses following the Russian invasion of Ukraine and the subsequent spikes in gas prices. Subsequently, the German government had to step in and inject billions of fresh equity in order to stabilize the systemically relevant utility.

The recovery went better than initially expected. After a strong first quarter, Uniper forecasts a return to profitability on a full year basis. The company now believes that no further capital increases will be necessary.

The share price, too, while still well below the (unadjusted) levels at the beginning of 2022, recovered significantly. In fact, I believe it recovered far too much. YTD it is up almost 70 percent at the time of writing (€5.25 per share). At its 2023 peak of €7.88, the stock even traded more than 250 percent above its December lows. Below, I will discuss why I believe the stock to be massively overvalued and what may be the catalyst for it to revert to a more realistic valuation.

Significant Dilution

First, it is necessary to compare apples with apples. Prior to 2022 (the year Russia began its war in Ukraine, sending European energy markets into turmoil), Uniper reported an adjusted EBITDA in a range between €1.55 billion and €1.85 billion. The highest full year earnings per share were recorded in 2019 , reaching €1.67. However, share count increased more than twelvefold in the process of the 2022 capital increase . On top of that, a subsequent capital increase in December led to a further dilution of about 64 percent. So based on today's share count, that record number would translate to EPS of a mere €0.05. Notably, the EPS figures quoted in Uniper's Q1 report are on the basis of outstanding shares as of the respective reporting date.

Long Term Headwinds

Furthermore, one has to keep in mind that the outsized Q1 profit is not the result of the operating business, but of hedging operations and the release of anticipated loss provisions. Obviously, those provisions can only be released once. These levels will not be the norm going forward. Without this knowledge, one would otherwise have to come to the conclusion, that Uniper is one of the cheapest investments out there with an implied P/E ratio of well below 2. Based on the Q1 adjusted net income, 2023 is not too far off 2020 levels so far when adjusting for the aforementioned one-off effects, though still well below 2021. There is, however, a relatively high degree of uncertainty as this would depend on the further development of the European gas market. Long term, it is doubtful at best that there will ever be an equally cheap replacement for Russian gas. Nor do I believe it to be particularly likely that Western European trade relations with Russia will go back to their antebellum state anytime soon. On the contrary, sanctions adversely affect Russia's capacity to properly maintain its gas infrastructure without now unavailable Western technology. That is bad news for Uniper, as gas accounts for more than a third of its power generation capacity . So the actual numbers are not unlikely to be far below the aforementioned levels.

It should not be disregarded, either, that Uniper is not paying a dividend at the moment and probably will not pay one for the foreseeable future. Traditionally, utility stocks are bought as a dividend play in many cases, so this may be a significant comparative disadvantage.

Valuation

Given all of the above, it sure sounds counterintuitive to learn that Uniper is trading at a historically high valuation. For perspective: Uniper's (undiluted) all-time high was slightly above €42 per share in late 2021. Adjusted back to the historic count of outstanding shares, today's share price of €5.25, on the other hand, would represent a price of well over €100. The market capitalization at that time was around €15 billion. Today it is just shy of €44 billion. I find it hard to argue, that major disruptions to the business, indefinite cancellation of dividends and buybacks and de facto nationalization should more than double the value of a company, let alone almost triple it. Especially taking into account that (economic) net debt is materially higher now at € 2.3 billion than it was at the end of 2021 (€ 324 million) and the company did still pay an annual dividend.

One may argue that high energy prices and more or less "free" (for Uniper as a legal entity, not for its respective owners, that is) capital injections have put the company in a somewhat stronger position going forward. Let us, therefore, be generous and assume a value of €20 billion, which is about a third above the highs in late 2021. In order to do so, I will give the company the benefit of the doubt and assume adjusted earnings on the same level as Q1 for the whole of 2023, resulting in assumed earnings of 1.8 billion, and an EV multiple of around 11 which is a little below the respective valuation of RWE AG ( RWENF ; RWEOY ) - which notably has been a relative winner of the 2022 energy crisis. That would still translate to a downside of more than 50 percent based on the current share price. And again, that is a very optimistic estimate. The company itself merely forecasts an adjusted EBIT and adjusted net income above 2022 levels (which saw the company generate the biggest annual loss in the history of Germany) as well as both figures being positive (explicitly subject to gas price development, cf. page 15 of the quarterly report )

Conclusion

I believe Uniper to be almost ridiculously overpriced. I am convinced that, eventually, that will have to change. A potential catalyst may occur, when the state begins to divest parts of its holdings. By now, Uniper is 99.12 percent state owned. Retail shareholders account for 62 percent of the remaining free float. Not only does that result in relatively low trading volumes and a corresponding risk of high volatility. There is another inevitable conclusion from that. Obviously, more than €40 million's worth of Uniper shares will not be entirely scooped up by retail investors. A majority of the equity presently owned by the government will have to be absorbed by institutional investors. And I do not expect them to be willing to pay any amount remotely close to the valuation implied by the current share price. No further capital increases being necessary is a net neutral at best, as, clearly, the current share price does not factor in any expectation of an upcoming equity raise.

That is why I view Uniper as a sell, with a downside potential of 50 percent or more. Yes, the stock has traded close to €8 (about 50 percent above today's price) just a few weeks ago, and it may again give the aforementioned composition of the free float and low trading volumes. But, while I do not presume to tell anybody what to do with their money or not and, obviously, this is not investment advice, there are surely more fun ways to gamble than buying the stock of a boring German utility.

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