Company Reports

While wholesale power prices stabilized, government bonds’ yields fell on weak economic indicators and lower inflation in the US and Europe. Second-quarter results were boosted by very favorable hydro conditions that led to some guidance upgrades. This goldilocks scenario bolstered a rally in European utilities, enabling them to massively outperform the market and recover much of their earlier underperformance.

No-moat Snam reported solid second-quarter results and confirmed its 2024 guidance. With no changes expected to our forecasts, we maintain our EUR 4.70 fair value estimate. Dividend yield of 6.8% is very attractive and reflect the undervaluation of the shares.

Utilities have reversed part of their first quarter’s fall, thanks to a strong rebound in power prices. Moreover, the deep undervaluation of renewables developers has driven takeovers by big investment firms at very high multiples. Neoen’s main shareholders accepted an offer at 18 times the EBITDA. The sector is still significantly lagging the market in 2024 because of high interest rates. Should they fall, it would boost the sector.

Based on strong first-quarter performance, management has raised its 2024 financial targets for adjusted EBITDA, adjusted net profit, investments, and tariff RAB. Management has made no changes to its long-term strategic plan or estimates. We will factor these results into our model but do not expect a material change to our EUR 4.70 fair value estimate for no-moat Snam. The shares appear undervalued.

Snam has three regulated segments: transportation, storage, and regasification/liquefied natural gas. The transportation segment, largely natural gas pipelines, contributes 80% of group EBIT. Storage contributes 20%, and regasification is only a marginal contributor. While these regulated assets benefit from efficient scale, we assign a no moat rating to Snam as regulation limits pretax allowed returns to keep prices low for customers.

We do not expect a material change to our EUR 4.70 fair value estimate after no-moat Snam reported 2023 results in line with guidance and confirmed its 2024 financial targets. The shares appear nearly fairly valued.

No-moat Snam announced it is accelerating investment in transportation infrastructure in addition to tweaking its dividend growth to 3.0% from 2.5% for the 2024-27 period. The group will release its full-year 2023 results on March 13. It confirmed its 2023 net income and EBITDA targets of EUR 1.14 billion and EUR 2.4 billion, respectively, in line with our estimates, but raised targets going forward above our estimates.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

We are initiating coverage of Snam with a no-moat rating and a EUR 4.70 fair value estimate, implying an enterprise value/EBITDA multiple of 11.2 times, EV/regulatory asset base of 1.3, and price/earnings of 13.1. While we like Snam’s regulated assets and believe they benefit from efficient scale, we assign a no-moat rating to the company as regulation limits pretax allowed returns to keep prices low for customers.

Snam has three regulated segments: transportation, storage, and regasification/liquefied natural gas. The transportation segment, largely natural gas pipelines, contributes 80% of group EBIT. Storage contributes 20%, and regasification is only a marginal contributor. While these regulated assets benefit from efficient scale, we assign a no-moat rating to Snam as regulation limits pretax allowed returns to keep prices low for customers.