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.

We confirm our EUR 25.70 fair value estimate after no-moat Naturgy released flat first-half EBITDA and net income. The latter exceeded consensus by more than 20%. The firm set 2024 guidance above our and FactSet consensus expectations. The 2024 P/E of 11.8 implied by the new guidance and the 6.4% dividend yield 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.

We confirm our EUR 25.70 fair value estimate for no-moat Naturgy after CriteriaCaixa, which owns 27% of Naturgy shares said on June 10 that it terminated discussions with Abu Dhabi's power and water utility Taqa that started in April. Taqa was seeking to acquire stakes of Naturgy's main shareholders to launch a full takeover bid. The announcement of the end of discussions sent shares down by 14%, namely to their depressed level of last April before the discussions started. The undervaluation of the shares is evidenced by a dividend yield of 6.6% and a 2024 P/E of 11.6.

Networks account for more than half of Naturgy's EBIT. Around 60% of networks' EBIT comes from Spain where the group is the leader in gas distribution. As it has consistently achieved high profitability and returns in the past in this business, the regulator imposed a sharp remuneration cut in 2021. Networks' returns are higher in Latin America and indexed to inflation.

On April 16, the Spanish stock exchange suspended trading in Naturgy shares after press articles reported that Abu Dhabi's power and water utility Taqa was discussing with Naturgy's major shareholders to acquire their stakes in order to launch a full takeover bid. On April 17, Taqa confirmed the talks. All in all, we confirm our EUR 25.70 fair value estimate and see the shares as undervalued despite their rise of 9.6% since April 15.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We confirm our EUR 25.70 fair value estimate after no-moat Naturgy released 2023 results in line with FactSet consensus, but slightly below our expectations. As planned, Naturgy will pay a final 2023 dividend of EUR 0.4, implying a total dividend of EUR 1.4 and a 6.2% yield, reflecting the undervaluation of the shares.

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 tweak our fair value estimate for no-moat Naturgy to EUR 25.70 from EUR 25 on the time value of money since our last update and the rise in our 2023 EBITDA estimate after the group raised its guidance for the second time in a row. Shares look fairly valued.

Networks account for more than half of Naturgy's EBIT. Around 60% of networks' EBIT comes from Spain where the group is the leader in gas distribution. As it has consistently achieved high profitability and returns in the past in this business, the regulator imposed a sharp remuneration cut in 2021. Networks' returns are higher in Latin America and indexed to inflation.

European utilities have underperformed the European market by 4% year to date with most of the underperformance occurring in the third quarter because of the rise in interest rates. This overshadowed strong second-quarter results driven by the easing of the energy crisis, persisting commodity price volatility, and the hedging improvement. These drivers have persisted in the third quarter. Moreover, some power price clawbacks expired at the end of June like in Germany and Belgium. On the flip side, the comparison basis will be tougher as of the third quarter.

We confirm our EUR 25 fair value estimate after no-moat Naturgy raised its 2023 guidance on the back of solid first-half results and shed more light on its 2023-25 strategic update whose key figures had been released July 12. Shares appear overvalued.

We maintain our fair value estimate of EUR 25 after no-moat Naturgy's board of directors updated the 2021-25 strategic plan by raising its 2025 EBITDA estimate roughly in line with ours, lowered its investments budget in line with our estimate, and raised its dividend floor over 2023-25 by 14% from EUR 1.2 to EUR 1.4 per share, implying a 5.5% yield. By reducing investments and increasing its dividend, the firm switched back to the policies of its 2018-22 plan. Further details on the revised plan will be provided with the first-half results on July 24. At the current share price, we don't see enough margin of safety to buy the shares.

Networks account for more than half of Naturgy's EBIT. Around 60% of networks' EBIT comes from Spain where the group is the leader in gas distribution. As it has consistently achieved high profitability and returns in the past in this business, the regulator imposed a sharp remuneration cut in 2021. Networks' returns are higher in Latin America and indexed to inflation.

We plan to tweak our EUR 24 fair value estimate upward after no-moat Naturgy released 2022 earnings and set 2023 guidance above our and FactSet consensus expectations. The firm has no visibility regarding the timing of the Gemini project, aiming to split its liberalized and regulated activities into two listed entities through a spinoff. This project, unveiled in February 2022, was due to be completed by the end of 2022, but was postponed at first-half 2022 results due to the fallout from the energy crisis. For investors seeking companies favorably exposed to high commodity prices, we recommend undervalued RWE and Engie.

Networks will account for about 60% of Naturgy's operating profit by 2026. Around two thirds of networks' EBIT comes from Spain. Naturgy is the global leader in Spanish gas distribution, where it has consistently achieved high profitability and returns leading the regulator to impose a sharp remuneration cut in 2021. Networks' regulated returns are higher in Latin America although high inflation and local currencies' declines have been a drag on returns in recent years.

We confirm our EUR 24 fair value estimate for no-moat Naturgy after the company released solid nine-month results albeit with sparse details and set 2022 EBITDA guidance in line with expectations but above Factset consensus. The group will pay a second interim dividend of EUR 0.4 per share on Nov.18 implying a full-year 2022 dividend of EUR 1.2, in line with the guidance and involving a 4.4% yield, below the sector median of 4.6%. The shares appear overvalued and more driven by risk arbitrage, given the limited floating capital.

We confirm our EUR 24 fair value estimate for no-moat Naturgy after the company released first-half results implying an improvement in the second quarter. It also postponed the Gemini project to split the company beyond the end of the year due to the fallout of the energy crisis, including regulatory uncertainties and market volatility. The shares appear overvalued and more driven by risk arbitrage, given the limited floating capital.

We maintain our fair value estimate of EUR 24 after no-moat Naturgy released mixed first-quarter results without setting a full-year guidance yet. Shares appear fairly valued after drop at time of writing.