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 17 fair value estimate after no-moat EDP Renovaveis released solid first-half results and confirmed its 2024 outlook. Shares appear undervalued.

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.

No-moat Neoen's main shareholders, together holding 53.3% of the shares, have agreed to sell them at EUR 39.85 per share to Brookfield Asset Management. Neoen's board has unanimously accepted the offer. Upon completion of the block acquisition, Brookfield will file an all-cash tender offer. The transaction is subject to regulatory approvals, which are expected to be obtained in the fourth quarter; clearing the tender offer that would occur in first-quarter 2025. We see the offer as attractive and raise our fair value estimate to EUR 39.85 from EUR 31.50, in line with it.

We confirm our EUR 17 fair value estimate after no-moat EDP Renovaveis released first-quarter results in line with FactSet consensus expectations at the EBITDA level and cut 2026 targets also in line with expectations after reducing its capacity addition targets. Shares appear undervalued after the selloff of renewables developers of the last months.

On April 1, The Australian Financial Review reported that no-moat Neoen hired Bank of America to sell 30% of its Australian business with a price tag of $1.6 billion. This spurred an 8.5% rally in the shares between April 2 and April 5. The $1.6 billion that was reported implies a whopping valuation of EUR 2.4 million per megawatt of installed capacity versus EUR 1.1 million/MW implied in our fair value estimate. All in all, the reported price implies a gross valuation premium (before any taxes on capital gains) of EUR 2.8 per share or 9% of our fair value estimate. We confirm our fair value estimate of EUR 31.50 for Neoen. Due to its young asset base and suitability for a takeover, stemming from its shareholder structure, it's the least undervalued pure renewables developer we cover.

EDP Renovaveis, the 71%-owned subsidiary of integrated Portuguese utility EDP, was created in 2007. With 16.6 gigawatts of installed capacity (mostly onshore wind) at end-2023, it is the fourth-largest renewables player in the world and in the U.S. The latter accounts for half of capacity, Europe for 36%, and the rest is located in South America and Asia-Pacific.

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 are maintaining our fair value estimate of EUR 21 for no-moat EDP Renovaveis as we roll our model to incorporate 2023 results released by the company that were below FactSet consensus. Guidance for 2024 was cut below expectations. That should still leave decent upside to the current depressed share price.

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.

With the U.N. Climate Change Conference, otherwise known as COP28, that started on Nov. 30, we are reasserting our view that the market underappreciates utilities' critical role in limiting global warming.

EDP Renovaveis, the 71%-owned subsidiary of integrated Portuguese utility EDP, was created in 2007. With 14.7 gigawatts of installed capacity (mostly onshore wind) at end-2022, it is the fourth-largest renewables player in the world and in the U.S. This enviable position stems from an early-mover advantage reflecting astute capital allocation, strong execution, and support from the parent company. Capacity doubled between 2010 and 2021, driving 20% EPS CAGR in the meantime.

No-moat EDP Renovaveis released third-quarter results that were above company-compiled consensus on the bottom line. We maintain our EUR 21 fair value estimate. The shares have been excessively sold off because of rising interest rates. We believe the market neglects supporting factors like high power purchase agreement prices, declining construction costs for solar, and attractive pricing of asset rotations.

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.

No-moat EDP Renovaveis released second-quarter results hit by unfavorable wind conditions in the U.S. The net profit was above the company-compiled consensus thanks to a positive one-off. The firm sold wind assets in Spain at an attractive price. All in all, we maintain our EUR 21 fair value estimate and see shares as attractive.

EDP Renovaveis, the 71%-owned subsidiary of integrated Portuguese utility EDP, was created in 2007. With 14.7 gigawatts of installed capacity (mostly onshore wind) at end-2022, it is the fourth-largest renewables player in the world and in the U.S. This enviable position stems from an early-mover advantage reflecting astute capital allocation, strong execution, and support from the parent company. Capacity doubled between 2010 and 2021, driving 20% EPS CAGR in the meantime.

No-moat EDP Renovaveis released first-quarter net profit above consensus it polled while its EBITDA was bang in line. We will likely tweak our EUR 22 fair value estimate downwards to incorporate the recent rights issue. This will not leave enough margin of safety to make shares attractive at the current price.

We are currently maintaining our fair value estimate of EUR 22 for no-moat EDP Renovaveis after it has released its 2023-26 business plan with financial targets in line with our estimates. The firm plans to finance EUR 1 billion of its intended EUR 20 billion gross investments between 2023 and 2026 with an equity offering. The price range for the offering is slightly below our fair value estimate (EUR 19.25-EUR 20.5), but we do not anticipate this will materially affect our fair value. Shares are in 3-star territory, meaning there is not enough margin of safety to buy them at the current share price.

We are currently maintaining our fair value estimate of EUR 22 for no-moat EDP Renovaveis as we roll our model to include full fiscal 2022 results. EDP Renovaveis’ EBITDA was EUR 2,157 million, slightly above consensus expectations of EUR 2,125 million, and having grown 23% year over year. During the year, EDP Renovaveis rotated nearly 1 GW of capacity. Net profit fell short at EUR 616 million versus the anticipated EUR 634 million as construction delays in Colombia resulted in a noncash impairment of EUR 54 million.

We maintain our EUR 22 fair value estimate for no-moat EDPR and EUR 6 for its parent company, no-moat EDP, after the former said that the clawback mechanisms recently introduced in Romania and Poland could shave about one third of its 2023 net income. The slight rise of EDPR shares at time of writing shows that the impact was already priced in. Shares are in 3-star territory. On the other hand, buying undervalued EDP shares gives exposure to EDPR at a discount.