Verbund - Higher Earnings Implies Higher CAPEX?

Verbund - Instant Earnings Comment
Recommendation: Neutral (unch.)
Target price (12M): EUR 40 (PREV:EUR 38)

 

 

Higher earnings imply higher CAPEX?

• Verbund posted EBITDA and profit numbers in line with the consensus. Management also gave guidance – ie: EBITDA EUR 1-1.2 bn, profit EUR 440 – 540 mn. The former met our FY 2019 estimation (EUR 1.15bn) while the latter missed probably on higher depreciation or tax. However, what have struck the market is the significant lift (+40% or ca. EUR 170m) in CAPEX for 2019 and 2020 which sum investor may expected to be distributed as dividend.
• In the second half of the year hydrological condition worsened (lower production from hydropower by ca. 34%) that took its toll on EBITDA, which had indicated by mgmt. Operationally, similar happened before when water supply was low. Revenue was rather flattish but margins fall sharply as the contracted volume was not generated but purchased on spot instead or generated by thermal units. EBITDA margin dropped by 800 bps to 27%, as expenses for electricity purchases increased by ca. 20% y-o-y. Quarterly EBITDA came in EUR 213 million 18% lower than last year due to the above mentioned issue.
• Flexibility products which are even more volatile revenue source than the underlying operation has achieved EUR 155 million a touch below the guided EUR 160 million, interestingly mgmt has continued to guide lower segment earnings for 2019 to EUR 100 million vs (EUR 130 million the first guidance for 2018 in 2017Q4).
• Net debt level continued its downward trend reaching EUR 2.56 billion a reduction of ca. EUR 300 million in a year, implying a 3 x net debt to EBITDA. This figure should drop further this year as well on the back of a ca. 30% jump in EBITDA to a neighbourhood of 2x – 2.5x, in our view.
• Significantly higher CAPEX (ca. at 1.7x CAPEX / DD&A). Management has increased CAPEX both for maintenance and growth equally by ca. 40%. On a back of an envelope calculation the incremental EBITDA (EUR 240 million) in 2019 will be split between higher CAPEX (EUR 171 million) and higher dividend (EUR 63 million; DY: 1.5%) while deleveraging remain at similar levels.

 

Hydro coefficient & hedged prices

Source: Verbund, Concorde

• Our long term view is still optimistic regarding the stock, Verbund is extremely well positioned to the future power market in our view, as it has 1) power generation almost from RE; 2), positively geared to carbon prices, however we think this has already been priced in. On the back of the elevated power prices we lift our TP to reflect the current power market conditions. Nevertheless the gradually approaching nuclear phase-out in Germany – expected to close the last nuclear plan in 2022 – should make Verbund increasingly valuable asset, but as of now we would wait for better buying opportunity.
• Commodity outlook: Energy prices softened in the last months on the back of worries of a global economic slowdown. Coal and natural gas prices have followed the price of crude oil and has not recovered since.  As for the future, we are cautiously optimistic on oil we expect to trade close to 70 USD /barrel in this year. As for the other commodities, we expect natural gas to be subdued in 2019 as nat. gas storages across EU are at level not seen in 7 years, as for coal, it reflects the expectations for the economic activity in China, in our view.

All in all, we expect German Baseload to hover around 50 EUR /MWh this year. Our EBITDA forecast for 2019 remained unchanged at a little below EUR 1.2 billion, in line with mgmt. guidance, while we lift CAPEX fort this year’s and the next to the level of the guidance, while leave TV CAPEX level where it equals the annual depreciation.

Last but not least, we roll over our model and set our ex – div 12m TP at EUR 40 per share from (EUR 38).

 

Quarterly P&L [EUR million]

Source: Verbund, Concorde

 

Valuation & Main commodity prices

Source: Concorde estimation

Verbund’s DCF valuation

Source: Concorde estimation

Verbund’s sensitivity to power prices (currently 1yr forwar @ 50 EUR/MWh)

Source: Concorde estimation

 

 

 

Gellert Gaál
analyst

CONCORDE SECURITIES LTD.

Alkotás Point
50 Alkotás street, H-1123 Budapest.
Phone:
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MEMBER OF THE CONCORDE GROUP

 

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