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ADMIE Holding | WACC step-up unlocks further value

Regulator raises IPTO’s WACC… – One year after setting IPTO’s WACC for the regulatory period 2022-2025, the Regulator (RAAEY) made a noteworthy decision revising upward the respective return for the period 2023-25 to 7.45%-7.57% (from 6.1% previously). We expect this change to unlock further value for ADMIE Holding and to catalyse further upside following a period of somewhat disappointing performance during 2022. In particular, the enhanced WACC coupled with IPTO's hefty €5bn 10-year investment plan (13% CAGR in RAB through to 2030) position ADMIE Holding as one of the most attractive players among EU peers, further strengthening its case as a compelling energy transition value/growth play.

…. boosting returns, with profitability further propelled by the unwinding of previous years’ under-recovery – On our estimates, the higher WACC will add an annual return on RAB of up to €50m until 2025, leading to a profitability step-up corresponding to 2-17% higher EBITDA than our previous forecasts in 2023-25e. Further underpinning IPTO’s earnings is the recouping of the 2022 under-recovery amounting to c€30m in 2024e. Taking into account the above along with improved unitary fees and a strong start to the year, we now estimate IPTO EBITDA will reach near €236m in 2023e, up by 21% yoy, followed by >20% growth in 2024e.

CapEx upgrades will lead to boosted RAB – The impact from the WACC increase will be further augmented by the significant RAB growth in the medium-term, especially if the WACC were to remain at similar levels in the next regulatory period. IPTO's €5bn 10-year capital expenditure plan, with FY'23e capex of €521mn followed by even higher investments in 2024 and 2025 (€552-583m), will translate into a 3-year RAB CAGR of c16%, thus providing a significant avenue of growth in the near-term.

Next milestone: Ariadne deal to unlock further value… – The WACC step-up is likely to play a pivotal role in the tender process for the disposal of 20% of Ariadne Interconnection, a subsidiary of ADMIE Holding. Following necessary approvals, binding offers are anticipated in September, with the process set to conclude by end of 2023 on our understanding. With the enhanced WACC, we believe it is reasonable to expect bids to settle at a premium to RAB, thus unlocking significant value. Our estimates suggest the consideration for 20% of Ariadne's equity could yield >€60m, approximately 11% of ADMIE Holding's market capitalization.

Valuation: risk-reward skewed to the upside – In the light of the regulatory amendments, we raise our estimates for IPTO's EBITDA by 2-17% over 2023-25, envisaging FY'23 EBITDA of €236m (+20% YoY) and FY'24/25 EBITDA at €303/348m, respectively. Although the positive WACC developments have already catalysed a bounce in the share price since Q2’23 and, on that basis, have been partly priced in, we argue that the risk-reward skew is still very attractive, with the shares still trading at a discount to RAB (on a seasonally adj. basis), in stark contrast to European peers trading at a median premium of 18%. Therefore, we reiterate our Buy rating increasing our PT to €3.3 (from €2.9 previously), anticipating the shares to move higher in the valuation spectrum as the RAB growth story unfolds.