Utilities: Value makes us believe . . . selectively
Over recent weeks, investors in Iberian utilities have been enduring the second wave of regulatory concerns in Spain in a year. Concerns about regulation in Spain started in Jun-17, with the first discussions about RoRs post 2019, but were revived recently by news about the government’s intention to cut the remuneration of regulated activities even before the end of the current regulatory term. We revisit the regulatory assumptions behind our estimates and find them strong enough to take current weakness as an opportunity. Still on regulation, we are now including in our forecasts a 10-year extension of nuclear plants in Spain (vs 50% of a 20-year extension NPV). Despite political hurdles, we see the current gov´t as very keen on such an extension to keep prices low. On interest rates, our valuations are based on LT standardized risk-free rates (Spain/Portugal 4%/4.5%), above market values and fw curves, giving us extra comfort on our FVs. The sector has been facing headwinds (FX, drought) and sometimes excessive regulatory risk fears, but we see some compelling valuations at this point, either in quality companies like Iberdrola or in potentially over-penalized stocks, like Endesa, both of which we upgrade to BUY.EDP Energias de Portugal is a utility company engaged as a generator, distributor and supplier of electricity in Portugal, and as an electricity generation company and a gas distributor in the Iberian Peninsula. In addition, Co. is a wind power operator with windfarms for energy generation in the Iberian Peninsula, the U.S., Canada, Brazil, France, Belgium, Italy, Poland and Romania and is engaged in developing wind projects in the U.K. Co. is also engaged in generating solar photovoltaic energy in Portugal, Romania and the U.S, and in Brazil it is engaged as an operator in electricity generation. As of Dec 31 2015, Co. had 9.7 million electricity customers and 1.4 million gas customers.
Endesa is engaged in the production, transmission, distribution, and supply of electricity, through hydroelectric, fossil fuel, and nuclear generation. Co. is also engaged in the mining of coal for use in its fossil-fuel electric plants; mining research; land restoration, and environmental monitoring and control.
Iberdrola is a holding company. Through its subsidiaries, Co. operates in four segments: network business, which includes all the energy transmission and distribution activities, and other regulated activity originated in Spain, the U.K., the U.S. and Brazil; deregulated business, which includes electricity generation and sales businesses as well as gas trading and storage businesses carried on by Co. in Spain, Portugal, the U.K. and North America; renewable business, with activities related to renewable energies in Spain, the U.K., the U.S. and the rest of the world; and other businesses, including the engineering and construction businesses and the non-power businesses.
Gas Natural SDG is a gas company based in Spain. Co. and its subsidiaries are primarily engaged in the supply, transportation, distribution and commercialization of piped natural gas, as well as the activities involving exploration and developing, supply, regasification, liquefaction and storage of natural gas, and the generation and commercialization of electricity. Co. operates mainly in Spain and also outside of Spain, especially in Latin America, Puerto Rico, Italy, France and Africa (through Maghreb-Europe gas pipeline and integrated LNG projects in Algeria).
Haitong is the first international Chinese investment bank and our goal is to be the primary channel for capital flows into and out of China. During 2015 the Senior Management Team in London was expanded significantly to focus on this objective and to provide a full-service cross-asset markets business coupled with sector-focused investment banking. We work closely with our world-wide network of offices to bring a true depth of understanding to all client situations.
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