FREE

EDP Renovaveis: Back to fundamentals . . . back to Buy

We are upgrading EDPR to BUY from Neutral and increasing our FV to Eur8.00/sh. Our old FV of Eur6.75/sh had been set in line with EDP’s offer price, but now the offer has ended the stock should be driven by its fundamental value. We think the LT appeal of renewable assets remains intact given the combination of strong political support in most regions with improving economics. In fact, LCOEs are falling faster than expected, meaning wind is becoming profitable without subsidies faster. We think EDPR is a great vehicle to take advantage of this trend given its significant size (3.2% of FY16 world ex-China wind installed capacity) and geographical diversification. On top of that we see possible new asset rotation by EDPR or M&A in the sector in Iberia highlighting the value of the assets and supporting the stock. Finally, we think the minority buyout attempt effectively created a backstop for EDPR shares (despite reducing liquidity). It showed EDP’s interest in increasing its stake and on a long-term horizon we would not rule out it launching another offer to simplify its corporate structure and to fully capture EDPR’s growth potential.