Utilities: Iberian TSOs: look for value in Portugal
We are reviewing our valuations for the Iberian TSOs (and rolling over our FVs to 2019), and also introducing our revised view about the regulatory outlook for the companies under our coverage. Regarding electricity transmission in Spain, we align our ROR (Rate of Return) expectation with that of the CNMC, while believing the regulator will not be too harsh on REE concerning pre-1998 assets. On gas in Spain, we believe that over the medium term the regulator may try to simplify the remuneration mechanism, thus we have a LT central scenario based on an extended RAB and a ROR similar to that for electricity transmission. Both Spanish TSOs may hold CMDs soon, but we see limited impact from such events. In Portugal, despite extending the special energy tax (CESE) for longer, we believe the market has yet to recognize that finally the CESE can be evaluated, and that REN’s valuation looks very attractive. As a result of these changes, we are cutting the FVs of both Spanish TSOs (Red Eléctrica to Eur19.1/sh from Eur20.5/sh, Enagás to Eur23.3/sh from Eur24.8/sh), but keeping both at NEUTRAL. We believe REN remains the only attractive opportunity in the space: we keep our Eur3.0/sh FV unchanged while reiterating our Silver Bullet BUY.Enagas is a gas transportation company based in Spain. Co. is engaged in the technical distribution and storage of gas through pipelines as well as the provision of regasification services. Co. and subsidiaries are engaged in the ownership, administration, storage, pipeline transportation, distribution flow, and sale of natural gas. As a transport company, Co. also provides gas and manages the gas infrastructures.
Ren Redes Energeticas Nacionais is engaged in two principal lines of business: electricity transmission, where Co. owns and operates Portugal's national high-voltage electricity transmission network (the "RNT"), and natural gas, where Co. is engaged in the reception, storage and regasification of liquefied natural gas ("LNG"), the operation of the national high-pressure gas transmission network, which Co. owns and operates under respective concessions and the underground storage of natural gas. Co.'s electricity transmission business is conducted through its subsidiary REN - Rede Electrica, which holds a 50 year concession to operate the electricity transmission network in Portugal.
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