REN: Buy on rights selling pressure
We upgrade REN from Neutral to BUY as short-term selling pressure from the ongoing rights issuance has brought REN’s shares to what we regard as very appealing valuation levels: our Eur 3.0/sh FV (from Eur 2.8/sh as we roll over our valuation to 2018) offers 24% upside and we note that the current 7.1% 18E dividend yield represents a spread of 5.1% to the 10Y Portuguese bonds, vs the 4% average spread since 2013. We view this dividend as sustainable and expect the company to maintain DPS at Eur 0.171 in the coming years. REN’s second-largest shareholder (Oman Oil, 15% stake) has not committed to maintaining its stake following the capital increase which suggests that the offloading of its 80m rights might be one of the leading causes of the selling pressure. This then triggers natural concerns about a possible Oman Oil placement. We view this recent underperformance of the shares (-3.6% since the beginning of the rights issuance trading vs -0.5% for PSI20) as a buying opportunity, particularly at a time when there is regulatory visibility on electricity assets until 2021.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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