EUR 850.00 For Business Accounts Only

Morningstar | EDP Targets Cumulative Free Cash Flow by 2022 In Line With Our Estimates; Shares Fairly Valued

We reiterate our fair value estimate of EUR 3.26 per share for EDP, along with our no-moat and stable moat trend ratings, after the company released 2018 results above our expectations on the bottom line and a 2022 financial outlook implying cumulative free cash flow roughly in line with our estimates. Our fair value estimate is aligned with the takeover bid of CTG launched in May 2018. Shares look fairly valued.

EDP expects to significantly increase renewables' investments, in line with the strategy of other diversified European utilities. The group targets EUR 12 billion of investments over 2019-22, two thirds of which for renewables. This is twice as much as our EUR 5.9 billion estimates. Still, on the other hand, the group intends to sell EUR 6 billion of assets of which EUR 4 billion through renewables asset rotation, also known as the build, sell, and operate model, that the group is used to. All in all, that points to net investments of EUR 6 billion through 2022. EDP targets 2020 and 2022 EBITDA of EUR 3.7 billion and EUR 4 billion, respectively, versus our EUR 3.8 billion and EUR 3.9 billion. Altogether and all else being equal, our EUR 100 billion downside at the EBITDA level would be offset by our EUR 100 million upside in net investments.

EDP targets 2020 and 2022 net income of EUR 0.9 billion and EUR 1 billion, respectively. This is above consensus' 2022 estimate of EUR 0.9 billion though below our EUR 1.1 billion. We believe the downside is driven by a higher level of minority interests due to higher growth in Brazil and renewables than in our estimates. EDP sets 2018 dividend at EUR 0.19 per share, flat versus last year and maintains floor at this level through 2022. Furthermore, the group increases its payout ratio from 65%-75% to 75%-85%. Taking the middle of the range and net income targets implies a 2022 dividend of EUR 0.22, implying a CAGR of 3.7%, below what most peers offer.

The tepid dividend growth comes from the pressure to deleverage, in our view. Thus, EDP targets a net debt of EUR 11.5 billion in 2022, implying a EUR 2 billion reduction from 2018, which would reduce net debt/EBITDA from 4 times in 2018 to 3 in 2022.

2018 recurring EBITDA decreased by 3% to EUR 3.3 billion, slightly below our EUR 3.37 billion and EUR 3.4 billion guidance, implying 6% growth in the fourth quarter, improving from the 6% decline at the end of September. The main driver of improvement in the fourth quarter was generation and supply in Iberia due to very low comps. Renewables' EBITDA decreased by 5%, also strongly improving in the fourth quarter with a 15% growth, after a 12% decline in the first nine months, on a sell down transaction. Over the full year, renewables were dampened by unfavorable wind conditions and lower average selling prices. In line with the first nine months, the main negative driver was Iberian networks, whose EBITDA tumbled by 19% on a regulatory cut in Portugal. The negative exchange rate effect shaved 5% off EBITDA.

2018 recurring net profit grew 3% to EUR 797 million, in line with guidance, though 7% above our and consensus' estimates. Upside was driven by better financial results notably due to a gain on disposal.