Morningstar | Minorities Will Capture a Significant Share of EDP's Earnings Growth
EDP is the European utility with the second-largest weight of renewables (behind Orsted), accounting for 65% of group EBITDA. They consist of EDP Renovaveis’ wind and solar assets chiefly located in the United States and Iberia and EDP’s hydro assets in Iberia and Brazil. Renewables are the main growth driver in our estimates due to the commissioning of new capacity. On the negative side, profitability will be hit by the phase-out of production tax credits in the U.S. The second-largest division is formed by EDP’s electricity networks in Iberia and Brazil, contributing 25% of EBITDA. The regulatory backdrop is challenging in Iberia but appears much rosier in Brazil, where EDP will invest heavily through 2022. The third division is client solutions and management, 10% of group EBITDA. Management aims to increase profitability by two thirds by 2022 on the back on market share gains and sales of new solutions. That seems a bit too optimistic to us. Altogether, we forecast a 9% EPS compound annual growth rate through 2023. However, the bulk of this growth will be concentrated in renewables and Brazil-listed subsidiaries, meaning that minorities will capture a large share of it. In May 2018, China Three Gorges, which owns 23% of EDP's capital, launched a takeover bid for EDP. CTG has yet to get regulatory approvals in the U.S. and Europe, which might be challenging. Also, EDP's board has rejected CTG's offer price of EUR 3.26 per share as too low. Activist investor Elliott joined the battle against the deal by acquiring a 2.9% stake in EDP. Elliott is pushing for material divestments, including the sale of all Brazil activities. The EUR 2 billion disposal target focused on Iberian thermal plants disclosed in March 2019 might reflect Elliottt's clout, which we see as a positive for minority shareholders. Still, our fundamentals-based fair value estimate is below the takeover bid of EUR 3.26. Accordingly, we see the shares as more suitable for risk arbitrageurs.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.
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