EUR 850.00 For Business Accounts Only

Morningstar | Electricite de France Sets Lower 2019 Guidance Due to the U.K.; Share Pullback Offers Entry Point

We reiterate our fair value estimate of EUR 15 per share along with our no-moat, stable trend ratings after Electricite de France released 2018 results in line with expectations and set 2019 guidance below them. We believe the group is well positioned to benefit from increasing carbon and power prices in Europe and see the pull back of Feb. 15 as a good entry point.

2018 EBITDA grew 11% to EUR 15.3 billion, slightly above our EUR 15.2 billion and consensus' EUR 15.1 billion forecast. As expected, the main positive driver was the French generation & supply business whose EBITDA went up by 29% to EUR 6.3 billion, in line with our expectations. The business was boosted by rebound in hydro and nuclear production after a poor 2017. The second main positive driver was the trading business whose EBITDA surged by EUR 77% to EUR 633 million, above our EUR 500 million estimate, thanks to commodities volatility and the LNG business. On the negative side, U.K.'s EBITDA went down by 24% to EUR 0.8 billion, well below our EUR 1.1 billion estimate, on lower nuclear output triggering buybacks on the wholesale markets. This implies a negative read-across for Centrica.

The group set 2019 EBITDA guidance in a EUR 15.3 billion-EUR 16 billion range, below our and consensus' EUR 16.3 billion. We believe the bulk of the downside comes from the U.K. We have not yet factored in the capacity payment suspension. Factoring in management's assumption of an end of the suspension at midyear would shave EUR 120 million off our EBITDA estimate. Our assumption of normalized nuclear output is likely too optimistic since four reactors are currently not working and the outage of two of them has been recently extended to April. Lowering our nuclear output would lower our EBITDA by around EUR 200 million. Altogether, our 2019 group's EBITDA would stand at EUR 16 million--that is the high end of the guidance. This downward adjustment would not impact our long-term estimates and valuation.

We believe the high end of the 2019 EBITDA guidance range is within reach, notably through higher cost savings. In 2018, the group achieved combined cost savings since 2015 of EUR 962 million, largely exceeding the EUR 0.8 billion target. Still, the group did not raise its EUR 1.1 billion cumulative savings target by year-end 2019. We assume that the plan will be increased by EUR 150 million.

Net financial debt slightly increased from EUR 33 billion at year-end 2017 to EUR 33.4 billion, below consensus' 34.6 billion. There were EUR 1.9 billion cash proceeds from disposals and EUR 0.5 billion cash outlays to increase dedicated assets, involving an organic increase in net debt of EUR 1.8 billion marking a steep improvement from the EUR 3.9 billion organic net debt increase in 2017 (before the rights issue and disposals). For 2019, the group guides for investment of around EUR 15 billion, in line with our EUR 14.8 billion estimate, and EUR 2 billion-EUR 3 billion of disposals. Altogether, we calculate that net debt would be roughly flat in 2019 though increasing organically (before disposals) by around EUR 3 billion, higher than in 2018 chiefly due to higher investments.

2018 recurring net income decreased by 13% to EUR 2.45 billion, below our EUR 2.6 billion estimate but above consensus' EUR 2.2 billion. Notably, depreciation came in at EUR 9.05 billion, above our EUR 8.8 billion estimate.