EUR 850.00 For Business Accounts Only

Morningstar | Raising EDF's FVE by 42% to EUR 15 and Lowering Uncertainty to Medium; Shares Undervalued

We raise our fair value estimate for EDF to EUR 15 per share from EUR 10.60  on mark to market of power prices and the incorporation of a 25% likelihood of a breakup. We reiterate our no-moat rating and upgrade our moat trend rating from negative to stable. We also lower our uncertainty rating from high to medium. Shares are undervalued.

Mark to market of our power price assumptions is the main driver of our 23% increase in net income estimates through 2022. European power prices have strongly increased since we last marked to market our model in February. We see this rise as sustainable and raise our assumptions accordingly. Another boost is our assumption that the 2019 EUR 1.1 billion cost savings target will be increased by EUR 150 million, given the large advance at first-half 2018. In all, our new estimates drive a 28% increase in our DCF-based fair value estimate to EUR 13.60. Furthermore, our new net income forecasts leave us 18% above consensus through 2020 and imply a 2018-19 average P/E of 14.1, in line with peers.

Speculation over a breakup of EDF, similar to German utilities, has periodically resurfaced over the last year. The rationale would be to end the capital allocation trade-off between renewables and nuclear and to reduce the holding discount. After a breakup, we calculate a fair value per share of EUR 19.20, implying a EUR 5.60 premium. Incorporating a 25% likelihood adds EUR 1.40 to our DCF-based fair value estimate. As of mid-August, the share price implies a 0% likelihood of a breakup, which we view as excessive.

We upgrade our moat trend rating from negative to stable and lower our uncertainty rating to medium. The key driver of the moat trend rating upgrade is regulatory improvement in France, reflected by the capacity mechanism. The uncertainty level has decreased on the postponement of the reduction in nuclear share in the French electricity mix to 50% and the approval of French electricity retail tariffs by the council of state.