Morningstar | Endesa exhibits low organic growth potential due to a lack of international exposure.
Endesa is an integrated utility operating in power production, distribution, and supply in the Iberian Peninsula.Regulated businesses account for more than 60% of the group’s EBITDA. The bulk of these consist of distribution networks in Spain whose regulated return is set to 6.5% through the end of the current regulatory period in 2019. As of 2020, the regulatory return should decrease to reflect lower Spanish bond yields. The liberalised generation and supply division accounts for one third of the group's EBITDA. Production mix is competitive, as production from nuclear and hydro plants weighs 50% of total production. Acquisition of Enel Green Power Espana in 2016 reflects the group's focus on development of renewables. However, increasing competition at auctions for new renewable capacity in Spain makes us sceptical as to the potential value creation. By 2021, we anticipate that Endesa will close half of its coal plant capacity not compliant with European industrial emission directives instead of carrying out costly required investments. To meet its electricity sales volumes, Endesa will have to offset these closures by increasing electricity purchases, which will hit margins. Endesa boasts a low net debt/EBITDA ratio of 1.5 times and a strong free cash flow yield of around 8% as at August 2018. The high free cash flow yield is partly because the group invests less than its depreciation, which we think undermines future growth. This also probably reflects pressure from parent company Enel, which owns 71% of the capital and intends to maximise the cash flow it receives by pushing for increasing the dividend. Thus, the dividend payout is set at 100% though 2020.Dividend seekers could be enticed by a high dividend yield. However, we see a potential misalignment of interests between Enel and the minority shareholders in the long run.Endesa is engaged in the production, transmission, distribution, and supply of electricity, through hydroelectric, fossil fuel, and nuclear generation. Co. is also engaged in the mining of coal for use in its fossil-fuel electric plants; mining research; land restoration, and environmental monitoring and control.
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