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Morningstar | Endesa Increases Investments and Unexpectedly Reduces Medium-Term Dividend

Endesa has released its 2019-21 business plan, a day after parent company Enel released its plan on Nov. 20. In line with Enel, Endesa plans to significantly increase renewables investments. Unlike Enel, which pledged dividend increases for the next three years, Endesa canceled its usual one-year dividend floor and lowered its medium-term payout ratio. We plan to increase our fair value estimate by a mid-single-digit rate, chiefly on higher regulated networks' profitability due to likely favorable regulatory change. The equity story of undervalued parent company Enel is more appealing.

Endesa increases its three-year investment budget by EUR 900 million over 2019-21, the bulk of which coming from renewables. The group increases its 2019 and 2020 EBITDA targets from EUR 3.5 billion and EUR 3.7 billion to EUR 3.7 billion and EUR 3.8 billion, above our respective EUR 3.5 billion and EUR 3.6 billion estimates. In 2019, the main drivers of the EUR 0.2 billion increase are higher power and gas margins and higher renewables growth. As the group has already hedged 70% of its power volumes for 2019, we think the new EBITDA target is within reach and will adjust our fair value estimate accordingly. In 2020, the EBITDA increase is also driven by higher power and gas margins and renewables. We will increase our 2020 EBITDA forecast, as forward power prices are higher than our current assumptions. In 2021, the group sets an EBITDA target of EUR 4 billion, well above our EUR 3.5 billion estimate. We will increase the latter on new renewables capacity and regulated networks due to the likely shift from a bond-linked model to a WACC-based remuneration involving lower returns cut than we anticipated so far. Altogether, we will raise our EBITDA estimates but not up to the new target levels, as we see some downside risk in the underpinning macro assumptions notably bullish Spanish electricity demand and higher power prices than current forwards.

The increase in EBITDA will be fully offset on the bottom line by higher depreciation and financial charges in 2019 and 2020. Consequently, Endesa leaves its net income targets unchanged at EUR 1.5 billion in 2019 and EUR 1.6 billion in 2020, slightly above our EUR 1.45 billion and EUR 1.55 billion estimates. In 2021, the group sets a net income target of EUR 1.8 billion, well above our EUR 1.44 billion, which we will raise.

Unlike previous years, the group does not set a dividend floor for next year. The payout ratio of 100% is maintained through 2020. However, it is unexpectedly lowered at 80% in 2021. Taking the group's net income targets points to a EUR 1.36 dividend in 2021, flattish versus 2018.