Morningstar | Endesa Releases 1Q Results in Line With Expectations, Maintains 2019 Guidance; Shares Overvalued
We reiterate our EUR 19.50 fair value estimate along with our no-moat, stable trend ratings after Endesa released first-quarter results that were broadly in line with consensus expectations and maintained its 2019 guidance. The shares look overvalued to us; we prefer undervalued parent Enel, which has a more favorable dividend policy and higher earnings growth provided by its large international footprint.EBITDA increased 5.5% to EUR 928 million, in line with expectations. On the positive side, liberalized business' EBITDA rose 14%. Improvement of the integrated electricity unitary margin of 16% to EUR 28.40/megawatt-hour offset a 4% decline in electricity sales volume and a 30% drop in gas margin. The electricity margin strengthening was driven by increase in achieved power prices, which offset higher variable costs stemming from lower hydro production and a jump in carbon dioxide prices. The drop in gas margin came from lower international liquefied natural gas demand, mostly from Asia. Regulated business' EBITDA was flattish as growth in networks' EBITDA was offset by a slide in nonmainland businesses. The latter was due to increases in fuel costs that should be passed through by year-end due to the six-month delay in indexation.
Net ordinary income decreased 2% to EUR 363 million, 4% below consensus expectations. EBITDA growth was more than offset by increased depreciation, partly because of IFRS 16, and lower financial results on an increase in provisions for workforce reduction plans owing to interest rate declines. The latter should not persist throughout the rest of the year.
Endesa reiterated its 2019 guidance for EBITDA of EUR 3.7 billion and net income of EUR 1.5 billion, in line with our estimates. During the conference call, management said downside to its budget stemming from the gas margin drop and lower hydro production will be offset by higher electricity unitary margin, efficiencies, and the repeal of the nuclear tax in Catalonia.
Net debt increased from EUR 5.96 billion at year-end 2018 to EUR 6.9 billion including IFRS 16. Notably, seasonal working capital deterioration had a negative effect of EUR 0.5 billion. Guidance is for net debt of EUR 7.3 billion at the end of 2019, including the full reversal of the working capital deterioration and investments of EUR 1.8 billion-1.9 billion, in line with our estimates.
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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