EUR 850.00 For Business Accounts Only

Morningstar | Endesa Releases H1 Results in Line With Expectations and Maintains 2019 Guidance; Shares Rich

We reiterate our fair value estimate of EUR 19.5 per share along with our no-moat and stable trend ratings after Endesa released first-half results in line with expectations and reiterated its full-year guidance. Shares appear overvalued. Because of its full exposure to Spain, Endesa lacks organic growth potential and suffers from high regulatory risk.

EBITDA grew 5% to EUR 1.87 billion, in line with consensus expectations, implying a slight slowdown from the 5.5% growth seen in the first quarter, to 4.5% in the second quarter. Net ordinary income increased by 3% to EUR 0.78 billion as EBITDA growth was mitigated by an increase in depreciation and financial costs. The main positive driver was the liberalized business, whose EBITDA increased by 21% in the first half, driven by an 8% improvement in the electricity unitary margin to EUR 27.5/MWh. However, the latter deteriorated from EUR 28.4/megawatt hour in the first quarter to EUR 26.5/MWh, chiefly on the generation tax reinstatement. Over the first half, the 23% fall in hydropower generation and increasing CO2 costs were more than offset by higher unitary revenue, increasing nuclear production, suspension of the generation tax in the first quarter and the Catalan nuclear tax reversal in the second quarter. For the full-year, management expects a unitary margin of EUR 26/MWh, above the business plan and our assumption of EUR 25/MWh. They also indicated that this upside will cover a potential shortfall from gas margins.

Regulated business' EBITDA decreased by 3% in the first half and 7% in the second quarter. Key to this is a 35% drop in non-mainland's EBITDA because of a delay in the remuneration formula to pass through the increase in fuel costs, especially CO2. Bottom line, the group expects to achieve a non-mainland's EBITDA of EUR 300 million for 2019, below our EUR 350 million estimate. The potential downside to our estimates here could be offset by the upside to our liberalized business' estimate.

Over the first half, net debt increased from EUR 5.96 billion to EUR 6.8 billion. For the full year, the group lowered its net debt guidance by EUR 100 million to EUR 7.2 billion because of a lower IFRS 16 effect.