EUR 850.00 For Business Accounts Only

Morningstar | Adding Enel to Best Ideas List; Firm Posted 1H Results Below Expectations and Maintained FY Guidance

We reiterate our fair value estimate of EUR 5.70 per share and our no-moat, stable trend ratings after Enel published half-year results below expectations but confirmed its 2018 targets. Enel is the most undervalued European utility under our coverage, despite appealing fundamentals in terms of earnings growth and shareholder remuneration. That leads us to add it to our Best Ideas list, and we see any weakness in the share price today as a good entry point.

Ordinary EBITDA grew 3% to EUR 7.7 billion in the first half, slightly below expectations. EBITDA growth slowed to 1.4% in the second quarter after standing at 3.9% in the first quarter. Group net ordinary income grew 4.6% to EUR 1.9 billion, 8% below consensus expectations, implying a 1.7% decline in the second quarter after 10% growth in the first quarter. In addition to the EBITDA slowdown, net income was dampened by an increase in the tax rate from 25% in the first quarter to 30% in the second quarter.

A key positive driver was improvement in hydro conditions, which accelerated during the second quarter. The other main positive driver was renewables and networks growth, which also accelerated during the second quarter. As highlighted in the publication of subsidiary firm Endesa, slowdown in the second quarter comes from tougher comps, as first-quarter 2017 was hit by a negative one-off gas supply in Spain. The second driver of the slowdown was deterioration in thermal generation margins in Europe, owing to the surge in gas, coal, and carbon costs. We expect this backdrop to persist during the second half. Foreign exchange movements shaved 3% off EBITDA.

The group confirmed its full-year targets of EUR 16.2 billion EBITDA and EUR 4.1 billion net income, in line with our estimates. We will adjust our estimates to incorporate the acquisition of Electropaulo, which we calculate to be slightly accretive, as we have already written. Electropaulo should add EUR 200 million of EBITDA as of the second half.

Net debt increased by EUR 4.2 billion during the first half to EUR 41.6 billion. Key to that is the EUR 3.2 billion of acquisition expenditures, mostly for Electropaulo. Management indicated during the conference call that it is confident it will reach the strategic plan's net debt target of EUR 39.8 billion at year-end. The key driver will be cash disposals expected in the second semester, especially the sale of renewables assets in Mexico under the "build, sell, and operate" model. Management guides for total cash proceeds in the range of EUR 1.2 billion-EUR 1.5 billion.