Morningstar | Best Idea Enel Confirms 2018 Earnings Targets Though Warning on Debt; Shares Undervalued
We reiterate our fair value estimate of EUR 5.70 per share and our no-moat, stable trend ratings after Enel published nine-month results in line with our full-year expectations, confirmed its 2018 earnings targets, and warned on full-year net debt. The increase in net debt will have a limited impact on our valuation. However, it dents management's credibility. All in all, we see potential share price weakness following this publication as a good entry point.Net debt increased by EUR 5.8 billion to EUR 43.1 billion during the first nine months. Consequently, the management now guides for a net debt of EUR 41 billion-EUR 42 billion versus the previous EUR 39.8 billion target reiterated at first-half results, involving a EUR 1.7 billion increase. Out of the latter, there is a EUR 900 million negative impact linked to foreign exchange and adverse hedging. There is another EUR 500 million linked to phasing of cash-in from disposals initially expected in 2018 but which will eventually occur in the first half of 2019. Taking the EUR 0.9 billion of negative foreign exchange impact and the balance of EUR 0.3 billion points to potential negative valuation impact of EUR 1.2 billion, that is around EUR 0.1 per share or only 2% of our fair value estimate.
Ordinary EBITDA grew 6% to EUR 12 billion at the end of September. EBITDA growth accelerated to 13% in the third quarter from 3% in the first half. The main driver of the growth acceleration during the third quarter was, as planned, the sale of renewables assets in Mexico that generated a capital gain of EUR 200 million accounted at the EBITDA level. The second main driver was positive one-off of EUR 150 million linked to Italian networks. Last but not least, retail margins significantly improved during the third quarter, notably in Iberia. Negative foreign exchange impact shaved 3% off EBITDA, in line with the first half.
Group net ordinary income grew 12% to EUR 2.9 billion, implying a strong acceleration to 29% in the third quarter after growing 5% in the first half. Foreign exchange negative impact at the EBITDA level was fully offset at the the bottom line due to positive impact below the EBITDA line notably on minorities which are higher in Latin America. Also, other financial expenses significantly decreased due to the higher discounting rate in Argentina.
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 that will not change upon this publication. Over the long run, we forecast EPS and dividend growth of 9% and 11%, respectively, through 2022, one of the highest in the sectors. Main growth drivers will be Latam networks and renewables energy.
Enel Societa Per Azioni is engaged in the generation and sale of electricity through its Generation, Energy Management and Sales Italy Division. Co. is also engaged in the distribution of electricity (Enel Distribuzione) and public and artistic lighting (Enel Sole) in Italy through its Infrastructure and Networks Division. Co.'s Iberia and Latin America Division coordinates Co.'s operations in the electricity and gas markets in Spain, Portugal and Latin America. Co.'s Engineering and Research Division manages the engineering processes related to the development and construction of power plants. Co.'s other divisions are the International Division as well as the Renewable Energy Division.
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