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Morningstar | Best Idea Enel Pledges Dividend Increase Through 2021; Shares Undervalued

Enel released its 2019-21 business plan in which it significantly increased its investments while committing to a minimum dividend for the next three years versus one year previously. New free cash flow and net income targets are roughly in line with ours. Accordingly, we reiterate our fair value estimate of EUR 5.70 per share along with our no-moat, stable trend rating. The shares appear significantly undervalued. Improvement of the risk profile and equity story evidenced by the dividend commitment justifies the cancellation of the discount to the sector.

A steep increase in investments should drive strong EBITDA growth. The group increased its investment budget 11% to EUR 27.5 billion over 2019-21 from EUR 24.6 billion over 2018-20. Key to that is renewables, where investments are to increase by EUR 2 billion. This is due to a reduction in the sale of renewable assets developed by the group, namely the build, sell, and operate model. In all, the group targets EBITDA of EUR 17.4 billion in 2019 and EUR 18.5 billion in 2020, above the previous targets of EUR 17.2 billion and EUR 18.2 billion and our estimates of EUR 17.26 billion and EUR 18.34 billion. In 2021, Enel targets EUR 19.4 billion in EBITDA, well above our EUR 18.5 billion target. Enel left its 2019 and 2020 net income targets unchanged at EUR 4.8 billion and EUR 5.4 billion due to higher financial costs driven by high net debt than in the previous plan. This is in line with our forecasts but 6% above the consensus on average. For 2021, the group set a net income target of EUR 5.6 billion, also in line with our estimate. Last but not least, the underlying macro assumptions of the plan seem realistic to us and even conservative regarding power prices in Italy and Iberia. In other words, we believe the new earnings targets are within reach.

The 2019-21 cumulative free cash flow is EUR 0.6 billion above the previous plan and EUR 0.8 billion above our current estimates. However, this is offset by an increase in run-rate annual investments beyond 2021 from EUR 6.7 billion to EUR 8 billion. Net debt will remain flat through 2021 as free cash flow will be fully dedicated to dividend funding. Net debt/EBITDA will improve from 2.5 in 2018 to 2.2 in 2021. That leaves room for additional minority buyouts in Latin America or share buybacks, to which management said it was open during the conference call due to the current depressed share price.

For the first time, the group set a dividend floor for the next three years implying a 9% compound annual growth rate through 2021. The 70% payout policy is maintained, meaning that the group will pay the highest between the floor and the payout-based dividend. The latter implies a 12% CAGR though 2021, one of the highest in the sector. When asked during the conference call about the rationale to guarantee the dividend for three years for the first time in the group's history, management highlighted increasing visibility and reduced risk due to the disposal of activities like the nuclear plants in Slovakia, the fact that there are only two regulatory changes by 2021 in Chile and Spain, and the big foreign-exchange hit in 2018, implying potential upside.