EUR 850.00 For Business Accounts Only

Morningstar | Enel Confirms Its Full-Year Targets After a Good Start to the Year; Shares Are Undervalued

We reiterate our fair value estimate of EUR 6.2 per share along with our no-moat, stable trend ratings after Enel released first-quarter results largely in line with consensus expectations and reiterated its 2019 guidance. Shares appear undervalued.

Ordinary EBITDA increased by 14% to EUR 4.45 billion, 4% above consensus expectations. Unusually, thermal generation was the main positive driver and its EBITDA jumped by 80%, well above the full-year target, on higher output and prices in Europe and Latin America and efficiencies. Renewables' EBITDA increased by 21% on the commissioning of new capacity, the full consolidation of a JV in the U.S. after the acquisition of the share not previously owned, and higher achieved power prices in Europe which more than offset lower hydro production. Renewables and thermal generation divisions were boosted by a EUR 160 million  co mpensation from the early termination of a power purchase agreement  in Chile.  Infrastructure's EBITDA increased by 7%, chiefly on the consolidation of Eletropaulo and positive regulatory change in Brazil. Retail's EBITDA was flat as margin squeeze in Romania due to a decrease in regulatory prices offset higher power margins in Italy and Iberia. Management mentioned during the conference call that the shortfall in Romania should be passed through next year.

Net debt increased by EUR 4 billion to EUR 45.1 billion during the first quarter. EUR 1.4 billion comes from IFRS 16 and EUR 0.7 billion from a negative foreign exchange impact. Seasonal working capital deterioration had a negative impact of EUR 1.1 billion, in line with last year. For the full year, the group adjusts its net debt target from EUR 41.8 billion to EUR 43.2 billion on IFRS 16. Furthermore, management mentioned that, should the euro/dollar exchange rate remain unchanged, net debt would amount to EUR 44 billion. However, management added that this is purely an accounting effect and this is hedged by derivatives.

Enel adjusted its 2017 EBITDA target from EUR 17.4 billion to EUR 17.6 billion on IFRS 16. We will adjust our EUR 17.4 billion estimate accordingly which will be neutral on valuation. Net ordinary income increased by 11% during the quarter, in line with expectations. EBITDA growth was mitigated by higher financial expenses reflecting rise in debt and lower equity income due to the unwinding of the U.S. JV. The group maintained its full-year net ordinary income target of EUR 4.7 billion, in line with our estimate that we will not change upon this publication.