EUR 850.00 For Business Accounts Only

Morningstar | Weak South American Currencies Mask Enel Americas' Solid Performance in 1Q

We are reaffirming our $10 per ADR fair value estimate after Enel Americas reported flat 2019 first-quarter earnings, reaffirmed guidance, and provided an update on its planned capital increase.

Earnings for the recently ended quarter were $0.18 per ADR versus $0.19 per ADR in the same period last year. However, weak South American currencies versus the U.S. dollar and hyperinflation in Argentina reduced earnings by roughly $0.10 per share. Thus, excluding the macroeconomic headwinds, the company had a solid start to 2019. Enel Americas reaffirmed its 2019 EBITDA guidance of $4.4 billion versus our estimate of $4 billion.

Management indicated during the earnings conference call that the planned capital increase was lowered to $3 billion from $3.5 billion but remains on track for closing in the third quarter. On April 10, Enel S.p.A. announced it had increased its stake in Enel Americas by 4.62%, to 56.42%. Although a shareholder vote will take place on April 30, Enel S.p.A. also announced it would vote in favor of the capital increase, sealing the deal that will increase shares outstanding by over 30% at the current stock price.

We consider it a positive for minority shareholders that Enel Americas’ largest shareholder recently increased its stake and will only be allowed to contribute cash for its new shares.

At the last capital increase in 2013, Enel Americas management, with approval of its board, was willing to significantly overpay for the assets its largest shareholder was contributing as its share of the capital increase. Pension fund managers, owners of about 14% of the company at that time, and regulators brought discipline to the process, hiring financial consultants and through negotiation reduced the amount paid for the assets by $1.2 billion, roughly 25% of the originally proposed valuation.

Earnings were boosted in the recently ended quarter by a one-time tax benefit of $347 million, approximately $0.30 per ADR, at Enel Distribucion Goias, a Brazilian distribution utility acquired in 2017. Even without the tax benefit, results were stronger than the $0.62 per ADR posted in 2017 and our estimate. The results were especially positive in light of the macro conditions in Brazil and hyperinflationary economy in Argentina.