EUR 850.00 For Business Accounts Only

Morningstar | ENGI Updated Star Rating from 19 Jun 2019

Engie is one of the three largest diversified international European utilities, along with Enel and Iberdrola. CEO Isabelle Kocher, who was appointed in 2016, launched a significant asset-rotation program that drove the sale of EUR 16.5 billion of mostly commodity-exposed assets--notably E&P, LNG, and coal plants--to focus on regulated, renewables, and client-facing businesses. This strategy has a sound strategic rationale, as it lowered the weight of activities that are typically not moaty with low returns on capital and volatile cash flows. The share of contracted or regulated activities has increased from 70% in 2015 to 93% in 2018. Regulated gas distribution and transmission networks, mostly in France, account for around 40% of the group’s EBITDA. Engie has less exposure than Southern European diversified Utilities to regulated networks in Latam that boast higher returns than in Europe. The acquisition of TAG, Petrobras' gas pipeline in Brazil, in 2019 reduces the gap. Contracted assets comprise thermal power plants in emerging markets with purchased power agreements, or PPAs, securing returns on capital. In renewables, Engie intends to develop solar and wind plants under the so-called DBPSO model (develop, build, partial sale, and operate model) to limit the capital intensity. Also, the creation of a JV with EDP in 2019 creates the fifth largest offshore wind player. Remaining merchant exposure is mostly made of thermal power plants in Europe, Belgian nuclear plants, and French hydro assets. Nuclear and hydro provide exposure to rising European power prices, which will support the group's earnings growth through 2023 as unfavorable hedging rolls off. Still, this will be mitigated by the closure of some nuclear plants as of 2022. With a net debt/EBITDA ratio of 2.4 times, Engie has among the lowest leverage in the sector providing financial flexibility. After the surprise dividend increase in 2018, we believe that strong free cash flow will enable a 5.7% annual dividend increase through 2023 by assuming a 70% payout ratio.