EUR 850.00 For Business Accounts Only

Morningstar | Engie Releases 1Q Results in Line With Expectations and Maintains FY Guidance; Shares Undervalued

We reiterate our fair value estimate of EUR 14.5 per share and our no-moat, stable trend ratings after Engie released first-quarter results in line with consensus expectations and reiterated its full-year guidance. Shares are undervalued.

Current operating income, or COI, decreased by 4% to EUR 2 billion. On the negative side, client solutions' COI decreased by 17% because of strong comps, unfavorable contract phasing and renewals, and rising development costs across Latin America. This implies a slowdown after the 8% growth achieved in 2018. Further, this activity is supposed to be the fastest growing, with 11%-14% CAGR targeted by 2021. However, the group highlighted that this quarter was atypical and guides for mid- to high-single-digit growth for the full year after improving contract phasing, strong backlogs, contributions from tuck-ins acquisition and cost-cutting. Networks' COI dropped by 5% after mild weather in France and positive one-offs in 2018. For the full year, Engie is guiding a mid-single-digit decrease versus an average annual decrease of 1%-4% guided through 2021. Nuclear's COI dropped by 45%. Performance should improve dramatically during the rest of year as volumes increase after the massive outages of 2018 and higher achieved prices.

On a positive note, renewables' COI grew 7% as capacity commissioning more than offset lower hydro production in France. For the full year, the group aims for growth in the low teens, in line with the average annual growth target by 2021, as hydro conditions normalise and stronger contributions from assets sales in the second half. Thermal's COI increased by 6% on a PPA ramp-up in Latin America and gas management in Europe. For the full year, Engie guides for a 20% decrease mainly because of the disposal of Glow.

The group reiterated its 2019 guidance of a recurring net income in a EUR 2.5 billion to EUR 2.7 billion versus our EUR 2.8 billion estimate that we plan to drop to adjust for the disposal of Glow.

Cash flow from operations plunged from EUR 1.6 billion in the first-quarter of 2018 to EUR 0.1 billion on margin calls expected to reverse throughout the rest of the year.

The acquisition of Tag, Petrobras' gas pipelines in Brazil, announced in April, should be closed by the end of the first half according to the group. The transaction is expected to increase Engie's net debt by EUR 1.6 billion and should be accretive by EUR 100-110 million per annum on 2020 and 2021 recurring net income, or 3-4% of our estimates. We believe that increasing exposure to energy networks in emerging markets makes strategic sense as they typically offer higher returns and solid organic growth compared to regulatory pressure on returns in developed markets.