EUR 850.00 For Business Accounts Only

Morningstar | Engie Releases a Good Set of First-Half Results and Confirms Full-Year Guidance; Shares Undervalued

We reiterate our EUR 15.50 fair value estimate and our no-moat, stable trend ratings after Engie released a good set of results enabling it to confirm its full-year guidance. Management confirmed its interest in EDPR's U.S. assets and announced that the expected investor day will be held in February 2019. Shares are undervalued.

EBITDA came in at EUR 5.1 billion, up by 6.2% organically, in line with the first quarter's  6%. Recurring net income increased by 19% to EUR 1.5 billion.

On the positive side, networks EBITDA grew 3% over the first half after declining 3% in the first quarter. As expected, profitability was boosted by the implementation of regulation for French storage terminals in April, retroactively applied to the first quarter. Renewables and contracted generation  EBITDA grew 4% in the first half after 12% growth in the first quarter. The business was boosted by better hydro conditions in France and Brazil. Merchant activities EBITDA increased 21%, implying a slowdown from the first quarter's  37%  on less favourable comps. Division EBITDA will fall by more than half in the second half due to unplanned nuclear outages unveiled in June.

On the negative side, client solutions EBITDA decreased by 1% after growing 2% in the first quarter. In line with the first quarter, the division's profitability was hit by  lower retail gas margins in France. In addition, business-to-business engineering oil and gas activities performed poorly. The group guides for a significant improvement in the second half due to the July  9%  tariff increase in French gas regulated tariffs and restructuring.

The group confirmed its 2018 guidance of a recurring net income in a EUR 2.45 billion-EUR 2.65 billion range, in line with our EUR 2.47 billion estimate. We have not yet factored in the EUR 250 million negative EBITDA impact from nuclear outages. Still, it should be offset by better performance in global energy management, France, and infrastructures than in our estimates.

The Lean programme's cost-cutting amounted to EUR 150 million in the first half, of which EUR 70 million came in the first quarter. This is slightly short of the EUR 350 million annual target, but we are confident that the group will be able to accelerate its progress throughout the rest of the year, in line with the 2017 pattern.