Morningstar | Excessive Share Price Reaction to Engie's Nuclear Outages; Shares Significantly Undervalued
We reiterate our fair value estimate of EUR 15.50 per share along with our no-moat, stable trend ratings after Engie announced additional unplanned outages at its Belgian nuclear plants Doel 1 and Doel 2. The share price is down 2%-3% on the news, reflecting the the market's jitters over Engie's Belgian nuclear business, which has been experiencing these kinds of setbacks since 2012 and is a big source of uncertainty for Engie. Nonetheless, we estimate that Belgian nuclear assets should be the main earnings growth driver over the coming years due to increasing carbon and power prices. We calculate a nonmeaningful impact from the outages announced Aug. 31. Therefore, we see the price pullback as unjustified and as a good entry point to invest. We believe the shares are significantly undervalued, with an unjustified 15% discount to the sector in terms of 2019 price/earnings despite Engie's higher earnings growth and strong free cash flow generation. We expect the capital market day scheduled in early 2019 to provide more clarity regarding capital allocation as well as medium-term financial targets, in line with the practices of peers Enel and Iberdrola. That should be a positive catalyst, in our view.Engie's Belgian subsidiary Electrabel announced extended outages at its Doel 1 and Doel 2 power plants due to necessary measures after an inspection program on the spare pipe of the backup cooling water system. Additional outages will total three months and will reduce production by 2 terawatt-hours, on our calculations. We estimate that will shave EUR 50 million off EBITDA, which is not meaningful, unlike the previous June nuclear production warning. The latter reduced production by around 10 TWh and shaved EUR 250 million off EBITDA.
Engie is an industrial group, based in France, active in the fields of gas, electricity, energy services and the environment. Co. is an energy provider across the entire energy chain, in electricity and in natural gas, including: purchase, production and commercialization of natural gas and electricity; transport, distribution, management and development of major natural gas infrastructures; design and commercialization of energy services and environment-related services. Co.'s activities are conducted through five segments: Energy Europe, Energy International, Global Gas and LNG, Infrastructures, and Energy Services.
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