EUR 850.00 For Business Accounts Only

Morningstar | E.On's First-Half Results Are in Line With Expectations, FY Targets Reaffirmed; Shares Overvalued

We reiterate our fair value estimate of EUR 8.60 per share after E.On released first-half results in line with expectations and reaffirmed its full-year targets of adjusted EBIT  and net income of EUR 2.8 billion-EUR 3 billion and EUR 1.3 billion-EUR 1.5 billion, respectively. This is roughly in line with our expectations. We do not plan to change our forecasts following the results, and we currently view shares as overvalued.

Adjusted EBIT grew 8% to EUR 1.9 billion and adjusted net income by 19% to EUR 1.05 billion, both in line with expectations. Adjusted EBIT actually decreased by 16% in the second quarter after growing 24% in the first one. Key to this reversal is tougher comps in the second quarter.

On the positive side, renewables EBIT increased by 15%, accelerating from a 7% growth posted in the first quarter due to capacity additions. Customer solutions EBIT grew 8%. The division's profitability was supported by a rebound in Germany that more than offset declines in the U.K. and other markets. Over the full year, we expect a 15% decline on account of restructuring costs and a challenging backdrop in the U.K. On the negative side, adjusted EBIT for networks decreased by 2%, implying an improvement from negative 5% in the first quarter to positive 2% in the second quarter, owing to a positive one-off effect. Over the second half, networks will be hit by lower returns for German gas networks and concession loss in Hamburg.

As part of its takeover bid on Innogy's minority shareholders, E.On has acquired 9.4% of Innogy stock. Together with RWE's stake, E.On will control 86.2% of Innogy, enough to integrate it. Completion requires a clearance decision from the EU Commission, expected by mid-2019 at the earliest. We are unconvinced by the rationale of the deal, following which E.On will be fully exposed to networks and retail. The former will be hit by a cut in allowed returns, while the latter lacks growth potential due to fierce competition, in our view.

Economic net debt was reduced by EUR 3.3 billion from EUR 19.2 billion at year-end 2017 to EUR 15.9 billion. The key driver is the EUR 3.8 billion cash proceeds from the sale of E.On's stake in Uniper to Fortum.