Morningstar | E.On’s 1Q Results Highlight Weak Rationale of the Deal With RWE; Shares Overvalued
We reiterate our fair value estimate of EUR 8.6, along with our no-moat, negative trend ratings after E.On released first-quarter results in line with expectations and maintained its full-year guidance. Shares are overvalued.EBIT decreased by 8% to EUR 1.18 billion and adjusted net income dropped by 11% to EUR 650 million, both in line with consensus expectations. On the negative side, customer solutions' EBIT plunged by 44% to EUR 219 million, mainly because of harsh business conditions in the U.K. caused by the tariff cap and fierce competition. Exposure to the challenging U.K. retail energy market will increase after the deal with RWE is approved since E.On will take over Npower, Innogy's struggling U.K. retail business. Energy networks' EBIT was flat in every region. On the positive side, renewables' EBIT rose by 23% after the commissioning of offshore wind farms in Europe and an onshore wind farm in the U.S. The only division that grew this quarter will be transferred to RWE at the end of 2019. This highlights the weak rationale of the deal for E.On, in our view.
Economic net debt increased by EUR 2.1 billion during the first quarter to EUR 18.9 billion. EUR 0.8 billion of this increase was because of IFRS 16 and EUR 0.2 billion was a result of an increase in the pension deficit, driven by declining interest rates. The latter implies a negative read-across for Innogy, which is due to publish its results soon. At year-end 2018, Innogy's economic net debt came in well above expectations, notably on an increase in pension provisions. This is a concern for E.On, which will consolidate the bulk of Innogy's economic net debt.
The group reiterated its 2019 guidance of an adjusted EBIT of EUR 2.9 billion to 3.1 billion and adjusted net income of EUR 1.4 billion to 1.6 billion, both in line with our estimates of EUR 2.98 billion and EUR 1.49 billion.
The transaction with RWE is on schedule and E.On is confident it should get the necessary approvals in the second half of 2019.
E.ON is an investor-owned energy company. The Generation global unit consists of all Co.'s existing (fossil and nuclear) generation assets in Europe. The Renewables unit is engaged in managing Co.'s carbonsourcing and renewables businesses. The Global Commodities unit buys and sells electricity, natural gas, liquefied natural gas, oil, coal, freight, biomass, and carbon allowances. The Exploration & Production unit is a active in the focus regions of the North Sea (U.K., Norway), Russia and North Africa. The New Build & Technology unit include Co.'s project-management and engineering operations to support the construction of new power plants and the operation of existing plants.
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