EUR 850.00 For Business Accounts Only

Morningstar | Innogy's Worse-Than-Expected Headwinds Negative for Pro Forma E.On

We reiterate our EUR 40 fair value estimate and no-moat, stable trend ratings for Innogy after the company reported 2018 net debt that was higher than expectations and set 2019 guidance well below expectations. Innogy also unexpectedly cut its dividend to EUR 1.40 from EUR 1.60, which is negative for parent RWE. That implies a negative read-across for E.On, which is is due to acquire most of Innogy by year-end. Our fair value estimate for Innogy is in line with the takeover price from E.On.

2018 adjusted EBIT decreased 7% to EUR 2.63 billion, below our EUR 2.7 billion forecast though in line with consensus. Downside to our EBIT estimate chiefly came from the renewables business, whose EBIT dropped 16% versus our flattish estimate on poor wind conditions. In line with the first nine months, the main negative driver was the retail business, whose EBIT dropped 21% to EUR 0.65 billion.

For 2019, Innogy targets EBIT of EUR 2.3 billion and net income of EUR 850 million, well below our estimates of EUR 2.6 billion and EUR 1 billion, respectively, and consensus net income of EUR 1 billion. Out of the EUR 330 million EBIT decline in 2019, EUR 200 million comes from the sale of Innogy's Czech grid business to RWE in February, whose price is undisclosed. Otherwise, a key negative driver will be the retail business, for which the group targets EBIT of EUR 300 million-400 million, well below our EUR 620 million estimate, on an expected EUR 250 million loss in the United Kingdom versus our outlook for a EUR 130 million loss, due to the tariff cap.

2018 total economic net debt increased by EUR 1.35 billion, to EUR 17 billion, well above consensus' EUR 14.9 billion estimate. This increase was due to cash flow deficit and an increase in pension provisions. All else being equal, this increase in economic net debt would have a negative impact of EUR 0.60 per E.On share upon acquisition of the bulk of Innogy by the latter, due by year-end.

2018 adjusted net income decreased 16% to EUR 1.03 billion, below consensus' EUR 1.06 billion and our EUR 1.1 billion. On top of the EBIT decline, net income was hit by a lower financial result, which was boosted by a gain from the sale of securities in 2017.