EUR 850.00 For Business Accounts Only

Morningstar | Best Idea Naturgy's 1H Results in Line With Expectations; Shares Fairly Valued

We reiterate our EUR 23.50 fair value estimate for Naturgy--formerly named Gas Natural--along with our narrow moat and stable trend ratings after the group released first-half results in line with expectations. The shares appear fairly valued. First-half recurrent EBITDA came in at EUR 2.1 billion, up 6% versus last year and in line with consensus expectations. This implies a slowdown in the second quarter as first-quarter growth stood at 7.8%. Recurrent net income increased 22% to EUR 532 million versus a 33% increase in the first quarter.

The main positive driver was the gas business. International LNG's EBITDA increased by EUR 70 million due to an ''extraordinary performance'' on the back of high international prices that persisted in the second quarter despite high temperatures. However, management emphasised during the conference call that this performance should not be extrapolated. Also, the margin of gas and power supply significantly increased. Still, with regard to power supply, we understood that margins deteriorated during the second quarter due to increasing electricity procurement costs owing to higher pool prices, which will persist in the second half of this year, according to current forwards.

On the negative side, adverse foreign exchange effects shaved 5% off EBITDA, offsetting all organic growth of the Latin American networks. Also, Spanish power generation's margins decreased because of deteriorating thermal spreads owing to the surge in carbon costs.

The group expects to deliver higher recurrent net income in the second half on the back of efficiencies, higher power generation profitability, renewables growth, Algerian contract renewal, and lower financial costs. Asked about its confidence in reaching full-year consensus expectations, which are aligned with ours, management replied that it will depend on the final outcome of the ongoing renegotiation for the Algerian contract renewal.

Reported EBITDA was flattish at EUR 2 billion. The EUR 100 million difference between reported and recurrent EBITDA comes from restructuring costs, retroactive gas supply and transportation costs, extraordinary fire prevention costs, and trial and penalties in Chile.
Regarding the bottom line, the group posted a net loss of EUR 3.3 billion due to the EUR 4.9 billion asset write-down announced in late June.

The group confirmed that it will start the share buyback in the second half with a maximum amount of EUR 400 million. That reflects the shareholder-return priority of the new strategic plan. At the current share price, we calculate that would be accretive by around 1%.