EUR 850.00 For Business Accounts Only

Morningstar | Naturgy Maintains 2019 Guidance and Raises Cost-Cutting Target; All Eyes on Spanish Regulation

We reiterate our fair value estimate of EUR 24.60 per share along with our narrow moat and stable trend ratings after Naturgy released first-half results roughly in line with consensus expectations and left its full-year targets unchanged. Should Spanish regulator CNMC's proposals issued July 5 be adopted, we would reduce our fair value estimate by EUR 2, to EUR 22.60 per share. The last closing share price of EUR 22.90 shows that downside appears limited.

Ordinary EBITDA grew 8% to EUR 2.28 billion in the half and 11% in the second quarter. In line with the first quarter, the main positive driver was Latin America networks, whose ordinary EBITDA increased 23% on positive tariff indexation and efficiencies across most countries.

The gas and power division's ordinary EBITDA increased 9% in the first half after being flattish in the first quarter. The key positive driver was gas, power, and service sales business on a margin recovery in power supply, whereas the business was loss-making in the 2018 second quarter. On the negative side, Europe power generation's reported EBITDA collapsed 78% in the second quarter after growing 13% in the first on a fall in hydro generation and increasing competition in combined-cycle gas turbines due to cheap gas while increasing carbon dioxide costs eroded margins. CCGT volume increased 6% in Spain, well below the increase reported by Endesa and Iberdrola. That might reflect weaker positioning than peers, which is disappointing as Naturgy has the largest CCGT fleet in Spain. In line with the first quarter, the international liquefied natural gas business performed poorly on lower volume and margins.

Naturgy did not change its full-year guidance of reported EBITDA and net income at EUR 4.6 billion and EUR 1.4 billion, respectively, in line with our estimates. However, the group raised its 2019 cost-saving target from EUR 100 million to EUR 150 million to offset poor performance in LNG and Europe power generation.

Reported net income increased 11% to EUR 592 million, slightly below consensus expectations. On a positive note, net debt decreased from EUR 15.3 billion to EUR 14.8 billion during the first half due to a EUR 0.8 billion working capital improvement that is partly sustainable, according to the management.