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Morningstar | Naturgy Sets 2019 Outlook Slightly Above Our Expectations

Naturgy released 2018 results below our expectations on a reported basis and set 2019 guidance above our estimates. We plan to increase our earnings and fair value estimates by a mid-single-digit rate following this publication. For the moment, we reiterate our EUR 22.30 fair value estimate for Naturgy along with our narrow moat and stable trend ratings.

Ordinary EBITDA grew 12% to EUR 4.4 billion, accelerating from 10% at the end of September. Reported EBITDA grew 3% to EUR 4 billion, below our EUR 4.25 billion estimate. The main driver of the downside was the increase in negative one-offs in the fourth quarter due to restructuring and provisions for litigation.

In line with the first nine months of the year, the main growth driver was the Gas & Power business unit due to strong performance of International LNG, European power generation, and energy supply divisions. International LNG's reported EBITDA jumped by 80%, in line with our estimate due to strong volumes and prices. After being flattish at the end of September, Europe power generation's EBITDA increased by 8% to EUR 411 million, above our EUR 356 million estimate. Factoring in this higher base will increase our subsequent years' forecasts. Infrastructures EMEA's reported EBITDA was flattish, in line with our estimates. Reported EBITDA includes a EUR 47 million negative one-off, higher than in our estimates. That means that, on an recurring basis, the business performed better than we anticipated. Incorporating that will increase our future estimates. On the negative side, foreign exchange shaved EUR 218 million, or 5% of EBITDA.

Naturgy set 2019 EBITDA and net income guidance at EUR 4.6 billion and EUR 1.4 billion, respectively, including restructuring costs of EUR 150 million, above our respective EUR 4.4 billion and EUR 1.3 billion estimates. We will likely raise our forecasts on better outlook for Europe power generation and infrastructures EMEA. 2019 dividend is confirmed at EUR 1.37 per share.

The group reported a net loss of EUR 2.8 billion, in line with expectations, on account of EUR 4 billion of asset write-down booked in the first half. Ordinary net income increased by 57%, in line with expectations. On top of ordinary EBITDA growth, ordinary net income was supplemented by better financial result due to issuances at lower rates.

Net debt decreased by EUR 1.5 billion to EUR 13.7 billion, excluding IFRS adjustment, chiefly due to the EUR 2.6 billion cash proceeds from disposals. We anticipated EUR 2.2 billion of net debt reduction. Key to the difference is higher dividend to minorities and higher investments.