EUR 850.00 For Business Accounts Only

Morningstar | Naturgy's 9-Month Results in Line With Expectations; Shares Slightly Undervalued

We reiterate our EUR 23.50 fair value estimate for Naturgy Energy Group along with our narrow moat and stable trend ratings after the group released nine-month results in line with our expectations. The shares appear slightly undervalued.

Recurrent EBITDA grew 10% to EUR 3.25 billion as growth accelerated from 6% in the first half to 19% in the third quarter. The main positive driver was the gas and power division; international liquefied natural gas' EBITDA jumped by EUR 170 million at the end of September, of which EUR 100 million in the third quarter was a result of a strong rise in international prices driven by Asian demand. LNG volumes saw a boost from first supplies from Sabine Pass and Yamal LNG, as planned. Gas supply's EBITDA benefited from the renegotiation of the Sonatrach procurement contract in September and higher gas selling prices. Europe power generation's EBITDA improved by EUR 33 million after decreasing by EUR 15 million in the first half; this was due to rebound in hydro volumes after the 2017 drought, which more than offset declining thermal margins on account of surging carbon dioxide costs. However, adverse foreign exchange effects shaved 6% off EBITDA, offsetting all Latin American networks' organic growth.

During the conference call, management said it was confident with the 2018 consensus recurrent EBITDA of EUR 4.3 billion, slightly below our EUR 4.35 billion estimate, which we are leaving unchanged. We are likely to tweak our long-term EBITDA forecasts due to the surge in CO2 costs since our last update. However, the impact on our free cash flow estimates and valuation should be neutral owing to lower capital expenditures, in line with the business plan.

Reported EBITDA decreased 1% to EUR 2.98 billion. Negative nonrecurring items increased from EUR 100 million in the first half to EUR 272 million for the nine-month period. The chunk of this increase comes from Argentina, where gas procurement costs increased due to the devaluation of the Argentine peso. This dynamic is classified as nonrecurring, given that this increase should be eventually passed trough to customers.

Recurrent net income increased 38% to EUR 877 million, accelerating from the first half's 22% growth, reflecting higher recurrent EBITDA growth in the third quarter. Our full-year estimate of EUR 1.27 billion is comfortably within reach, as it implies a 6% decline in the fourth quarter.