EUR 850.00 For Business Accounts Only

Morningstar | Raising Our FVE for Red Electrica on Likely Adoption of a WACC-based Model; Shares Overvalued. See Updated Analyst Note from 09 Nov 2018

We raise our fair value estimate for Red Electrica by 7% from EUR 16.7 to EUR 17.8 per share on likely shift from a bond-linked to a WACC-based remuneration model from 2020 onward after a recent proposal of the Spanish regulator CNMC. We anticipate this proposal to be cleared by the ecological transition ministry. The CNMC proposal reflects an improvement in the Spanish regulatory backdrop to which Red Electrica is fully exposed, but shares appear overvalued after the recent rebound. We maintain our narrow moat and stable trend ratings.

On Nov. 2, CNMC stated that it intends to shift from the current bond-linked model to a WACC-based model for electricity distribution and transmission networks. The new rate will amount to 5.6% versus 6.5% currently. This is better than our previous estimates based on the continuation of the bond-linked model. Under this model adopted in 2013, the remuneration rate is calculated by adding 200 basis points to the Spanish 10-year treasury yield. The remuneration rate was set in 2013 when Spanish 10-year treasury yield stood at 4.5% and fixed until year-end 2019, hence the current 6.5% rate. As of 2020, the remuneration rate was supposed to decline to reflect much lower govies' yield of 1.6% as of early November 2018. The decline was capped at 50 basis points annually. Accordingly, we factored in so far an annual 50-basis-points cut in 2020, 2021, and 2022; namely the end of our explicit forecast period. That involved a 5% rate of return to perpetuity. We now factor in the 5.6% proposed by the CNMC from 2020 onward, which increases our 2022 net income by 8% and fair value estimate by 7%.