EUR 850.00 For Business Accounts Only

Morningstar | Red Electrica's 2018 Results Are In Line With Expectations; Shares Overvalued

We reiterate our fair value estimate of EUR 17.80 and our narrow, stable moat trend ratings after Red Electrica released 2018 results in line with expectations. The dividend is set at EUR 0.98, 7% higher than in 2017, in line with our estimates and the business plan, implying a yield of 5.1%, in line with the sector average. We view the shares as overvalued.

EBITDA increased by 1.3% to EUR 1.54 billion, the lowest growth rate since 2013, in line with our expectations. Tepid 0.4% revenue growth was offset by an 8% reduction in operating costs excluding staff costs on efficiencies and lower claim rate. Net profit went up by 5.2% to EUR 705 million, slightly above our EUR 694 million expectation as depreciation was below our estimate due to the extension of the estimated useful life of certain transmission assets that we have yet to factor in.

On Feb. 12, Red Electrica announced an agreement to acquire 89.7% of Spanish communications satellite operator Hispasat from Abertis, which looks like a case of "diworsification" to us. This is not a surprise since reports of the deal regularly surfaced over the last year. The price paid of EUR 0.95 billion is also in line with what was speculated. It implies an enterprise value of EUR 1.3 billion and an EV/EBITDA of 8.3. We calculate that net debt/EBITDA will increase from 3 times to 3.5 after the acquisition. It will be roughly neutral on the bottom line and slightly value-destructive on our estimates. Notably, the business is quite capital-intensive and has a negative economic profit, so it will reduce Red Electrica's ROICs by around 50 basis points a year, by our calculations. But the group's ROICs will still be comfortably above its weighted average cost of capital, so we do not intend to change our narrow moat rating. The main rationale for the acquisition appears to be diversification, as the returns of Spanish transmission networks will be cut in 2020, but Hispasat’s financials look weak, and we see no synergies.