EUR 850.00 For Business Accounts Only

Morningstar | We Lower Our RWE FVE to EUR 17.40 on Additional Negative Information; Shares Fairly Valued. See Updated Analyst Note from 10 Oct 2018

We further reduce our fair value estimate for RWE to EUR 17.40 from EUR 19.30 on additional negative information on the Hambach issue. RWE's reward/risk ratio has sharply deteriorated, but shares look fairly valued after the sell-off. We reiterate our no-moat, stable trend ratings.

On the ZDF TV channel, RWE's CEO mentioned that in the worst-case scenario where RWE is not allowed to clear the forest and must therefore terminate the operations of its Hambach mine in the early 2020s instead of midcentury, the total negative financial impact would roughly amount to EUR 4 billion-EUR 5 billion. This is much higher than our initial estimate, in which we assumed the worst-case scenario's impact would be the annual free cash flow loss in 2018-20 to perpetuity. The amount mentioned by the CEO includes lost future cash flows, but also incremental provisions to cover dismantling costs, and so on. We factor in a 25% likelihood of this worst-case scenario and discount the amount to 2018, shaving EUR 1.5 off our fair value estimate.

According to the group, the suspension of the allowance to clear the Hambach Forest will reduce annual lignite production by 10 million-15 million tons and power production by 9-13 TWh. Negative annual impact on the EBITDA should amount to around EUR 150 million versus " low three-digit million euros" initially estimated . Furthermore, assuming that the court eventually grants the forest clearance at the end of 2020, the detrimental impact should last through the end of 2021 versus year-end 2020 previously, as it will take time to return operations to normal. Also, this negative EUR 150 million impact includes efficiency measures that the group will implement to cope with the issue. Therefore, our previous assumption that the group will implement an additional EUR 200 million cost savings plan appears too optimistic. The impact of these negative items on our estimates is mitigated by higher spread assumptions on recent power price increases.

The German coal exit commission, officially called the "Commission on Growth, Structural Change and Employment", is due to issue recommendations for closing the gap to Germany's 2020 climate target "as much as possible" in December 2018, namely before the COP 24, which is to be held in Poland. This task force was launched last June to phase out coal power while finding economic perspectives for coal workers and regions. On the bottom line, this could lead to set deadlines to phase out a certain amount of coal plants' capacity. This is potentially highly negative for RWE, assuming no compensation. The commission comprises four leaders. Two are former premier ministers of lignite mining states and therefore are pro-coal, in our view. One is a climate economist and can be seen as anti-coal. The fourth is the former Chief of the Chancellery and close to Angela Merkel. We believe that he can be seen as a "pivotal vote". Apart from the leaders, there are three members of the Bundestag and 24 other members. Among those 24 members, we count 10 with obvious anti-coal backgrounds. In order to be adopted and proposed to the German government, measures need two thirds of approval in the commission. In all, we believe the final outcome is uncertain, but we see more downside than upside for RWE.