EUR 850.00 For Business Accounts Only

Morningstar | Increasing RWE’s Fair Value Estimate to EUR 25.5 on Higher Renewables Growth; Shares Undervalued

We are increasing our fair value estimate from EUR 19.30 to EUR 25.50 per share for RWE, chiefly on higher renewables growth. Our new fair value estimate involves a 2020 P/E of 12.5 times and an upside of 14% to the current share price. We reiterate our no-moat and stable trend ratings.

Proforma RWE will be the third largest renewable player in Europe and the second global player in offshore wind. Renewables will produce a 2020 EBITDA of EUR 1.8 billion by our estimates, growing to EUR 2.3 billion in 2023 on the back of growth investments, accounting for 65% of the group’s EBITDA in 2023. This is well above our previous estimate of EUR 1.7 billion EBITDA in 2022. The reason for this is higher capacity growth estimates after taking a fresh look at E.On and Innogy's renewable portfolio of assets in development. Moreover, we increased our profitability estimates for the big offshore wind farm Triton-Knoll on lower operating expenses due to the utilization of large 9.5 MW Vestas turbines.

In the conventional generation business, increasing power prices  will offset the closure of the last nuclear plants in 2022. RWE is the most sensitive European utility to changes in power prices. We calculate that a EUR 2 per megawatt-hour increase in generation spreads would add EUR 4 per share (16%) to our fair value estimate.

We do not factor in coal and lignite plants closures after the German exit coal commission’s recommendations, pending more clarity. In other words, we assume that compensation for closures will be neutral compared with our DCF-based value of these assets of EUR 200 million per MW. There is some upside since RWE claims EUR 0.6 billion per MW, in line with what it got under a previous scheme.

We forecast RWE's net income to grow annually by 18% on average over 2019-23. Our 2020-21 net income estimates are 11% above the consensus that we believe neglects the impact from increasing power prices.