EUR 850.00 For Business Accounts Only

Morningstar | RWE Releases 2018 Results Below Expectations, Uncertainties High; Shares Overvalued

RWE released 2018 results below expectations on the bottom line and set 2019 targets also below expectations. We reiterate our EUR 19.30 fair value estimate along with our no-moat, stable trend ratings. The equity story comprises high uncertainties such as the re-establishment of U.K. capacity payments and the level of compensation for coal plant and lignite mine closures in Germany. The shares look overvalued.

RWE's stand-alone EBITDA decreased 26% to EUR 1.52 billion, slightly shy of our and consensus' EUR 1.56 billion forecast. European power's EBITDA decreased 28% to EUR 334 million versus our EUR 363 million estimate due to the U.K. capacity payment suspension in the fourth quarter. Lignite and nuclear's EBITDA tumbled 47%, in line with our estimate, on lower generation margins and volumes. Adjusted net income decreased 40% to EUR 0.59 billion, in line with our estimate though below consensus' EUR 655 million, which underestimated finance costs.

For 2019, RWE expects EBITDA of EUR 1.2 billion-1.5 billion, compared with our EUR 1.52 billion and consensus' EUR 1.47 billion outlook. The downside to our estimates comes from the U.K. capacity payments suspension, which we have yet to factor in. Doing so would reduce our EBITDA by EUR 185 million and put us in the middle of the guidance range. RWE guides for EUR 0.3 billion-0.6 billion in adjusted net income in 2019 versus our EUR 612 million and consensus' EUR 589 million outlook. Factoring the capacity payments suspension would bring our estimate to the middle of the targeted range.

RWE's hedging has improved, reflecting increasing power prices: 90% of 2020 generation is hedged at EUR 31 per megawatt-hour, versus 90% at EUR 30/MWh at the end of September and our EUR 29.6/MWh estimate; 60% of 2021 generation is hedged at EUR 37/MWh versus 60% at EUR 33/MWh at the end of September and our EUR 38/MWh estimate. 2021 average hedged power prices correspond with average hedged carbon dioxide prices of EUR 7/tonne versus EUR 5-6/tonne at the end of September and our EUR 6/tonne estimate. That means that our potential downside in 2020 would be offset by our upside in 2021. RWE's so-called implicit fuel hedge strategy means that when it improves its hedged power prices, this is mitigated by increasing CO2 prices. Altogether, we will not change our long-term estimates based on power prices of EUR 50/MWh and CO2 costs of EUR 22/tonne.

Net debt on a stand-alone basis was almost halved to EUR 2.3 billion, well below expectations, due to financial transactions for which RWE received variation margins that will mature in 2019. That will drive the reversal of the effect and therefore a significant increase in net debt in 2019.