EUR 850.00 For Business Accounts Only

Morningstar | Trading Division's Good Performance Doesn't Change Our Cautious Long-Term View on RWE

We reiterate our fair value estimate of EUR 19.30 along with our no-moat, stable trend ratings after RWE released first-quarter results significantly above expectations while reiterating full-year guidance. The shares appear overvalued.

EBITDA jumped 71% to EUR 510 million, well above the consensus' EUR 308 million. Adjusted net income more than doubled to EUR 273 million, well above the consensus' EUR 73 million, on the jump in EBITDA and a better financial result. The key positive driver was an outstanding performance of the trading and supply division, which delivered EBITDA of EUR 255 million versus a EUR 24 million loss last year and consensus' EUR 50 million. The division was notably boosted by strong gas and LNG activity. RWE highlighted the volatility of this business and reiterated its full-year guidance of EUR 100 million-300 million in EBITDA, mentioning a good chance to reach the upper end of the range versus our EUR 200 million estimate. Lignite and nuclear's EBITDA increased 4% to EUR 188 million as higher power prices offset lower volume linked to the restrictions from Hambach mine. The group reiterated its full-year EBITDA guidance of EUR 250 million-350 million, in line with our EUR 317 million forecast. On the negative side, European power's EBITDA dropped 60% to EUR 63 million, below the consensus' EUR 107 million. The division was hit by lower volume and the suspension of the U.K. capacity payments. For the full year, RWE reiterated its EBITDA guidance of EUR 250 million-350 million, below our EUR 370 million as we have yet to factor in the U.K. capacity payment suspension.

RWE confirmed its 2019 outlook for adjusted EBITDA of EUR 1.2 billion-1.5 billion on a stand-alone basis and adjusted net income of EUR 0.3 billion-0.6 billion range. The trading division performance's potential upside to our estimates will be offset by the capacity payment suspension. All in all, we will not materially change our 2019 estimates upon this publication.

Improvement of hedged power prices is offset by increasing carbon dioxide prices. Of 2020 outright generation, 90% is hedged at EUR 31 per megawatt-hour with CO2 at EUR 5/MWh, unchanged versus year-end 2018. This hedging involves a 2020 margin after CO2 (power price - CO2) of EUR 26/MWh, above our EUR 23/MWh estimate. Of 2021 generation, 90% is hedged at EUR 39/MWh with CO2 at EUR 9/MWh versus 80% at EUR 37/MWh with CO2 at EUR 7/MWh at year-end 2018. That implies a margin after CO2 of EUR 30/MWh for the hedged portion versus EUR 25/MWh for the full volume on our estimates. Of 2022 outright power generation, 50% is hedged at EUR 44/MWh for a CO2 price of EUR 14/MWh, implying a margin after CO2 of EUR 30/MWh versus our EUR 26/MWh estimate for all the volume. Nevertheless, current forward power and CO2 prices of EUR 48/MWh and EUR 26/ton point to a margin deterioration for the unhedged portion. Altogether, we might increase our 2020 and 2021 earnings estimates on hedged margins above our expectations. However, the recent increase in CO2 prices implies potential downside to our long-term estimates.

Net debt increased by EUR 2.4 billion to EUR 4.7 billion during the quarter, mainly due to outflow of variation margins. For the full year, RWE reiterates its guidance of net debt significantly above 2018.