CEZ: Czech windfall tax overkill (downgraded to HOLD)

We have downgraded our rating on CEZ to HOLD (from Buy) and reduced our 12M price target (PT) to CZK 868/share (from CZK 1,314), offering 6% upside, following Parliament’s approval of two new windfall taxes, hitting CEZ’s earnings. Instead of extracting all of the revenues to subsidise household power bills in the form of dividends, the government decided to: 1) tax CEZ’s revenues this December and next year, applying a stricter form of the European power cap; and also 2) imposed another windfall tax (WFT) on the company’s 2023-25E net profit. Reflecting this negative impact, we have cut our net profit and dividend forecasts, which generate a dividend yield of only 6.3% in 2023-25E, at an 80% payout. This year’s dividend is only affected by the revenue tax in December and CEZ is guiding for a DPS of CZK 97-112, or 12-14% yields – one of the reasons that limits the downside now, in our view. In our model, we do not assume that the WFT will be cancelled by the constitutional court, CEZ going back to a 100% payout, or the State’s plan to take over generation (which would either: 1) have a high cost for the budget deficit; or 2) be cheap, and attacked by the minority shareholders). At our 2022-24E EV/EBITDAs of 3.4-5.0x, CEZ looks cheap, but its lower dividend outlook in 2023-25E might lead to more pressure next year, after the 2022E dividend is paid.