Electrica: Powering up again (upgraded to BUY)

Despite the conclusion of the long-awaited transaction with Fondul Proprietatea, the poor results reported in 2017 have weighed more on Electrica’s share price, which has fallen 12% in the past six months. We see the price decline as an overreaction as investors waiting for the positives from the Fondul transaction have been caught off guard by the poor results. The high spike in electricity prices recorded last year in Romania could not be passed onto customers, and both the supply and distribution sides of the business have been affected negatively. On the other hand, we believe that the extraordinarily high electricity prices of last year will not be repeated and that electricity prices should return to more normalised levels, leading to a gradual improvement in Electrica’s results. We also believe the company is likely to make an effort to protect its dividend stream. As a result, we have adjusted our estimates by incorporating the transaction with Fondul, but also the new level of electricity prices and a gradual return to normal profit. Having also increased our cost of equity for Romania, our price target (PT) has dropped slightly, to RON 14.9/share. Still, given the price weakness, we upgrade our recommendation to BUY.