Polish Utilities: Treasure Island (ENA and PGE stay BUY, TPE upgraded to BUY, ENG downgraded to HOLD, LWB stays HOLD)
In this report, we have updated our price targets (PTs) and recommendations on PGE, Enea, Energa and Tauron, and we also transfer coverage of Bogdanka. We like the improving fundamentals, from positive FCF to falling debt/EBITDA or green investments ahead, but the sector is likely to be held hostage to near-term risks, in our view, from the power price compensation news to M&A activity, most likely between the state-controlled gencos. We try to reflect these in our pecking order. We have revised our modelling assumptions: we have reduced our coal prices, increased our CO2 price assumptions and lowered the 2020E regulatory WACC. This leads to slightly higher 2020E power price expectations than in our previous report (in October 2018). The utilities are trading at our 2019-20E P/E of 4.3x and EV/EBITDA of 3.6x, far below their historical averages, which we explain mainly by the state interfering with power prices. Nonetheless, we believe that the market is overstating the issue, which is one of the reasons we remain positive on the whole sector. At these low multiples, the transition to positive FCF generation, plus a move from coal investments to renewables – which may very well be NPV-positive – could trigger a fundamental rethink about the sector, for which investors may start to consider positioning themselves.ENEA is engaged in production of electricity and heat; trade in electricity; and distribution of electricity.
Energa SA is a Poland-based company engaged in the electric power sector. It produces and distributes the electric power and participates in the electric power market in Northern and Central Poland. It divides its business into seven segments: Electricity Distribution consists of electricity distribution conducted by subsidiaries; Renewable Energy invests in renewable energy sources and produces electricity through hydro, wind and bio-energy plans; Baseload Power Plant consists of manufacturing and investment activities in the area of conventional power plants, service and repair activities related to the generation of electricity; Combined Heat and Power (CHP) includes manufacturing activity of power plants and the heat distribution; Sales is engaged in lighting services, trading of electrical energy and customer service; Services provides accounting, human resources (HR) and payroll services, among others; Other includes hotel and training centers, and transportation services.
Lubelski Wegiel Bogdanka is a hard coal manufacturing group based in Poland. Co.'s core business activities are mining and agglomeration of hard coal. The energetic coal sold by Co. is used mainly for the generation of electric and thermal energy as well as for cement production. Co.'s customers are mainly the industrial companies, first of all those acting in the power industry and situated in east and northern - east Poland. Co.'s mine is located in the part of Lubelskie Coal Basin (LZW) and performs its mining operations within the mining area with surface of 57 km2.
PGE Polska Grupa Energetyczna is an electricity company based in Poland. Co. is engaged in the generation and selling of electricity. Co. is a predominant power producer and supplier in Poland and a major heat and power sector company in Central and Eastern Europe. Co. supplies over 5 million households, businesses and institutions through a combination of its own fuel resources (lignite), power generation and final distribution networks. Co.'s activities focus on the following areas: Conventional Power Generation, Renewable Power Generation, Nuclear Power Generation, Wholesale, Distribution and Retail. Co. has 12.2 GW of installed generation capacity.
Tauron Polska Energia is engaged in the generation, transmission, distribution, and sale of electricity and heat in Poland. Co. generates electricity from various conventional and renewable energy sources, including hard coal, lignite, natural gas, biomass, wind, solar, and hydro power. It is also involved in quarrying, crushing, and breaking of limestone; quarrying of stone for the construction industry; mining of hard coal; trading in electricity; and production of technical gases. In addition, Co. engages in the repair and maintenance of machinery and electrical equipment; electrical installations; and construction of power lines.
WOOD & Company is the leading investment bank in Emerging Europe. Founded in 1991 and head-quartered in Prague, our footprint spans the region and touches investors around the globe.
A pioneer in Emerging Europe, WOOD executed many of the first CEE equity trades and landmark investment banking transactions. Our electronic trading platform was the first in the region, and remains the best. We are continually expanding our relevance and reach in these ever-evolving markets.
Our equity market share reflects our stature: 7% in Warsaw, 20% in Bucharest, 16% in Hungary, 40% in Prague and 5% in Vienna. Our distribution is unparalleled, with the largest salesforce in the region, servicing a uniquely diverse investor base.
We couple local expertise with a truly international perspective. With offices on the ground in the region, and in key financial hubs such as London and Milano, we are never far from our clients and we remain at the forefront of what’s afoot in the CEE emerging and frontier landscape.
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