Polish Utilities: Unloved, but (really) cheap again (upgrading to BUY on Enea, Energa & PGE, Tauron stays HOLD)
In the current Polish power macro environment, our pecking order for the state-controlled utilities is PGE, Energa, Enea and Tauron, and we upgrade the first three to BUY, while maintaining Tauron as a HOLD. Capacity market legislation constitutes a big win for the whole sector, although the ultimate size of the payments and their allocation will only become apparent after the auctions, planned for the end of this year. In the meantime, rising coal prices and pressure on coal generation margins are the main theme we would play in the coming quarters. In this environment, PGE and Energa are the most resistant to a margin squeeze, thanks to their lignite exposure and regulated “must run†sales, respectively, and so are our preferred picks. With the sector on a 2018-19E EV/EBITDA of c.4.0x – 1.7 SD below the trailing 5Y average – another modest rerating of valuations is, in our view, more likely than not. This said, absent material improvements in corporate governance – e.g., an end to state-directed capital allocation, predicable dividend policies – we are sceptical that investors will be encouraged to pay European utility multiples (a 2018-19E median of 7.2x; the Poles are at a c.40% discount).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.
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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