Company Reports

While wholesale power prices stabilized, government bonds’ yields fell on weak economic indicators and lower inflation in the US and Europe. Second-quarter results were boosted by very favorable hydro conditions that led to some guidance upgrades. This goldilocks scenario bolstered a rally in European utilities, enabling them to massively outperform the market and recover much of their earlier underperformance.

We raise our fair value estimate for E.On to EUR 16 from EUR 15 following the upgrade of the economic moat rating from none to narrow. Our new fair value estimate offers 18% upside to the current share price. It implies a 2024 enterprise value/EBITDA of 8.9 times, P/E of 14.7 times, dividend yield of 3.4%, and free cash flow yield of negative 3%. E.On is ideally positioned to benefit from high growth in electricity networks across Europe to ease the energy transition.

E.On transformed itself in 2016 by spinning off Uniper, its commodities and power generation business, and ultimately selling its stake in Uniper to Fortum in January 2018 for EUR 3.7 billion. This deal refocused E.On on networks, retail, and renewables.

We confirm our EUR 15 fair value estimate after no-moat E.On released good first-half results and confirmed its 2024 guidance. Shares appear undervalued despite an appealing dividend growth outlook and high earnings visibility.

Utilities have reversed part of their first quarter’s fall, thanks to a strong rebound in power prices. Moreover, the deep undervaluation of renewables developers has driven takeovers by big investment firms at very high multiples. Neoen’s main shareholders accepted an offer at 18 times the EBITDA. The sector is still significantly lagging the market in 2024 because of high interest rates. Should they fall, it would boost the sector.

We maintain our GBX 1,040 fair value estimate after National Grid released fiscal 2024 results that were in line with company-compiled consensus and a new 5-year strategic plan calling for a massive step-up in investments to be funded by a GBP 7 billion rights issue and noncore asset disposals. The firm will pay a GBX 58.5 dividend in fiscal 2024, 5.6% above last year. It extends its target to grow the dividend in line with inflation through fiscal 2029 with the caveat that the 2024 dividend will be rebased to take into account the rights issue's shares. All in all, we forecast a 2025 dividend of GBX 43.

We confirm our EUR 15 fair value estimate after no-moat E.On released solid first-quarter results thanks to the retail business. Shares appear undervalued despite an appealing dividend growth outlook and high earnings visibility.

E.On transformed itself in 2016 by spinning off Uniper, its commodities and power generation business, and ultimately selling its stake in Uniper to Fortum in January 2018 for EUR 3.7 billion. This deal refocused E.On on networks, retail, and renewables.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We maintain our EUR 11.40 fair value estimate as we roll over our model to incorporate the final 2023 results of no-moat E.On. The group set its 2024 guidance above our expectations and FactSet consensus. It rolled over its five-year business plan to 2028, materially increasing its investments on more favorable regulation of networks. The 2028 net income target is set 32% above the previous 2027 guidance and involves a 1.3% compound annual growth rate from 2023 and 6% when restated from one-offs during 2023. The target to raise the dividend by up to 5% a year has been extended to 2028. The 2023 dividend is set at EUR 0.53, 4% above 2023 and implying a 4.5% yield, below the sector's median of 4.9%. That said, the firm offers the longest-duration dividend growth commitment among the European utilities we cover.

We confirm our EUR 11.40 fair value estimate after E.On released preliminary 2023 earnings above its guidance but a bit shy of our estimates on the bottom line. Final results will be released on March 14. They should include guidance for 2024 as well as the 2023 dividend. We expect the 2023 dividend to amount to EUR 0.54, 5% above 2022, at the upper end of the group's targeted growth and implying a 4.3% yield, in line with the sector median. All in all, shares appear overvalued.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

We confirm our EUR 11.40 fair value estimate after no-moat E.On released solid 9-month results and maintained its 2023 guidance, which looks too conservative to us. Shares appear fairly valued.

European utilities have underperformed the European market by 4% year to date with most of the underperformance occurring in the third quarter because of the rise in interest rates. This overshadowed strong second-quarter results driven by the easing of the energy crisis, persisting commodity price volatility, and the hedging improvement. These drivers have persisted in the third quarter. Moreover, some power price clawbacks expired at the end of June like in Germany and Belgium. On the flip side, the comparison basis will be tougher as of the third quarter.

No-moat E.On released its final first-half results. There was no surprise since the firm had released them on July 28. They were materially above expectations, mostly thanks to positive one-offs that led E.On to significantly raise its 2023 guidance. Incorporating this drives an increase in our fair value estimate to EUR 11.40 from EUR 11.00. Shares are in 3-star territory.

E.On transformed itself in 2016 by spinning off Uniper, its commodities and power generation business, and ultimately selling its stake in Uniper to Fortum in January 2018 for EUR 3.7 billion. This deal refocused E.On on networks, retail, and renewables.

We confirm our EUR 11 fair value estimate after no-moat E.On prereleased solid first-half results, notably thanks to positive one-offs driving a raise in the 2023 guidance. Final results will be released on Aug. 9. Shares appear fairly valued.

We confirm our EUR 11 fair value estimate after no-moat E.On posted a strong earnings rebound in the first quarter, slightly above FactSet consensus. The firm now guides for the upper end of its 2023 guidance. We believe it will be exceeded. However, this appears more than priced in as the shares look overvalued.

E.On transformed itself in 2016 by spinning off Uniper, its commodities and power generation business, and ultimately selling its stake in Uniper to Fortum in January 2018 for EUR 3.7 billion. This deal refocused E.On on networks, retail, and renewables.

We plan to tweak upward our EUR 9.40 fair value estimate after no-moat E.On released final 2022 results, set 2023 guidance above our estimates and FactSet consensus, and rolled over its five-year business plan on March 15. The latter includes a step-up in network investments for a limited bottom-line accretion due to higher depreciation and interest rates. The company extends to 2027 its guidance of growing the dividend annually by up to 5%. This is the longest-duration dividend growth commitment among European utilities we cover. The dividend on 2022 earnings will amount to EUR 0.51, 5% above the year before and implying a 4.9% yield.