Enel Earnings: Good Start to the Year as Anticipated, Free Cash Flow Materially Improved

No-moat Enel ENEL released good first-quarter results, in line with the consensus it polled, and maintained its 2023 guidance. We should tweak upward our EUR 7.2 fair value estimate on the incorporation of recent disposals at high multiples. This will leave a good upside to the current share price.

First-quarter ordinary EBITDA grew by 22% to EUR 5.5 billion. Reported EBITDA increased by 5% to EUR 4.8 billion. The EUR 0.7 billion downside versus the ordinary EBITDA chiefly stems from solidarity contributions in Spain and Romania and discontinued operations in Romania and Greece.

The main positive driver was the retail business, mostly thanks to strong performance by the power-free segment in Italy as the year-ago quarter was hit by a margin squeeze caused by spiraling sourcing costs. Grid’s EBITDA jumped by 29%, mostly thanks to regulatory improvement in Romania. On the negative side, global generation and trading profitability in Italy dropped on lower power prices and volumes.

Ordinary net income increased by 2% to EUR 1.5 billion as the ordinary EBITDA growth was largely offset by net financial charges and minorities that more than doubled. The former’s increase was driven by higher debt and cost of debt, confirming our view that Enel is one of the most exposed European utilities to rising interest rates. The second’s increase was fueled by stronger growth in businesses with high amount of minorities like Spain, Latin America, and Romania. Reported net income tumbled by 28% to EUR 1.03 billion.

Enel maintained its 2023 guidance of a net ordinary income in a EUR 6.1 billion-EUR 6.3 billion range, well above our EUR 5.3 billion, which we should tweak upward. This is still below the guidance that is based on cost of debt assumptions that are too upbeat in our view.