* Earnings to 2017: A2A to CL-Sell; GDF SUEZ off CL, remains Buy
We see 8% EPS 2013-17 CAGR for the sector, with a broad range
We expect an average 8% EPS CAGR for the sector in 2013-17, with a broad
range between stocks – up as much as c.20%-40% for Drax, PPC, Veolia,
Shanks, Verbund and Centrica, but negative for EDP, Tauron and PGE. We
see higher power prices and capex as the main drivers of the sector’s
earnings growth.
Rating/CL changes: Centrica to Buy, A2A added to CL-Sell; Tauron
down to Sell, and PPC down to Neutral; GDF off CL-Buy
Mainly as result of recent share price moves, we make several rating
changes. We upgrade Centrica to Buy from Neutral as we believe the
valuation overly discounts the risk of a tariff freeze. We downgrade Tauron
to Sell as we believe the prospective earnings decline is not reflected in the
share price (7% P/E sector-relative premium 2014E). We downgrade PPC to
Neutral from Buy post share price outperformance. We add A2A (Sell) to
the Conviction List, while we remove GDF Suez from the Conviction List
(remains Buy) following recent outperformance. We update our forecasts
across our coverage to reflect higher capex medium term and other stock
specific changes. The average change to our EPS for each year through
2013E-17E is 0%-3% and our 12m price targets change by -7% to +6%.
A2A onto CL-Sell, 12m price target €0.67, 22% downside
We see 17%-20% downside to consensus 2014-15 EPS due to lower profits
from power generation, gas supply, networks and waste. Based on the
weak earnings outlook and low dividend yields, we expect the 17%-32%
sector-relative P/E premium in 2014-15 to reduce; we add A2A to the
Conviction Sell List, with a 12-month PT of €0.67, implying 22% downside.
CL comprises three Buys (E.ON, REE, Drax) and two Sells (EDP, A2A)
E.ON offers short-term mean reversion coupled with a material mediumterm
market recovery. REE continues to trade at a c.20% discount to
regulated peers; we expect this discount to close with further regulatory
clarity in Spain by year-end. In our view, Drax’s plan to convert at least half
of its coal-fired generation capacity to biomass burn is not fully reflected in
its share price relative to the sector. On EDP, beyond 15% 2014E EPS
downside risk to consensus, we see risk from further government
intervention in Portugal and a potential dividend cut.
