We upgrade Enel Green Power to Buy and raise our share price target to €2.00 to
include a 20% takeover premium. We retain our Buy recommendations on Enel
and Endesa.
- Our Buy rating on Enel is based on a belief that the market is under-estimating
the potential efficiencies to be wrung out of the group restructuring measures.
Developing line of sight management is a first step in this process. Global
Business Lines is the second, which should ensure much better capital
allocation as well as best practice efficiencies. Quite rightly, the market has
been focused on falling Italian bond yields for the last two years. Now it is time
for that focus to shift to fundamentals.
- Our Buy rating on Endesa is predicated on a special dividend, paid as early as
2016 (on 2015 earnings) and our forecasts being ahead of consensus. With both
generation and distribution being mature businesses, the Enel group is
running Endesa as a cash cow, with consequent benefits.
- Our Buy rating on Enel Green Power is based on Enel buying out the
minorities at a price of €2.00 per share.
Squandering away Enel group’s biggest growth driver: Despite only accounting
for 12% of Enel group’s 2015 EBITDA, Enel Green Power (EGP) accounts for 50% of
Enel group’s EBITDA growth 2016-2019E. Yet Enel only owns 69.2% of EGP,
effectively squandering away growth to minorities. We think it makes sense for
Enel to buy out the minorities of EGP. It would only cost the company c€3bn
(assuming a 20% premium). That could be financed by a special dividend from
Endesa.
Endesa could finance the EGP minority buyout: Endesa, 70% owned by Enel,
could pay a €4bn special dividend in 2016. By our estimates, Endesa’s balance
sheet headroom is c€5bn (with gearing at 3.0x, the general sector benchmark for
vertically integrated utilities, versus 1.4x currently). Coincidentally, distributable
reserves are also €5bn. We now assume that Endesa will pay a €4.0bn special
dividend on 2015 earnings, in 2016, one year earlier and €1.0bn higher than we
previously forecast. Endesa has repeatedly said “we give ourselves a couple of
years to find additional opportunities to invest… we would consider paying an
extraordinary dividend, but indeed that would not occur before 2016”, Paolo
Bondi, CFO Endesa, FY14 conference call. As we have argued (see Awash with cash,
29 July), we see limited opportunities in Iberian M&A, implying that Endesa will
more likely pay a special dividend than find substantial investment opportunities
in Iberia. In any case, these investments would have to be cleared by the new
Global Business Lines, which would look at alternative uses of funds, ie buying out
EGP.
Earnings accretive to Enel: Whilst this is not our sole measure of value creation,
EPS nevertheless rises by c3%. Assuming that raising €4bn (at Endesa) would cost
2.0%, that would be an after-tax cost of €56m. We estimate 2015 minority interests
on EGP at €144m in 2015, escalating to €205m in 2018. On that basis, this deal is
accretive from day one, assuming a 20% buyout premium.