EDF- Upgrade to Buy: shares could double if €30 carbon floor is enacted
A worst-case outcome for EDF now seems less likely after the Government backed the company with a bigger
than expected €4bn capital raise. At the same time, the key upside risk has become more credible after
President Hollande stated that France will adopt a unilateral carbon price floor. Many questions remain (carbon
floor viability/terms/timing), but the balance of risks has shifted to the upside, in our view. Upgrade to Buy
with PO rising to €15.7 (36% upside potential). In a bull case scenario, where French power returned to €40-45
and EDF re-rated to the sector multiple, the shares could potentially double.
German Utilities reject nuclear commission recommendation
After months of deliberations, the German nuclear commission (KFK) has finally reached a unanimous
recommendation that the nuclear operators transfer €23.3bn to the German government to cover long-term
nuclear waste liabilities. This equates to a 35% risk premium on top of €17.2bn of nuclear waste transport,
interim and final storage liabilities. We estimate that E.On will be required to fund €10.0bn in total (inc. €2.6bn
risk premium) and RWE €6.2bn (inc. €1.6bn risk premium). The nuclear operators have rejected the
recommendation, arguing that the premium is too high (press reports suggest their maximum was €21.8bn). In
addition, the need to fund €17.2bn immediately could prove problematic. We believe there is now scope for
negotiations between the government and the operators to resolve the outstanding issues. In particular, we
still believe there is scope for a deal around the nuclear court tax and phase out cases. (full note also attached)
Vestas - Particularly good entry point into long term story, Buy
Reiterating Buy on top global renewable play, 46% upside potential: We view investor positioning on Vestas
as overly negative and shares have lagged (-9% YTD) despite 17-18% 2016-17 EPS upgrades since FY results. We
think the market is overly concerned about some short term risks (Q1, SunEdison bankruptcy) and we see FY16 as
well supported (we expect Vestas to reiterate FY16 guidance this Friday). We see positive potential catalysts in
2H16 (US order pickup, buybacks) and think current weakness offers an enhanced buying opportunity (46% upside
potential to our DKK630 PO). Our long term positive thesis on Vestas is unchanged (beneficiary of thematic
renewable transition, long term growth, net cash and shareholder returns). 2016-17E valuation seems appealing
(c10X EV/EBIT, 15x P/E ex half net cash), especially vs. EU industrials (12-13x EV/EBIT, c16x P/E) have which
rerated. Vestas’s 2017E FCF yield is 6% but rising to c8% by 2019.