First Take: €4 bn capital increase plan announced
News
EDF announced measures to strengthen its capital: EDF said it proposes a
€4 bn capital increase via a market operation by the closure date of the
2016 accounts and subject to market conditions and it will propose an
option to pay the dividend related to fiscal years 2016 and 2017 in shares.
The French government (which owns an 85% stake in EDF) said it will
subscribe to €3 bn of this capital increase and that it will take its 2016/17
dividend in shares. In addition EDF said that capex will average €12.5-
13.5 bn pa over the next 3 years and that a €10 bn disposals programme is
targeted by 2020. Finally, the cost-cutting programme will be increased to
at least €1 bn by 2019 (vs. 2015) from previous target of €700 mn by 2018.
Analysis
EDF’s announced measures would strengthen EDF’s balance sheet but at
the expense of dilution for EDF’s current shareholders as we believe the
cash would be needed to reduce leverage: a €4 bn capital increase is
equivalent to 17% of the current market cap of EDF. As a sensitivity, EDF
would trade on 11.7x 2018E P/E post-capital increase (based on Reuters
cons forecasts) vs. 9.8x pre-capital increase. We estimate these measures
would help in the medium term to reduce EDF’s leverage towards the
targeted net debt/EBITDA range of 2-2.5x. As a sensitivity, we estimate
that, assuming mark-to market of current French power prices (€28-
29/MWh), post €4 bn capital increase and €10 bn disposals, net
debt/EBITDA would be c.€2.2x in 2018E.
Implications
We have a Neutral rating on EDF. Our 12-month price target of €12.7 is
based on 50% SOTP (€9.8), 50% P/E relative value (€15.6). Our P/E valuation
is based on a 13.5 multiple in line with the 2004-14 sector average applied
25%/75% to our 2016/17 forecasts. Risks include higher/lower price level on
regulated tariffs; higher/lower nuclear output; higher/lower power prices.