EDF - Govt is now aware…but will it act fast enough and strongly enough?
Risk/reward still to the downside
Govt now aware of problems, but will action be timely and sufficient?
Recent statements by the Energy Minister Royal ("ready to green light nuclear life extension") and by the
Economy Minister Macron – "state ready to provide financing to EDF", and "transmission business
(c€13bn RAB) may be opened to partners" – suggest that the government is now aware of the
company's risks, and appears open to help. Having said that, we would flag that (i) most proposals "buy
some time", but don't address the problem at its core: at the forward curves, nuclear is FCF negative by
>€4bn pa; and (ii) most of the structural suggestions debated (carbon floor, capacity payment) may
either harm consumers (via higher bills) or not comply with EU legislation, and could therefore not be
implemented (at least not in a timely manner).
Scrip to 2020 would dilute EPS by c60% and up govt stake to almost 90%
As reported by http://www.challenges.fr/, EDF may extend its scrip dividend to 2020. Although at first
sight EDF's yield appears attractive (c11.5%), we believe extending a scrip-program would be negative
for two reasons. (1) Such plan would dilute EPS by c60% (Dec-2020). (2) It could increase the
government stake to 89%, which might appear as a partial re-nationalization, as suggested by our
report from late February.
Nuclear FCF negative, EPS negative by 2018E and B/S soon at breaking point
We believe the street hasn’t quite worked through the financial implications of: (i) the 2016 marketliberalization,
which has exposed a much larger share of nuclear volumes to the fluctuations of power
prices and (ii) the 35% decline in power prices over 1y. On the status quo (ie current forward curves and
no government intervention), 2015-18E EBITDA would drop by c30%, 2018E EPS would fall below zero,
and EDF would be FCF negative throughout 2020E, before disposals and dividends. This would bring net
debt to EBITDA above the 2.5x company-target by 2017E.
Valuation: Risk/reward still skewed to the downside
Our Sell rating is predicated upon the view that the street underappreciates the extent to which lower
power prices will impact earnings and B/S. Our base-case scenario assumes the current power forward
curves, the self-help measures already announced by the company and no government intervention. Our
€8ps PT is based on averaging our base/upside/downside scenarios, as detailed on page 3.