* Early signs suggest major strategy-shift: upside case +c25% total return
Recent developments – such as the likely disposal of US merchant assets and lower upstream capex –
seem to hint of a profound transformation, which might lead Engie to rotate up to 30% of the portfolio
(c€21-30bn). Exiting global merchant generation and upstream would allow the company to redeploy
capital in contracted generation and networks. This would bring three main advantages: (1) Complexity
and business-risk would significantly drop, thanks to a larger exposure to predictable earnings. (2)
Growth would improve as most activities would show mid-term c2.5% annual EBITDA growth (UBSe).
(3) Dividend coverage would improve: Engie could keep its €1 DPS and, by the end of the decade,
distribute more than 30% of its market cap.
* Restructuring likely to shift focus away from PE, onto SOP: execution is crucial
Divestments (which may partly happen via spinoffs or IPOs) may crystallize value; this could push
investors away from near term PE valuations – biased, as generation EPS are depressed – onto sum of the
parts; as a result the stock is likely to re-rate. Although this may simply remain a scenario analysis, it
appears supported by early signals. For our upgrade to work, over the coming 6m Engie would have to
show more tangible moves.
* Downside risk from here is limited even if nothing were to happen, in our view
Ongoing negative earnings revisions and the threat of a dividend cut would cap the shares, if we were to
assume management inaction. Yet, downside risk is limited as the stock may be "fundamentally
protected" by our base-case SOP valuation of €18.3ps, which values global merchant assets well below
pure-plays. By contrast, assuming mid-cycle PE valuations on 2017 EPS, the stock could face downside
risk to €14.2ps. Also, we estimate that the stock already prices in 20-25% DPS cut.
* Valuation: restructuring could remove "complexity discount". Upgrade to Buy
Such major rotation might suggest a SOP-based valuation approach, which we estimate at €18.3ps
before any restructuring. A successful completion of such scheme could up our SOP to €19.5ps, or 20%
above current levels (+26% tot. return). All of this, whilst paying >6% dividend yield. We upgrade to