EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act

Business Strategy & Outlook

EDP is the European utility with the second-largest weight of renewables (behind Orsted), accounting for two thirds of the group’s EBITDA. They consist of EDP Renovaveis’ wind and solar assets chiefly located in the United States and Iberia and EDP’s hydro assets in Iberia and Brazil. Renewables are the main growth driver as per estimates due to the commissioning of new capacity and capital gains from asset rotations. EDP plans to install 12.5 GW of net capacity by 2025 or 2.5 GW per year, still less than 4 GW-6 GW planned by Enel, Iberdrola, or Engie but almost 3 times as much as 0.9 GW of the previous 2019-22 business plan. As the third-largest renewables player in the U.S. through EDP Renovaveis, EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act. The second-largest division is formed by EDP’s electricity networks in Iberia and Brazil, contributing around one third of EBITDA. Networks’ profitability will grow thanks to investments in Brazilian networks and indexation to high inflation. The third division is client solutions and energy management, which weighs around 5% of group EBITDA. It is composed of Iberian thermal power plants and supply activities.

The almost zero implicit valuation of EDP’s Iberian operations when stripping out the market value of EDP’s stakes in its subsidiaries EDP Brazil and EDP Renovaveis reflect an excessive holding discount. To eliminate it, EDP’s management is contemplating changing the group’s capital structure. This could lead to a “reverse acquisition” of EDP by EDP Renovaveis. Such a situation where a subsidiary acquires its parent is called a downstream merger. The subsidiary buys back its shares from the parent and then redeems them or issues them to a shareholder in the acquiree. Consequently, the merger may be completed without increasing EDP Renovaveis’ share capital. EPS will grow annually by 9.9% on average through 2026 and a return to dividend growth as of 2023.

Financial Strengths

Net debt to increase from EUR 11.57 billion in 2021 to EUR 16.7 billion in 2026 as organic operating cash flow will be too low to cover hefty investment plan and dividend payments. The net debt/EBITDA to decrease from 3.1 in 2021 to 2.9 in 2026, averaging 2.8 during the period. Net debt/equity will average 0.9 through 2026. EBIT/net interest coverage will strengthen from 4.5 in 2021 to 5.5 in 2026. EDP’s dividend policy is based on a floor of EUR 0.19 per share, equal to the dividend paid since 2012, and a 75%-85% payout ratio. Taking the maximum between EUR 0.19 and an 80%-based dividend, the earnings estimates point to a EUR 0.19 dividend in 2022 and an average annual growth of 11.3% between 2022 and 2026.

Bulls Say

Being an early mover, EDP has an attractive portfolio of renewables assets, especially in the U.S.
EDP should beat its 2023-25 financial targets due to soaring power prices in Europe.
EDP might push EDP Renovaveis to do a downstream merger to eliminate the holding discount.

Company Description

EDP is a vertically integrated utility company and is the largest generator, supplier, and distributor of electricity in Portugal. In addition to Portugal, EDP has sizable operations in Spain, Brazil, and the U.S. EDP owns 82.6% of EDP Renovaveis, the third-largest wind power owner/operator in the world. EDP also owns 51% of Energias do Brasil, an electric utility that serves a population of almost 8 million.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.