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Enel’s Attractive Fundamentals are not Priced In

Business Strategy & Outlook:   

Enel has been suffering from high leverage stemming from the acquisition of Endesa at the top of the cycle in 2008. Sovereign debt crises in Spain and Italy and economic doldrums in these countries led to the implementation of adverse regulation for utilities. After 2014, the regulatory and economic backdrop in Enel’s core markets has stabilized, and a new strategy aiming to boost organic growth and streamline the group organization has been implemented. Management reduced costs while increasing growth investments in regulated networks and renewables and strengthened control of its fastest-growing Latin America and renewables businesses by delisting Enel Green Power in 2016 and buying out Latin America activities from its subsidiary Endesa. 

The energy crisis, which started in 2021 has put energy affordability at the forefront of the political agenda of European countries, increasing political risk. Nonetheless, measures mulled by the Spanish government in 2021 to tackle soaring energy prices have been significantly amended so their impact on Enel’s Spanish subsidiary Endesa will be fairly limited. Likewise, windfall taxes taken by the Italian government will have a limited impact on earnings as they will spare hedged power production and will be applied only above EUR 60/megawatt-hours. At end-2021, Enel had 50 gigawatts of installed renewable capacity, the highest among European utilities. The firm intends to increase its solar, wind, and batteries capacity by 19 GW by 2024, or 6.33 GW per year. Thanks to higher renewables generation, the firm intends to lower the cost of energy sold by enhancing its integrated model through the reduction of its short position. The group pledges a fixed dividend of EUR 0.4 and EUR 0.43 in 2023, implying an annual growth rate of 6.4%. In 2024, Enel targets a flat dividend of EUR 0.43. By assuming a 70% payout ratio in 2025 and 2026, forecast a 2021-26 dividend CAGR of 5.5%, in line with its earnings growth.

Financial Strengths:  

The forecasted net debt to increase from EUR 51.6 billion at end-2021 to EUR 57.6 billion at end-2022 on high investments and involving a net debt/EBITDA ratio of 3 times, in line with the guidance. The net debt shall peak at EUR 61 billion in 2023 before falling to EUR 55 billion in 2026, notably thanks to the EUR 7 billion disposals planned by the group. Net debt/EBITDA ratio would peak to 3.05 in 2023 before receding to 2.5 in 2026 on increasing EBITDA and a net debt decline. The projected ordinary EBITDA/net interest expense and net debt/equity to average 9.5 times and 1.25 times, respectively, through 2026. All said, posit Enel will be able to fund its investments and dividends without tapping the stocks market. In line with its 2022-24 business plan, factor in 2022, 2023 and 2024 dividends of EUR 0.4, EUR 0.43, and EUR 0.43, respectively. In 2025 and 2026, assumed a 70% payout ratio involving a 2026 dividend of EUR 0.5 and 2021-26 dividend CAGR of 5.5%.

Bulls Say: 

  • Enel’s diversified profile and leadership positioning in renewables and networks offers solid and visible earnings growth.
  • Strengthening of the Brazilian real and the U.S. dollar will support earnings.
  • Enel boasts higher returns on invested capital than its peer Iberdrola.

Company Description: 

Enel is a diversified energy company domiciled in Italy. Operations are concentrated in Italy, Spain, and Latin America. The firm’s primary activities are electric generation, electric networks, and gas and electricity marketing. Around 50% of the company’s EBITDA is derived from its regulated networks. Taking into account power sold through power purchase agreements in Latin America, around 70% of EBITDA is quasi-regulated. Enel is a giant in global power generation with 86 gigawatts of capacity, of which 39 GW is renewables, including a large share of hydro.

(Source: Morningstar)

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