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Trading backfires, but generation and UK improve; cash flow continues to suffer
11 Aug 16
Given the positive first quarter results, the group had a difficult second one as it missed all the market forecasts with revenues decreasing 3.8% yoy to €23.9bn, with EBITDA contracting 5.5% yoy to €3.11bn and the operating result falling 7.2% yoy to €1.88bn, both below market consensus. The major reason for this was the poor performance of the trading division that had a relatively strong first quarter and significant losses in the second, which is now expected to be below the 2015 level for the year. However, given a relatively low effective tax rate (8%) the group had a 10.1% increase in adjusted net income to €598m, but still fell short of expectations by 8.2%. On a reported basis, net income decreased by 73.8% yoy to €457m. Net debt increased by 11.1% ytd to €28.28bn driven by a negative operating cash flow (-€1bn) due to margin calls on hedge positions and negative working capital, where the 30% drop in capex and no dividend payments was not enough to compensate a €1.7bn fall in free cash flow. This and the increase in pension provisions (+€1.9bn) due to low interest rates have pushed net debt upwards. The group maintains its full-year guidance with EBITDA at €5.2-5.5bn, operating profit at €2.8-3.1bn and adjusted net income of €0.5-0.7bn. The IPO of the new company “Innogy” (renewables, networks and retail) continues on schedule, with separate operations expected to start from 1 September 2016 and a listing expected before the end of the year.
Interesting spin-off proposition and possibility for value creation: Innogy
01 Jul 16
RWE’s management presented on 30 June 2016 the new profile of the company that will be created from the spin-off: Innogy. This will be a company focused on distribution networks (€13.3bn RAB), renewable energy (3.1GW installed) and retail (23m customers). The listing will start with 10% of Innogy via a primary offering expected in late 2016, while a further placement of Innogy may be possible via a secondary offer at the same or different time. Innogy will have a more stable earnings contribution and a lower exposure to commodity price movements as 60% of its EBITDA will be generated from regulated or semi-regulated business such as network infrastructure and renewables. The remaining part will be linked to hydro generation (classified within the renewable business, but with exposure to price movements as they are not covered by feed-in-tariffs or PPA contracts) and retail. In terms of the financial profile of the new company, based on 2015 values, Innogy would have €4.5bn in EBITDA (61% networks, 21% retail and 18% renewables). The payout ratio has been set at 70-80% of adjusted net income, and net income for 2015 is currently estimated to be around €1.6bn. A €6-7bn planned capex programme will be attributed to Innogy, whereby both dividend payments and capex are expected to be fully covered by operating cash flows (with an expected 70% CFOA/EBITDA conversion ratio). In terms of debt expectations, all senior debt will be transferred to Innogy, although for the moment the hybrids will remain within RWE AG as it may put Innogy’s equity levels at risk. The balance sheet and capital structure expected would be based on a 4.x net debt/EBITDA ratio, which has been raised from the previous expectations of a 3-3.5x ratio. For the moment, given the low float initially proposed, rating agencies have decided that Innogy would not be able to hold a separate rating notation. No information has yet been provided in terms of growth expectations or any forward looking variables as this has been considered for the moment sensitive information prior to the IPO, additional information is expected at a later stage. Moreover, RWE’s management has reiterated once again Innogy’s listing as a priority, even under the current environment of volatile markets and increasing political uncertainty.
Trading and one-offs boost results; cash flow suffers; guidance maintained
12 May 16
A positive start of the year for the company even if revenues fell 6% yoy to €13.65bn, which is in line with expectations, but EBITDA rose 5% to €2.31bn beating forecasts mainly driven by an unusually high trading performance. Operating income followed the same path helped by lower depreciation expenses to a 7.1% yoy increase. However, higher financial expenses and lower contribution from minorities pushed adjusted net income to €857m, which is a 2.3% yoy decrease but is 29% better than expected. On the other hand, net debt increased 11.1% ytd to €27.9bn, due mainly to negative free cash flow despite the decrease in capex and a substantial increase in pension provisions. The group has adjusted upwards its expectations on net debt because of this. Moreover, despite the good results, the group still maintains its guidance, which seems conservative (net income between €500m and €700m), as it does not expect the good performance to continue.
Uncertainty over future dividend payment and operating cash flows
08 Mar 16
No major surprises in the RWE results as the group previously published that net income would finish in negative territory (-€170m), a dividend suspension for the common shares and substantially lower guidance. Nevertheless, there is no reassurance on future dividend payments as the dividend policy depends on growth opportunities’ indebtedness and the earnings situation, with an expected decrease of 37-55% in net income next year, increasing the doubts that a dividend would be paid next year. In addition to the negative results on the generation side of the business, the UK business (NPower) continues to underperform as it had an operating loss of €137m due mainly to billing problems with its residential customers and substantial customer losses to competitors. No recovery is expected before 2018, when a substantial restructuring process should have begun with an expected quarter reduction in the workforce (2,400 job reductions). Operating cash flows deteriorated substantially (-40% yoy) driven by lower margins and the payment of CO2 allowances reaching €3.34bn. Capex was reduced by 4% to €3.3bn, taking almost all the operating cash flows of the group. Net debt is not expected to decrease anytime soon, despite disposal objectives (€1.8bn). Concerning the NewCo separation, a more detailed schedule has been provided. The operational start of the NewCo is expected on 1 April 2016, with a full implementation of the new structure on 30 June 2016 and the planned IPO in Q4 16.
Dividend suspended and 2016 profit warning
17 Feb 16
Prior to the full-year results, RWE has suspended the dividend payment for 2015 on common shares and the payment of €0.13 for preferred shares. Moreover, the group has announced that it would book €2.1bn in impairments on its German and UK generation assets, added to a €0.9bn write-down on deferred taxes. RWE has presented preliminary unaudited results for 2015 with EBITDA reaching €7bn, operating profit at €3.8bn and adjusted net income at €1.1bn, with reported net income in negative territory reaching -€200m. The company has also provided a substantial cut in 2016 guidance with EBITDA expected between €5.2bn and €5.5bn and net income between €500m and €700m.
Strategy change for renewables, networks and retail: a 10% IPO in 2016
02 Dec 15
Following E.On’s approach and the changes in the German electricity market, RWE has decided to include renewables, networks and retail activities in a new subsidiary to be listed on the stock market. The IPO would include around 10% of the new company’s share capital to be offered to the public in late 2016. The proceeds from the new company's IPO will be mainly used to finance growth investments in the new company. The new company will have a leverage target of 3.0x to 3.5x net debt/EBITDA post IPO, with an expected EBITDA between €4.3bn and €4.5bn. The new company would employ around 40,000 people, 66.7% of RWE's current staff. No changes on the assets to back nuclear liabilities. RWE will remain the majority shareholder of the new company. The parent company (RWE) will focus on power generation and energy trading.
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Fighting the waves
25 Oct 16
Management action in response to a tough trading climate and falling profits should contribute to a sound recovery in profits next year. Following share price weakness, the group is valued at a substantial discount to both the broking market leader Clarkson and to other peers. Meanwhile, if the dividend can be held, the shares offer a well above-average yield, pending an eventual improvement in trading conditions.
21 Oct 16
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N+1 Singer - Morning Song 21-10-2016
21 Oct 16
Xaar has announced that its FD, Alex Bevis, will be leaving to pursue other opportunities after almost 6 years with the group. A search is underway for his replacement and Alex will remain with Xaar until 24th March 2017. While Alex’s departure is disappointing, Xaar’s strategy remains on track, with new product launches expected to drive near term organic sales growth and a target of £220m sales by 2020. This reflects stronger leverage of Xaar’s innovative technology into a broader spread of end products and markets, with the £220m expected to be composed of broadly equal contributions from ceramics, packaging & product printing, Thin film/P4, and partnerships/M&A. Prospects for the group are exciting, with positive news flow on product launches and end markets anticipated over the year ahead.
FY17 expectations unchanged. Interim dividend maintained
25 Oct 16
Interims reflect tough markets which impacted Technical. Shipbroking delivered a resilient result and Logistics has performed well. The interim dividend has been held at 9.0p. The group anticipate an improvement in H2. The Board’s expectations for the year are unchanged based upon the strength of the order book due in H2, its ongoing market coverage and the benefits of action taken previously. We have retained our FY2017 PBT forecast of £8.7m and a maintained dividend. We reiterate our Buy and adjust our TP to 450p.
N+1 Singer - Morning Song 20-10-2016
20 Oct 16
A highly disappointing update from Senior reports a number of issues adding up to the Group being behind expectations. Following the Flexonics issues over the past 12 months, there are now issues on the Aerospace side which are affecting the outlook. In a period when some stability was required, this is disappointing. We have downgraded FY16 EPS by 6.8% and, whilst we see Senior remaining a US takeover target, we move from Buy to Hold (target price down from 262p to 196p) until more clarity is available on the direction of the Group.