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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.

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.