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We have dropped our coverage of Hera owing to internal reorganisation. Our valuation range and estimates are therefore no longer valid.
HERA Hera S.p.A.
Hera posted a great performance in the first nine months of 2023, with increasing contributions from Electricity, Waste, and Water, while Gas earnings decreased moderately in Q3 following a weaker start to the year. Earnings benefited from both an organic effect with the acquisition of new customers and M&A transactions. No guidance has been communicated for FY23 but these results are in line with the expected growth in the 2026 trajectory.
Solid Q3 trends; on track to reach FY23 consensus profitability estimates Q3 EBITDA growth was c. 18% YoY (to EUR289m) thanks to a positive performance in the electricity sector, which continued to benefit from higher unitary margins and higher sales from energy efficiency projects. On the contrary, the gas sector suffered from a tough basis of comparison as it normalized in 2023 and waste EBITDA was flattish in Q3 despite the consolidation of ACR. The customer base growth accelerated to c. +9% in 9m (vs c. +8% in H1 23) thanks to c. +19% growth in electricity customers. 9m NP grew by 10% in line with the trend expected by consensus for FY23 (+8.3%e). ND was stable at EUR4.149bn (vs EUR4.146bn in H1 23) as the option to ask for delays to bill payments after the floodings in Romagna region was prolonged until end October. The leverage ratio stands at 2.9x and in our view should decline thanks to NWC by year end. Capex grew double digit in Q3 (+18%) to a total of EUR516m for 9m 2023 (+16% YoY in 9m). Conf call feedback: regulatory returns higher next year, still low visibility on Q4 results Regulatory returns were up by 90bps in gas, 80bps in electricity and an estimated 80bps for water. Management did not disclose expectations for Q4. Fair value range confirmed at EUR3.1-EUR3.5 We maintain our current FV range of EUR3.1/EUR3.5, which is based on a DCF for the lower end of the range and a peer-multiple methodology for the upper end. Valuation still offers some upside as it trades at 1.1x EV/CE with returns expected to improve thanks to the regulatory WACC, revised up for next year, and ongoing strong growth in investments and customer acquisitions.
On the same track as in the first quarter and with little surprise, Hera published a solid H1 23 with rising earnings in Electricity, Waste and Water, whilst Gas decreased moderately after a mild winter that weighed on the Q1 23 earnings. The group does not provide a FY 2023 guidance but remains confident that it can deliver the financial objectives of the Business Plan 2026.
Q2 2023 above our expectations due to supply margins expansion Hera has unveiled its Q2 2023 results, which were higher than our estimates: EBITDA +19% YoY, EBIT +21%, net income +7%. The main driver of this set of results was the electricity division, which took advantage of higher unitary margins. Net Debt reached around EUR 4,146m, up vs. EUR 3,815m posted as at the end of Q1 2023. This dynamic is mainly connected with the dividend payment, the capex deployment and a temporary NWC effect linked to the flood in the Emilia Romagna region (option to ask for bill payment delays to the end of August). Conf. Call feedback: NWC impact of gas stocking, cost of debt, debt/EBITDA ratio The company has started a new gas stocking process ahead of next winter season and the potential NWC impact ought to be limited to roughly 20/25% of what was experienced in 2022 in light of current gas prices. The cost of debt reached 2.9% in H1 2023 and the company expects this level to remain substantially stable till the end of 2023. The debt/EBITDA ratio was 3.0x at the end of H1 2023 and is expected to remain stable in the coming months. This provides the company with the flexibility needed if MandA opportunities materialise. ACR integration and potential synergies ACR, the company acquired late in 2022, contributed with ca. EUR 8.8m in terms of EBITDA to H1 results. On a FY basis, the management expects ACR to generate an EBITDA contribution of ca. EUR 19/20m. In 2024, on the back of potential achievable synergies of about 20/25%, ACR ought to contribute nearly EUR 24/25m to the consolidated EBITDA. Fair value range confirmed at EUR 3.1/EUR 3.5 We maintain our current valuation range of EUR 3.1/EUR 3.5, which is based on a DCF (EUR 3.1; WACC @ 6.8%; LT growth @ 2%) and on a peer-multiple methodology (avg. of 2023-2024 EV/EBITDA multiple points to EUR 3.5).
Hera published a solid Q1 performance with strong organic growth in its two most strategic growing business units, energy and waste, amidst resilience for the gas segment. The Group will continue to focus on these strategic business units, both internally and supported by M&A, as outlined in its 2022-26 strategic plan presented earlier this year. We are confident in the group’s strategy, particularly with regard to the moderate 2.84x leverage and its past experience in delivering on acquisitions (>40 since 2002).
Q1 2023 a tad higher than expected. Debt reduction driven by gas destocking Hera has unveiled its Q1 2023 results, which were a tad higher than our estimates: EBITDA +9% YoY, EBIT +7%, net income +1%. Net Debt reached around EUR3,778m, down vs. EUR4,250m at end 2022. This dynamic is mainly connected with the reduction in stored gas. We note that the level of gas stored was at 55% of the capacity as at the end of March, which compares with ca. 84% at the end of 2022. Hera was one of the largest contributors to the gas inflows in the storage sites in 2022 (the impact was ca. EUR504m in terms of NWC at the end of 2022, EUR878m as at the end of Q3) and one of the main beneficiaries in the reduction of gas stocks registered in Q1 (the NWC gas destocking positive impact was ca. EUR400m in Q1 2023). Conf. Call feedback: gas stocking, FY NWC dynamic, Trieste WTE The company is ready to start a new gas stocking process in view of the next winter season even though the potential NWC impact will be limited in light of the current gas prices. Overall, Hera expects the NWC to not change considerably in the next quarters if prices remain at the current levels. The Trieste WTE plant, back in operation, ought to contribute with ca. EUR8m of EBITDA. The WACC revisions ought to add ca. EUR25/30m of EBITDA in 2024 The current regulatory framework entails a revision of the allowed return for the regulated activities effective from January 2024. According to company guidance, this may generate a roughly 80/85bps increase in the returns/WACCs, with a potential ca. EUR+25/30m effect on EBITDA in 2024 (ca. 2.5%), which is not included in the company''s business plan since Hera has assumed flat allowed returns over the 2022-2026 period (we adopted the same conservative approach). Fair value range confirmed at EUR3.1/EUR3.5 We maintain our current valuation range of EUR3.1/EUR3.5, which is based on a DCF (EUR3.1; WACC @ 6.8%; LT growth @ 2%) and on a peer-multiple...
A more favourable context: easing inflation, rate hikes end and allowed returns upside Easing inflation pressure and the potential imminent end of rate hikes are positive elements for the Italian utility sector and thus for Hera (easier refinancing/debt cost management/DPS appeal). In addition, based on the changes of parameters that drive the revision of the WACC/allowed return, we estimate that the theoretical change in the allowed return would be 0.94%, which could mean the new allowed returns, effective on January 2024, could be increased by 94bps. What to expect in Q1 2023: EBITDA up by more than 7% YoY, debt down by ca. 10% Q1 2023 was defined by lower energy prices and gas stored volumes. We expect these elements to be a positive driver for Hera as it has almost no exposure to the power generation, with supply margins locked-in when the contracts are signed, a positive NWC effect due to gas destocking, lower shaping costs. Factoring in also the MandA contribution, we estimate Hera to post an EBITDA increase of ca. 7% YoY in Q1 2023 while net debt ought to be down by ca. 10%. Management team reshuffle: continuity and innovation In almost 1 year, Hera has changed its CEO and its CFO and it is going to change its Chair. While the new chair and the new CFO are managers with a long experience inside the group and should provide continuity to the company, the new CEO was an external hire. Considering that the new CEO has already spent almost one year in Hera, we believe the ramp up phase is over, and this is testified by the leading role he had on the new business plan recently unveiled. This new management team is leveraging on the work done in the past, setting a clear strategy and growth path while at the same time adding new potential initiatives and innovation. Valuation range confirmed at EUR 3.1 to EUR 3.5 We confirm our valuation range of EUR 3.1/EUR 3.5 per share, which is based on a DCF (EUR 3.1; WACC @ 6.8% and LT growth @ 2%) and...
Hera reported FY2022 results above the market consensus and the group’s outlook, but below our expectations, unsurprisingly mainly attributable to growth in the gas activities as well as the waste management business unit, amidst a soaring energy price environment. The regulated activities suffered from a lower revised WACC although this was notably offset by good progress in the unregulated businesses, through energy transition solutions, circular economy and solutions. The group increased its dividend by 4% to €0.125/share, confirming the resilience of Hera’s business model.
No surprises from Q4 2022 results. Dividend yield at ca. 5% Hera has unveiled its Q4 2022 results, which were in line with the preliminary figures unveiled early in February when the company announced its new business plan: EBITDA + 23% YoY, EBIT +36%, net income +315%. On a FY basis, EBITDA was up ca. 6% YoY, EBIT +3% and net income -4% (ca. +1% if we exclude 2021 positive one-offs). The net financial position reached EUR 4.25bn, with a net debt/EBITDA ratio of 3.28x (ca. 2.9x if we exclude the impact of the stored gas costs of ca. EUR 504m). Hera is distributing EUR 0.125 p.s. as a dividend on 2022 results (implied yield ca. 5.1%). Conf. Call feedback: MandA, refinancing needs, WACC revision The company is actively scouting the market in search of potential opportunities. The sectors of focus are waste and energy supply. Hera has no major short-term refinancing needs (2023-2025 maturities represent only 12% of its market cap). On the regulated activities, the company expects the WACC trigger activation in 2024, with a positive impact in the range of 80/85bps as at today (ca. EUR 25/30m in terms of EBITDA, which is not included in the recently unveiled business plan. A positive 2023 outlook The 2023 outlook is positive, considering that in the waste sector Hera is due to take advantage of the MandA performed and the contribution of the WTE plants revamped in 2022 (EBITDA impact ca. EUR 30m). In addition, the normalisation of the energy costs coupled with the renegotiations of the expiring contracts should provide the company with a further upside YoY. As regards the stored gas costs, Hera estimates almost full reabsorption by the end of Q1 2023. Fair value range confirmed at EUR 3.1/EUR 3.5 We maintain our current valuation range of EUR 3.1/EUR 3.5, which is based on a DCF (EUR 3.1; WACC @ 6.8%; LT growth @ 2%) and on a peer-multiple methodology (avg. of 2023-2024 EV/EBITDA multiple points to EUR 3.5).
With a well-balanced business mix and almost no exposure to fluctuations in energy prices/windfall profit taxes, we expect Hera to benefit from steady growth, no major short-term refinancing needs and relatively low leverage. The new plan increases visibility and confirms the dividend policy. 2023 Outlook for Sector Valuation and Performance The sector screens a touch expensive vs. the market but it maintains its historically superior dividend yield and still offers an attractive earnings yield-bond yield spread despite the rise in rates. We think this leaves market-relative valuation looking attractive overall given the sector''s defensive characteristics going into a potentially recessionary 2023. 2023 Sector Outlook for Financing and Debt - Hera scores quite well Rising cost of capital is arguably one of the most important topics in the sector for 2023. Despite the strong move in rates, the results of our analysis are overall reassuring. Hera is well positioned relative to the sector, considering that it has no major short-term maturities, the debt is expected to decline over 2022-2025, and it does not rely on farm-downs to finance new developments. We lower estimates, but remain ahead of the company''s targets The recently unveiled 2021-2026 business plan is consistent with the strategy announced last year, points to a sound growth, a more balanced EBITDA mix, a further increase in capex and confirms the dividend policy. We have fine-tuned our estimates, increasing adj. EBITDA by ca. 1% but lowering net income by ca. 3%. We remain ahead of the company''s 2026 targets on both metrics. Valuation range of EUR 3.1 to EUR 3.5 We lower our valuation range to reflect the lower estimates, higher debt, a slightly higher WACC and peer de-rating. Our range is based on a DCF (EUR 3.1; WACC @ 6.8% and LT growth @ 2%) and peer multiples (EUR 3.5; reflects the avg. of 2023-2024 EV/EBITDA multiples).
The new strategic plan introduced by Hera for the 2022-26 period highlights a better balanced business model between regulated activities and liberalised businesses, still focused on waste, networks and energy. After an unprecedented year, the group reported a 19% higher than expected dividend to €0.125 for 2022 and intends to invest more than €4.1bn by 2026, up by 59% vs the last 5-year plan, on a more well-balanced strategic plan, leveraging on both organic growth and M&A operations.
The results reported by Hera for the Q3-2022 again highlighted a resilient business model, especially in such a volatile environment with many uncertainties. Despite the current energy crisis, the Italian utility showed its robustness thanks to its diversified activities, combined with a well-balanced profile between internal growth and M&A. The group continues to make significant investment in its transition to renewable energy as well as a strong effort in gas storage.
A resilient set of results, bang in line with our estimates Hera has unveiled its Q3 2022 results, which were bang in line with our estimates: EBITDA almost flat YoY; EBIT -3% and net income adj. -30% (due to higher provisions linked to higher prices/revenues). The main EBITDA drivers were the positive performance in the energy efficiency sector, the quality premia in the water and businesses and the higher contribution of the plastic recycling business. Net debt reached EUR 4.49bn, up vs. EUR 3.68bn posted as at the end of Q2 2022 with an implied Debt/EBITDA (12m rolling) of ca. 3.6x, or 2.9x if we exclude the gas storage impact. Results are confirming the company''s resilience in a difficult environment. Conference call feedback: gas destocking and NWC reduction in Q4, opportunities on FUI Gas volumes stored are ca. +40% YoY as at the end of Q3 2022. In normal conditions, without additional inflows, inventories go down by nearly 40/45%% in Q4. It is also worth noting that seasonal NWC trends usually entail a positive effect on Q4, further helping the debt reduction by year end. In addition, the current scenario is due to provide the company with opportunities linked to the ''Fornitore Ultima Istanza'' gas market, on which Hera has a leading role. ACR adds to the list with huge potential The company has provided some details on the recently announced acquisition of a 60% stake in ACR (2021 EBITDA ca. EUR 17m), one of the leading players in the remediation sector in Italy. Based on our estimates, the implied EV/EBITDA multiple paid is ca. 6.5x, in line with the historical multiple paid by Hera in this sector, while synergies may reach up to 30% of the acquired EBITDA. Fair value range confirmed at EUR 4.2/EUR 4.5 We maintain our current valuation range of EUR 4.2/EUR 4.5, which is based on a DCF (EUR 4.5; WACC @ 6.5%; LT growth @ 2%) and on a peer-multiple methodology (avg of 2022-2024 EV/EBIT multiple points to EUR 4.2).
Nothing seems to be able to disrupt Hera’s business, not even an energy crisis. The group posted moderate but real growth for every business unit, with group EBITDA up by 3.3%. Although the net profit struggled to reach positive territory due to higher D&A and extraordinary taxes, the guidance and targets have been confirmed.
Hera’s FY21 results came in line with both the consensus and our expectations. The business was supported by the two strong pillars: gas activities and waste management. The dividend of €0.12 per share is fully in line as well. We confirm our positive view, supported by strong fundamentals and great outlook in promising businesses.
The new five-year strategic plan to 2025 is marked by strategic adjustments rather than clear surprises. Although EBITDA targets by 2025 seem conservative, a strong acceleration in capex (+59% vs the previous plan) and a focus on Waste activities embody the growth drivers. An acceleration in dividend distribution also allows it to offset the historical decrease in dividend yield lasting a decade, good news for shareholders. We reiterate our confidence and positive recommendation.
A mixed set of results from Hera as the sequential acceleration in gas and waste activities was offset by a very bad performance in the electricity business. Group EBITDA remained 9.6% higher yoy, and adjusted net profit +8.2%. There was a slight miss, however, on net debt (+12%) following active M&A and higher capex. Positive view confirmed.
Hera has benefited from a strong recovery in waste management, combined with its exposure to commodity volumes and price effects, to increase its H1 21 EBITDA by 10.4%, to €618m. Note also the positive impact from trading activities, an unsustainable source of profits. We like the deleveraging process (net debt/EBITDA down from 2.8x to 2.5x), a good point for the group relying on inorganic growth and dividend distribution. Positive view confirmed.
As usual, Hera released a strong set of Q1 results. The energy business, namely gas volumes sold, and the trading activities are the key drivers of the profit increase (+6.3%). The Italian group is also pursuing strong investments, strengthened by a global deleveraging. Further evidence of the resilience of its diversified business model.
After the first 9 months affected by the economic slowdown, a solid Q4 (revenues up by 17% yoy) allowed Hera to finish the year on a positive note. EBITDA is up by 3.5% and well above our bearish estimations (8% higher), while net income is slightly below expectations. There was a good point on the dividend, historically stable, which has risen to €0.11 (+10%) for FY20 and expected to reach €0.13 by FY24. Positive opinion confirmed.
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