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Guidance upgraded after outstanding adjusted first-half performance

  • 29 Jul 16

EDP published half year results which were in line with expectations, with EBITDA decreasing 3% yoy to €2,067m and operating profit reaching €1,327m, down 8% yoy due mainly to €744m of impairment charges. Moreover, higher financial expenses (+12% yoy) and a higher effective tax rate (at 27% vs 18% previously) have plunged the attributable net profit of the group to a 20% yoy decrease to reach €472m, below the €482m expected by the market, which has been partially offset by lower minority interests (specially on the Brazilian side of the business as this decreased 59% yoy). On the other hand, operating cash flows increased by 15% yoy to €2,208m mainly driven by a positive contribution in regulatory receivables, where a 2% decrease in capex, a 7% increase in dividend payment added to a 57% decrease from financing activities have allowed the group to maintain a positive free cash flow during the period, reaching €175m. The positive cash flow results added to lower regulatory receivables have allowed the company to reach a 5% yoy decrease in net debt to €16.48bn. Following the results and just before the conference call, EDP has decided to raise its FY guidance, with EBITDA expected at €3.75bn (vs €3.6bn), net profit of €950m (vs €900m) and a net debt of €16bn (vs €16.5bn). Moreover, it expects a moderate improvement in the 2017 outlook following recent moves on energy prices and credit/forex markets.

Initiation of coverage.

  • 21 Mar 16

Energias de Portugal (EDP) is a vertically-integrated utility company, and the biggest Portuguese industrial group with a €10.9bn market cap. EDP is the largest generator, distributor and supplier of electricity in Portugal with significant operations in Spain. It is the third largest producer of wind energy in the Iberian Peninsula and one of the largest in the world. In terms of market share for electricity in Spain (generation, regulated and retail), EDP is behind Endesa (1st) and Iberdrola (2nd), while it also has a significant presence in the gas sector. The group has a highly regulated business structure as 80-85% of its earnings come from either regulated or semi-regulated activities such as networks, renewables with Feed-in-Tariffs (FiT) and conventional generation with Power Purchasing Agreements (PPA). However, its regulated exposure is expected to decrease in the coming years to around 70% as deregulation starts in Portugal and conventional assets under development and not covered by PPAs are commissioned. The group’s main operations are located in Portugal, Spain, Brazil, and the US with some other renewable projects in additional European countries (France, Belgium, the UK). Overall, the group has a well-diversified generation portfolio, where 70% of its power generation comes from renewable sources (including hydro) and 17% in gas assets to cover renewable volatility, positioning the group within the top ranking companies in the energy transition faced by the European power market. Main drivers The growth objective of the group is quite ambitious as it targets a 5% CAGR on earnings from 2015 onwards and a 7% CAGR on EPS. We apply more modest growth than these expectations due to its exposure to the Brazilian economy (17.5% of revenues, 17% of earnings and 10% of debt), the slowdown in European renewable capacity, and an increasing exposure to power price movements (and its downward trend) as it moves towards a more deregulated model. We believe the next trigger will come from the release of the detailed FY15 accounts and from the capital markets day presentation when we should see the impact of the slowdown of the Brazilian economy on future expectations, and also guidance confirmation of its ambitious growth potential. It will also be useful to know the position of China Three Gorges (CTG) once the lock-up on its holding expires in the same month. We initiate coverage of EDP with a positive view, although with an Add recommendation backed by a limited upside potential as the company has taken a positive path to follow, but some of its top-line growth may be lost due to minorities and dividend payments (especially to its subsidiary EDP Renováveis), in addition to short-term uncertainty on CTG’s position once the lock-up ends.