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Utilities Electricity
4 February 2009
Green Utilities
Is profitable growth still
possible? Rating/TP changes
Virginia Sanz De Madrid
Grosse
Research Analyst
(34) 913355898
virginia.sanz-de-madrid@db.com
Utilities in a world heading for recession
The tough economic situation raises concerns over cash flows, profits and capex
plans for many firms. We analyse four companies and recommend Buy on the
renewables in the medium term.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Iberdrola Renovables (IBR.MC),EUR3.05 Buy
EDP Renovaveis (EDPR.LS),EUR5.64 Buy
Companies featured
Iberdrola (IBE.MC),EUR6.07 Hold
2007A 2008E 2009E
DB EPS (EUR) 0.43 0.48 0.56
P/E (x) 23.1 12.6 10.7
EV/EBITA (x) 18.8 13.1 10.8
Iberdrola Renovables (IBR.MC),EUR3.05 Buy
2006A 2007E 2008E
DB EPS (EUR) – 0.03 0.09
P/E (x) – 100.9 32.9
EV/EBITA (x) – 36.3 22.7
Energias de Portugal (EDP.LS),EUR2.76 Hold
2007A 2008E 2009E
DB EPS (EUR) 0.20 0.18 0.23
P/E (x) 20.7 15.4 12.1
EV/EBITA (x) 18.0 14.7 12.5
EDP Renovaveis (EDPR.LS),EUR5.64 Buy
2007A 2008E 2009E
DB EPS (EUR) 0.00 0.09 0.21
P/E (x) – 63.8 26.8
EV/EBITA (x) – 25.9 17.8
Global Markets Research Company
Caution on the incumbents: Iberdrola and EDP
In a GDP recession scenario, with lower power prices hurting margins for hydro
and nuclear players, regulatory uncertainty in the company’s home market, as well
as depreciating currencies in the UK and Brazil, we currently see little
attractiveness in investing in Iberdrola. EDP looks safer in this environment due to
its high exposure to PPA contracts in generation, which provide cash flow stability
in the current macro downturn; our biggest concern, however, relates to B/S
soundness, with 2008 debt/EBITDA of 4.5x. If events do not evolve in line with
management guidance, a dividend cut or a capital increase may be unavoidable.
We favour renewables in the current environment
We favor renewable plays over incumbents as we believe the former carry fewer
risks in the current market environment: they are less affected by lower power
prices, demand slowdown and uncertainty around the tariff deficit. While we
assumed cuts in capex of 25%, EBITDA CAGRs into 2010 are still above 20%.
Revised valuations based on lower price environment; risks
We have reviewed valuations by factoring in a lower price environment, a demand
slowdown, lower peer multiples and higher COCs. Our valuations are explained in
detail in the company section of this report (p 29-62). To summarise our TPs and
recommendations: Iberdrola from E10 to Euro6.9/shr (Hold); Iberdrola
Renovables from E5.2 to E4.4/shr (Buy); EDP from E3.8 to E2.9 (Hold); and
EDP Renovávais (EDPR) maintained at E7/shr and upgraded from Hold to
Buy: For renewables, if we value only the existing facilities and those that are
under construction, we still reckon upside potential of more than 25% to intrinsic
value. We disagree with the view that a negative pipeline needs to be factored in,
as our IRR analysis shows, investing in renewables allows for value creation
(assuming a 7% COC), with the exception of some specific countries. IRRs in
regions such as Spain, Portugal, the US (with incentives), the UK, Greece, Italy and
Belgium range from 7.7% to 16%. With Buy recommendations for both stocks
we prefer IBR over EDPR, as our geographic IRR analysis indicates IBR has
better geographic diversification. Additionally, its parent company (which provides
the financing for expansion) is in a better financial situation. Catalysts to our
recommendation would be a clarification of President Obama’s plan to reactivate
investments in renewables in the US. For both firms, the US is the big area for
growth. Downside risks for all four names are: macro variables such as interest
rates, supply costs, currency and inflation affecting future P&L and valuation;
regulatory risks such as negative decisions on the tariff deficit in Spain or
renewables regulation in the US; financing risks, such as the financial crisis leaving
companies unable to raise cash in debt markets, thus leading to dividend cuts or
even a capital increase. Upside risks for Iberdrola would be a corporate move in
its capital or a satisfactory end to Spain’s regulatory concerns; upside risks for
EDP would be a full delivery on targets as well as power prices decreasing further,
making its PPAs more valuable.
Table of Contents
How to play the green theme........................................................... 3
Renewables favoured over incumbents....................................................................................3
Caution on the incumbents: Iberdrola (Hold, TP E6.9/shr) and EDP (Hold, TP E2.9/shr) ...........5
Top Picks: IBR (Buy, TP of E4.4/shr) and EDPR (Buy, TP of E7/shr) ..........................................5
Power prices and demand................................................................ 7
Slowdown scenario...................................................................................................................7
Power prices............................................................................................................................7
Macro inputs in Iberia ...............................................................................................................9
Power prices and demand in the UK.......................................................................................11
Regulatory angles............................................................................ 13
Tariff deficit and last resource tariff in Spain...........................................................................13
PT distribution regulation ........................................................................................................13
Renewables regulation update ...............................................................................................14
Renewables expansion: value creation in current scenario......... 17
IRRs for wind farms across the world.....................................................................................17
Analysing IBR and EDPR pipelines in relation to profitability ..................................................20
Financials.......................................................................................... 22
Our approach ..........................................................................................................................22
Iberdrola.................................................................................................................................24
EDP........................................................................................................................................25
Companies ....................................................................................... 28
Iberdrola update .............................................................................. 31
Revised model ........................................................................................................................31
Valuation ................................................................................................................................34
Recommendation: Hold & Risks: ............................................................................................35
Iberdrola Renovables update ......................................................... 39
Strategic highlights of the investor day...................................................................................39
Model.....................................................................................................................................39
Valuation and recommendation: Buy ......................................................................................42
EDP update....................................................................................... 47
Main highlights from EDP’s investor day: ...............................................................................47
Revised model ........................................................................................................................48
Valuation ................................................................................................................................50
Recommendation and risks; maintain Hold.............................................................................51
Recommendation...................................................................................................................52
EDP Renováveis ............................................................................... 57
Revisiting the model ...............................................................................................................58
Valuation ................................................................................................................................60
Recommendation and risks.....................................................................................................61
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