EDP-Energias is an international energy group, active in 14 countries, a leader in value creation, innovation and sustainability. It is one of the main electricity groups in Europe, and the largest in Portugal. With a control position in the Spanish company Hidroeléctrica del Cantábrico, and is also present in the electricity sectors of Latin America (mainly in Brazil), Africa and Macao, in generation, distribution and commercial businesses, with 10 million customers and 12,000 employees worldwide. The activities of the EDP Group are focused on the generation and distribution of electrical energy, as well as on telecommunications and in the area of information technology.
- Production, sale and distribution of electricity: hydroelectric, thermoelectric, wind, cogeneration and biomass base.
- Sale and distribution of gas.
- Provision of energy services: engineering and consulting services for the construction and installation of thermoelectric and hydroelectric units.
- Others: steam production, computer services, etc.
EDP’s net result in the first nine months of 2022 grew by 1%, to €518 million, favored by the good performance of international operations, mainly in the renewable energy activity in Europe and electricity grid operations in Brazil. The net operating result was negative in Portugal, at -181 M€ from January to June, due to the severe drought, with hydroelectric production 63% below expectations, coupled with high electricity prices in the Iberian market in this period (€186/MWh). In current EBITDA it increased by 21%, to €3,046M in 9M22, +15% if exchange variations are excluded, with a strong contribution from the growth of EDP Renovavéis and the electricity networks in Brazil.
SOLVENCY AND LIQUIDITY
Net financial costs increased by €224M, to €580M, with an average cost of debt of 4.3%, mainly penalized by the increase in inflation in Brazil, which more than doubled the cost of debt in Brazilian reais. If this debt in reais is excluded, EDP’s debt costs are 2.6% at the end of 3Q22. Net debt amounts to €15,300M and liquidity at the end of September was €9,300M.
STRATEGIC PLAN 2021-2025
EDP’s strategic plan presented at the beginning of 2021 and with a time horizon that covers until 2025, is focused on a strong acceleration of the growth of renewable energies, with the aim of investing 24,000 million euros in the development of 20 GW of energies renewable. The Group expects to obtain profits of 1,200 million euros in 2025, which means registering an average growth of 8% per year and paying a minimum dividend of €0.19/share.
From January to September 2022, EDP doubled its investment to €5,500M, of which 96% was allocated to renewable energy and electricity grids. In renewables, EDP installed +2.7GW of capacity in the last 12 months, and maintains a good pace of execution of its Strategic Plan. With the entry into Asia Pacific at the beginning of 2022 and the acquisition of the portfolio of solar projects under development by Kronos, based in Germany, EDP now has projects in operation and development in 29 markets.
FORECASTS AND PROSPECTS
The current situation of uncertainty regarding the evolution of the war in Eastern Europe, the monetary policy restrictions to try to curb inflation and their repercussion in a possible slowdown in the economic recovery contributes a lot of volatility and makes it difficult to make forecasts. For companies, this volatility in the energy market and the escalation in the prices of the electricity and gas “pool” are making it difficult to establish their strategic plans due to the lack of clarity and predictability in the regulation of the peninsular electricity system. . If until recently the intervention of the regulator was undesired by the sector, in the current circumstances no one doubts the need for this intervention and a review of the functioning of the price setting of the electricity “pool” at a European level. EDP is keeping its objectives unchanged for the moment and the heavy investment planned in renewable energy places the group in an unbeatable position in the energy transition process. The planned asset rotation, with which it could enter up to 8,000 million euros in 2025, will also give EDP the capacity to carry out its growth plan.
EDP has followed a sustained dividend distribution policy, which includes an interim payment of €0.19 per share in recent years. Thus, the group has proposed to maintain a Pay-Out of between 75% and 85% in the coming years, with a minimum DPA of €0.19/share. With this amount and at the prices of this report, EDP’s dividend-yield yield exceeds 4%.
The Strategic Plan is ambitious with a clear commitment to renewable energy. It will invest up to 2025 a total of 24,000 million euros and the installation of 20GW of new capacity in North America and Europe. It also highlights the significant control of leverage and high shareholder remuneration. Good geographical diversification, with a presence in 16 countries and moderate exposure to the price of energy in the pool. The purchase of Viesgo has undoubtedly been a good operation and will increase its business in Spain.
In a valuation by multiples and under forecast results for 2023 (EPS: €0.28/share), EDP is not trading cheap, with a PER of 17v, compared to the average ratio over results for its main competitors such as Iberdrola (15.8v). or Endesa (15.5v). If the PER is adjusted for the estimated growth in EPS, the PEG ratio for EDP shows an undervaluation (0.7v). The multiple over Cash Flow moderates from higher historical levels and stands at around 5.5v for EDP, compared to 6.7v for Iberdrola and 5.8v for Endesa. The dividend yield helps maintain the valuation.
Based on our fundamental assessment, the recommendation is neutral for EDP in the medium/long term.
Galp Energia is currently the only integrated group of oil products and natural gas in Portugal, with activities ranging from the exploitation and production of oil (14% of sales) and natural gas (15.1% of sales), to the refining and distribution (70% of sales) of petroleum products, to the distribution and sale of natural gas and to the generation of electrical energy.
Geographical distribution: its activities are expanding strongly worldwide and are mainly carried out in Europe (87% of sales), Latin America (10.6%) and Africa (2.5%).
In the first nine months of 2022 as a whole, Galp’s attributable net profit was 1,020 million euros, compared to losses of 102 million in the same period last year. On his side, billing grew by 82%, up to 20,651 million. In the third quarter, the Portuguese oil company registered an attributable net profit of 307 million euros, compared to losses of 334 million that it posted in the same period of 2021. In adjusted terms, the company’s earnings between July and September were of 187 million, 16% more.
Billing for the quarter as a whole was 7,761 million euros, which is why it grew by 78% compared to the same quarter last year. The cost of products sold between July and September grew by 95%, reaching 6,349 million euros, while spending on supplies and services increased by 27%, up to 484 million. The item of personnel rose 17% year-on-year, up to 91 million. The gross operating result (Ebitda) contracted by 4%, up to 630 million euros. On the other hand, the adjusted data was 784 million, 29% more.
On the balance sheet side, the Net Financial Debt is reduced to €2,096M from €2,185M in the previous quarter.
Galp’s oil production increased 7% in the third quarter of the year compared to the previous one, while its refining margin fell 65%. The company produced a daily average of 126,000 barrels of crude between July and September. Its refining margin stood at $7.70 per barrel, well below the $22.3 per barrel registered in the second quarter of the year.
Clear commitment to renewable energy that seems very successful. The JV with ACS for the photovoltaic solar energy business is very positive. In renewables, the objective is to reach a gross renewable energy generation capacity in operation of more than 4 GW by 2025 and c.12 GW by 2030, of which Galp expects to maintain a participation of c.50%.
The entry into the renewable energy business in Brazil was also positive, with the acquisition of 594 MWp of solar capacity. In this way, it meets its objective of expansion in renewables and takes an important leap in the transformation of its business profile. The projects acquired in Brazil have a Commercial Operation date before 2025.
Galp is also in a privileged position to develop green hydrogen solutions, taking advantage of its industrial capabilities and intends to develop an electrolyser project with a capacity of 100 MW by 2025, with potential for further expansion to 0.6-1.0 GW. The Group is also evaluating opportunities to enter the battery value chain and thus position itself to expand its activities to the chemical processing of lithium in Portugal, guaranteeing raw material and developing important alliances.
As for oil and gas, the energy market is registering extremely high volatility and that is not favoring the sector. High gas prices will foreseeably take a breather this winter 2022/23, a downward correction due to high inventories in Europe. It will be for the winter of 23/24 when tensions return with the Russian supply closed. In this sense, even the Government of Portugal warned that the price of gas could increase six times in 2023 compared to 2021, reaching 120 euros per megawatt hour (MWH) on average. Added to this is the drop in production in Nigeria, Galp’s main supplier, due to flooding. Possible alternatives would be Equatorial Guinea and Trinidad and Tobago.
In its Business Plan, Galp considers a stock base dividend and an additional variable component, which will be distributed to the extent that the DFN/EBITDA multiple is less than 1.0x, and the total distribution may represent up to 1/3 of the CFFO. The base dividend must be paid in two annual installments. If there is a place for the payment of the variable quota, it will be paid once a year together with the second installment of the base dividend, prior approval at the General Meeting. Likewise, Galp’s board of directors has revised the distribution guidelines for shareholders, with an annual increase in cash distribution per share of 4%. Therefore, the base dividend for 2022 is expected to be €0.51 per share and grow at the same rate in subsequent years. At the prices of this report, the yield on dividend-Yield is around 7.29%.
The Energy Group maintains a solvent and robust balance with DFN/EBITDA of only 0.61v and DFN/PN of 0.62v, good consistency and stability. This gives you the ability to face your strategic plan without stress on the balance sheet and with the ability to increase leverage.
Based on a valuation by ratios and under EPS forecast for the end of 2023 of €1.36/share, revised upwards, GALP is trading at 6.3 times PER, lower than its historical average and with a margin compared to the average of the market, although its competitor Repsol is trading at only 5v. PVC 1.47v for Galp, much higher than Repsol’s 0.73v. GALP’s dividend-yield yield is not negligible >7% at the prices of this report, exceeding Repsol’s dividend yield (4.8%).
Based on a fundamental analysis, we reiterate a positive assessment for Galp in the medium/long term.
The data, opinions, estimates, forecasts and recommendations contained in this report have been prepared by Investment Strategies and its collaborators with the aim of providing its users with information on companies, sectors and financial markets, without these directly or indirectly implying a personalized recommendation of the company or assets analyzed for the purpose of constituting personalized investment advice. The analysis is based on the preparation of detailed financial projections based on public information and following the traditional fundamental analysis methodology. Said parameters represent the personal opinion or estimation of the analyst. The person receiving this analysis must apply their own judgment when using these parameters, and must consider them as one more element in their investment decision process. These parameters do not constitute a personalized investment recommendation.
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