Report

Revenue of Energias de Portugal (EDP) fell by 4% to EUR 4.8bn in Q4, while it grew by 38% to EUR 20.6bn in FY-22. Q4 was way below estimates whereas it was significantly higher than consensus estimates for the full year. To grow its future revenue EDP increased its installed capacity by 6% to 26'187 MW. EBITDA in Q4 went up by staggering 22% to EUR 1.8bn and for FY-22 by 22% to EUR 4.5bn. Both were much higher than anticipated. EBIT grew in line with EBITDA in Q4-22 to EUR 1.9bn and even more by 31% to EUR 2.5bn in FY-22. In contrast, net income was quite disappointing. It fell by 49% in Q4-22 to EUR 202m and grew at a much more subdued level with 6% for FY-22 to EUR 657m. The hydro business was mainly responsible for the weaker-than-expected bottom-line result. EPS in return was EUR 0.08 in Q4 and EUR 0.21 in FY-22. Net income and EPS were weaker than expected. The board will propose a dividend per share of EUR 0.19 as previously guided and on the same level as last year.

Revenue within Renewables went up by 28.2% to EUR 3.6bn and EBITDA went up by 10% to EUR 2.5bn in FY-22. Main driver was the Wind & Solar business (+23%) in Europe as well as Brazil & Other, whereas the North American business actually had negative growth. On the other hand, hydro suffered from negative growth of 31% in FY-22, driven by poor hydro resources in Iberia. Yet, the level should recover as strong rainfalls in Q4 helped to refill reservoirs. The Electricity Networks segment had barely any revenue expansion with growth of 2.7% to EUR 4.1bn. EBITDA went up by 13% to EUR 1.5bn. Whereas the business was stagnant in Portugal and slightly negative in Spain, the business benefited from growth in Brazil of 44%. The last segment Client solutions & Energy management increased revenue by 51.2% to EUR 17.1bn. EBITDA went up significantly by 298% to EUR 486m as margins also expanded. 

After the release of its 2022 results, EDP has published its 2025 targets, based on an EUR 25bn investment plan until 2026. The focus of the plan will be on investments into renewables making up EUR 21bn of the total sum of EUR 25bn. Part of the plan will be the acquisition of all remaining outstanding shares of EDP-Energias do Brasil and a capital raise of EUR 1.0bn to finance that transaction. In addition, the listed subsidiary EDP Renovaveis raises capital from Lisson Grove Investment of around EUR 1.0bn to finance investments into renewables. The financial targets of the new strategy are to achieve recurring EBITDA of EUR 5.7bn by 2026 with a CAGR of 6% between 2022 and 2026, recurring net income of EUR 1.4bn to EUR 1.5bn with a CAGR of 12% to 14% between 2022 and 2026. Lastly the dividend payout ratio will drop from the range of 75% to 85% to a range of 60% to 70%, with a DPS floor of EUR 0.20 in 2026. 

Valuation

Energias de Portugal currently trades at 17.5x P/E 23E, below its 5-year historical average of 18.4x and above the MSCI EUROPE Electric Utilities Index (16.8x). On a 2023E EV/EBITDA basis, the stock is trading at 8.8x, above its 5-year average of 7.6x and above the MSCI EUROPE Electric Utilities Index (8.4x). On a P/S 23E basis, the stock is trading at 1.4x, above its 5-year average of 1.0x and above the MSCI EUROPE Electric Utilities Index (0.9x).        

Conclusion

As the negative surprise on the bottom-line was mainly driven by the hydro business in Portugal which has already shown some promises as rainfalls let to higher levels towards the end of 2022, we continue to believe in the prospects of the company. Furthermore, the newly issued investment plan supports our long-term case for EDP. We confirm our strong buy recommendation.

Management Outlook

2022-26 business plan:

EBITDA of EUR 5.7bn by 2026 with a CAGR of 6% between 2022 and 2026, recurring net income of EUR 1.4bn to EUR 1.5bn with a CAGR of 12% to 14% between 2022 and 2026. Dividend payout ratio will drop from the range of 75% to 85% to a range of 60% to 70%, with a DPS floor of EUR 0.20 in 2026.