Scalper1 News
Positioning themselves strategically; inflection point in stock price. Geographical exposure to accelerating green energy trends. Preferred pick amongst large-cap European utilities. E.ON ( OTCQX:EONGY ) reported a record annual loss for 2014 as it took impairment charges associated with writing off its Italian and Spanish businesses as discontinued assets in its FY14 results on 11th March. These divestments are part of a refocusing its core businesses and portfolio optimization. E.ON’s announced in Dec 2014 that it will divest carbon interests and look to refocus business on renewables, smart grids and energy efficiency in a bold move to reposition itself in an industry strongly influenced by green energy trends. The European Union has set a target of 20% for the share of energy consumption to come from renewable energy sources by 2020, with each member state agreeing to a national target outlined in the 2009 EU Renewables Directive. Initial doubters of the credibility of the commitment have been proved wrong with the steady progress made by member nations. By 2012 the EU achieved 11.0% share of energy consumption generated from renewables . E.ON is particularly exposed to these trends as its home market is Germany which has undergone a transformation since the 2011 Fukushima crisis. It has set itself a target of generating 80% of electricity from clean sources by 2050 . Furthermore, technological advances in renewables have seen the costs of generating renewable energy falling, particularly for solar energy. This the shift towards renewable energies looks set to continue and we believe E.ON’s recently announced new strategic positioning will bring long term benefits to the company and its shares. Within Europe, E.ON has exposure to the regions that appear to be most affected by trends towards green energy. The company’s earnings are mainly generated from Germany with the UK and Sweden the other largest sources of earnings within the EU. Germany and Sweden generated ~24% and 60% of their electricity consumption from renewables in 2012. Furthermore, the UK government has been supportive of new green energy projects approving a number of projects in recent years as it tries to meet EU targets for 2020. In 2014, E.ON grew EBITDA by 20% in wind and solar and overall 18% of EON s EBITDA came from renewables . This looks set to continue as they stated they would pursue disciplined capex with > 70% of 2015 capex in Wind, Solar, Distribution Networks & Customer Solutions. The recent new refocused strategy and its exposure to countries in Europe that provide more favorable conditions for renewable energy growth should benefit the company in the medium to long term. E.ON has stated its preference towards wind and solar energy. Positioning towards renewables not only aligns it to wider energy regulation but also to technological trends. UBS stated in a report published in 2014 it believes solar and smart grid technologies will be at the forefront of wider change in power generation . It emphasizes “Solar is at the edge of being a competitive power generation technology” and that “power is no longer something that is exclusively produce by huge, centralized units owned by large utilities”. The falling cost of renewables technologies has coincided with the expected rise of the electric car and improvements in battery technologies. UBS predict a 50% reduction in the cost of batteries by 2020. This will allow homeowners to own battery packs to store energy and power their electric vehicles. Michael Liebrich of Bloomberg New Energy Finance stated that renewable energies have become “fully competitive with fossil fuels in the right circumstances” and their competitiveness looks set to strengthen in coming years as technological advances continue. Therefore, the positioning of the business towards renewables looks smart and it should help E.ON trade on higher valuation multiples, such as P/E. Renewables trade on higher multiples compared to traditional energy business due to stagnation in these traditional businesses and the potential for growth in renewable energy along with higher profit margins. Risks during the strategic overhaul should be taken into account as there is degree of uncertainty over divestments and the valuation of the new company that will be spun-off in 2016. Divestments have continued into 2015 with the sale of its Italian coal and gas power plants and reports suggesting it is looking to sell its North Sea exploration and production assets for around $2bn. Other business risks include its exposure to Russia which generated 7.4% of EBITDA in 2013. Furthermore, gas prices which continue to stay low or trend downwards will affect company earnings as E.ON repositions its business model. Analysts appear divided on whether EON’s transformation is too radical and whether the strategy will be successful. The stock has underperformed the wider European market and Stoxx 600 Utilities index over the last 5 years due to its poor performance, see graph below. It is valued attractively given this underperformance and current poor ROA at 0.96x P/B (cf sector 3.2x) with EV/EBITDA of 4.2x . Its dividend yield is 3.9%, slightly higher than the sector with a pay-out ratio of 60% which is easily defendable given a reasonable net debt to EBITDA ratio of 2.4x. It has also announced it will keep a fixed dividend to bridge the transition to its spin-off. (click to enlarge) The big question is can a traditional utility reinvent itself as a green energy services power house. We believe they can and implementing the strategy earlier than its competitors will allow E.ON to position itself competitively within a transforming industry. Its aims to decarbonise its services at a faster rate should be attractive to investors and raise it from current low stock valuation multiples. Furthermore, the less capital intensive its business becomes the greater the cash flows it will generate and the more it will be able to boost investment and shareholder returns in the future. Renewable energy is shaping the utilities sector and we believe E.ON’s recent strategic overhaul positions it perfectly to benefit. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News