E.ON Should Continue To Outperform
FY 2014 numbers were in line with low expectations. Earnings are still declining, but at a slowing speed. Cash generation is strong enough to support leverage and to allow for new growth capex. The corporate split is well under way. Relative out-performance vs RWE should continue. E.ON’s (OTCQX: EONGY ) FY 2014 results were in line. Ebitda was in line with guidance, at Eur 8.3bn (USD 8.8bn), vs. consensus of Eur 8.4bn (USD 8.9bn). Net income came in at Eur -3.3bn (USD -3.5bn), broadly in line with consensus of Eur -3.2bn (USD -3.4bn). The Eur 5.4bn (USD 5.7bn) write-offs, most of which on the power plant, were well flagged. They now allow for a clean slate ahead of the corporate split. Adjusted net income was in line at Eur 1.6bn (USD 1.7bn). Management’s guidance for 2015 Ebitda of Eur 7-7.6bn (USD 7.4-8bn) is 5% short of the Eur 7.7bn (USD 8.1bn) consensus at the mid point. The outlook is weak, but largely reflected. The power price impact is smoother than for RWE ( OTCPK:RWEOY ). Achieved hedged prices are still coming into line with market forwards over the next two years. Nevertheless, among the two Germans, E.ON stacks up much better than RWE. The generation business accounts for ~21% of Ebitda, vs. ~36% for RWE. E.ON’s generation portfolio has a stronger cash flow base due to its better fuel mix. It is cash positive. Even when excluding the one off effects of the nuclear tax and provisions release, I estimate cash flow generation would have been flat y/y. Going forward, there will be a small positive impact from capacity payments in the UK. Leverage is still high at 4.1x Ebitda, but it is slightly less of a concern: Higher cash flows leave a greater degree of financial flexibility. And, there will be further cash inflows from the various announced disposals. There will be movement on gearing as the split will entail different balance sheet structures from today. Capex is twice the amount of RWE’s capex, with a correspondingly higher level of growth capex. I estimate that at least Eur 2.5bn will go into growth capex, most of which into renewables. That will build a stronger foundation for growth post 2015. In a sector that is returning to growth mode, E.ON has a good foundation in place: Renewables, one of the most important growth drivers, account for ~15% of Ebit, vs. ~8% for RWE. The split is well under way and both new companies are viable propositions. There will be intense scrutiny on the company’s ability to meet its nuclear liabilities post split. The government has commissioned legal studies, but not found any factors that were conducive to stopping the deal at this stage. So far, there will likely be a very public debate, but outright government intervention seems less likely. While the outlook is challenging for E.ON, I expect it to outperform on a relative basis. The shares are trading on a 16x 2015E P/E which is in line with the broader sector peer group. 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.