Cheuvreux expects Italian utilities to keep low profitability
Sep 26, 2012 - Cheuvreux does not expect Italy's utilities to materially raise their profitability in the next three years as the electricity market is suffering from enormous overcapacity, gradual shift from conventional fuel to renewables, and depressed margins.
The introduction of capacity payment to support new combined cycle gas turbines (CCGT) could be a turning point but it is improbable it could act as a stock catalyst in the short term, Cheuvreux analyst Francesca Pezzoli said, confirming a cautious view on the sector.
The hefty investments and the weak demand in the past years led to enormous overcapacity with reserve margins at 40%, Pezzoli said.
Cheuvreux does not expect to see a demand-and-supply balance until 2015, even if renewable energy production slows down. Consequently, profitability will remain at depressed levels for the next three years, the analyst added.
The photovoltaic boom has had two major effects: high electricity prices and shifting of the generation towards CCGT at the expense of conventional generation.
On one hand, renewables are replacing the CCGT, on the other hand, gas-fired plants are necessary. Therefore, the energy regulator is promoting the capacity payment to attract investments as of 2017.
Cheuvreux's base-case scenario sees only a slight drop of the earnings before interest, tax, depreciation and amortisation (EBITDA) of the power generators in the next five years. The broker raised the share price targets on the Italian utilities by an average 12% to reflect the reduced spread between Italy's bonds and the German benchmark Bunds.
Cheuvreux raised its price target on A2A SpA (BIT:A2A) to EUR 0.45 from EUR 0.40, with an "underperform" rating since the utility is the most sensitive to the changes the broker expects and would be the main beneficiary of a potential capacity payment.
The brokerage lifted the price target on Enel SpA (BIT:ENEL) to EUR 2.90 from EUR 2.55, rated "underperform", as it is the least sensitive to changes given its wide diversification and limited exposure to CCGT.
Enel's renewable energy arm Enel Green Power (BIT:EGPW), the only one rated "outperform", saw its price target raised to EUR 1.60 from EUR 1.50. Enel Green Power could face downside risks -- with earnings per share (EPS) falling 15% -- if electricity prices drop. Yet, EGP would not be affected by a possible capacity payment, Cheuvreux said.
The broker lifted its price target on Iren SpA (BIT:IRE) to EUR 0.50 from EUR 0.45, with an "underperform" recommendation. Cheuvreux sees a 14% downside in Iren's EPS in the worst-case scenario and a 30% upside in the best of cases.
Enel had plunged 3.39% to EUR 2.854 at 1445 CET on the Milan market today, Enel Green Power was down 1.82% to EUR 1.35, A2A had plummeted 4.56% to EUR 0.4061, and Iren had slumped 6.33% to EUR 0.4515.
(EUR 1 = USD 1.288)