Company Reports

After splitting off its networks and retail businesses into Innogy in October 2016, RWE retained its conventional generation and commodities businesses, along with a 77% share of Innogy. Under a large asset swap with E.On, RWE sold its stake in Innogy to the latter while retaining Innogy’s renewables business, receiving E.On's renewables division as well as a 15% stake in E.On. The deal was completed in 2020. The rationale was stronger for RWE, which doubled its renewable capacity and became the second-largest global offshore wind firm.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We confirm our fair value estimate of EUR 55 after no-moat RWE released final 2023 results. In late January, it released preliminary 2023 results and said that it expected to reach the lower end of its 2024 guidance due to the fall in wholesale power prices and generation spreads since the guidance was set in November 2023. In the March 14 publication, the group confirmed its 2027 and 2030 targets and said it was committed to the bottom of them, which is roughly in line with estimates. Shares have sold off excessively as the market overestimates the group’s exposure to power prices, in our view.

The German government agreed on Feb. 5 to tender up 10 gigawatts of new gas-fired power plants. It is willing to provide EUR 17 billion of subsidies, according to Reuters. Those plants should be able to switch to hydrogen between 2035 and 2040. The German government also said it intends to introduce a capacity mechanism for existing baseload power plants by the middle of the year that would be functional by 2028. This capacity mechanism, already in place in other countries like the U.K. and Belgium, has long been awaited for Germany.

We confirm our EUR 55 fair value estimate after no-moat RWE’s 2023 preliminary earnings largely exceeded its guidance and company-compiled consensus for the fourth year in a row. On the downside, the firm said it expects to reach the lower end of its 2024 guidance because of the recent fall in European wholesale power prices. This sent the shares down by 6% on Jan. 26 as the market has been used to multiple guidance upgrades since 2019. Still, we believe RWE could continue to surprise on the positive side in 2024 due to persisting commodity price volatility driven by the growing share of intermittent renewables. RWE is long-volatility thanks to its high-performing trading business and its combined cycle gas turbines. All in all, shares look materially undervalued.

After splitting off its noncommodity businesses into Innogy in October 2016, RWE retained only its conventional generation and commodities businesses, along with a 77% share of Innogy. Under a large asset swap with E.On, RWE sold its stake in Innogy to the latter while retaining Innogy’s renewables business, receiving E.On's renewables division as well as a 15% stake in E.On. The deal was completed in 2019. The rationale was stronger for RWE, which doubled its renewable capacity and became the second-largest global offshore wind firm.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

With the U.N. Climate Change Conference, otherwise known as COP28, that started on Nov. 30, we are reasserting our view that the market underappreciates utilities' critical role in limiting global warming.

We confirm our EUR 55 fair value estimate after no-moat RWE held a capital markets day where it raised its investments, set 2024 guidance in line with the company-compiled consensus and our expectations, and also set 2027 guidance above our expectations. The company set the 2024 per-share dividend at EUR 1.1, 10 % higher than in 2023 and pledged to grow the dividend by 5%-10% per year versus a flat dividend planned in the previous CMD. We commend this although we would have preferred to see a share buyback after two years of outstanding earnings. We reckon that RWE will not need to raise equity to fund its plan. Shares are significantly undervalued.

We maintain our EUR 55 fair value estimate after no-moat RWE released 9-month results above company-compiled consensus thanks to yet another strong performance of the trading business and confirmed its 2023 guidance. The firm will update its medium-term guidance and investment plan at its capital markets day on Nov. 28. We would welcome an increase in shareholder remuneration. In any case, we see the shares as materially undervalued after an excessive read-across from Orsted's U.S. issues.

RWE and National Grid's joint-venture, Community Ocean Wind (73% owned by the former), was awarded a 1.3 gigawatt offshore wind project at the latest New York auctions. We reckon that the project's returns are above our estimates for offshore wind farms to be commissioned beyond 2030. However, Orsted's woes have shown that execution risk is high in the U.S. All in all, we confirm our fair value estimates of EUR 55 and GBX 1,040 for RWE and National Grid, respectively. The former is materially undervalued.

European utilities have underperformed the European market by 4% year to date with most of the underperformance occurring in the third quarter because of the rise in interest rates. This overshadowed strong second-quarter results driven by the easing of the energy crisis, persisting commodity price volatility, and the hedging improvement. These drivers have persisted in the third quarter. Moreover, some power price clawbacks expired at the end of June like in Germany and Belgium. On the flip side, the comparison basis will be tougher as of the third quarter.

At round 5 of the U.K. contract-for-difference auctions on Sept. 8, 3.7 gigawatts of renewable capacity were awarded, one third of the amount awarded last year—1.9 GW was solar and 1.5 GW was onshore wind. No offshore wind capacity was cleared. This a blow to the U.K. goal to grow offshore wind capacity to 50 GW by 2030 from 14 GW currently. Still, no surprise here as many developers had warned that the ceiling strike price of GBP 44/MWh in 2012 prices of these auctions was way too low given the 40% increase in construction costs over the last year. Overall, the absence of awarded capacity reflects price discipline from developers.

After splitting off its noncommodity businesses into Innogy in October 2016, RWE retained only its conventional generation and commodities businesses, along with a 77% share of Innogy. Under a large asset swap with E.On, RWE sold its stake in Innogy to the latter while retaining Innogy’s renewables business, receiving E.On's renewables division as well as a 15% stake in E.On. The deal was completed in 2019. The rationale was stronger for RWE, which doubled its renewable capacity and became the second-largest global offshore wind firm.

No-moat RWE released its final half-year results. On July 26, it preleased them and materially upped its 2023 guidance. The positive surprise of final results released Aug. 10 is the disclosure of a guidance for flexible generation through 2026 above the company-compiled consensus and our own expectations. For the moment, we confirm our EUR 53 fair value estimate.

We maintain our EUR 53 fair value estimate after no-moat RWE had to release its first-half results earlier than expected because they largely exceeded company-compiled consensus expectations, as obliged by German stock exchange regulations in this case. This has happened for the third quarter in a row. On the back of this very strong print, the firm materially raised 2023 guidance. RWE is the fourth-largest renewables firm in the U.S. and second-largest offshore wind firm. On the other hand, its combined-cycle gas turbines and trading arm highly benefit from volatile commodity prices and growing intermittency of the power generation system due to the rise in renewables output. Despite this competitive business mix, shares are materially undervalued.

We maintain our fair value estimate of EUR 53 per share after no-moat RWE released its final first-quarter results. Shares look materially undervalued. There was no major surprise in this print since preliminary results had been released on April 27. Results were impressive, with EBITDA jumping almost fivefold. Results included divisional earnings and drivers, while the 2023 guidance was conservatively confirmed.

We are currently maintaining our fair value estimate of EUR 53.00 after no-moat RWE prereleased very strong first-quarter results and conservatively maintained its 2023 guidance. Shares are undervalued.

We don't expect to materially change our EUR 53 fair value estimate after no-moat RWE set 2023 earnings guidance above our expectations and those of company-compiled consensus and surprisingly hiked its dividend floor from EUR 0.9 to EUR 1 per share. Despite a competitive assets portfolio and excellent track record, shares appear significantly undervalued.

RWE has been heavily hit by the collapse of power prices and upheaval of German energy policy since 2011, which led to the cancelation of the dividend between 2015 and 2018. Since 2016, the backdrop improved with the rebound of power prices and EUR 1.7 billion nuclear fuel tax refund in mid-2017.