EDP Earnings: 2023 Net Income Guidance Raised by 14%, Shares Materially Undervalued

We maintain our EUR 5.8 fair value estimate after no-moat EDP released solid nine-month results and raised its set 2023 net income guidance. Shares have been hit by the sell-off of subsidiary EDPR on rising interest rates. Consequently, EDP is the most undervalued integrated utility we cover despite having the highest earnings growth outlook.

Nine-month recurring EBITDA grew 26% to EUR 3.8 billion. In the third quarter, the EBITDA jumped by 30%, largely improving from the second quarter’s 18% fall. Recurring net profit doubled to EUR 1 billion as the EBITDA growth was supplemented by a reduction in noncontrolling interest reflecting lower EDPR’s net income.

In line with the first half, hydro, clients, and energy management was the main growth driver. Its EBITDA tripled in the third quarter on better hydro conditions after the 2022 drought and cheaper sourcing costs in the wake of the normalization of wholesale gas and power prices. Wind and solar’s nine-month EBITDA decreased by 4%, improving from the first half’s 23% drop thanks to a 33% jump in the third quarter. The latter was boosted by capital gains of EUR 0.4 billion, nearly 140% above the year-ago quarter, from two deals in Spain and Poland. Network’s nine-month EBITDA decreased by 2%, because of overcontracting costs in Brazil and the inflation-driven increase in operating costs in Iberia.

EDP confirmed its 2023 EBITDA target of EUR 5 billion while raising its recurring net income target by 14% to EUR 1.2 billion-EUR 1.3 billion. The latter’s midpoint implies 44% growth versus 2022. Key to that is a better performance of the integrated businesses in Iberia (hydro, clients, and energy management) which has no minority and a weaker-than-expected performance for wind and solar (EDPR) due to poor wind conditions and delays in capacity additions, which has a high share of minorities. We will adjust our 2023 EUR 1.06 billion net income accordingly, but the impact on our long-term estimates will be limited.