Endesa Earnings: Lower Sourcing Costs Drive a Strong Start to the Year, Guidance Appears Prudent

We retain our EUR 22.30 fair value estimate after no-moat Endesa ELE reported strong earnings rebound in the first quarter, albeit anticipated by FactSet consensus, and conservatively kept its 2023 guidance. This publication confirms our stance that the latter should be exceeded, since market gas and power prices have fallen below the group’s assumptions—supporting an integrated margin above the guidance. Shares are still a bit undervalued.

First-quarter EBITDA jumped 60% year over year to EUR 1.46 billion, driving a 76% net income rebound to EUR 0.6 billion.

Generation and supply’s EBITDA surged 2.5 times, mostly thanks to a 1) doubling of the free power unitary margin to EUR 65 per megawatt-hour driven by higher margins of CCGTs on lower gas costs; 2) a rebound in hydro output as the year-ago quarter was dampened by a severe drought; and 3) positive management of the short position. Supply’s profitability materially improved from the loss posted last year, as the gas unitary margin surged sixfold thanks to lower gas costs. Networks’ EBITDA increased 4% on the absence of last year’s negative resettlements. On the negative side, the 1.2% energy levy shaved off EUR 0.2 billion in EBITDA, as expected.

Endesa confirmed its 2023 financial targets of EUR 4.4 billion-EUR 4.7 billion for EBITDA and EUR 1.4 billion-EUR 1.5 billion for net ordinary income, below our estimates of EUR 4.7 billion and EUR 1.7 billion, respectively, that we maintain after today’s strong print.

Operating cash flow improved by EUR 0.38 billion from the year-ago quarter, but was still EUR 0.1 billion negative as the EBITDA was almost fully absorbed by an EUR 1.4-billion working capital deterioration, including EUR 0.3 billion of regulatory working capital (worse than last year’s EUR 0.17 billion), the bulk of which for the Spanish islands. Net debt was EUR 11.6 billion at the end of March, EUR 0.7 billion higher than at year-end 2022 due to negative operating cash flow and investments.