Engie Earnings: 2023 Guidance Raised Again, Which Implies an Appealing Dividend; Shares Undervalued

We don’t expect to materially change our EUR 17 fair value estimate after no-moat Engie ENGI released 9-month earnings implying a decline in the third quarter because of high comps, but raised its 2023 guidance for the third time this year. Applying the midpoint of the group’s target payout to new guidance points to a dividend of EUR 1.57, 12% above 2022 and involving a juicy 10% yield on top of the 12% upside offered by our fair value estimate.

Nine-month ordinary EBIT increased by 15% to EUR 8.3 billion, slowing down from the first-half’s 32% growth because of a 32% fall in the third quarter.

The key driver of the earnings decline in the third quarter was the general energy management and sales business, whose EBIT tumbled 80% as the year-ago quarter was boosted by extraordinary market conditions. Energy solutions’ EBIT tumbled by nearly 90% in the third quarter because of contract provisions related to cost overruns in the construction of two co-generation plants. On the positive side, renewables’ EBIT jumped 46% since the beginning of 2023 due to an improvement in hydro conditions, higher achieved power prices, and new capacity. In the third quarter, renewables’ EBIT growth accelerated to 52% as the year-ago quarter was hit by drought-driven electricity buybacks at high market prices. Networks’ EBIT grew 26% in the third quarter, improving from the first-half’s 8% fall, notably due to the full commissioning of transmission lines in Brazil.

Engie upped its 2023 recurring net income guidance by 8% from EUR 4.7 billion-EUR 5.3 billion to EUR 5.1-EUR 5.7 billion. The latter’s midpoint of EUR 5.4 billion is above our EUR 5.2 billion, which we should tweak upward, but this won’t materially have an impact on our long-term estimates.

Nine-month operating cash flow increased by 55% year on year to EUR 9.5 billion. Looking at the third quarter, the operating cash flow more than doubled as the EBIT decline was largely offset by a EUR 1.5 billion working capital improvement.