Redeia Earnings: Management Reiterates 2023 Guidance; Shares Undervalued

We maintain our EUR 16.50 fair value estimate after no-moat Redeia RED released tepid nine-half results reflecting the less favorable regulatory environment in Spain compared with most Western European countries. Nonetheless, this seems to be excessively priced in. Redeia largely confirmed its 2023 targets, aiming for transmission investments above EUR 700 million, EBITDA above EUR 1.5 billion, and net profit in line with 2022. Shares appear undervalued.

The nine-months top line grew 2%, slowing down from 3% in the first half. Underlying drivers were similar as in the first half. The Spanish transmission business was flat, while noncore businesses like the international transmission business and telecommunications grew faster. EBITDA was flat over the first nine months after growing by 1% in the first half. Tepid revenue growth was more than offset by rising operating costs. Net profit fell 3% to EUR 0.54 billion as increased minority interest from the sale of a 49% stake in Reintel weighed on earnings.

Nine-month operating cash flow was EUR 0.2 billion, 85% lower than last year because of a EUR 0.8 billion working capital increase in 2023, of which EUR 0.4 billion was in the third quarter, due to the repayment of excess tariffs collected in previous years. Consequently, net debt increased by EUR 0.56 billion during the third quarter to EUR 4.97.