Endesa Earnings: Hit by Negative Gas Supply Margins, 2023 Guidance Maintained; Shares Undervalued

We retain our EUR 22.30 fair value estimate after no-moat Endesa ELE reported nine-month results hit by a gas supply loss and stated that it will reach the upper end of its 2023 guidance. Shares are undervalued. The firm will hold its annual capital market day on Nov. 23. Current guidance calls for a 2023 dividend of EUR 1 versus EUR 1.59 for 2022. We expect a EUR 1.17 dividend based on a 73% payout and implying a 6.5% yield. Still, there is a chance that Endesa will pay a higher dividend than guided, in line with what it did over the last three years.

Nine-month EBITDA decreased by 3% to EUR 3.35 billion, sharply deteriorating from the first-half 27% growth because of a 42% fall in the third quarter. Nine-month net ordinary income tumbled by 28%, worsening from the first-half’s 20% growth as the EBITDA slide was supplemented by the Spanish energy levy and higher financial costs chiefly because of a higher cost of debt.

The key negative driver during the third quarter was a material loss in the the gas supply business versus a high margin in the year-ago quarter. The loss was driven by a drop in demand below contracted volumes and an inefficient hedging due to a temporary mismatch between TTF gas prices and Spanish PVB gas prices. The group affirms that it expects a strong rebound as of the fourth quarter. On the positive side, renewables’ EBITDA more than doubled in the third quarter chiefly thanks to a material increase in the output from solar plants. Networks’ EBITDA jumped by nearly 80% in the third quarter as the year-ago quarter was hit by a clawback of 2017-19 remuneration.

Endesa said it will reach the upper and of 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 respective estimates of EUR 4.7 billion and EUR 1.7 billion. We will tweak the latter downward by raising our financial costs estimates, which will have no valuation impact.